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How to Insure the Sharing Economy

During the snowstorm that hit the East Coast in January, I took some time to clean up my office and read reasonably current newspapers and trade magazines. I quickly identified many opportunities for new insurance products, mostly around shared assets. For example, an article on Millennials and the sharing economy explained that (primarily young) people make money by sending selfies of what they are wearing every day to a website called CovetMe; they get paid based on the brands and looks they are sporting.

They Uber their way to work, school or social events (when did Uber become a verb?) as a driver or passenger; they use their subscription to a shared car service such as Zipcar to take occasional trips; or they get paid for allowing advertising on their own car by subscribing to companies such as Carvertise. FlightCar gives you free parking at big airports if you let other travelers use your parked car when you are traveling. Similar sharing activities take place with homes, clothing and accessories, occasionally used tools and equipment and even medical equipment.

All these shared assets need to be covered in different ways than the traditional, personal lines homeowner’s or car insurance policies. Occasionally renting out assets to third parties or shared ownership of one asset between non-family members creates a different risk profile than self-use only, both for property coverages and especially for liability.

Think about deductible coverage between multiple owners in case of a claim, good driver discounts or multiple non-familial owners getting involved in the same accident, as liable parties and as claimants. The insurance market has been pondering insurance solutions for the shared economy for a while now and found ways to cover Uber drivers or Airbnb landlords or offer non-owner car insurance. As an industry, however, we defaulted to our classical model of insurance and put a commercial coverage, bought by the shared economy company for their members,  on top of individual personal insurances where needed.

It works, but, as one can imagine, it is a bit clunky. Especially on larger claims, I expect delays and issues to occur concerning liability, wear and tear, acceptable use of assets and confusion around which policy should pay followed by subrogation. Now, most shared-economy companies have stated that they will reimburse their members for losses and will figure out later what is covered by which insurance. This is a good thing for their members, of course, but it doesn’t necessarily help insurers very much.

We should be able to do better and create truly new insurance coverages for the shared economy. For example, why wouldn’t an insurer work with one of the new tech companies that provides people with a cloud solution to document all of their assets with pictures, videos, sales receipts or warranty documents? Why wouldn’t an insurer create a comprehensive coverage for property and liability for all these clients’ assets, under the assumption that they will be shared? Tag the key assets with a sensor and learn from usage data. Use telematics data on the car use. Limit home rentals to one or two partner companies and learn from usage analytics.

Why wouldn’t a carrier try a pilot with a segment of young people with limited assets, in a single location?

I know that this is not a simple proposition and that, in creating these kind of coverages, many hurdles will be encountered. I do think, however, that the market is ready, and that the sharing economy will become a force to be reckoned with soon. So, we might as well figure out how to insure and service that force.

As my colleague Mark Breading stated in his recent research brief, Insurance in the Connected World: Observations on Opportunities and Threats, “Actively participating in the rapidly growing sharing economy will be critical for personal lines insurers. Asset ownership is shifting and requiring a different approach for managing and protecting the assets.”

It is not going to be easy, but customers will count on our industry to develop solutions to protect their shared assets. We have successfully been supporting changing economies and technologies for centuries now – I am sure we’ll also find a solution for the new sharing economy in a connected world.

The Mystery of the Millennial Buyer

For several years, I’ve heard clamor from the agency world about how Millennials’ demands are so different from previous insurance buyers. Well, as a Millennial insurance buyer, I’m here to say… we still have some work to do. We still have a lot of work to do.

According to Accenture Outlook: Who are the Millennial shoppers? And what do they really want?, Millennials are exceptionally loyal …if they feel they’ve been treated right. And, we all know it’s cheaper to keep a customer than it is to get a new one.

“Right” is an incredibly subjective term and can certainly get lost in translation in the insurance world. “Right,” in the insurance world, typically means paying exactly what is fair for losses. No more, no less. That’s understandable, and, as someone in the insurance world, I understand the sentiment.

But I’d like to help you to understand how I define “right” as a Millennial insurance buyer.

Educate, don’t sell

The days of the uninformed insurance buyer are long gone. The added value of the agent is around education. Take a step back and help the Millennial customer understand the fundamentals of risk management and see that insurance is one of many tools used to manage risk. Millennials will identify the value that you bring to the purchasing transaction and remain loyal customers rather than commodity-buyers.

Empower them to make good financial choices

You empower Millennials to make smart financial decisions through education. This also means explaining the upsides and downsides of different policy options. For example, explaining how deductibles and premiums correlate, rather than trying to get them to take the lowest deductible. Millennials expect that, when they come to you asking for help in the realm of personal finance, you’ll be looking out for their best financial interests, rather than your commission check. As soon as a Millennial believes you’re NOT looking out for her best interest and are more interested in the sale, you have just made yourself the commodity.

No more fancy terminology

We have an epidemic of insurance buyers who have no clue what they’re buying. “Limit,” “peril,” “liability,” “occurrence” – these are not words the Average Joe and Average Jane have any practical reason to know, outside of purchasing insurance. Millennials won’t settle for someone who isn’t able (or willing) to give the layman’s definition of these terms. This requires you to have a real command of the fundamentals of risk and insurance, rather than a command of policy forms and exclusions.

Embrace technology to increase service

Sure you have a Facebook and a Twitter, maybe you even post regularly, but that’s not what will retain Millennials. Make yourself and your agency available to them on their terms: phone, email, text or social media. Encourage them to take pictures and videos of all their belongings if they don’t want to make an inventory list. Send periodic, non-marketing text messages to encourage safety. (Example: “With the coming cold weather, be sure you clean off your furnace and think about getting it inspected. Build-up can reduce efficiency, which costs you more money and might even cause a fire.”) These are the types of things that will differentiate you and your team from every other agent out there.

As an aside: If you want to serve Millennials, you must make online payments easy. Most Millennials don’t own stamps and are using the same checkbook they got when they were 16 and opened their first checking account.

Humanize them at claim time

Millennials want to be treated like the humans they are when claims hit, which, in all reality, isn’t asking much. Instead of aiming for that minimum threshold, exceed expectations by doing the following when you are notified of their claim: 1) Make sure they’re okay, 2) Check in and see how they’re doing and if they’re worried about anything (lawsuits, another loss, further injury, claim not getting paid, etc.), 3) Make sure you’re communicating with them, in addition to the adjuster, 4) Explain to them how this might affect future premiums. Claims are your time to shine, and, if treated well, Millennials can be some of the most loyal customers you’ll have.

In closing …

Insurance is a paper and a promise

Without anything more tangible than that, it’s not too much to ask to be treated well, as a smart and autonomous human being. If you can show that to your Millennial customers and follow it up at claims time, you’ll crack the nut that is the Millennial insurance-buyer.

The views expressed by the author are the author’s alone and do not necessarily represent the views of Aon or its affiliates. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial or other professional advice.

Broad Array of Roles for Disability Coverage

In the world of disability insurance, most financial advisers think of personal income protection. This is only the beginning of the possibilities that the adviser may be able to provide to safeguard clients, their businesses and assets. There are many products available within the disability insurance realm and diverse opportunities to provide your expertise.

Diversity of Product:

Key Person

The most valuable asset in a business is the people. Imagine if one of your key executives had an illness or an accident and was unable to work and continue creating revenue and profit for your company. What effect would this have on the bottom line? How would you replace the lost revenue?

Retirement/Deferred Compensation

At a closely held, family owned business, benefit plans favoring the family and the senior management are important for retention and reward. Over the past year, a non-qualified deferred compensation plan is put in place for the top 10 executives. What happens if one of the executives becomes sick or hurt and is unable to work and contribute to the plan? Can the plan be funded? If yes, how?

Contract Fulfillment

The board of a company just signed the largest contract in company history for a new CEO. The contract has financial guarantees, performance bonuses and the other usual language. What happens if the CEO becomes ill or has an accident and is unable to perform his duties? The company is on the hook for the financial guarantees. Should this be funded out of company cash flow or have the liability transferred through a disability insurance policy?

Loan Protection

There are more than 21 million small business loans valued at more than $600 billion. Business loans are taken out for business-related expenses, such as:

  • Purchase or expansion of a practice or business
  • Purchase of a large piece of equipment
  • Facility renovations
  • An increase in working capital or build-up of inventory
  • Purchase of a building or land for a business

It may make sense to provide disability insurance to cover the business loans in the event the business owner has a disabling accident or illness. There are separate insurance policies or riders to a traditional policy that provides benefits to cover the loan or loan payment obligations.

Impaired Risk

Perhaps a client will not qualify for traditional or even non-traditional coverage because of an extensive medical history. Impaired risk coverages can work for pre-existing medical conditions.

Diversity of Opportunity:

QSPP Can Prevent Dysfunction and Disruption

  • Could you continue to pay a disabled employee’s salary from your business?
  • How long could you afford to pay a salary?
  • Would the payments you pay be deductible to your business?

It is the American dream: turn a simple idea into a start-up and, through innovation, hard work and the right people, grow that start-up into an industry leader. It may seem obvious that a business owner would want to do everything to protect the people who help grow the business. As the business grows, however, offering everyone the same protection in the case of injury or illness may become difficult. Owners have a tendency to focus on partners, executive staff and key employees. This is a completely logical line of thinking, but without a Qualified Sick Pay Plan (QSPP) in place, it could put the business at high risk.

A QSPP is a formalized plan determining who will be paid, how much will be paid and how long salary will be continued when employees are unable to work because of an injury or illness. The plan can have different determinations for different classes of employees within the company. It can also be self-funded, or funded through an insured product, such as disability income policies.

Why a QSPP?

There are two key reasons: tax implication of benefits paid and potential precedent. The Internal Revenue Code states that wages paid to a disabled employee may not be deductible as a business expense unless they are paid under a salary continuation program. Without a program in place, any payments made are not deductible by the business and are fully taxable to the employee.

The implementation of a plan allows a business to deduct wages paid to employees who cannot work, and an employee can receive qualified benefits tax-free. The absence of a QSPP could result in the IRS disallowing benefits paid to an employee as sick pay. This would have serious tax implications on the employer and the employee.

An even greater danger to an employer is the existence of benefit payment precedent. It may seem completely logical to continue the salary of key employees responsible for revenue growth, but, without a QSPP, any sick pay for any employee creates a precedent of the same pay for all employees. Any variation between employees could be viewed as discrimination. To eliminate this risk, it is important to create a formal, written plan stating any differences of salary continuation length or frequency between classes of employees before an employee needs to use it.

How Is a QSPP Implemented?

A QSPP requires two components: a plan resolution and plan letters to employees.

A plan resolution is drafted and executed by the company’s board. This resolution defines the classes of employees, how benefits will be paid and how long they will be paid.

Plan letters communicate the information to the employees. They can be class-specific.

How Can Benefits Under a QSPP Be Funded?

This is an important consideration. A QSPP can be fully self-funded, fully insured or a combination. If a plan is fully self-funded, the company can be burdened with all of the responsibility of determining who cannot work and how long they can’t work and of paying benefits from company accounts during a time when, depending on the person who cannot work, the company may need the funds the most. Additionally, the FASB 112 Accounting Rule makes a company become an insurance company by requiring it to carry the present value of future claims as a liability on the balance sheet if it chooses to self-fund a salary continuation program. Two implications of FASB 112 are:

  • Companies with self-funded disability programs must set aside all the money upfront
  • This requirement can significantly reduce profits while increasing liabilities

Under a QSPP plan with disability income insurance, the insurance company determines when your employees cannot work, the insurance company determines how long they cannot work and the company pays smaller, regular payments for the benefit during a time when all employees are actively at work. A fully insured plan not only takes much of the liability away from the employer, but it also allows the company to predict future plan costs. Disability income insurance premiums are level for the life of the policies. Three tax shelters of an insured salary continuation program are:

  • Premiums paid are deductible as a fringe benefit expense (IRC Section 162(a)).
  • Employer premiums are not included in employee’s taxable income. (IRC Section 106).
  • A special tax credit may be available for employees that are permanently and totally disabled (IRC Section 22(b)).

In working with the son of the owners of a medium-sized technology security firm, I learned that Mom and Dad would take care of the son if anything were ever to happen. As a financial adviser, what do we do now? A conversation about the company benefits and what the parent/owners wanted to have happen with their family and their employees created an opportunity. By educating the clients on sick pay plans, we were able to provide better recommendations to the owner (parents) for the benefit of the son and the other employees while keeping the firm in legal compliance.

Divorce Settlements

Most if not all settlements include division of assets and liabilities owned by the parties. Additionally, when appropriate, especially if there are children involved, there is an alimony agreement. What happens to the continuing alimony payment if the payer becomes sick or hurt and unable to earn the income to make the support payment?

With the divorce rate at 50% or higher for U.S. marriages, there is an opportunity to protect a spouse and provide the children a source of income used for living and educational expenses. The solution is to place a disability insurance policy on the payer, with the spouse as beneficiary.

Occupational Diversity

Students, coaches, umpires, golf professionals, chefs, race car drivers, comedians and musicians, to name just a few, are thought to have a hard time obtaining disability income insurance. They are not hard to insure if you are able to go a little deeper within the traditional markets or outside to the non-traditional markets.

Our hobbies sometimes position us to have access to people in these diverse occupations. One of my hobbies is to watch, listen and learn from professional speakers. It has been a privilege to spend time with some of the all-time greats. I am always amazed at their accessibility if you step forward and participate. Once, I hosted Chris Gardner, who became nationally know for his life story through the movie “Pursuit of Happiness,” where his role was played by Will Smith. As Chris and I began building a relationship, he learned about our firm, and it became evident that no one had spoken to him about protecting his flow of income from a disabling accident or illness.

There are many diverse opportunities for you as the adviser to protect your client’s flow income, business entity and valued assets. Think beyond personal disability insurance and help your clients understand their needs to secure their financial foundations.

Healthcare Exchanges: Math Doesn’t Work

Employers of all sizes are rushing into healthcare exchanges these days — often after heavy prompting by their consulting firm or broker. Part of the expectation is that employers can cap their future health plan costs while giving active employees more options. Sounds great, doesn’t it?

The problem is the math doesn’t work. In addition, this approach has been tried before and flopped miserably.

The previous iteration of healthcare exchanges was in the early ’90s and was called “cafeteria” plans. The same claims were made: “No longer will your costs be at the mercy of healthcare inflationary trends. You can control how much you want to increase your subsidy each year – that is, if you want to increase it at all.” This failed because the math worked against the strategy then, too.

Let’s take a steely-eyed look at the numbers. If a company puts employees into an exchange because it wants to cap its costs going forward, that creates a reverse leveraging effect on employee payroll deductions.

Here’s an example: Assume premiums (or self-insured budget dollars) are $10,000 per employee per year and the company contributes 75%. The company pays $7,500 per employee per year (PEPY), and the employee pays $2,500. If plan costs increase 10%, and the company’s contribution stays flat, the employee cost will increase by $1,000 per year ($10,000 x 10%). That means the employee payroll deductions will go from $2,500 to $3,500, or an increase of 40%!

If costs go up another 10% in the next year or two, and the company contribution remains flat, the employee payroll deduction will increase another $1,100, for a total of $4,600, or a total increase of nearly 85% over a few years.

What employers quickly realized in the ’90s was that, if they didn’t keep increasing their subsidy level at a market rate, the cost to employees became intolerable. This reality led to the demise of so-called cafeteria plans.

If that is not enough, consider this. Some benefit managers hope exchanges will lead employees to choose less costly plans, ones with even higher deductibles. However, in an era in which 80% of plan dollars are being spent by 6% to 8% of plan members (called outliers), that notion is flawed. Why? The 92% who aren’t spending much may choose plans with higher deductibles and copays, but the outliers won’t. Period. The result is having about the same claim dollars as before but collecting less in employee contributions, an unsustainable proposition for employers.

Further, some outlier spending is deferrable. An outlier-to-be in a high-deductible plan can switch to a low-deductible plan in the following year, have an expensive surgery and then switch back. That, of course, is the definition of adverse selection.

A private exchange may look like a good fit for your situation, but beware. If your consulting firm owns an exchange, really beware.

Alas, considering the rush into exchanges today, it looks like history is doomed to repeat itself.

Will Fintech Disrupt Health, Home Firms?

The integration of technology in the insurance company’s value proposition is turning out to be one of the main evolutionary trends in the sector, and digital initiatives have been for a couple of years now one of the priorities of insurance groups. Until today, though, they have brought only limited improvement when it comes to the competitive abilities of the insurer.

The best practices at the international level show that, to obtain concrete benefits, the innovation has to be directed toward clearly determined strategic objectives.

An interesting example is the American company Oscar – a start-up that in less than two years has managed to raise more than $300 million at a valuation of more than $1.5 billion. It has radically innovated the customer experience of individual health insurance policies by directing the innovation effort toward two key factors that are crucial for the profitability of the medical spending reimbursement business: deductibles and “emergency” visits.

Oscar has created an insurance value proposition based on a smartphone app that incorporates a highly advanced search engine – including a search based on symptoms – allowing the insured to identify and compare the medical structures part of the preferred network. In this way, the client receives support in optimizing direct spending before reaching the deductible; this basically postpones when the insurance company starts to pay and thus reduces the amount of spending (medical reimbursements) by the insurer for the remainder of the year.

The company addresses emergency visits by providing chat with a specialist and a call-back system that the insured can choose at will from inside the network. This represents a comfortable alternative and reduces the number of urgent visits.

Health insurance and connected health

In these last months, I have been considering how to replicate the motor telematics experience for the health insurance sector. Insurance companies see the benefits from a telematics black box and how the return on investment in this type of technology can be maximized by the insurer: This is possible by taking into consideration not only the underwriting of the car insurance policy but by also looking at the services provided to the client, at loss control and at customer loyalty. In health insurance, similar benefits are achievable by using mHealth devices and wearables.

The first element is risk selection, seen in car insurance as:

  • the capacity of auto selection and dissuasion of risky behavior,
  • the integration of static variables traditionally used for pricing with a set of “telematics data” gathered within a limited time and used exclusively for supporting the underwriting phase.

The creation of a value proposition that is focused on the use of wearables and that uses “gamification” makes the product attractive to individuals who are younger and healthier – generating a self-selection effect comparable to the motor telematics experiences. Oscar, since the beginning of January, has been offering clients a pedometer connected to a mobile app. Every day, the app shows a personalized objective that, if attained, means $1 earned by the customer. Each month, the customer can receive a maximum of $20 as cash back from the company.

The second source of value generation is services. The use of telematics data represents an incredible opportunity for offering new health services and for offering a better customer experience: for example, the geolocation of medical structures and doctors who are part of the network, linked to a medical reimbursement policy.

Medibank, of Australia, has integrated in its health policy (using a smartphone app) a series of services built on informative contents and advice. The services are medical – as done by the Italian insurance fund Fondo Assistenza Benessere, using an app called Consiglio dal Medico (an Italian start-up partnering also with Uber) – as well as related to wellness. Medibank, using this package of services, produced 10% growth in the company’s top line. This Australian player has created an app for noncustomers that gives access to wellness discounts and attracts customers who can later be offered other insurance, too.

The ability to provide health services with a high perceived value (from the client’s point of view) can also allow the company to increase the efficiency of guidance inside the preferred network – this is a crucial aspect for controlling the loss ratio of a medical reimbursement product. The loss control actually represents the third area of value creation, just as it does for the auto business.

Within the health industry, it will soon be possible to generate significant economical benefits employing telemedicine to optimize spending with medical reimbursements or to link the reimbursement to the actual observance of the client’s medical prescriptions. In the medium to long term, the objective is to have behavioral and contextual data to prevent fraud and early warning systems that can spot altered health conditions and that allow preventive and timely intervention.

South African-based Discovery has successfully tried out this second approach. It reduced the loss ratio of the cluster of insured who suffer from diabetes – mainly reimbursements linked to complications because of lack of self-control. Discovery provides an instrument for measuring the blood sugar level through a connected app and rewards the insured.

Discovery’s Vitality program represents the international best practice regarding the fourth axis of value creation: behavior guidance, by using a loyalty-based system that rewards non-risky behavior. The South African company has integrated – in its very complex reward system – devices for measuring physical activity and has incorporated their usage among the “rewarded” types of behavior. Discovery’s experience in several different countries proves the effectiveness of this approach in terms of:

  • commercial appeal
  • capacity to acquire less risky clients
  • ability to gradually reduce the risk profile of the single client.

Pricing based on individual risk is the last benefit achievable with the integration of wearables and health insurance policies. Constant monitoring of the level of exposure to risk lets the insurer create tariffs based on the health state, lifestyle and context of a person. As already done in the auto telematics business, this will be a goal to be attained after some years of data gathering and systematic analysis of the historical series together with information regarding medical reimbursements.

Home insurance and connected home

Homes are another area in which, at an international level, there has been experimentation with how to integrate an insurance policy with actual sensors. There already exists a replication of the business model used more than 10 years ago in the auto insurance sector — an up-front discount between 10% and 25% of the insurance premium based on installation of a device at the client’s house and by the payment of a fee for services or a lease for the technology. This approach, which has been adopted in the U.S. by State Farm, Liberty Mutual and USAA and in Italy by IntesaSanpaolo Assicura, BNP Paribas Cardif, Groupama e Poste, is based on two of the five levers of value creation: first, loss control – focused on flooding, fire and theft – and second, value-added services. American companies have even reached the point where they offer clients a wide range of services provided by selected partners (such as Nest) and tied to the home “ecosystem,” which can even include medical assistance services.

An interesting and innovative example of the use of such technology for the assessment and risk selection in home insurance is the one adopted by Suncorp with a retail touch to it, and by ACE Group, which focuses more on the insurance needs of high net worth individuals (HNWIs). Both companies have used a partnership with a start-up called Trōv – a smartphone app that allows registering and organizing the information referring to personal objects, including through photos and receipts – to evolve their underwriting approach when it comes to the risk connected to the contents of the house.

Domotics, or home automation, is growing at a high rate even in Italy and represents a material part of the revenues generated by the Internet of Things, according to data provided by the Osservatorio of the Politecnico di Milano. A horizontal domotics solution – with thermostats, smoke and water detectors, sensors present in appliances and other household items, sensors at the entrance and antitheft alarms, sensors spread within the building – would let an insurance company track the quantity and level of exposure to risk. This includes, for example, the periods and ways in which the home is used but also the state of the household and the external conditions to which it is exposed (humidity, mechanical vibrations, etc.).

The insurer could price based on individual risk, adopting pricing logic based on behavior, as already done in the motor sector. This could open up growth opportunities, such as for secondary houses used only for vacation and rarely insured. This scenario, which sees the growth of solutions built on connected objects within the home – if correctly approached by insurers by reviewing their processes to make the most of the potential offered by gathered data – can lead to important benefits in loss control: Some studies have estimated that there is the potential to cut in half the current expenses for claims.

To turn this opportunity into reality, it is essential that the insurer acquire the ability to connect its processes (through adequate interfaces) with the different connected objects. Insurers must create an open digital platform that uses the multiple sensors to be found in the home “ecosystem” – just like those used in the health sector.

The change of paradigm doesn’t only concern fundamental aspects of the technological architecture – like data gathering or standardization of data coming from heterogeneous sources – but affects the strategic choices of the business model. For insurers, it becomes a necessity to define their level of ambition for their role in the ecosystem and for their cooperation with other players to create solutions and services around an integrated set of client’s needs.

It is extremely interesting to see the journey made by American Family Insurance, which – in partnership with Microsoft – has launched a start-up accelerator focused on home automation.

Insurers have to start thinking strategically around how adapt insurance business to IoT, before some new Fintech comers do it.

This article originally appeared in the Insurance Daily n. 749 and n. 750 Editions.