Tag Archives: economics

Important Alliance to Fight Health Costs

The Wall Street Journal reported that 20 large U.S. companies joined to fight high healthcare costs, launching the aptly named Health Transformation Alliance. Employers account for one in five dollars spent on healthcare in the U.S., yet they have relatively weak influence in the marketplace. But these influential companies are intent on aggressive action. With this kind of unified leadership, the alliance promises to shake the foundations of our health care economy.

There have been other efforts to harness the power of the business community to improve health care. My organization, the Leapfrog Group, is one such effort, founded by Business Roundtable in 2000 to address quality and patient safety in hospitals. Based on what we’ve learned over the past 16 years, here are three key principles for the alliance to start with:

  1. Lowering costs won’t automatically lower prices.

Whenever the subject of cost reduction comes up, some providers tout the enormous cost savings they have put in place through improved efficiencies, better technology or less invasive procedures. Recently, they have also pointed to the potential of large hospital system mergers to reduce costs through economies of scale. But employers are right to wonder why their own healthcare price tag continues to rise, despite these marvelous advances. Why don’t they see the cost savings?

Simply put, cost savings to the provider are not the same as cost savings to the purchaser. This sounds like such an obvious point. But the obfuscation over whose costs are saved persists and trips up progress year after year, with purchasers left scratching their heads. The alliance members will succeed in cutting their own prices only if they clearly demand that cost-reduction strategies have visible and substantial effects on their own bottom lines.

  1. Lowering prices won’t automatically lower costs.

Even if purchasers do succeed in lowering prices, the cost-reduction job is not done. That’s because the amount of waste in healthcare is profound. The Institute of Medicine estimates that as much as one-third of all costs are associated with unnecessary services, errors, infections and management inefficiencies. Not all providers are the same, and some incur much more waste than others. Whatever the price of a particular procedure, it’s no bargain when there are infections, complications and mismanagement—or if the procedure wasn’t medically necessary in the first place.

This is not chump change, this is game change. A 2013 study in the Journal of the American Medical Associaton (JAMA) reported that, on average, purchasers paid $39,000 extra when a patient contracted a surgical site infection. That excess doesn’t show up on the claim as a line item called “waste.” It is buried in a series of excess fees, tests, treatments and time spent in the hospital. Employers intent on cutting costs must factor wastefulness into the pricing equation.

  1.  Focus on the market incentives.

Our system of costs and pricing creates perverse incentives. The more a provider wastes, the more it can bill the employers. New financing models are slowly emerging, aimed at achieving value—the novel idea that payments align with patient outcomes. One of the most promising models is called “bundled pricing,” in which a health system is paid one total price for a particular procedure, including physician fees, radiology, hospital charges, etc. In this model, a provider is given incentives to actually reduce waste, so it maximizes profit under the bundle.

Some large employers have developed bundled pricing arrangements with a select group of health systems, for a select group of procedures. Walmart is a leader in this, as are employer members of the Pacific Business Group on Health. What have they found? A significant reduction in waste and better care for employees.

Another promising use of bundled pricing is coming from international medical tourism. Health services and pharmaceuticals are often much less expensive overseas than in the U.S. Most international providers offer bundled pricing and concierge hosting services. For example, Health City Cayman Islands offers bundled prices for certain heart and orthopedic surgeries, including all facility and physician fees, along with pre- and post-operative care at a lovely beachfront hotel. Its prices are one-fourth to one-fifth those for comparable services in the U.S.

The problem with medical tourism: determining the quality of international providers. Employer groups, like the Health Transformation Alliance, must address this in their work. Once again, waste and quality need to be factored into the cost equation.

What Are Other Marketers Doing?

“Insurance Marketing & Distribution Summit Europe 2015” proved to be a great event.

There were interesting speakers, a range of topics and plenty of opportunity for interaction. Plus, it was a pleasure for me to share with this group, but more on that later.

Following events that were useful for getting close to leaders on whom insight leaders focus less (IT, digitalcustomer experience), I was back with marketing  and sales. Most likely, the primary customer for most insurance insight teams is their marketing leader. So, I hope it’s helpful to hear the thoughts and plans of a number of leaders from the insurance marketing community.

Here are key messages from these insurance marketers:

  • Marco Brandt (Agila) shared about Agila’s journey from being a broker-based pet insurer to focusing on the Internet channel. It uses digital capabilities for personalization of communication and pricing. Perhaps the biggest opportunity for the company, though, was to use its digital communication and free content to dramatically increase the number of touch-points with their customers (a recurring theme). Agila has a strong story to tell about growth of customer satisfaction and premium income (which doubled in five years). The company’s next, self-identified challenge is to embrace mobile.
  • Stephan Dequaire (Towergate) provided a review of the growth of price comparison sites in the UK car insurance industry. I was surprised at how much Compare the Market now dominates, above even MSM and Go Compare. It was also interesting to see how much this model varies across the world. By comparison with the U.S., intermediaries (including tied agents) are more the norm across Europe, where there is also a larger share for bancassurers. Some research suggests the shine is coming off them, though, with even consumer advice sites pointing to direct insurers. What was more shocking was to hear how a consumer advice site suggests consumers lie about data to get a better price (“optimizing your job title,” etc). It really brought home the erosion of consumer trust, in the UK market especially.
  • Phil Bayles (Aviva) reminded us that, across Aviva and insurance as a whole, the intermediary channel still provides the largest profit and volume. He provided a nice segue into my later talk because he stressed how more than 25% of management time was now taken up by conduct risk agenda. The challenge with succeeding with your intermediary channel, including independent financial advisers (IFAs), is that they deal with you day in and day out. You can’t persuade an intermediary channel with some catchy or emotive brand advertising. Bayles stressed the need for a focus on adviser satisfaction and ease as well as fixing problems quickly. With a strategy to be “No. 1 for Brokers,” there is nowhere for Aviva to hide if tracking does not match up. Transactional net promoter scores (TNPS) suggest that Aviva is well on its way.
  • Simon Green (The FCA) talked about how FCA’s behavioral economics expertise was influencing policy and reviews, as well as the important role of technology innovation.
  • Pollyanna Deane (Simmons & Simmons) brought legal expertise to our proceedings and talked about increasing regulatory scrutiny, including the likely impact of the Insurance Distribution Directive. She also mentioned the risk of European Insurance & Occupational Pensions Authority (EIOPA) becoming a third regulator for UK insurers!
  • I then presented on customer insight and conduct risk, where I shared a number of the lessons I’ve learned from training insurance marketing teams on using customer insight to mitigate conduct risk. This included briefly covering consumer spotlight, behavioral economics and vulnerable customers. I’m pleased to say there was considerable interest afterward as marketing leaders could see the benefits of more focus on conduct and on embedding insight in their processes.
  • Louis de Broglie (InsPeer) focused on innovation. He explained the interesting concept on which his start-up, InsPeer, is based. Returning to the insurance origin of mutuality and governance in community, his company provides consumers with a way to pool their excesses. Currently, only available in France, this unregulated solution combines the purchase of high-excess cover from an insurer with a community that contracts to cover a proportion of others’ excess in the event of a claim. This results in lower premium and zero excess for each individual, as well as social pressure on claim veracity and lower claims frequency for the insurer. The next stage is intended to be peer-to-peer insurance, akin to the evolving models from Guevara in the UK, as well as others worldwide. Given the explosive growth of Uber and AirBnb, it seems likely some model of peer-to-peer disruption will take off.
  • Monika Schulze (Zurich) returned to the theme of greater engagement through marketing. Her recurrent theme was the importance of emotion, using your brand and an emotionally engaging narrative consistently across channels to provoke positive responses and engagement from consumers. Inspired by “Transmedia Branding,” Schulze really brought this topic to life through a number of videos that made an impact and examples of clever use of social media. Perhaps the most surprising part of this event was a story about Lidl selling milk in Sweden. Through active monitoring of Facebook comments, Lidl spotted a Swede named Bosse who said he didn’t want to buy German milk. Lidl used this as a chance to humanize its brand, and the company renamed its milk “Bosse’s Milk” across Sweden, including a photo of Bosse and an explanation that the milk actually is Swedish milk. This action, in response to an individual, captured the public imagination and boosted sales. For a great example of fleet-of-foot and creative marketers using emotional advertising, check out Zurich’s #SaveThe Snowmen.
  • Gordon Rutherford (Axa) also stressed the importance of emotional communication in brand engagement. Along with warning to not be one of those needy brands that basically use social media to say “please love me,” he highlighted the impact of finding a noble cause to really make a difference and to improve brand sentiment. An example is Axa’s “glass of consciousness” exhibitions in Mexico, which engage the public with the need to change attitudes about drinking and driving. Axa has found a way to humanize its brand and engage its own employees, all the while making a social difference.
  • Edward Rice (AIG) shared AIG’S progress in digital transformation, where the company has gone beyond just using digital as a marketing channel and is using it to reengineer business and customer experience. He noted that the right comparison for customer experience isn’t the low bar currently set by the insurance industry but is, rather, the personalized, digital ease provided by retailers. He  then shared numerous examples of how, once you have the basics delivered consistently, you can surprise and delight your customers with personalization and relevance. One interesting example was marketing done by Boden and easyJet that shows customers that the brands remember past purchases and have an apparent growing understanding. Rice also touched on the power of responding to one individual on social media as a way to humanize your brand and be playful and on the importance of providing timely advice and warnings that help customers reduce risks.
  • Isabelle Conner (Generali) explained the huge cultural transformation that she is leading, changing a 184-year-old business from product-centric to customer-centric. She stressed the importance of emotional brand marketing and reminded everyone that we are in an ideal position to put this into action, with insurance being about protecting what people love and being there when the traumatic happens. But the marketing has to be grounded in changing the customer experience reality and the internal brand reality, not just be about broadcasting a message. Perhaps the part that had the most impact was when she shared videos of Generali’s CEOs from Spain, Switzerland and France calling customers who left detractor net promoter score (NPS) ratings. It is so important to include timely response and resolution in your NPS metric programs, but it has even more of an impact on a company’s culture when CEOs get engaged in the experience.
  • Stephen Ingledew (Standard Life), although not an insurer, has many of the same challenges in the world of retirement savings, investment and income solutions. Ingledew focused on the importance of customer engagement in redesigning improved experiences. He shared some details of co-creation sessions and agile development, the latter being more than just an approach to IT development but also a mindset of continual learning and iteration. Some of his examples of online tools included elements of “gamification,” which is helpful for consumers in the baffling world of pension reform choices. The brand approach of “#ReadyWhenUAre” nicely balances a range of enablers, while avoiding being paternalistic. Another critical customer need is education, but it becomes tricky to do it in a way that is neither boring nor patronizing. Selecting Steph and Dom from the British reality show Gogglebox to host a series of videos to chat in the pub about the issues was inspired choice, and one can see why it has gone viral.
  • Zach Goren (Media Alpha) brought the world of West Coast U.S. innovation to the conference. Media Alpha is helping auto insurers, among others, buy targeted “in market” customer leads in real time, rather than just relying on mass market advertising through Google (where insurance keywords cost a fortune). Media Alpha is basically an innovation on the traditional market of selling unconverted quotes, but the company does this in real time and stays on the insurer’s site. So, the insurer becomes both a seller of insurance as well as a seller of advertising space to competitors, especially where customer details show this person is unlikely to convert. Media Alpha provides real opportunities to offer consumers more choice.
  • James Baker (Vitality) leads the insight team and helps the company’s brand understand how to bring about behavioral change in its customers. The company has an interesting approach, providing health insurance but also helping motivate you to not need it, through rewards for a healthier lifestyle. This approach provides more opportunity for engagement with insurance customers and offers tangible value back on your policy (many insurers would love to achieve either). Vitality’s insight, built on a hybrid segmentation of FSS and behavioral analytics, has identified a number of actions and rewards, under the concepts of “we’ll be there for you” and “we’ll make it more rewarding to be well in the first place,” that have driven significant engagement and behavior change. Ideally placed to exploit wearables and other IoT innovation, given the importance of employers and employee benefit consultants to Vitality’s business, the company can also demonstrate benefits in reduced absenteeism.
  • David Stevens (LV=) brought to life the complex world of automated advice in the pensions/retirement income sector. The company has innovated with so called robo-advice (although the process also includes human interaction). LV=’s innovation with Wealth Wizards (which it acquired) and the fact it has broken down the steps into manageable chunks should really help. With the high cost of advice, too many in the public are not engaging with such an intangible service. A fixed price of £199 for personalized options after automated fact finding is much more accessible, and the offer is communicated in an emotionally warm way. Once again, you can see the influences of both personalization and gamification in the company’s communication. The style of communication and the ease of playing with the tools also contribute to humanizing insurance (as does clear fixed pricing).
  • Adam Kornick (Aviva) heads up the company’s global analytics capability, and he shared how it is using predictive analytics in pricing and risk modeling. Kornick gave an important reminder that price is the primary selection criteria consumers cite with insurance, so personalized pricing matters every bit as much as, if not more than, personalized communication. One of Aviva’s key innovations has been to build on the individual price for quoting (based on captured and average data) that others have done for home insurance and to give customers the price of a product that they are most likely to buy next. It was also interesting to hear of Aviva’s progress in broker analytics, another reminder as to the importance of the intermediary channel and how predictive analytics can help there, too.

Phew. Well done for making it to the end of this post! Key themes I took away are the need for: personalization, emotions, humanizing insurance, more frequent engagement through communication, innovations and continued focus on the intermediary channel.

Hope all those topics and ideas were useful. Please share the insurance marketers’ innovations you are generating from customer insight.

Meanwhile, if you’re interested, you can download a free copy of my presentation here.

Blockchain Technology and Insurance

What if there was a technological advancement so powerful that it transforms the very way the insurance industry operates?

What if there was a technology that could fundamentally alter the way that the economics, the governance systems and the business functions operate in insurance and could change the way the entire industry postulates in terms of trade, ownership and trust?

This technology is here, and it’s called the blockchain, best known as the force that drives Bitcoin.

Bitcoin has gotten a pretty bad rap over the years for good reason. From the collapse of Mt. Gox and the loss of millions –  to being the de facto currency for pedophilia peddlers, drug dealers and gun sellers on Silk Road and the darling of the anarcho-capitalist community – Bitcoin is not doing well in the public eye. Its price has also fluctuated wildly, allowing for insane speculation, and, with the majority of Bitcoins being owned by the small group that started promoting it, it ‘s sometimes been compared to a Ponzi scheme.

Vivek Wadhwa writes in the Washington Post that Chinese Bitcoin miners control more than 50% of the currency-creation capacity and are connected to the rest of the Bitcoin ecosystem through the Great Firewall of China, which slows down the entire system because it is the equivalent of a bad hotel Wi-Fi connection. And the control gives the People’s Army a strategic vantage point over a global currency.

Consequently, the Bitcoin brand has been decimated and is thought by too many to be a kind of dodgy currency on the Internet for dodgy people.

The blockchain, a core technology behind what drives Bitcoin, has been slow to enter the Zeitgeist because of this attachment to Bitcoin, the bête noire of the establishment.

But that is changing fast. Blockchain as a tool for disintermediation is simply too powerful to ignore.

People are now beginning to really look at the blockchain as an infrastructure for more than monetary transactions and what it has done for Bitcoin. Just as Bitcoin makes certain financial intermediaries unnecessary, innovations on the blockchain remove the need for gatekeepers from a number of processes, which can really grease the wheels of any business, including insurance companies.

How blockchain works and can work for the insurance industry

Because of the way it distributes consensus, the blockchain routes around many of the challenges that typically arise with distributed forms of organization and issues such as how to cooperate, scale and collectively invest in shared resources and infrastructures.

In the blockchain, all transactions are logged, including information on the date, time and participants, as well as the amount of every single transaction in an immutable record.

Each trust agent in the network owns a full copy of the blockchain, and, in the case of a private consortium blockchain (more relevant to the insurance industry), the transactions are verified using advanced cryptographic algorithms, and the “Genesis Block” sits within the control of the consortium.

The mathematical principles also ensure that these trust agents automatically and continuously agree about the current state of the blockchain and every transaction in it. If anyone attempts to corrupt a transaction, the trust agents will not arrive at a consensus and therefore will refuse to incorporate the transaction in the blockchain.

Imagine there’s a notary present at each transaction. This way, everyone has access to a shared, single source of truth. This is why we can always trust the blockchain.

Imagine a healthcare insurance policy that can only be used to pay for healthcare at certified parties. In this case, whether someone actually follows the rules is no longer verified in the bureaucratic process afterward. You simply program these rules into the blockchain.

Compliance in advance.

Automation through the use of smart contracts also leads to a considerable decrease in bureaucracy, which can save accountants, controllers and insurance organizations in general an incredible amount of time.

While the global bankers are far out of the blocks when it comes to learning, understanding and now embracing blockchain technology, the insurance industry is lagging. Between 2010 and 2015, a mere 13% of innovation investments by insurers were actually in insurance technology companies.

There are some efforts to tap innovation, as the Financial Times in the UK recently wrote. European insurers such as Axa, Aviva and Allianz, along with MassMutual and American Family in the U.S. and Ping An in Asia are setting up specialist venture capital funds dedicated to investing in start-ups that may be relevant for their core businesses.

Aviva recently announced a “digital garage’ in Singapore, a dedicated space where technical specialists, creative designers and commercial teams explore, develop and test new insurance ideas and services that make financial services more tailored and accessible for customers.

And others are sure to follow in the insurance industry, particularly because both the banking industry and capital markets are bullish on investing in innovation for their own sectors – and particularly because they are doing a lot of investment in and around blockchain.

Still, the bankers and capital markets are currently miles ahead of the insurance industry when it comes to investing in blockchain research and startups.

Competitors in the capital markets and banking industries in terms of blockchain solutions include: the Open Ledger Project, backed by Accenture, ANZ Bank, Cisco, CLS, Credits, Deutsche Börse, Digital Asset Holdings, DTCC, Fujitsu Limited, IC3, IBM, Intel, J.P. Morgan, London Stock Exchange Group, Mitsubishi UFJ Financial Group (MUFG), R3, State Street, SWIFT, VMware and Wells Fargo; and the R3 Blockchain Group, whose members include the likes of Barclays, BBVA, Commonwealth Bank of Australia, Credit Suisse, Goldman Sachs, J.P. Morgan, Royal Bank of Scotland, State Street and UBS.

Then there are start-ups like Ripple and Digital Asset Holdings, led by ex-JPMorgan exec Blythe Masters, who turned down a job as head of Barclays’ investment bank to build her blockchain solution for banking.

There are others in the start-up world moving even faster in the same direction, some actually operating in the market, such as Billoncash in Poland, which is the world’s first blockchain cryptocash backed by fiat currency and which passed through the harsh EU and national regulatory systems with flying colors. Tunisia is replacing its current digital currency eDinar with a blockchain solution via a Swiss startup called Monetas.

There are both threats and opportunities for the bankers… so what about the global insurance industry?

Every insurance company’s core computer system is, at heart, a big, fat centralized transaction ledger, and if the insurance industry does not begin to learn about, evaluate, build with and eventually embrace blockchain technology, the industry will leave itself naked and open to the next Uber, Netflix,  AirBnB or wanna-be unicorn that comes along and disrupts the space completely.

Blockchain more than deserves to be evaluated by insurers as a potential replacement for today’s central database model.

Where should the insurance industry start?

Companies need to start to experiment, like the bankers and stock markets, by not only working with existing blockchain technologies out there but by beginning to experiment within their own organizations. They need to work with blockchain-focused accelerators and incubators like outlierventures.io in the UK or Digital Currency Group in the U.S. and tap into the latest start-ups and technologies. They need to think about running hackathons and start to build developer communities – to start thinking about crowdsourcing innovation rather than trying to do everything in-house.

Apple, Google, Facebook and Twitter have hundreds of thousands of innovators creating products on spec via their massive developer communities. Insurance companies that don’t start lowering their walls might very well find themselves unable to innovate as quickly as emerging companies that embrace more open models in the future and therefore find themselves moot. Kodak meet Instagram.

The first step for insurance companies with blockchain technology will likely be to look at smart contracts, followed by looking for identity validation and building new structural mechanisms where parties no longer need to know or trust each other to participate in exchanges of value.

Blockchain technology, for instance, can also allow for accident or health records to be stored and recorded in a decentralized way, which can open the door for insurance companies to reduce friction in the current systems in which they operate.

Currently, the industry is highly centralized, and the introduction of new blockchain-fueled structures such as mutual insurance and peer-to-peer models based on the blockchain could fundamentally affect the status quo.

As comedian and writer Dominic Frisby once penned, “The revolution will not be televised. It will be cryptographically time stamped on the blockchain.”

Some of the many questions that the industry should explore:

  • What kind of effect will blockchain technology adoption in markets have on the the public’s perception of risk?
  • Today, the insurance industry is centralized, but what could it look like if it were decentralized?
  • How could that affect how insurance companies mutualize?
  • Can the blockchain improve customer relations and confidence?
  • Can smart contracts built on the blockchain automate parts of the process in how business is done in the insurance industry?

If you want to explore further, sign up to express interest here about our coming event in London: Chain Summit Blockchain Event for Insurance.

No More Need for Best-of-Breed Solutions?

Every five years or so, the insurance industry changes course. Hard market, then soft market. Keep the lights on, then innovate. Build, then buy. Outsource, then in-house. Best-of-breed, then suite.

Unlike with most politicians, some measure of this waffling is certainly beyond the control of insurers truly in the thick of it. However, other preferences reflect the uncertainty of markets and economies, the fluctuation of consumer expectations and demands and what some may call downright desperation to stay ahead of the curve.

Technology has long been recognized as an enabler, and it definitely fills that role when planned for strategically and implemented well. As the industry has taken up the challenge of providing faster, better, more personalized service to consumers, the demand for technology to facilitate the necessary processes has increased, as well. Core system modernization has become a top priority for insurers across all lines of business (LOBs). This means analyst firms and consultants are being engaged at a staggering (and expensive) rate to help spec out requirements, develop the request for proposal (RFP) and narrow things down to a very short list.

Interestingly, the biggest question for most insurers is not whether all of the core administration systems need to be replaced, but rather how and when is the best time to do it. Enterprise rip-and-replace projects traditionally come with a big stigma, a heavy dose of fear and bit of skepticism. Can it be pulled off successfully? With advances in technology such as the move toward cloud for deployment, the incorporation of configuration tools that promote insurer self-sufficiency and better implementation methodologies, the dark skies are definitely clearing.

Today’s most modern enterprise suites provide better integration, better capability and better results than niche-focused solutions of the past. While suite components can, by and large, all be implemented individually, pre-integration, reliance on a single data repository, use of a common architecture, an ensured upgrade path and common user interfaces mean these solutions still have a serious competitive edge over standalone systems. But does this really mean there is no more need for best of breed?

Better Integration

Once famous for creating silos and building “kingdoms” within the enterprise, insurance technology has come a long way. Recognition that insurance processes could be completed faster, and with greater assurance of accuracy, if every relevant employee was looking at the same information, insurers are turning to enterprise suites as the solution of choice. The core administration (policy, billing and claims) components of most modern enterprise suites offer increased integration and conveniently draw information for customer service representatives (CSRs), agents and underwriters from a single data or document repository. Further, by building on similar workflows, user interfaces (UIs) and processes, enterprise suites minimize change management issues and decrease downtime needed for training.

Better Capability

It’s pretty common to hear technology vendors talk about how their solutions let insurers concentrate on core competencies, but rarely is this turn of phrase actually applied to technology vendors. Insurance suites of the past typically built out full, robust capability for core administration processes, but only invested in the bare minimum when it came to supporting processes, functions and components. The best enterprise suites available today not only handle, but excel at, providing capability for peripheral processes that support core administration, including reinsurance, underwriting, document/content management, accounting/general ledger, agent/producer and consumer portals. This depth of capability was once only available to insurers through best-of-breed solutions, but now only highly customized situations and processes require such niche-focused systems.

Better Results

Even though everyone suspects it’s a much higher number, best guesses throughout the industry say that insurers replace core administration systems only once every eight to 10 years. That low frequency hardly allows internal IT staff to gain any kind of proficiency in implementation methodologies or change management. The tightly integrated nature of suite components eases implementation challenges measurably, and at the end of the day, once you get into a groove, why get out? By taking advantage of teams already established for one replacement project for another, insurers can lessen business interruption significantly. Plus, using an agile implementation methodology that incorporates iterative releases will eliminate the scope creep and missed expectations inherent to waterfall projects.

Conclusion

Five or 10 years ago, it may have been necessary to buy a best-of-breed technology solution to get capability specific to a certain LOB or process. However, modern enterprise suites, whether implemented together or individually, today offer the same robust capability once offered only by best-of-breed solutions, but with better integration, faster access to critical data, significantly easier upgrades and ultimately, better results.

Thought Leader in Action: At Walmart

How do you manage risk when your company is the biggest employer in the U.S. other than the federal government? Very carefully — and very well, if you’re K. Max Koonce II, the senior director of risk management at Walmart, until recently, when he took a senior position at Sedgwick. You do that partly by taking advantage of an extraordinary amount of data to identify potential problems, to use outcomes analysis to greatly shrink the number of litigation firms you use, to be highly selective about doctors used for workers’ comp and even to set up a full-sized, in-house third party administrator.

But let’s begin at the beginning:

Koonce was born in Mississippi, but his family moved to Bentonville, AR, where he has lived most of his life with his wife and family. He attended Harding University, a private liberal arts university located in Searcy, AR, where he graduated with a BBA in economics. Thinking that economics was not as challenging a career as what he aspired to, Koonce attended the University of Arkansas William Bowen School of Law to obtain his J.D.

He was immediately hired by Walmart upon his graduation in the ’90s and was given the responsibility to set up Walmart’s internal legal defense system for the roughly 30,000 Walmart employees at the time. He and his in-house team of legal aides handled all of Walmart’s workers’ comp and ultimately much of its liability claims. The program worked so well that the governor of Arkansas appointed Koonce as an administrative law judge for the state workers’ comp commission in 1997, with Walmart’s blessing. With Koonce’s departure, Walmart eliminated the internal legal program and transferred its litigation to outside legal firms.

koonce
K. Max Koonce II

By January 2000, Koonce was appointed by the governor to the Arkansas Court of Appeals. With a vacancy in the State’s Supreme Court, Koonce ran for State Supreme Court in a partisan election. During the campaign, he shared fond memories of attending all kinds of civic events, fundraisers and county fairs around the state. When he failed to get elected, Walmart brought him back to head its risk management program that same year. The program grew dramatically with his return.

Apart from the U.S. government, Walmart is the largest employer in North America. Nearly 20 million people shop at Walmart every day, and 90% of the U.S. population lives within 15 minutes of a Walmart. If Walmart were a country, it would be the 26th-largest economy in the world. Walmart manages 11,500 retail units in 28 countries; generates $482 billion in annual sales; and has 2.2 million employees (1.4 million associates in the U.S.). Koonce exclaimed that there was no other retail company to benchmark to, so his risk management department had to make up its own risk benchmarks. Interestingly, with a tightly managed work culture and such huge numbers to work with, Walmart’s risk management statistical and actuarial claim calculations have proven to be consistently accurate for many years.

Walmart’s risk management department has grown over the years to more than 40 risk management support personnel. Walmart divides its risk portfolio by working with two competing insurance brokers. Koonce said he had an incredibly talented and dedicated team of risk management professionals working at headquarters in Bentonville. “The analytics and metrics achieved by my experts,” he said, “were as good as any in the insurance industry.” He said that no relevant risk factors in Walmart’s operation went unnoticed.

Walmart’s workers’ comp program is designed to include specific doctors and medical facilities to ensure consistent care of any injured workers. Walmart manages detailed feedback from all of its employees to continue to fine tune its workers’ comp program. Koonce stated that risk management has always been a part of the Walmart culture, going back to its founding by Sam Walton in 1962; Walton wanted to help individuals and communities save money while ensuring that the company’s operations adhere to ethical decision making, good communication and responsiveness to employees and stakeholder.

Using an “outcomes-based” approach to litigation management, Walmart’s team relies on claims data analysis and metrics to choose, evaluate and consolidate the number of workers’ comp attorney firms. Max notes: “This approach forms tighter relations with a smaller number of lawyers to create a ‘one team’ approach to litigation.” In California alone, for example, the mega-retailer reduced the number of legal defense firms from more than 20 to three. The outcomes-based litigation strategy relies on a multivariate analysis using Walmart’s own claims data. Metrics are used to benchmark attorney performance and align specific lawyers with cases depending on claim facts and knowledge about an attorney’s unique skills and experience. At Walmart, claims examiners generally choose specific defense attorneys to maintain a continuing team relationship.

Besides retail store risks, Walmart also manages the largest private trucking firm in the U.S. and delivers more prescriptions than any other retailer. Asked if he had experienced any highly unusual claims during his tenure at Walmart, Koonce said that Walmart is all about awareness, control and consistency and that claims were nearly always within an expected parameter (i.e. slip-and-fall claims) and not horrific, as some employers experience. Each store location, including Sam’s Clubs, have conscientious safety response teams that sweep the stores periodically during their shifts and respond immediately to any safety hazards like floor spills.

A unique feature of Walmart is its subsidiary, a third party claims administrator (TPA) called Claims Management Inc. (CMI), at which Koonce served as president. Located in nearby Rogers, AR, CMI administers the casualty claims, including workers’ compensation, for all Walmart stores. Although most companies with national operations use insurer claims administrators (for non-self-insured operations), or multiple regional TPAs, Walmart’s CMI operation is a sizable TPA of its own with 600 employees. As Koonce explains, “CMI provides the claims oversight the company feels is desirable to maintain good control, communication and consistency.”

Unlike most national companies, Walmart has been able to maintain a highly efficient and focused risk management program through a tight-knit organization consisting of mostly local or regional employees who live and work in Benton County, AR (pop. 242, 321). Most of Walmart’s managers have been employees who have worked their way up the corporate ladder. Sam Walton once said: “We’re all working together; that’s the secret.”

Koonce left Walmart in September to serve as senior VP of client services for Sedgwick Claims Management Services. He was succeeded by Janice Van Allen, director of risk management at Walmart, who started as a store department manager in 1992. Koonce said he’s doing what he loves most at Sedgwick — helping risk managers achieve success with their internal programs.