Tag Archives: fragmentation

Top Emerging Risks for Insurers

Over the past two decades, enterprise risk management (ERM) has evolved from a novel concept to an accepted and mature business practice. As such, insurers have significantly improved their identification and mitigation of risks, especially in the areas of underwriting aggregation, capital inefficiencies, dominance of legacy systems and others. Certain emerging risk areas are definitely on insurers’ radar screens, such as: the Internet of Things (IOT), autonomous cars and climate change. Yet, there are other emerging risks that are not fully recognized or understood. These require a robust application of enterprise risk management techniques.

Alternative Capital at the Primary Level

So far, alternative capital providers, in the form of insurance-linked securities. collateralized reinsurance, etc., have made their impact felt among reinsurers. Primary insurers, of course, have used alternative capital in place of traditional reinsurance, usually CAT bonds. However, primary insurers have not felt the threat of being replaced by alternative capital.

The risk is real that large books of low-volatility policies, which would normally be covered by primary insurers, could be packaged by banks, reinsurers or other parties into securitized risk pools. Such packages would be attractive to investors, who want to participate in a different tranche of risk than currently offered at reinsurance levels. Thus, primary insurers could be bypassed altogether, at least, in terms of bearing risk and being paid for risking their own capital for doing so. Primary insurers would likely be needed to supply some services, such as actuarial and claims, by the party packaging the pool. But insurers could be replaced over time by other entities, given advancements in automation, coupled with artificial intelligence.

See also: Insurers Grappling With New Risks  

Before a wholesale movement of business occurs, primary insurers themselves could package large books of their less volatile business and offer them as alternative capital investments. However, in doing that, they may hasten the scenario where other parties become the packagers, simply by virtue of providing the example.

Market Fragmentation

It is clear now that internet players, which are expert at digitization as well as a variety of other forms of innovation, will be insurers as well as distributors of insurance. What is less clear, but is nevertheless an emerging risk area, is how well they will perform at profitability and how much market share they will absorb. Despite the lack of clarity at this point, the risk boils down to increased fragmentation in the marketplace wherein large and small insurers, alike, will have to deal with more competition and a greater division of business among all players.

It is not uncommon for personal insurance buyers to bundle their home, auto and either small business or life insurance with one or two carriers. But with more choices in an already crowded arena and heightened ease of doing business, it is easy to picture the same individual buying his or her 1) auto coverage from a per-mile internet provider because of best rates, 2) homeowners coverage from another internet provider because of its social responsibility stance, 3) small business coverage from a traditional insurer because of its customer service and 4) life insurance from yet another internet provider because it requires less information and hassle.

It is also easy to see that more provider choices for customers will likely lead to less volume for any one insurer. Already there over 5,000 insurers domiciled in the U.S. Although the larger insurers control a disproportionate share, more active insurers may play havoc with that situation while knocking out some smaller insurers altogether.

Bottom-line, fragmentation risk carries burdens for insurers in terms of: 1) how  to vary expense with volume, 2) how to keep their brand awareness and image vibrant and 3) how to encourage and manage continuous innovation.

Cyber Aggregation

Cyber has become a growing line of business among many, mainly larger insurers’ portfolios. When insurance pundits are questioned about where growth will come from, cyber is the answer cited most often, usually followed by privatized flood insurance.

See also: How the Nature of Risk Is Changing  

Although loss modeling has come a long way for natural catastrophe events, it is still in its infancy when it comes to cyber events. Thus, the progress that insurers have made in managing how much aggregate business they write subject to hurricane or earthquake prone losses is far superior to their ability to manage cyber aggregations.

This risk area is incredibly significant because of factors that this author has written about previously. Cyber events can potentially be either or both simultaneous and ubiquitous, unlike natural catastrophes, which tend not to happen at the same time or simultaneously around the whole world. Consider the magnitude of the losses if the “Not Petya” cyberattack that happened to Merck were to have happened to the entire Fortune 500 or to half of the Fortune 1000 during the same week. The insured loss alone for the Merck attack was estimated by Verisk-PCS as $275 million. Alternatively, consider the losses if hackers were to strike the electric grid in five major cities at the same time.

Insurers face the risk that they are assuming more risk than they realize or are capable of handling should a massive, coordinated attack occur. Until models are more perfect, insurers should proceed with an abundance of caution.

Innovation Trends in 2016

For the past few years, the innovation rate in the global insurance industry has run at peak levels, in good part because of digitization, which continues to be a pervasive influence—if not as disruptive as early projections.

Initial expectations of a departure from traditional distribution channels turned out not to be the case. Clients preferred direct, personal contact when buying insurance products. While online channels have not generated major changes—for example, in the vehicle insurance sector in Italy (5% of premiums today are generated online, compared with 1% in 2012) —telematics has had a substantial impact. It represents 15% of all insurance policies today in Italy. (These policies did not exist in 2002.)

Digital transformation is, of course, leaving its mark in four macro areas.

First, consumer expectationsA Bain survey suggests that more than three out of four consumers expect to use a digital channel for insurance interactions.

Second, product flexibility: The traditional Japanese player, Tokio Marine, for example, started offering temporary insurance policies via mobile phone, e.g., travel insurance limited to the dates of travel and personal accident coverage for people playing sports.

Third, ecosystems: They are created when the insurance value proposition depends on collaboration with partners from other sectors. For example, when Mojio sells a dongle (at, say, a supermarket) that requires connection to an open-source platform to be installed in a car, third-party suppliers are able to extract driving data from that platform and create services based on it. Onsurance, for one, offers tailor-made insurance coverage based on the data collected.

Fourth, services: Insurers today are moving away from the traditional approach of covering risks to a more comprehensive insurance plan, which includes additional services.

Connected insurance: a telematics “observatory” to promote excellence 

The fact that the Italian insurance market represents the best of international automotive telematics practices gave rise to the idea of creating an “observatory” to help generate and promote innovation in the insurance sector. Bain, AniaAiba and more than 25 other insurance groups are among its current participants.

The observatory has three main objectives: to represent the cutting edge of global innovation; to offer a strategic vision for major innovation initiatives while reinforcing the Italian excellence paradigm; and to stimulate research and debate concerning emerging insurance issues such as privacy and cyber risk.

The Observatory on Telematics Connected Insurance & Innovation, will focus not only on vehicle insurance (where Italy has the highest penetration and the most advanced approach worldwide), but on additional important insurance markets related to home, health and industrial risk, which, I am convinced, represent the next innovation wave.

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Italy is currently the best practice leader in connected insurance. Italian expertise in vehicle telematics is finding applications in other insurance areas, particularly in home insurance—where Italy is the pioneer—and in the health sector, where we recently launched our first products.

InsurTech on the rise

Another sector that has seen an increased number of investments in 2016 is InsurTech. Until last year, attention focused on many types of financial service start-ups. Today there is significant growth in investments in insurance start-ups: almost $2.5 billion invested in the first nine months of 2015, compared with $0.7 billion in 2014 [according to CB Insight]. Many new firms are entering the sector, bringing innovation to various areas of the insurance value chain. The challenge for traditional insurers will be to identify firms worth investing in, and also to create the means for working with those new players.

The challenge is integration

Ultimately, the main challenge for insurers will be to find ways to integrate the start-ups into their value chains. The integration of user experience and data sources will be key to delivering an efficient value proposition: It is untenable to have dozens of specialized partners with different apps in addition to the insurer’s main policy. It will be necessary to manage the expansion and fragmentation of the new insurance value chain.

To come up with an answer to this problem, start-ups are generating innovative collaborative paradigms. One example is DigitalTech International, which offers companies a white-label platform that integrates various company apps and those of third-party suppliers into a single mobile front end, even as it offers a system for consolidating diverse client ecosystems (domotics, wearables, connected cars) into a single  data repository.

Integrating and managing complex emerging ecosystems will be one of the greatest challenges in dealing with the Internet of Things (IoT) for the insurance industry.

(A version of this article first appeared on Insurance Review.)

How Work Comp Can Outdo Group Health

We all know the current healthcare system in the U.S. delivers erratic quality at unsustainable, yet ever-increasing, costs. Workers’ compensation medical care is affected by those costs. 

A major shift in the health industry, value-based healthcare, will benefit workers’ compensation. Embracing selected new medical management methodologies put forth in value-based healthcare has the potential to be powerful.

Value-based healthcare means restructuring how medical care is organized, measured and reimbursed. It moves away from a supply-driven system organized around what physicians do to a patient-centered system organized around what patients need. The focus is shifted from volume and profitability to patient outcomes (quality care). When fully implemented, the overall impact will be nothing less than staggering.

Porter and Lee, healthcare industry strategists at Harvard, have described six value strategies necessary to achieve healthcare industry transformation. Many of the changes are now underway in ACOs (accountable care organizations) such as the Cleveland Clinic, proving the concept. These defined initiatives produce desired results—quality care at less cost. 

Six components of value-based healthcare

The following briefly describes the methodologies necessary to transform healthcare, according to Porter and Lee.

  1. Integrated practice units (IPUs)—meaning multiple specialists practice together, resulting in comprehensive and integrated medical care rather than fragmented, duplicated services
  1. Measure true outcomes and costs for every patientWhen outcomes are measured and reported publicly, providers are under pressure to improve. Fraud and self-dealing are reduced.
  1. Bundled paymentsPayment bundles are capitated single payments for all the patient’s needs during defined episodes of care, such as specific surgical procedures. Providers are rewarded for delivering quality while spending less.
  1. Integrate care delivery systemsServices are concentrated and integrated to eliminate fragmentation and to optimize the quality of care delivered at any given location.
  1.  Expand geographic reachCenters of excellence are developed where expertise is gained through higher volume of similar procedures.
  1.   Information technologyData mining powerfully enables the first five initiatives and informs services and decisions.

As Porter and Lee say, “Whether providers like it or not, healthcare is evolving from a proficiency-based art to a data-driven science, from freelance physicians to hospital-employed physicians, from one-size-fits-all community hospitals to vast hospital networks organized around centers of excellence.”

Value-based medical management in workers’ comp

The goal of value-based medical care is to enhance quality outcomes for patients (injured workers) while reducing costs. Focusing on quality (what the patient needs) actually reduces costs.

For group health, the measures are physical and philosophical, requiring widespread disruption in how services are organized, delivered and reimbursed. However, workers’ compensation payers can benefit by incorporating three of the six value measures into their medical management process now.

  1. Measure true outcomes and costs for every patient (the injured worker)

Physician performance is scored based on injured workers’ experience and outcomes along with cost. Providers who score poorly can be avoided.

  1. Bundle payments

Bundling is capitating payments for all the services required for procedures such as specific surgical procedures, including all associated pre-op and post-op care. The costs are kept in line because providers need to stay under the cap to be profitable. They also focus on quality, because re-dos, redundancy and complications add cost to the service bundle, thereby diminishing profits. Prepare to see bundled payment options available to workers’ compensation sooner rather than later.

  1. Information technology

The data in workers’ compensation, while in silos, is all organized around individual claims and injured workers. When the data is integrated at the claim level, patient experience, provider performance, outcome and cost analysis opportunities are unlimited. The more comprehensive and accurate the data, the greater the opportunity for gain.

Those who cling to traditional seat-of-the-pants medical management will be left behind. Those in group health may be hampered by slow regulatory change, organizational upheaval and resistant providers, while workers’ compensation payers are free to adopt transformative value measures now. Organizations that progress rapidly to implement the value agenda will reap huge benefits.