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13 Emerging Trends for Insurance in 2016

Where does the time go?  It seems as if we were just ringing in 2015, and now we’re well into 2016. As time goes by, life changes, and the insurance industry—sometimes at a glacial pace—does, indeed, change, as well. Here’s my outlook for 2016 on various insurance topics:

  1. Increased insurance literacy: Through initiatives like The Insurance Consumer Bill of Rights and increased resources, consumers and agents are both able to know their rights when it comes to insurance and can better manage their insurance portfolios.
  2. Interest rates: The federal funds target rate increase that was announced recently will have a yet-to-be determined impact on long-term interest rates. According to Fitch Ratings, further rate increases’ impact on credit fundamentals and the longer end of the yield curve has yet to be determined. Insurance companies are hoping for higher long-term rates as investment strategies are liability-driven. (Read more on the FitchRatings website here). Here is what this means: There will not necessarily be a positive impact for insurance policy-holders (at least in the near future). Insurance companies have, for a long period, been subsidizing guarantees on certain products or trying to minimize the impact of low interest rates on policy performance. In the interim, many insurance companies have changed their asset allocation strategies by mostly diversifying their portfolios beyond their traditional holdings—cash and investment-grade corporate bonds—by investing in illiquid assets to increase returns. The long-term impact on product pricing and features is unknown, and will depend on further increases in both short- and long-term interest rates and whether they continue to rise in predictable fashion or take an unexpected turn for which insurers are ill-prepared.
  3. Increased cost of insurance (COI) on universal life insurance policies: Several companies—including Voya Financial (formerly ING), AXA and Transamerica—are raising mortality costs on in-force universal life insurance policies. Some of the increases are substantial, but, so far, there has been an impact on a relatively small number of policyholders. That may change if we stay in a relatively low-interest-rate environment and more life insurance companies follow suit. Here is what this means: As companies have been subsidizing guaranteed interest rates (and dividend scales) that are higher than what the companies are currently (and have been) earning over the last few years, it is likely that this trend will continue.
  4. Increasing number of unexpected life insurance policy lapses and premium increases: For the most part, life insurance companies do not readily provide the impact of the two prior factors I listed when it regards cash value life insurance policies (whole life, universal life, indexed life, variable life, etc). In fact, this information is often hidden. And this information will soon be harder to get; Transamerica is moving to only provide in-force illustrations based on guarantees, rather than current projections. Here is what this means: It will become more challenging to see how a policy is performing in a current or projected environment. At some point, regulators or legislators will need to step in, but it may be too late. Monitor your policy, and download a free life insurance annual review guide from the Insurance Literacy Institute (here).
  5. Increased complexity: Insurance policies will continue to become more complex and will continue their movement away from being risk protection/leverage products to being complex financial products with a multitude of variables. This complexity is arising with products that combine long-term care insurance and life insurance (or annuities), with multiple riders on all lines of insurance coverage and with harder-to-define risks — even adding an indexed rider to a whole life policy (Guardian Life). Here is what this means: The more variables that are added to the mix, the greater the chance that there will be unexpected results and that these policies will be even more challenging to analyze.
  6. Pricing incentives: Life insurance and health insurance companies are offering discounts for employees who participate in wellness programs and for individuals who commit to tracking their activity through technology such as Fitbit. In auto insurance, there can be an increase in discounts for safe driving, low mileage, etc. Here is what this means: Insurance companies will continue to implement different technologies to provide more flexible pricing; the challenge will be in comparing policies. The best thing an insurance consumer can do is to increase her insurance literacy. Visit the resources section on our site to learn more.
  7. Health insurance and PPACA/Obamacare: The enrollment of individuals who were uninsured before the passage of Obamacare has been substantial and has resulted in significant changes, especially because everyone has the opportunity to get insurance—whether or not they have current health issues. And who, at some point, has not experienced a health issue? Here is what this means: Overall, PPACA is working, though it is clearly experiencing implementation issues, including the well-publicized technology snafus with enrollment through the federal exchange and the striking number of state insurance exchanges. And there will be continued challenges or efforts to overturn it in the House and the Senate. (The 62nd attempt to overturn PPACA was just rejected by President Obama.) The next election cycle may very well determine the permanency of PPACA. The efforts to overturn it are shameful and are a waste of time and money.
  8. Long-term care insurance: Rates for in-force policies have increased and will almost certainly face future increases—older policies are still priced lower than what a current policy would cost. This is because of many factors, including the prolonged low-interest-rate environment, lower-than-expected lapse ratios, higher-than-expected claims ratios and incredibly poor initial product designs (such as unlimited benefits on a product where there was minimal if any claims history). These are the “visible” rate increases. If you have a long-term care insurance policy with a mutual insurance company where the premium is subsidized by dividends, you may not have noticed or been informed of reduced dividends (a hidden rate increase). Here is what this means: Insurance companies, like any other business, need to be profitable to stay in business and to pay claims. In most states, increases in long-term care insurance premiums have to be approved by that state’s insurance commissioner. When faced with a rate increase, policyholders will need to consider if their benefit mix makes sense and fits within their budget. And, when faced with such a rate increase, there is the option to reduce the benefit period, reduce the benefit and oftentimes change the inflation rider or increase the waiting period. More companies are offering hybrid insurance policies, which I strongly recommend staying away from. If carriers cannot price the stand-alone product correctly, what leads us to believe they can price a combined product better?
  9. Sharing economy and services: These two are going to continue to pose challenges in the homeowners insurance and auto insurance marketplaces for the insurance companies and for policy owners. There is a question of when is there actually coverage in place and which policy it is under. There are some model regulations coming out from a few state insurance companies, however, they’re just getting started. Here is what this means: If you are using Uber, Lyft, Airbnb or a similar service on either side of the transaction, be sure to check your insurance policy to see when you are covered and what you are covered for. There are significant gaps in most current policies. Insurance companies have not caught up to the sharing economy, and it will take them some time to do so.
  10. Loyalty tax: Regulators are looking at banning auto and homeowners insurance companies from raising premiums for clients who maintain coverage with them for long periods. Here is what this means: Depending on your current auto and homeowners policies, you may see a reduction in premiums. It is recommended that, in any circumstance, you should review your coverage to ensure that it is competitive and meets your needs.
  11. Insurance fraud: This will continue, which increases premiums for the rest of us. The Coalition Against Insurance Fraud released its 2015 Hall of Shame (here). Insurance departments, multiple agencies and non-profits are investigating and taking action against those who commit elder financial abuse. Here is what this means: The more knowledgeable that consumers, professional agents and advisers become, the more we can protect our families and ourselves.
  12. Uncertain economic and regulatory conditions: Insurance companies are operating in an environment fraught with potential changes, such as in interest rates (discussed above); proposed tax code revisions; international regulators who are moving ahead with further development of Solvency II; and IFRS, NAIC and state insurance departments that are adjusting risk-based capital charges and will react to the first year of ORSA implementation. And then there is the Department of Labor’s evaluation of fiduciary responsibility rules that are expected to take effect this year. Here is what this means: There will be a myriad of potential outcomes, so be sure to continue to monitor your insurance policy portfolio and stay in touch with the Insurance Literacy Institute. Part of the DOL ruling would result in changes to the definition of “conflict of interest” and possibly compensation disclosure.
  13. Death master settlements: Multiple life insurance companies have reached settlements on this issue. Created by the Social Security Administration, the Death Master File database provides insurers with the names of deceased people with Social Security numbers. It is a useful tool for insurers to identify policyholders whose beneficiaries have not filed claims—most frequently because they were unaware the deceased had a policy naming them as a beneficiary. Until recently, most insurers only used the database to identify deceased annuity holders so they could stop making annuity payments, not to identify deceased policyholders so they can pay life insurance benefits. Life insurers that represent more than 73% of the market have agreed to reform their practices and search for deceased policyholders so they can pay benefits to their beneficiaries. A national investigation by state insurance commissioners led to life insurers returning more than $1 billion to beneficiaries nationwide. The National Association of Insurance Commissioners is currently drafting a model law  that would require all life insurers to use the Death Master File database to facilitate payment of benefits to their beneficiaries. To learn more, visit our resources section here. Here is what this means: Insurance companies will not be able to have their cake and eat it too.

What Can You Do?

The Insurance Consumer Bill of Rights directly addresses the issues discussed in this article.

Increase your insurance literacy by supporting the Insurance Literacy Institute and signing the Insurance Consumer Bill of Rights Petition. An updated and expanded version will be released shortly  that is designed to assist insurance policyholders, agents and third party advisers.

Sign the Insurance Consumer Bill of Rights Petition 

What’s on your mind for 2016? Let me know. And, if you have a tip to add to the coming Top 100 Insurance Tips, please share it with me.

Reimagining Insurance in 2016

After more than 20 years in the insurance industry, working on three continents in various product lines and capacities, I have seen many changes occur alongside a notable constant: Insurance consumers want to pay less, and insurance company returns don’t satisfy shareholders.

Therein lies the rub. The conventional way to increase returns has been for insurers to increase premiums (based on what is presumed to be a fixed risk level), but that approach is contrary to the client’s desire. Yes, insurers also look to improve operational efficiency and claims handling, but those efforts are yielding diminishing returns.

Why not take a different tack and really focus our efforts on reducing the cost of risk? We’d then diminish the tension between insurers and their clients. Client premiums would drop, and insurers’ profitability would rise.

Like many, I believe that insurance is on the cusp of dramatic change. Insurers that thrive will put risk reduction at the forefront of their value proposition. That risk reduction will translate into lower premiums for diminished risk. Clients, and society at large, will be the ultimate winners.

The increasing availability and variety of data, more sophisticated tools to extract insights from that data and technology to cost-effectively support risk reduction will fuel this evolution. Insurers will need to rebalance their resource deployment away from the evaluation of risk for the purpose of assuming liability (underwriting) to the evaluation of risk for the purpose of reducing risk (risk consulting). Clients will come to expect insurers to provide advice on actions they can realistically employ AND the savings they will be guaranteed if they take those actions.

Whether change displaces current insurers or they evolve remains to be seen. Some insurance executives see a future of insurance that delivers a different value proposition to clients. We see a value proposition that primarily focuses on reducing the cost of risk. Insurers will increasingly supplement expertise with data, analysis and technology focused on reducing the cost of risk. They see a future where the industry unlocks the insights in insurers’ own data, integrates external sources as they become available and closes information gaps that exist. They see a future where clients are empowered with clear, objective risk measures that allow them to control their risk level … and their premiums.

In this future, insurers become tech companies where the insurance policy covers the limited remaining risks and in essence serves as a warranty of the risk services provided.

My discussions leave me optimistic that there are like-minded executives who see a different value proposition for insurers. But most I have spoken with draw the conclusion that neither their company nor any they know has the critical mass of support necessary to drive change.

To adapt and stay viable, insurance companies need to think about how evolutions in technology and data science can benefit clients and reshape business models. My goal is to encourage that debate.

I’ll be introducing a topic and perspective every other week that will focus generally on evolutions in the industry and the power of technology to transform the way risk is quantified, along with associated pitfalls. Each piece will conclude with a polling question and, depending on the volume of response, these results will be published.

Coming topics will include:

New Data and New Tools: When we think of data, most think of text and numbers that has been organized. By expanding our thinking, we can add satellite imagery, sensor-derived data, the Internet of Things (IoT), traffic cameras, customer service phone call recordings, pictures and many other potentially valuable sources. Imagine being able to analyze traffic light cameras to understand real-time risk at intersections. Imagine crowdsourcing the analysis of satellite and aircraft imagery to identify properties affected by natural disasters. Imagine being able to review a snapshot of a damaged automobile and adjust many claims without human intervention. Research, and in some case practical applications, exist in these and many other areas. We need to identify the information we need to know to understand risk and then either find the data that will help us or create our own. How do we ensure that the insurance industry is at the forefront of collecting, generating, integrating and analyzing all forms of data to drive deeper insights?

Data, Data Everywhere but Not a Drop for (Clients) to Drink: Every insurance company collects and generates a tremendous amount of data. Some of that data is structured; a much larger volume is memorialized in pdf files, pictures and customer service call recordings. While potentially useful for clients, the data is rarely made available at all and even more rarely in a format that provides insights. Insurers are investing in using that information to drive better claims outcomes, better risk segmentation and better internal processes. Clients expect to benefit from insurers’ resources but generally don’t get the insight they need to effect change. What would it mean if we insurers transformed our business model so that data-driven insights and risk mitigation strategies replace risk transfer as the core of value proposition?

Risk Mitigation Strategies and New Technologies: Imagine being able to identify the moment a risky behavior is occurring and having the ability to automatically intervene or alert the appropriate person. In some realms, that possibility already exists. Applications exist to alert drivers to their own risky behavior. Active technology exists to automatically apply the brakes to prevent collisions. Yet even where appropriate data exists, insurers are hesitant to make definitive recommendations based on specific technologies. Insurers are unique in that they price risk and ensure the realization of financial benefits from investments in risk reduction. Should we as an industry more actively become creators or advocates of risk technology? Can we have enough faith in our recommendations to integrate benefits immediately in prices? Does the traditional insurance policy become a form of warranty that our risk advisory services are effective?

Transparent Risk Indices: We are about to enter an information age where it is possible to quantify risk objectively in real-time. Creating risk indices, making them transparent and using them as the basis for establishing price would give clients confidence in the objectivity of the process and confidence that if they invest in changing those indices they will immediately get the benefit. The indices will also give non-insurance risk capital providers the opportunity to deploy capital against and trade risks that previously lacked the transparency. What can we learn from other financial services that have developed transparent risk indices that allowed capital to be deployed against those risks from a wider variety of sources?

A Commissioner’s View of Innovation

There’s a thundering herd running through Iowa this year — and not just the herd of presidential candidates. There also is a herd of technological innovators driving considerable change in insurance.

Many people find it intriguing that technology innovators are coming through Iowa, but Iowa is an insurance state and home to some of the largest insurance companies in the U.S. Iowa also is home to niche companies that price out very specific risks to targeted markets.

In my role as Iowa’s insurance commissioner, I’ve met with many entrepreneurs whose ideas will improve, enhance and create value for insurance companies and consumers. In these meetings, I hear a fairly consistent and constant theme: State insurance regulators are a major burden for entrepreneurs and, in turn, for their ideas for innovation.

However, when I walk them through what regulators do and provide them a copy of the Iowa insurance statutes and regulations that empower my office, I’ve found that most haven’t read even one word of insurance law before working on an idea or creating a product or service.

To be clear, I don’t believe I stand in the way of innovation. On the contrary, I am very supportive of innovation.

But my fellow regulators and I do have an important job — consumer protection. Insurance is one of the most regulated industries in the nation because, for the insurance system to work, when things go wrong and a consumer needs to make an insurance claim the funds to pay the claim must be available.

The days on which people file insurance claims may be the worst days in their lives, and they may be very vulnerable. Perhaps a loved one passed away; a home is destroyed; an emergency room visit or major surgery is needed; someone may be entering a long-term care facility; a car is totaled; or injuries are preventing a return to work. Insurance is a product we buy but really hope we never use. However, when we need to use it, we want the company to have the financial resources to pay the claim. It’s our job as regulators to make sure the companies in our states are financially strong enough to pay claims in a timely fashion.

Insurance is regulated at the state and territorial level by 56 commissioners, superintendents or directors. The state-based regulatory system has served consumers well for more than 150 years and demonstrated extreme resilience in the last financial crisis. My fellow commissioners and I are public officials either elected or appointed to our respective posts. We are responsible and accessible to the citizens of our states or territories.

However, I do understand that complying with the laws of all the states, District of Columbia and territories poses challenges to entrepreneurs. In recognition of this, state regulators have worked together to help minimize differences between states through the National Association of Insurance Commissioners, thereby creating a more nationally uniform framework of insurance regulation while recognizing local markets and maintaining power in the hands of the states.

The job of an insurance regulator sounds easy. We exist to enforce the state’s laws, to make sure that companies and agents follow that law and to ensure that companies domiciled in our state are in financial position to pay claims when required. As with many things, the duties of regulators are more difficult than they appear. Regulators need to have great knowledge of multiple lines of insurance, technological advances, financial matters and marketing practices. In reality, the execution of our job duties in enforcing our state’s laws may at times cause friction with some innovative ideas.

As I stated, I don’t believe that I or my fellow regulators stand in the way of innovation. I believe that a robust and competitive market that delivers value to the consumer is one of the best forms of consumer protection. However, our insurance laws are also designed to make sure that insurance companies stay in the market and keep the promises that they have made to their customers when the products were originally sold.

In executing my duties as commissioner, I pay a great deal of attention to innovation and developments. I personally spend time with entrepreneurs, investors and others to learn about new trends and ideas. My commitment to enforcing state laws, combined with the laser focus on protecting consumers, requires keeping abreast of innovation.

My office addresses more than 6,000 consumers’ inquiries and complaints every year. People on my staff address issues quickly and care deeply about their roles in helping Iowans. I’ve learned in my nearly three years as commissioner that many consumers don’t understand the insurance they own. They may have relied on an agent, or purchased insurance coverage on their own, hoping it will suit their needs. However, when life happens and an insurance claim needs to be made, consumers may discover the coverage they purchased did not suit their needs. For instance, some people may discover their health plan network doesn’t have healthcare providers near their home. Others may discover too late that certain items lost in a fire were not covered under their homeowners’ policy. Some consumers may discover that the very complex product that they bought simply did not measure up to their expectations.

Having consumers be comfortable with making a purchase and not understanding what they purchased is a culture we need to change. Some consumers desire to simply establish a relationship with an insurance agent or securities agent they feel they can trust, schedule automatic withdrawals from their bank account to be invested or submit their premiums for their insurance products as required so they can ultimately focus their attention on all the other activities that occupy our busy lives. In essence, they forget that they purchased the coverage, and, while it may have been the right purchase at that time, it may not fully suit their needs now or when they need to file a claim.

Insurance regulators and the insurance industry need to encourage consumers to learn more about their coverage needs and the insurance they actually purchase. Innovation that leads to personalizing insurance and better consumer understanding is a good thing. Innovation that increases speed-to-market, enables better policyholder relations through in-force management and provides more value to the consumer is a good thing. However, all that innovation must comply with our state’s laws.

To that end, I’ve met with several entrepreneurs to highlight issues that would arise with certain proposed business models. I enjoy discussing ideas about our industry and sharing Iowa’s perspective. Innovation can help consumers, and it’s my hope that entrepreneurs continue to work with regulators to develop new products and services. This collaboration helps both the regulators and the entrepreneurs and has led to some very positive and healthy dialogue in Iowa.