Tag Archives: insurtech trends

White-Collar Crime: Are You Next?

Are you next for white-collar crime? Unfortunately, the answer is likely yes.

Karen’s family-owned company prided itself on the loyalty and longevity of its employees. However, when she didn’t recognize a vendor receiving continuing payments, she grew suspicious. When the company’s bookkeeper assured her the invoices, which totaled in the tens of thousands of dollars over 18 months, were legitimate, Karen wanted to believe her.

A thorough investigation determined the vendor was a front for fraud, and the “loyal” employee was the mastermind behind an all-too-common crime.

Chances are you know a client, colleague or acquaintance who has experienced a similar nightmare. According to the Association of Certified Fraud Examiners’ 2018 Report to the Nations, small businesses – those with 100 employees or less – lose nearly twice as much per scheme to white collar crime as larger businesses, $200,000 versus $104,000. Detecting fraud required a median duration of 16 months.

While misappropriation schemes like fraudulent disbursements are the most common, at 89% of occupational fraud cases, financial statement fraud schemes are the most costly, racking up a median loss of $800,000 in 2018 – enough to put most small businesses out of business. The most common forms of occupational fraud were corruption, billing fraud and non-cash theft.

Why are small companies more vulnerable?

First, most employers trust their people, especially those with tenure. If you think Darla in claims who just celebrated 20 years with the organization is unlikely to be running a false invoicing scheme, think again. Fraudsters who have been with a company longer than five years steal twice as much. Fraudsters who collude with coworkers, a common occurrence, up a company’s losses exponentially. Word to the wise: Don’t trust Darla, and don’t overlook her friend Sheila in accounts receivable!

Second, there’s a misplaced assumption that it “won’t happen to me.” The truth is that occupational fraud happens all the time, and most victims don’t recover a penny. In 2018, 2,690 cases of occupational fraud were reported globally, costing companies over $7 billion. However, the incidence of fraud is likely much higher. Why? Companies don’t want the negative publicity. In fact, the number of occupational fraud cases prosecuted in 2018 decreased by 16%.

Third, many companies simply don’t have the resources to establish a fraud prevention department. As a result, internal control weaknesses are responsible for half of all frauds. This includes a lack of formal controls, no management review of vulnerabilities and no independent checks or audits. Many companies choose instead to rely on employees to “tip them off” to co-workers who are skimming or running scams. While employee tips do work, it’s no guarantee that fraud will be avoided or less damaging.

See also: ‘Jobsolescence’: How Big a Threat?  

The best defense is a good offense. Formal fraud control mechanisms result in lower losses and quicker detection. Among the most common fraud prevention tactics include employee codes of conduct, external audits of financial statement and reporting processes, audits by internal staff, independent audit committees, management certification of financial statements and fraud prevention training for employees and management.

Surprisingly, the best tactics for reducing fraud losses and duration are the least used. Surprise audits result in 51% lower losses and 54% quicker detection, and data monitoring and analysis results in 52% lower losses and 58% quicker detection. Yet only 37% of companies victimized in 2018 had these controls in place.

Here is my advice to insurance clients on how best to protect their businesses as well as those of their insureds from fraud:

Understand that an external audit is not intended to detect risk. Most accounting and assurance firms clearly state in their letter of engagement that an audit of financial statements is not designed for fraud detection. Any fraud-related services require a separate letter of engagement with a specific scope of services focused directly on fraud detection.

Know that neither you nor your insureds are impervious to fraud no matter how delightful your people are. There are six well-known behavioral red flags, such as living beyond one’s means, financial and family difficulties, control issues, a wheeler-dealer attitude and unusually close associations with vendors or customers. Fraudsters typically display one or more of these red flag behaviors. Understanding and recognizing the red flags can help detect fraud and mitigate losses.

Select an audit/assurance professional who holds both CPA (certified public accountant) and CFE (certified fraud examiner) designations. CPAs understand the financial side of organizations and financial ratios/relationships, while CFEs understand investigative techniques, fraud schemes, prevention and deterrence. Put these distinct knowledge bases together and your organization will have a powerful advocate for mitigating, preventing and detecting white-collar crime.

Conduct a risk assessment. The objective is to identify what makes an organization most vulnerable to fraud. The process involves assessing the incentives, pressures and opportunities that individuals within your organization have to commit fraud and determining those who put you at greatest risk. The assessment also looks at existing controls and their effectiveness and whether the organization is complying with regulations and professional standards. The findings serve as the foundation of the fraud prevention strategy.

Develop and implement a fraud prevention strategy that incorporates policies and procedures for: preventing and detecting fraud; educating employees; communicating continually; responding to fraud once identified; limiting damage; punishing perpetrators; and rebuilding organizational confidence in the wake of fraud.

If you suspect fraud is present in your organization, contact your CFE immediately. A CFE will help determine whether an issue is actual fraud or a mistake, and how best to proceed. The sooner you engage a knowledgeable CFE, the quicker you can determine fraud, the perpetrator, extent of damages and how best to proceed.

See also: Hacking the Human: Social Engineering

I close this article by asking the same question I opened with: Are you next? It is my hope that your organization is the next to implement an anti-fraud strategy and not the next victim of fraud. While no system of internal controls can fully eliminate the risk of fraud, well-designed and effective controls will mitigate your risk.

Keys to Improving in Commercial Auto

A strong economy does not translate to commercial insurance profits. After eight consecutive years of underwriting losses, commercial automotive insurers are shouting, “Enough is enough!” Today, these insurers are in a strong position to right the ship and turn those losses into profits.

While written premiums have increased 64% from 2012-2018, the industry continues to experience significant profitability challenges, having booked more than $11 billion in underwriting losses during that same period, according to BestLink Industry data from A.M. Best. Trade combined ratios have been deteriorating in recent years and peaked at 108.1% in 2016 before improving marginally to 107.8% in 2017 and 105.8% in 2018.

©A.M. Best – used with permission

Changes in risk exposure are pressuring insurers to improve pricing and underwriting effectiveness. As macroeconomic fundamentals remain strong, drivers are logging more miles and fleets are steadily growing, resulting in a shortage of experienced drivers, according to the Truck Driver Shortage Analysis conducted by ATA. With increases in exposure due to more miles driven, less-experienced drivers on the road and a rise in distracted driving incidents, it can be difficult to see how we can return to profitability anytime soon.

Choose a Smarter Path to Profitability

Despite these challenges, you can break the money-losing cycle of losses and create profit within your commercial auto book. A simple option is to increase base rates and risk alienating current and prospective clients. Alternatively, you can work more surgically, while improving your underwriting returns by using more data, information and technology.

See also: Cyber Insurance Needs Automated Security  

There are a number of ways to improve your underwriting and pricing decision-making process and reclaim commercial auto profits:

  1. Reduce your MVR expense — Don’t waste money ordering MVRs to determine if a driver has a violation on his or her record. TransUnion’s internal data shows that 72% of drivers have a clean driving record. To validate driving histories, use court record data first and only order MVRs on the drivers who warrant it. Court record data is readily available for a fraction of the cost of MVRs.
  2. Use new driver information for fleet underwriting — Aggregated driver information and non-adjudicated violation data are available to help insurers improve underwriting and pricing. For example, according to TransUnion’s aggregated results based on an internal study, we have seen insurers realize up to a 200% improvement in loss ratio lift by using new driver information. Look for ways to use more data to build smarter predictive models for fleet driver underwriting.
  3. Include vehicle history in underwriting — Every vehicle has a different story. For example, two five-year-old trucks, same make and model, may have different histories. One may have a branded title, while the other may have a single owner and no damage. Vehicle histories are predictive of future losses, and incorporating this data into your underwriting process can provide benefit. Adopt aggressive portfolio management techniques. Monitor, identify and mitigate changes in risk. Profits are gained by narrow margins in commercial auto insurance, and changes in risk can be one of your biggest portfolio exposures. Today’s advanced portfolio management techniques are more available and affordable than you may think.
  4. Reward companies engaged in preventing distracted drivers — Distracted driving is a growing factor in trucking accidents and fatalities. Truce Software and other similar devices mitigate against distracted driving. Provide policy incentives encouraging clients to adopt technology and programs that help reduce distracted driving.
  5. Require telematics program participation — Electronically monitoring driver safety and behavior enables you to encourage better driving habits. Monitoring can benefit your customers and enable you to better understand the risk within a fleet. Make telematics a standard requirement for writing a policy.
  6. Enhance your fraud prevention strategy — The best defense against fraud is to stay on offense. Insurers face fraud throughout the entire policy lifecycle, from the initial application to the claims process. The majority of insurers believe fraud contributed at least five percentage points to their combined ratio, according to a recent Forrester Consulting study. Fraudsters continue to evolve, and so should your fraud strategy.

See also: Underwriters Need Some Power Tools  

As you can see, despite the challenges associated with profitability, there are ways commercial auto insurers can bend the loss curve toward profit. By leveraging more comprehensive data, information and technology, you can give your underwriting business a fighting chance and say, “Enough!” to underwriting losses.

How to Experiment in Innovation Training

Many companies want to establish a culture of innovation, one that encourages flexibility and creativity and supports risk-taking. The benefit? Breakthrough products, a superior customer experience and a nimble response to market challenges.

But what is happening in organizations today, and what can HR teams do – specifically the L&D (learning and development) function – in not only supporting, but also driving, a culture of innovation?
While the shape of an innovation culture can vary from company to company, certain traits tend to stand out. There should be no surprise that the companies leading the innovation culture charge are unafraid to take risks, create diverse environments where employees can personalize their learning, and are role models for the rest of the company in terms of their approach to learning and development (L&D). (Findcourses.co.uk has highlighted some of the best practices for harnessing risk and building a culture of innovation at your organization.)

Creating a safe space for risk

Innovation happens when employees feel free to take risks without repercussions. Focusing on employees’ individual strengths has been key to creating a culture of innovation. Focusing on strengths creates trust; it creates a safe space to try something and possibly fail, have a conversation about it and move forward. For many organizations, innovation is a byproduct of their culture that prioritizes relationship-building and trust between employees and managers over learning hard skills.

Going hand-in-hand with creating an environment where risks can happen without repercussion, encouraging idea-sharing between colleagues on all levels of the organization will also propel innovation. The takeaway? Learn to create risk programs that allow employees to cultivate their individual strengths while building relationships with others on the team. Where there’s support, there’s innovation – and trust needs to exist between team members for innovation to flourish.

Experiment (and then recalibrate)

Innovation comes from risk-taking. But because there are so many effective mediums and methods to deliver learning in 2019, it’s important to think outside the box and beyond traditional learning – and to never be afraid of recalibrating based on results. According to the 2019 L&D Benchmarking Survey, employee engagement and risk-taking go hand in hand, with 77% of organizations with highly engaged employees “very willing” to take risks.

However, it is also worth remembering that not every risk works. It’s vital to carry out evaluations and continuously monitor feedback to produce and develop the most innovation-driving programs.
Evaluation and recalibration are at the heart of world-leading innovation initiatives. Through surveys, focus groups or other evaluations, it’s crucial to determine which programs work, which can be optimized and which should be scrapped. Even more critical, however, is that you cultivate a working environment where employees can question current processes without repercussion. In a space where there’s mutual trust, reflection can grow into innovation.

See also: Is Your Education Strategy Effective?  

Embrace diversity

Research shows that companies with diverse and inclusive workforces are more innovative and profitable – and increasing inclusivity isn’t something that needs to be relegated to your company’s talent management or D&I functions. L&D teams should create or offer initiatives themselves. “We’ve had people from over 25 different countries developing our content,” says Martin Hayter, the Global Assurance Learning Leader for EY.

“The team has a global flavor to it. It brings more creativity and higher quality, and we know that the content we develop is going to be applicable to different cultures and to both emerging and mature markets.”

The evidence is beginning to emerge: The more diverse your team, the stronger your culture of innovation will be.

Keep your L&D function agile

An agile L&D program is the key to supporting innovation, especially when your company is composed of a large multinational workforce. L&D teams must be built upon a flexible framework and remain nimble, adjusting to continuous organizational changes without compromising either the speed or quality of talent development strategies. An overly planned L&D program is less likely to adapt with any changes in business strategy, so don’t be afraid to stray from your schedule when business needs shift. This also means that, for innovation to occur, your program needs to tailor itself to the individualized present (and future) need of employees.

See also: Case Study on Risk and Innovation  

To stimulate a culture of innovation, look outside your company walls for inspiration. Other companies and teams likely have excellent insights that you can apply to your own programs. For your L&D team to create a culture of learning for your organization, your team itself must also be constantly learning.

Participating in industry L&D or HR award programs is another way to get insights on your strategy and programs, and it’s one approach EY has used to benchmark themselves. Their L&D team also works with external vendors to ensure they’re incorporating the best practices in the industry. An innovative, forward-thinking L&D team is one way to spark progress across the entire organization.

Make the connection between L&D and innovation explicit
You could plan great L&D initiatives and hope that it sparks innovation company-wide, or you could be even more aggressive. Planning programming around the concept of innovation might include a speaker series with innovators in your industry, a course on design thinking or hack-a-thons where employees get to take a step back from their daily duties and focus on what could be improved at your company.

The Behavioral Science on Buying Insurance

Why do people buy insurance, when they could spend their money on dozens of other excellent products and services? A classical answer would be, “to be safe against risks.” Then, why do some people spend thousands of dollars on insurance products while others don’t spend a penny? Doesn’t everyone want to be safe against risks?

To find real answers, it is necessary to take a closer look at the motivations of people.

Deciding whether to purchase insurance is not easy. Consumers usually don’t get any financial benefit in return for the premium they pay. However, in addition to financial benefits, insurance products offer moral benefits such as peace of mind and a feeling of safety. So the benefit of insurance from the customer’s view can be formulated as (risk expectation x coverage) + (moral benefit).

Thus, the motivation of customers to buy insurance depends on two main indicators: risk expectation and risk sensitivity. Risk expectation determines the expected financial value of insurance. Risk sensitivity shows the concerns of customers, so it directly affects moral benefit.

Who Wants Pizza?

Being cautious is the main instinct behind insurance purchases. Of two consumers who face the same risks, the more cautious one is more likely to buy insurance. Exercising regularly to be safe against chronic illness resembles buying home insurance to be safe against fire, theft and earthquake. Preferring fast food instead of healthy food is like buying a great TV instead of auto insurance. Purchasing an insurance product is like dieting; costs arise immediately, but benefits are achieved later.

See also: Behavioral Economics Show Details Matter  

Generally, competition among insurance companies is thought to depend on prices, brand awareness and customer service. In fact, competition is much broader. Purchasing decisions cross product categories; people buy home insurance or… shoes.

Insurance companies should develop strategies to convince more people to buy insurance, not those shoes.

Fans of Insurance

The key point is: People make risk assessments based on their personal experiences, not actuarial tables. Therefore, insurance companies need to focus on the feelings and emotions of consumers and not just working on statistics.

People exaggerate the likelihood of risk occurrence under certain circumstances, which increases their sensitivity of risk. People will be more likely to buy insurance even if all other factors are the same.

Some opportunities:

  • High Loss Frequency: Consumer tend to demand insurance where loss frequency is high even if severity is not so great. A house fire is a disaster, but a car accident is more likely. This explains why automobile insurance is one of the biggest lines.
  • Customers With Claim: Risk sensitivity increases cumulatively. If you faced a negative situation recently, you look at the world more pessimistically. It would be a good strategy to offer home insurance to customers who made auto insurance claims the previous month.
  • Highlighted Risks: If a risk is highlighted in public, people exaggerate the possibility even if risk occurrence is not high. Theft news broadcast on TV for a week would increase people’s tendency to buy home insurance policy for a time.
  • After Tragic Events: Right after tragic events like earthquake, flood and terror attacks, people think they will happen again soon. It makes no sense to buy insurance after an earthquake because, statistically, a new earthquake is not to be expected soon, but sales rise.
  • Uncertainty and Fear: Important experiences like having a baby or suffering a heart attack make an impact on people’s view of life. There will be a significant increase in risk sensitivity. Therefore, it would be a good strategy to offer life insurance bundled with family health insurance to a customer who had a baby recently.

Homework for Insurers

On the behavioral approach side, there are some basic steps to follow to grow the whole insurance market;

  • Being Micro: Insurance products are not only complex but also are too focused on macro risks. In fact, the daily risks of our lives are more micro and ordinary. Why are major risks like fire or flood pointed out in home insurance products rather than damage to electronic devices or accidental risks?
  • Being Visible: Insurance companies have a natural advantage because they pay thousand of claims every single day to people and touch their lives. Creating positive stories from negative events can bring life to insurance products.
  • Being Informative: Insurers should undertake the mission of “warning against risks,” in addition to providing financial coverage. The insurance company that interacts with customers regularly and improves their risk awareness would build brand trust.
  • Being Protective: Getting share from competitors is becoming tougher everyday. Insurance companies are not only competing with new-generation insurtechs but also with technology, entertainment and consumer goods companies. The most rational and cost-effective strategy could be retaining the existing customer portfolio.

See also: Machine Learning – Art or Science?  

New-generation economic theories based on behavioral science provide important insights about customers’ decision mechanisms. Many organizations, from e-commerce companies to government institutions, are profiting from the insights. For insurance companies, a good place to state would be understanding that customers are not robots who just want the most coverage at the cheapest price.

Thanks to Daniel Kahneman and Richard Thaler for inspiring this article with their behavioral economic theories.

Using High-Resolution Data for Flood Risk

More than 200 million people and two-thirds of the 48 contiguous states are at risk from flooding, according to Edward Clark, director of the U.S. National Water Center. This demonstrates the major threat that flooding poses to the reinsurance industry in the U.S. In light of this hazard, the U.S. private insurance market is growing, with 2017 reporting $600 million in premiums, an increase of $217 million over 2016. But why isn’t this figure higher? And, why do approximately 85% of U.S. homeowners lack flood insurance policies?

One of the key reasons, among many, for low private insurance penetration stems from the inadequacy of current flood data, such as FEMA’s, to fully assess this hazard.

Changes in landscape

Many parts of the U.S. have experienced extensive redevelopment since the creation of the industry-standard FEMA flood maps, and these redevelopment changes haven’t been adequately captured in flood maps—until now.

To illustrate this, take Sherwood Park in Palm Shores, Florida, which has seen rapid and major development since the 1980s. Areas that were once rural wetlands have been re-landscaped and developed into desirable real estate.

See also: How Non-Standard Became the Standard  

Figure 1 shows a historical map of the Palm Shores development in 1981. Palm Shores as an urban area was then confined to the southern part of the area shown, with areas to the north and west entirely rural with several lakes and ponds. This is contrasted with Figure 2, which shows aerial imagery of the Palm Shores development in 2016—an entirely different, more urbanized, landscape today.

Figure 1: Historical map of Palm Shores development in 1981. 

Figure 2: Aerial imagery of Palm Shores development in 2016. This shows an entirely different, more urbanized, landscape today. Basemap: U.S Geological Survey Historical Topographic Map Collection, 1983 ed., accessed via topoView.

Flood maps from the 1980s

To fully and accurately represent today’s flood hazard in these changing areas, it’s vital for insurers to use the most recent flood maps available, which use contemporary, best-available elevation data.

Figure 3 shows FEMA’s flood hazard zones for the Palm Shores area, showing some patches of Zone A flood zones in red, largely restricted to the west. The housing development in the bottom center is Sherwood Park, classified by FEMA as being in a Zone X area of minimal flood hazard.

Figure 3: FEMA flood hazard zones for the Sherwood Park housing development, Palm Shores, FL. 

Figure 4, on the other hand, shows JBA’s 1-in-100-year flood map, the equivalent of a FEMA Zone A map, which shows a very different picture. The areas of flood hazard are distributed across more of the overall area, with the Sherwood Park area now being represented as flood-prone.

Figure 4: JBA’S 1-in-100-year flood map, showing areas of flood hazard in Sherwood Park (dark orange indicates more severe flooding). Contains Microsoft® Bing™ Maps, © 2010-2017 Pirmin Kalberer & Mathias Walker, Sourcepole AG.

This disparity in flood hazard mapping can be better understood in the context of the altered landscape. It can be seen that FEMA’s mapping for this area largely corresponds to the landscape of the 1980s rather than the landscape of today. If insurers rely on mapping using this outdated data, they may easily over- or underestimate flood hazard in areas that have experienced redevelopment since the map’s creation.

See also: Hurricane Harvey: An Insurtech Case Study  

The need for high-resolution data

This urbanization in areas across the U.S. also highlights the need for high-resolution data, especially when we consider that more than 20% of all NFIP flood claims relate to properties outside FEMA-designated high-risk flood hazard areas.

Figure 5 shows downtown Miami when mapped at 30m resolution (left) and when mapped at 5m resolution (right). The 5m resolution illustrates the flow of water down narrow features such as walkways and roads much more effectively, whereas the 30m mapping can result in under- or overestimation of the hazard.

Figure 5: 30m flood map (left) vs JBA 5m flood map (right). Basemap data ©Mapbox ©OpenStreetMap.

In light of these changes in landscape, it’s vital that insurers use the right tools for today’s world. JBA’s flood maps include the most up-to-date elevation data and can be used within SpatialKey to help insurers better understand risk in the context of their portfolios for more informed and confident underwriting.