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The Dark Side of Rapid Change

Global trade and investment have been great engines of progress for much of the world. Over the past two decades, poorer countries reduced the gap between themselves and their richer counterparts for the first time since the Industrial Revolution, in no small part because of the opportunities opened by global trade. Technology has the same transformative potential in industries as varied as energy, health care, transportation and education. Inventions that are imminent or already here could transform the lives of billions of people for the better.

Yet, as we see in the 2016 U.S. election campaign, and as we have seen in Europe and elsewhere, rapid change has a dark side. If too many people are unable to adapt quickly and successfully to these changes, they will push back – blaming trade or immigrants or the elites – and demand a reversion to a simpler time.

The task of governments is to help people manage these transformations so that they benefit many and do as little harm as possible. In the U.S., governments mostly failed at that task during the era of globalization; if the full benefits of the coming technologies are to be enjoyed, governments will have to do much better this time around.

See also: ‘Interactive Finance’: Meshing with Google  

The competitive pressures created by globalization should have been no surprise. About 45 years ago, President Richard Nixon’s top international economic adviser, Pete Peterson, warned him that rising competition from Japan and Germany, with much more on the way, “poses adjustment policy which simply cannot be ignored.”

Americans have unquestionably gained by the lower prices and higher quality that import competition enabled. Apple iPhones and the latest Boeing jets are the result of the collective input of tens of thousands of collaborators in dozens of countries around the world. But many lost well-paid manufacturing jobs to import competition or outsourcing, and the U.S. government has made little effort to mitigate those costs, even in worker retraining.

President John F. Kennedy promised in 1962 that the government would help American workers who lost out to trade competition as the U.S. lowered its barriers to imports. “When considerations of national policy make it desirable to avoid higher tariffs, those injured by the competition should not be required to bear the full brunt of the impact,” he said. But today, the U.S. spends a smaller proportion of its wealth on worker retraining than any of the other 34 member countries of the Organization for Economic Co-operation and Development except for Mexico and Chile.

Too often, the attitude of the U.S. government has been deeply irresponsible, assuming that markets would simply sort everything out for the best. In the long run, everybody may end up with work and income, but, in the short run, as Peterson told Nixon, the failure to help Americans adapt to the new reality will “leave long periods when the transition is painful beyond endurance.”

With technology change, too, we know well in advance exactly what is coming. Driverless technology, for example, will soon become the standard in the trucking industry. Driverless trucks can run 24 hours a day and won’t demand overtime pay. There are 3.5 million truck drivers in the U.S., and an additional 5.5 million jobs in related industries – roughly one in every 15 American workers. They could perhaps go to work for UPS or deliver pizzas, but many of those delivery jobs will be lost to drones.

Personal-care robots will increasingly replace home healthcare aides, and self-checkout machines are already replacing retail-store clerks; these are jobs that filled some of the gap left by the disappearance of manufacturing jobs to global competition, but they, too, will soon be under siege. Automation is even hitting law and education, two sectors long thought immune to technological substitution.

See also: How Technology Breaks Down Silos  

These vulnerabilities necessitate something that too often was absent in the era of globalization: good public policies. Artificial intelligence will transform teaching, for example, but, without access to the highest-speed broadband, students in poor and rural areas will fall further behind their urban counterparts. And unless we strengthen social safety nets and retraining schemes, there will be far too many losers in the labor market. There is no way to avoid the huge impact that technology will have on employment; we have to prepare for it and help those whose skills it antiquates.

Much more even than globalization, technology is going to create upheaval and destroy industries and jobs. This can be for the better, helping us create more interesting jobs or freeing up time for leisure and artistic pursuits. But unless we find ways to share the prosperity and help Americans adapt to the coming changes, many could be left worse off than they are. And, as we have seen this year, that is a recipe for an angry backlash—and political upheaval.

This article was written with Edward Alden.

How to Shrink Employees’ Waistlines

A majority of the population of countries in the Organization for Economic Cooperation and Development is now classified as overweight or obese, with weight-related health costs accounting for up to 10% of total healthcare spending. Levels of obesity are also rising in the developing world.

Excess weight can lead to multiple health issues, increasing the number of sick days, as well as health insurance premiums. In addition, poor health costs U.S. companies U.S. $227 billion a year in lost productivity, while U.K. companies are losing £29 billion a year (U.S. $45 billion) through sick leave costs. With lack of physical activity during modern office workdays, a core contributing factor to the sedentary lifestyles that are increasing obesity, encouraging exercise is in everyone’s interests.

The question is no longer so much whether you should invest in employee wellness, but how.

In Depth

Numerous studies have shown benefits from encouraging employees to exercise:

  • Better problem solving: Want your employees to get better at solving problems and innovating? Aerobic exercise has been shown to boost both positivity and creativity.
  • Improved mental health: Physically active employees are significantly less likely to suffer from depression or job burnout.
  • More capable management: Getting managers exercising not only reduces their stress levels but makes them better managers, according to some studies.

There are several approaches companies can take that can help even the most reluctant employee start adopting a more healthy lifestyle. However, it’s important to remember that, to get the benefit, it is important that employees see the exercise as enjoyable and practical, not as a chore. Here are just a few:

  • Calorie-counted staff cafés: Consuming too many calories is the key cause of most weight issues, so helping staff manage their intake by providing healthy yet nutritious meals at an on-site café can be a major boost. In addition, several studies have shown that workplace cafés can act as social hubs that boost employee engagement and motivation.
  • On-site gyms: Employees are more likely to exercise if it is convenient, while time lost traveling to an off-site gym can reduce productivity and increase stress. On-site company gyms can save employees an average of $58 a month in membership fees — and make it easy to get the productivity and health benefits of daytime exercise.
  • Discounts for regular workouts: With the rise of wearable fitness tracking devices come new opportunities to monitor employee lifestyles, and reward the healthy ones. The ability to keep track of employee activity is sparking a fresh wave of apps that could help reduce insurance premiums if adopted at scale.
  • Standing desks: Studies have shown standing desks — a popular alternative in modern workplaces — lead to an increased heart rate, improved energy levels and employees burning as much as 20 additional calories an hour. Long periods of sitting, meanwhile, have been associated with increased mortality across a range of illnesses, with some doctors warning that sitting is the new smoking.
  • Cycle-to-work schemes: As well as saving employees money (as much as $7.3 billion a year in the U.S. alone) and being a great way to burn off excess calories, cycling to work is, on average, associated with one less sick day per year than for non-cycling colleagues.
  • Group calisthenics: One of the oldest workplace wellness programs (still popular in many Asian countries), organized all-company workouts are starting to make a comeback in the West. Though they can be awkward at first, done right they can boost team spirit and employee health.

It has become a truism that employees are businesses’ biggest asset. Just as you would invest in keeping your machinery operating at its best through regular maintenance, investing in maintaining your staff’s health is increasingly vital. Not only could it be good for productivity, but studies have shown that such programs can be vital in both attracting and retaining top talent. With staff turnover rates increasing across the world, if you want to thrive in the long term, investing in employee health and wellness could be an increasingly important strategy to keep your people active, productive and engaged.

Talking Points

“Instead of viewing exercise as something we do for ourselves — a personal indulgence that takes us away from our work — it’s time we started considering physical activity as part of the work itself. The alternative, which involves processing information more slowly, forgetting more often and getting easily frustrated makes us less effective at our jobs and harder to get along with for our colleagues.” – Harvard Business Review

“Workplace wellness and community prevention programs are a win-win way to make a real difference in improving our health and bottom line all at once.” – Jeff Levi, executive director, Trust for America’s Health

“Employees are eight times more likely to be engaged when wellness is a priority in the workplace.” – World Economic Forum

This article originally appeared onTheOneBrief.com, Aon’s weekly guide to the most important issues affecting business, the economy and people’s lives in the world today.”

Further Reading

If the Regulations Don’t Fit, You Must…

International regulatory bodies like the G20 and the Organization for Economic Cooperation and Development (OECD) are still pining for recommendations for regulators on how to avoid another financial crisis like the one that engulfed the global economy in 2008.

The groups are increasingly leaning toward stronger consumer regulations to prevent another catastrophe, just like sophisticated regulators in the U.S. and other countries across the globe. The OECD, unfortunately, is taking a shortsighted approach to its consumer protection recommendations by suggesting one-size-fits-all regulatory standards will work for every regulator across the globe.

The OECD’s consumer protection recommendations won’t be issued, or received, lightly. And suggesting misguided regulations is dangerous. The guidelines will be (rightly) considered by regulators in nearly every country, despite their very different levels of sophistication concerning financial markets and consumer awareness. We’ve seen movement on one-size-fits-all policies in this area for years, most recently with Solvency II and capital standard policies under consideration in Brussels. The latest version we struggle with is a recommendation for regulators on how to consider the OECD’s High-level Principles on Financial Consumer Protection.

The principles are focused on the following areas:

  • Legal, regulatory and supervisory framework
  • Role of oversight bodies
  • Equitable and fair treatment of consumers
  • Protection of consumer assets against fraud and misuse
  • Protection of consumer data and privacy
  • Competition.

And the OECD recently issued draft guidance (framed as a “toolkit”) to address how best to approach the recommendations. Of course, each principle offers broad recommendations on how to manage issues affecting intermediaries. These could ultimately hit broker remuneration, transparency requirements, cooperation among supervisors and the like. And if the draft recommendations gain momentum, our ability to educate our regulators and shape sound consumer protection policies could be diminished.

That’s why the World Federation of Insurance Intermediaries (WFII) has been following the proposed “toolkit” closely. The federation issued a strong response to the OECD’s suggestions, rightly calling out the organization’s shortsighted approach and its assumption that regulators should approach with the same vigor businesses large and small and products designed for individuals, multinational corporations and companies located anywhere in the world.

The comments filed with the OECD by WFII rightly stated: “the pure fact that an effective approach has been developed in a range of jurisdictions is, in our view, not an indication in itself that it is indeed an ‘effective’ approach. We believe that sound research, an impact assessment and a cost/benefit analysis should be undertaken each time by the regulator/supervisor of the particular jurisdiction before any of these so-called effective approaches summed up in this draft, regardless of them being categorized as a ‘common,’ ‘innovative’ or ‘emerging’ approach. We urge the drafting team to clearly include this need for sound research, an impact assessment and a cost/benefit analysis in the introduction.”

The federation went on to suggest that applying the same guidelines to multiple industries can be dangerous, and it suggested to the drafters that the language clearly define when various sectors should be considered equally and when they should be treated differently.

Perhaps the most relevant comment to our market is the federation’s position on regulating companies of widely disparate sizes and revenue models. The federation told the OECD that “proportionality is a fundamental principle that should be taken into account by all regulators and supervisors every time they consider imposing requirements on the financial sector. Given the importance of this principle, we believe requirements imposed on the financial sector should be proportional to the size of the market player and the complexity of its service.”

The federation concluded its comments by suggesting regulators should engage market players and industry representatives with direct knowledge of the market practices as key rules are written. This point is particularly important for emerging regulators to consider, as their markets are among the fastest-growing in the world. A thoughtful and democratic approach to market guidelines ought to be encouraged to ensure their continued strength.

Nearly every developed economy continues to struggle with how to avoid another economic collapse, and the OECD has a strong role to play by issuing sound recommendations. It’s our sincere hope the suggestions to scale back its one-size-fits-all approach are heard loud and clear.

This article first appeared in Leader’s Edge magazine.

Top 10 Emerging Social Risks in 2015

Risk managers make many decisions – building valuation, vendor management, employment issues, budget allocation, to list a few. However, in our rapidly changing society, managing risk is more than simply choosing the best insurance package or retention level. We must monitor our world to watch for emerging societal risks that can abruptly increase our day-to-day challenges.

What is an emerging risk? I’m going to borrow a definition from Donald Donaldson of LA Group in Montgomery, Texas. He defines emerging risk as: “A new loss exposure for which a risk treatment has not been identified, or an existing exposure that is evolving and becomes difficult to quantify.” The Organization for Economic Co-operation and Development (OECD) describes “emerging constructs” as “major trends or new and persistent threads of behavior driven by a particular alignment in incentives or a technological innovation.” Whether you define societal risks as emerging risks or constructs, many challenges lie ahead for today’s risk managers.

Using my education, which includes a master’s degree in sociology, and my experience as a risk management professional, I forecast 10 social risks emerging — in some cases swiftly — in 2015 and beyond.

1. Europe, Asia and North America face increased risk of “sleeper cell” terrorist attacks. As attacks increase, so will hate crimes against all Muslims. In response to such attacks, formerly moderate Muslims may become increasingly radicalized. Houses of worship will become much more difficult to insure as hate crimes increase.

2. U.S. police forces will face pressure. They will come under increased scrutiny by the public because of societal tensions, social media and a general distrust of authority. The use of body cameras and ramped-up training will increase, in part to satisfy the demands of insurers, which bear the brunt of adverse claims actions.

Increased terrorism may cause police departments to devote more resources to tracking down and isolating suspects. This may, for a time, tip the scales in favor of police forces. However, an increased focus on terror training leaves police with fewer resources to investigate property and day-to-day crime that we now rely on them to handle expeditiously. Losses will increase and further erode the public’s confidence in the police. The belief that the police are here to protect only the rich and powerful may spread, adding to the public’s growing distrust of authority.

Homeowners’ carriers may find themselves facing unusual risks as more homeowners arm themselves or buy personal protection dogs. Zdenek Blabla, owner of Alpine K-9, imports Czech Border Patrol protection dogs for his clients. “In the past year, I’ve sold several German shepherd dogs to special forces combat officers who don’t want to leave their families without protection during their activation,” he says. “They understand probably better than anyone the dangers we face in today’s society.”

3. Policing agencies across the nation will face increased recruitment and retention difficulties because of a less robust candidate pool and the need for officers who are better-qualified to interact with diverse communities. For years, U.S. police chiefs complained of their inability to attract highly qualified recruits. According to one textbook on policing tactics, “Poor recruitment and selection procedures result in hiring or promoting personnel who cannot or will not communicate effectively with diverse populations, exercise discretion properly or perform the multitude of functions required of the police.” It is clear that today’s U.S. police forces face significant and growing challenges.

4. Schools will focus more on instructing schoolchildren how to protect themselves in risky situations. Examples include how to cooperate with the police in a routine traffic stop or other police intervention, what to do in a hostage situation and “duck and cover” exercises for students in newly emerging earthquake zones. This increased focus on situational awareness will drain resources from already depleted public school funding, ultimately reducing the time spent for the actual education of students.

5. Corporations that rely heavily on suppliers both here and abroad will closely analyze their supply chain risk. With political disruptions likely to increase supply line disruptions, risk managers must analyze sole-source and global suppliers and ensure the organization’s insurance will respond appropriately to these unique risks. As recently as 2014, one major university referred to supply chain disruption from civil unrest as “not a major concern.” Given the recent disturbances in Oakland, CA, New York City and Ferguson, MO, civil unrest is a growing concern for risk managers worldwide in 2015.

6. Employers will realize the need to increase security while also purchasing kidnap and ransom coverage for employees who travel abroad or face domestic terrorism threats. The Charlie Hebdo massacre starkly revealed that Stéphane Charbonnier’s bodyguard was completely unprepared for that brutal attack. Business owners will face the need for improved security measures at their homes and businesses, as well as when their family members travel.

7. Communities will experience an increase in social unrest, driven by social media “flash mob” actions or spontaneous reactions after incidents with racial or equality overtones. Other controversial issues, such as environmental measures and other governmental actions, will trigger increased public discord and civil disruption.

8. Continued weather swings will result in property damage and loss of life from natural disasters. With more money allocated to fight the new wave of terrorism both at home and abroad, fewer federal dollars will be available to help weather-ravaged communities. As we saw after Hurricane Katrina, civil unrest follows when authorities cannot provide adequate protection.

9. Poverty, income disparity, unemployment and dissatisfaction among today’s youth will increase globally. Expect corporate leaders, including top insurers, to more candidly discuss poverty and income disparity, unemployment and dissatisfaction among today’s youth in America, the Middle East and Europe. Graham E. Fuller, author of The Future of Political Islam, discussed this concept in 2003: “The great question for most Middle Eastern societies is who will be able to politically mobilize this youth cohort most successfully: the state, or other political forces, primarily Islamist?” We must not underestimate the ways that unemployment and poverty may lead to the radicalization of youth both here and abroad.

10. Pandemics will threaten local medical resources’ ability to provide adequate medical care. Flu epidemics, tuberculosis, measles and other contagious diseases will make medical management much more onerous. An aging population with chronic conditions will place additional stress on available medical resources. According to the World Health Organization, there is an “emerging global epidemic of diabetes.”

Are these predictions exaggerated? I don’t think so. That advanced degree I mentioned earlier tells me that I have not overstated these predictions; they are credible and approaching quickly. As societies become more complex, yet increasingly related, breakdowns anywhere in the global chain can cause disruptions worldwide.

As risk management professionals, we must do more than simply purchase a coverage portfolio to protect our assets. We must understand and prepare for the societal risks that present unlimited challenges to America’s organizations.

TRIA Non-Renewal: Effect on P&C?

Losses stemming from the destruction of the World Trade Center and other buildings by terrorists on Sept. 11, 2001, totaled about $31.6 billion, including commercial liability and group life insurance claims — not adjusted for inflation — or $42.1 billion in 2012 dollars. About two-thirds of these losses were paid for by reinsurers, companies that provide insurance for insurers.

Concerned about the limited availability of terrorism coverage in high-risk areas and its impact on the economy, Congress passed the Terrorism Risk Insurance Act (TRIA). The act provides a temporary program that, in the event of major terrorist attack, allows the insurance industry and federal government to share losses according to a specific formula. TRIA was signed into law on Nov. 26, 2002, and renewed for two years in December 2005. Passage of TRIA enabled a market for terrorism insurance to begin to develop because the federal backstop effectively limits insurers’ losses, greatly simplifying the underwriting process. TRIA was extended for seven years to 2014 in December 2007. The new law is known as the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) of 2007.

This week, Congress failed to reauthorize TRIA before members adjourned for the holiday recess. Now, with the expiration of the law on Dec. 31, some businesses may be left without insurance coverage in the event of a terrorist attack on the U.S. Both houses of Congress have been discussing legislation that would set out the federal government’s involvement in funding potential terrorism losses, but bills proposed by the two houses earlier this year differed, and no extension was passed.

A report from the Wharton Risk Management and Decision Processes Center found that, under the current TRIA program, some insurers have already reached a level of exposure to losses from a terrorist attack that could jeopardize their ability to pay claims, based on a critical measure of solvency: the ratio of an insurer’s TRIA deductible amount in relation to its surplus. The report, “TRIA After 2014: Examining Risk Sharing Under Current and Alternative Designs,” found that as the deductible percentage rises, as it does under the Senate bill and proposals put forward in the House, more insurers have a deductible-to-surplus ratio that is above an acceptable level. The report also sets out in detail the amount the American taxpayer and federal government would have to pay under differing scenarios.

A RAND Corp. study published in April 2014 found that in a terrorist attack with losses of as much as $50 billion, the federal government would spend more dealing with the losses than if it had continued to support a national terrorism risk insurance program, because it would likely pay out more in disaster assistance.

A report by the President’s Working Group on Financial Markets made public in April 2014 generally supports the insurance industry’s view that the expiration of TRIA would make terrorism coverage more expensive and difficult to obtain.

The insurance broker Marsh released its annual study of the market, “2014 Terrorism Risk Insurance Report,” in April. Among its many findings is that uncertainty surrounding the potential expiration of TRIA significantly affected the property/casualty insurance market. Some employers with large concentrations of workers and companies with property exposures in major U.S. cities found that terrorism insurance capacity was limited and prices higher, and some could not obtain coverage at all. If the law is allowed to expire or is significantly changed, the market is likely to become more volatile with higher prices and limited coverage, the study concludes.

Before Sept. 11, 2001, insurers provided terrorism coverage to their commercial insurance customers essentially free of charge because the chance of property damage from terrorist acts was considered remote. After Sept. 11, insurers began to reassess the risk. For a while, terrorism coverage was scarce. Reinsurers were unwilling to reinsure policies in urban areas perceived to be vulnerable to attack. Primary insurers filed requests with their state insurance departments for permission to exclude terrorism coverage from their commercial policies.

From an insurance viewpoint, terrorism risk is very different from the kind of risks typically insured. To be readily insurable, risks have to have certain characteristics.

The risk must be measurable. Insurers must be able to determine the possible or probable number of events (frequency) likely to result in claims and the maximum size or cost (severity) of these events. For example, insurers know from experience about how many car crashes to expect per 100,000 miles driven for any geographic area and what these crashes are likely to cost. As a result, they can charge a premium equal to the risk they are assuming in issuing an auto insurance policy.

A large number of people or businesses must be exposed to the risk of loss, but only a few must actually experience one, so that the premiums of those that do not file claims can fund the losses of those who do.

Losses must be random as regards time, location and magnitude.

Insofar as acts of terrorism are intentional, terrorism risk doesn’t have these characteristics. In addition, no one knows what the worst-case scenario might be. There have been few terrorist attacks, so there is little data on which to base estimates of future losses, either in terms of frequency or severity. Terrorism losses are also likely to be concentrated geographically, since terrorism is usually targeted to produce a significant economic or psychological impact. This leads to a situation known in the insurance industry as adverse selection, where only the people most at risk purchase coverage, the same people who are likely to file claims. Moreover, terrorism losses are never random. They are carefully planned and often coordinated.

To underwrite terrorism insurance — to decide whether to offer coverage and what price to charge — insurers must be able to quantify the risk: the likelihood of an event and the amount of damage it would cause. Increasingly, they are using sophisticated modeling tools to assess this risk. According to the modeling firm AIR Worldwide, the way terrorism risk is measured is not much different from assessments of natural disaster risk, except that the data used for terrorism are more subject to uncertainty. It is easier to project the risk of damage in a particular location from an earthquake of a given intensity or a Category 5 hurricane than a terrorist attack because insurers have had so much more experience with natural disasters than with terrorist attacks, and therefore the data to incorporate into models are readily available.

One problem insurers face is the accumulation of risk. They need to know not only the likelihood and extent of damage to a particular building but also the company’s accumulated risk from insuring multiple buildings within a given geographical area, including the implications of fire following a terrorist attack. In addition, in the U.S., workers’ compensation insurers face concentrations of risk from injuries to workers caused by terrorism attacks. Workers’ compensation policies provide coverage for loss of income and medical and rehabilitation treatment from “first dollar,” that is, without deductibles.

Extending the Terrorism Risk Insurance Act (TRIA):

There is general agreement that TRIA has helped insurance companies provide terrorism coverage because the federal government’s involvement offers a measure of certainty as to the maximum size of losses insurers would have to pay and allows them to plan for the future. However, when the act came up for renewal in 2005 and in 2007, there were some who believed that market forces should be allowed to deal with the problem. Both the U.S. Government Accountability Office and the President’s Working Group on Financial Markets published reports on terrorism insurance in September 2006. The two reports essentially supported the insurance industry in its evaluation of nuclear, biological, chemical and radiological (NBCR) risk — that it is uninsurable — but the President’s Working Group said that the existence of TRIA had inhibited the development of a more robust market for terrorism insurance, a point on which the industry disagrees. TRIA is the reason that coverage is available, insurers say. The structure of the program has encouraged the development of reinsurance for the layers of risk that insurers must bear themselves — deductible amounts and coinsurance — which in turn allows primary insurers to provide coverage. Without TRIA, there would be no private market for terrorism insurance.

Studies by various organizations have supported a temporary continuation of the program in some form, including the University of Pennsylvania’s Wharton School, the RAND Corp. and the Organization of Economic Cooperation and Development (OECD), an organization of 30 member countries, many of which have addressed the risk of terrorism through a public/private partnership. The OECD said in an analysis that financial markets have shown very little appetite for terrorism risk because of the enormousness and unpredictability of the exposure. RAND argued not only that TRIA should be extended but also that Congress should act to increase the business community’s purchase of terrorism insurance and lower its price. RAND also advocated mandatory coverage for some “vital systems,” establishing an oversight board and increasing efforts to mitigate the risks.

For the full report from which this is excerpted, click here.