Tag Archives: risk

Case Study on Risk and Innovation

How can you grow in a market that is flat or shrinking? This is a common problem faced by businesses. whether they are in insurance or manufacturing. It was the challenge my team faced immediately after I was promoted to lead Stryker’s EMS (ambulance) equipment business in 1999. The lessons we learned apply across a broad spectrum of businesses. Stryker EMS had grown aggressively following its 1994 launch by taking share from a monopoly competitor. But, as our slice reached 50% of that market, it was mathematically unfeasible to expect that the pace of expansion could continue meeting our parent company’s 20% growth requirement. We had to find other avenues to expand. The first prong of our approach was to extend globally. Nothing particularly original in that approach, but the second prong would challenge every bit of our ingenuity as we created three new market categories.

The situation we faced is similar to that of many insurance companies. Industry experts believed that there was little opportunity for innovation in the EMS patient handling equipment space—resembling what many believe about parts of the insurance space. We proved the skeptics wrong; you can, too. The valuable lessons we learned while inventing three breakthrough market categories have direct analogies in insurance, where finding game-changing innovations brings unique challenges.

First, we took a broad, strategic view of the issues facing our customer and partnered with industry leaders to uncover significant costs that were hidden in their financial statements. Simply put, we did our research. Insurance companies seeking to innovate could leverage their financial experts and actuaries in similar endeavors. Second, we focused on the root causes of those hidden costs, constantly asking what could be done to reduce or eliminate those causes. This is a mindset that the best insurance companies follow. Third, we invented technologies that enabled several of the breakthroughs; gaining patent protection and exclusivity in the process. In many of these inventions, we brought to bear crucial technologies that were being developed in unrelated markets but had application to what we were attempting to accomplish. This is similar to those in insurance looking to enhance quoting, claims processing, risk management and a host of other functions by applying burgeoning innovations in augmented reality and machine learning that are taking place in the computer, smartphone, and tablet markets.

See also: 4 Hot Spots for Innovation in Insurance  

This extract from the new book Commanding Excellence: Inspiring Purpose, Passion, and Ingenuity through Leadership that Matters tells the EMS story. While the challenges in insurance are distinct, applying similar thought processes and fundamental approaches from this innovative leader in medical devices could be the secret sauce to innovative breakthroughs.

From Chapter 22: Purpose-Drive Creativity at Stryker

The second prong was focused on solving significant problems facing EMS providers around the globe. Over the next decade, we developed three new product categories that dramatically improved patient handling in prehospital treatment. After several years in the business, my team realized that an emerging employee-injury crisis was facing our customer base. As patients were getting heavier, and the average EMTs lifting the patients were aging and included a higher number of females, on-the-job back injuries were soaring. In addition, the many safety issues that arose in the event of an ambulance crash were gaining awareness. Stryker EMS set off on a determined mission to provide technological solutions to these challenging issues. We worked closely with internationally recognized EMS services to identify the sources of injury, developed strong partnerships with ambulance manufacturers and regulatory bodies working on crash-worthiness, and dared our engineering and marketing talent to devise breakthrough answers to these difficult problems.

First we launched the category of tracked EMS stair chairs. These were foldable/storable wheeled chairs that had an innovative friction-based track system that users could deploy to provide considerable assistance when transporting people down the stairs. The StairPRO was a game-changing product. Smaller EMTs gained the capability to safely transport patients down the stairs, dramatically reducing the risks of back injury to themselves while also improving safety for the patient. As we developed the product, many focus groups loved demonstrations of the prototypes but thought such a product would be far too expensive. To do it right, the chair would end up being three to five times more costly than the seldom-used, simple folding chairs most ambulances carried at the time. We knew the injury-reduction benefits were real, and the costs of such injuries far exceeded the cost of a fleet of tracked chairs. As it turned out, the StairPRO chair saw the fastest market uptake rate of any new product Medical Division had ever launched, even at the high price.

Our second major breakthrough was a viable powered ambulance cot. Lifting patients from the ground to the upright position for moving the cot and then loading the cot into the ambulance was another source of heavy back strain driving high rates of injury. Stryker launched an innovative battery-powered, hydromechanical cot that allowed EMTs to lift patients with great ease with the press of a button. The product was a particularly challenging engineering feat, because it had to have the power and strength to assist lifting up to a 700-pound patient yet still be light and maneuverable and have no compromises in the time it took to load and unload from the ambulance. Several patented new technologies allowed all of these requirements to be met, and PowerPRO was another runaway success.

The final major breakthrough was, perhaps, the most demanding and complex product Stryker Medical ever developed. We found it odd that in most of the developed world, the process of loading garbage from a customer’s curbside into a truck had converted from a physically intensive, back-injury-prone, manual operation to one where the sanitation companies issued customers customized wheeled containers that could be rolled out to the curbside and then picked up and hydraulically dumped into the garbage truck. This conversion involved a multimillion-dollar infrastructure investment all over the globe. Yet critically ill patients were still being loaded into the backs of ambulances by skilled EMTs and paramedics using simply their own brute force. It was an operation riddled with significant injury risks for the providers and patients. Not infrequently, patients were dropped or tipped over during loading or unloading, resulting in injuries and lawsuits. The situation begged for a technology solution.

As with the PowerPRO, there could be no compromises. Load and unload times had to be equal to current methods; a complete and seamless manual back-up had to work in the event of power loss; battery management had to be automatic; crash-worthiness had to be best in class; operation had to be simple; and the device needed to be easily cleaned. In the process of addressing all these often competing requirements, the team invented and patented multiple technologies for the loading and unloading method, near-field communication techniques between the stretcher and the loading system, inductive charging between the trolley and the cot (to recharge the batteries) and a host of other mechanisms. At launch, the PowerLoad system was well received, and it is still in the process of transforming the industry’s infrastructure today. We look forward to the day when no patient has to be loaded by brute force.

With the international expansion and three breakthrough new-product categories, the EMS business was a significant growth engine, delivering a combined annual growth rate of over 25% during the years through 2012, when I retired. There was nothing more rewarding than to have seasoned paramedics come into our booth at trade shows and ask to hug the engineers, thanking them for creating technologies that allowed them to do their jobs without injuring themselves or patients.

The purpose-driven atmosphere unleashed creative energies to go after these game-changing innovations. Success continues in EMS. In 2016, Stryker acquired the world’s leading manufacturer of EMS defibrillation for over $1.2 billion to complement the company’s global market position in the prehospital market.

See also: Innovation Executive Video – Pypestream’s Donna Peeples 

Pulse Check: How Do You Approach Risk?

The first step to managing risk is understanding it.
That simple sentence gets to the heart of the opportunities and challenges of risk management. The concept of risk is pretty simple.

The ISO 31000 definition of risk couldn’t be much more straightforward: “the effect of uncertainty on objectives.” But anyone who’s been tasked with managing an organization’s risk knows that identifying and managing business risks is complex.

How organizations tackle risk varies from company to company based on their particular risk appetite. One business may be ready to push the envelope and look for competitive advantages through bigger gambles, while a more conservative firm may rely on established trends and avoid risk to the extent possible.

For risk managers tasked with interpreting an organization’s risk appetite and recommending a course of action, risk is something of a moving target. The risks themselves are constantly changing, and even within a single organization, the approach to risk may vary by department or individual.

See also: Easier Approach to Risk Profiling  

And risk managers’ jobs are only getting more difficult. In fact, more than 70 percent of executives say that risks have gotten more numerous and more complex over the last five years, according to a recent report from the Enterprise Risk Management (ERM) Initiative at North Carolina State University and the American Institute of Certified Public Accountants. The report, “The State of Risk Oversight: An Overview of Enterprise Risk Management Practices,” surveyed CFOs and other executives at organizations of varying sizes across a broad range of industries. While these executives said that risks were getting more complicated, only a quarter said that they have a “mature” or “robust” risk management process to address these escalating risks.

Understanding risk at the enterprise level

Those organizations that lack effective risk management processes have limited ability to assess emerging strategic, financial or operational risks and opportunities. Only a quarter of those surveyed considered their organization’s risk management process to be an important strategic tool.

The holistic approach of ERM, which seeks to actively manage all of an organization’s risks instead of taking the traditional silo approach, has several benefits. It helps leaders establish an enterprise-wide appetite for risk and prioritize individual risks based on what’s likely to have the most significant impact on the organization.

Perhaps most importantly, it identifies the interplay of specific risks–circumstances that could originate in one area but have major implications for another. If flooding is likely to delay a delivery to a manufacturer, a robust ERM program would analyze that risk’s effect on not just shipping and receiving but also sales, facilities, customer service and any other area that could be affected.

As organizations take an enterprise-wide view of their risks, the skills risk managers need to be successful will shift as well. In one 2017 PwC survey, 63 percent of corporate officers said that giving frontline employees more risk management responsibilities enables their companies to better foresee and respond to risk, and about half will further this shift in the next three years. It’s clear that organizations are increasingly relying on risk managers who can effectively communicate risk elements and strategy to both executives and employees.

Understanding emerging risks

Understanding your organization’s risk appetite and addressing current risks is only part of risk management. New risks crop up all the time, and risk managers need to stay vigilant. Cyber risk, with its ever-increasing sources and severity, gets a lot of media coverage and is a top priority for most organizations, but even traditional types of risk are constantly shifting and evolving. Risks stemming from government action and regulations have been particularly difficult to predict of late, and organization-specific issues like employee malfeasance, reputational harm and operational risks continue to pose serious threats.

More and more risk managers are turning to data analytics to quantify these risks, but many organizations still struggle to effectively use the data at their disposal. In fact, another PwC survey asked U.S. executives, “Which areas of risk represent the largest capability gaps for your company today?” The leading response: fragmented risk data and analysis. Risk managers have so much data at their fingertips, much of it unstructured, that they can’t effectively use it to make risk-based decisions. Complexity scientist Francesco Corea points out that more information should lead to more accurate results, but it can also make things more complicated.

See also: New Approach to Risk and Infrastructure?  

Understanding what your risk managers need

As organizations work to establish an ERM program and grapple with overwhelming amounts of data, let’s take a closer look at three factors that will make risk managers and their departments more effective.

  • Risk managers need education. A solid foundation in risk management principles and practices, as well as an understanding of the methods used to deploy ERM across an organization, is essential. The Institutes’ Associate in Risk Management (ARM™) program provides that comprehensive overview, but ongoing education to keep up with evolving risks is just as important.
  • Risk managers need access. Risk managers need to be able to secure buy-in from many individuals: executive decision makers, data scientists, frontline employees and more. Risk managers therefore need access to these collaborators, as well as training on the soft skills needed to be effective in their role.
  • Risk managers need allies. An organization shouldn’t rely on just one or two risk experts to deal with risk. If risk is to truly become a key strategic tool, individuals at every level of the company need to develop basic risk knowledge and a risk mindset.

This piece is based on one of several Institutisms, mottos to inspire risk management and insurance professionals to success through lifelong learning and continuous education. Knowledge is the path to managing your clients’ risks. And in the world of risk management and insurance, The Institutes are the ultimate knowledge resource for professionals–at every level and in any discipline. From designations and continuing education to networking and research that informs public policy, our name is all you need to know. Learn more about the ARM designation.

The Evolution in Self-Driving Vehicles

Although driverless cars will become mainstream in more than a decade, there are certain considerations that insurance executives should start thinking about now. We will continue to explore this evolving topic and suggest ways insurers can position themselves to take advantage of the enormous disruption that autonomous technology will cause to the business of risk. We will provide our perspectives on how the risks involved in transportation will be transformed, how financial responsibility will be assigned and how insurance products will need to be adapted – and how the key issues might be influenced by regulators and legislators.

In our view, insurers will face these five key challenges.

Challenge 1: What risks will remain – and will new ones arise?

A primary aim of autonomous technology is to reduce the number of traffic accidents, and the public’s and regulators’ expectations will be very high. We will examine what the residual risk of collisions could be and how the cost of injuries and repairs could change. We will offer our view on how new technologies will improve reporting of claims and change the potential for fraud.

At the same time, new risks will emerge, such as cyber attacks, software bugs and control failures. What will the exposure to systemic risks mean for insurability?

See also: Future of Self-Driving Cars (Infographic)

Challenge 2: Who is the customer, and how will we do business with that customer?

Who is liable for risk will be the key question, especially if a high proportion of remaining accidents will be attributable to failures in control software and systems. We will consider how original equipment manufacturers (OEMs) and manufacturers could become liable for claims in the future, and whether they can shift the legal or financial burden to others in the supply chain. For example, could vehicle end users be required to purchase policies to indemnify OEMs, or will the cost of product liability insurance be passed to new vehicle purchasers? If transportation is consumed on a pay-per-use basis, could insurance be wrapped into the charge?

Whatever the outcome, the current insurer-consumer relationship – along with marketing, sales and distribution methods – will be fundamentally altered. Retaining control over this relationship will be essential if insurers are to avoid becoming redundant or marginalized by other players.

Challenge 3: How will the insurance product have to change?

Changes in liability and use will necessitate major revisions to the insurance products to meet the market’s needs. We will examine how autonomous products can be developed and configured to cover gray areas of liability and negligence resulting from the overlap between human and computer control. Would product tiers correspond to the “one-to-five” scale of the vehicle’s automation capability? Pay-per-use (versus “blanket” cover) could imply that short-term rather than annual renewable policies would become the norm – and lessons learned from current ride-sharing products could be employed. How will regulation affect or keep pace with the new products? Considerations for commercial lines might be significantly different when the rate of adoption is expected to increase the fastest and different technologies and enhanced safety overrides could be economical to deploy.

Challenge 4: How will we price it – and can it still be profitable?

The relative importance of different rating factors in pricing will change markedly. First, analysis of risk would depend primarily on the degree of self-driving versus manual control. For autonomous operation, pricing would be based on assessing the vehicle’s level of automation in terms of its technology, quality of implementation and anticipated types of driving. There are nuances between manufacturers even for relatively basic, standardized technologies, such as automatic emergency braking (AEB). For example, fuller automation capability may vary depending on the OEM, sensor quality and software used. How would data on the technical capability and usage statistics be collected? Could this be centralized in some way and retrieved transparently by insurers, rather than having to be disclosed?

The economics of the product will also be very different given a much reduced number of claims, and we will examine the speed of change, the resulting size of the market over time and the return on capital it might sustain compared with the present. Key questions will be to what extent this might be offset by increased overall demand for transportation, given the surge in accessibility of car transportation combined with the anticipated benefits to congestion. Could any alternative, discretionary coverages become more relevant?

Challenge 5: What influence will legislators have?

A large number of agencies are managing pilot programs, and their policies will have a major influence by encouraging or inhibiting adoption in each different country. We will give an overview of the current progress in each jurisdiction and highlight leading models that we foresee will become the templates for broader rollout.

Starting from an overview of the applicability of current insurance legislation to autonomous vehicle operation, we will review how legislation is likely to guide the cover and scope of autonomous insurance products in the future and the likely compulsory minimum cover requirements.

See also: Of Robots, Self-Driving Cars and Insurance  


As we have seen, autonomous vehicles will revolutionize mobility and inevitably automobile insurance. While we cannot predict the pace of these changes, we encourage insurers to prepare accordingly.

The lessons from other industries are stark. Companies content to wait and see, or worse – are oblivious to the threat until it is too late – could share the familiar fate of other household names that have been left behind by a wave of new technology.

In considering the next steps, insurers should analyze their business portfolios and strategies to understand their exposure to these changes. They should conduct what-if scenario analysis to model potential effect and evaluate what actions will be required to transform their organizations in parallel with various levels of car automation.

Early innovators are likely to generate substantial benefit for their businesses. To be successful in this space, insurers will need to aim for agile innovation and improve the way they use increasing volumes of data. They should also explore new collaborative models to shape a connected automotive ecosystem that will include insurers, auto manufacturers, technology companies and regulators.

You can find the full report from EY here.

Is This the Largest Undisclosed Risk?

The Employee Retirement Income Security Act (ERISA) has been around since the Ford administration. Most people know the law in relation to retirement benefits, but it’s emerging as an unexpected, yet high-potential, opportunity to drive change in the dysfunctional U.S. healthcare system.

The law sets fiduciary standards for using funds for self-insured health plans, which is how more than 100 million Americans receive health benefits. Health plans for wise companies with more than 100 employees are self-funded because they are generally less costly to administer. As a result, more than $1 trillion in annual healthcare spending is under ERISA plans or out-of-pocket by ERISA plan participants. While it’s roughly one-third of healthcare spending, employer/union-provided health benefits likely represent more than two-thirds of industry profits as they wildly overpay for healthcare services because of the misperception that PPOs help save them money. In reality, PPO networks cost employers/unions dearly.

This overpayment makes ERISA plans an attractive target for operational efficiencies. Healthcare is the last major bucket of operational expenses that most companies haven’t actively optimized (they’ve already optimized operations, sales, marketing, etc.). For those that don’t get on top of this, it could also be a source of significant potential liability for companies and plan trustees. We are already aware of the ripple effect on benefits departments — one entire benefits department (with the exception of one person) was fired when the board realized the lack of proper management.

See also: ERISA Bonding Reminder  

ERISA requires plan trustees to prudently manage health plan assets. Yet very few plans have the functional equivalent of an ERISA retirement plan administrator who actively manages and drives effective allocation of plan investments. This person (or team) would have deep actuarial and healthcare expertise to enable them to deeply understand and negotiate potential high-cost areas of care, something traditional human resource departments lack.

At the same time, it’s broadly estimated that there is enormous waste throughout the healthcare system. The Economist has reported that fraudulent healthcare claims alone consume $272 billion of spending each year across both private plans and public programs like Medicare and Medicaid. The Institute of Medicine conducted a study on waste in the U.S. healthcare system and concluded that $750 billion, or 25% of all spending, is waste. PwC went so far as to say that more than half of all spending adds no value. It’s impossible to imagine any CEO/board allowing this in any other area of their company.

Increased outside scrutiny on how ERISA-regulated health plans spend their dollars could create immense potential liability for both company directors and health insurers across the country. Nationally prominent lawyers, auditors and others are catching on to this and are taking action to get ahead of it or are advancing potential new categories of litigation that could result in hundreds of billions in damages.

In just the last couple of months, we at the Health Rosetta Institute — a nonprofit focused on scaling adoption of practical, nonpartisan fixes to our healthcare system — have learned of some key events that will likely further increase scrutiny on ERISA fiduciary duties.

First, two Big Four accounting firms have refused to sign off on audits that don’t have allowances for ERISA fiduciary risk. A senior risk management practice leader at one of those firms told a room of healthcare entrepreneurs and experts that ERISA fiduciary risk was the largest undisclosed risk they’d seen in their career. As more accounting firms start to require this, it will change how employers manage ERISA health plan dollars.

Second, independent directors have quietly sounded the alarm to three company auditors about this growing issue, recognizing the potential for personal financial liability that director and officer insurance policies may not cover. We expect to see more of them focusing on this issue, given that healthcare spending is roughly 20% of payroll spending for most companies.

Third, attorneys are building litigation strategies around employers filing suits against their ERISA plan co-trustees (the plan administrators who actively manage the plan’s health dollars) alleging they breached their ERISA fiduciary duties by turning a blind eye to fraudulent claims. We expect the first of these cases to be brought this year and expect to see significantly more in the next couple years. One firm we’re aware of is working on cultivating dozens of these cases.

The implications of this third trend could be enormous. If boards and plan trustees know fraud could exist and don’t take action to rectify the issues, they could open themselves to liability from shareholders and plan beneficiaries. The scale of damages just for fraudulent claims could be on the magnitude of lawsuits over asbestos and tobacco. A very conservative estimate of what percentage of claims are fraudulent is 5% (many believe 10-15% is more accurate). Employers spend more than $1 trillion per year on healthcare. If you take the low-end estimate (5%) and extrapolate over the statutory lookback period for ERISA (six years), that would be $300 billion.

These legal threats could force employers to actively manage health spending the same way they manage other large operational expenses. We’ve already seen companies doing this, reducing their health benefits spending by 20-55% with superior benefits packages.

Employers use a variety of approaches, but most are relatively straightforward and focus on proven benefits-design solutions that make poor care decisions more costly and better care decisions less costly to encourage the right behavior. Most importantly, they don’t focus on shifting costs to employees. This cost-shift to the middle class has devastated the American Dream and was the backdrop for the populist campaigns that were badly misreported (in terms of their root cause).

See also: Solution to High-Cost Indemnity Payments?  

Three high-potential areas for improvement include actively managing high-cost care to move it to high-quality, lower-cost care settings; directly addressing drug costs; and creating incentives for wise care decisions. Here are a few repercussions these changes may have for companies and investors:

  1. As more procedures move from expensive hospital settings to lower-cost independent ambulatory surgery centers, this means lower margins at for-profit hospitals, threatening return assumptions on hospital revenue bonds and growth potential for ambulatory care categories.
  2. Tackling pharmacy spending puts downward pricing pressure on pharmacy benefits managers. An indirect example of the consequences of this is the face-off between drug middleman Express Scripts Holding Company and health insurer Anthem. In the next quarter, a statewide health plan is doing a reverse auction to select their next PBM. It’s hard to imagine the incumbent PBM will be willing to drop its pricing and rebate games for a high-profile public entity.
  3. More active management of healthcare, self-insurance and lower costs by employers reduce revenue and margins at public insurance companies, threatening core revenue streams. This is compounded by self-insured employers moving to independent plan administrators not tied to traditional insurers.

Surprisingly, the most sustainable and high-impact of these approaches will benefit employees, as well. Most wasted spending in healthcare that directly affected patients is the result of overuse, misdiagnosis and sub-optimal treatment.

Time and again, we’ve found that the best way to slash costs is to improve health benefits.

And isn’t better healthcare at a lower cost the best outcome for all of us?


This article was also written by Sean Schantzen, who was previously a securities attorney involved in representing boards, directors, officers, and companies in securities litigation and other matters including some of the largest securities cases in U.S. history.

An earlier version of this article was also published on MarketWatch.

Let’s Get Rid of Risk Altogether!

The Social Network of Things is here!

In a complex landscape of old and new, cars and networks are being built to be self-aware, adaptable and communicative with one another and humans in real time. We live in extraordinary times where there is transformative experience with three kinds of cars — some fully automated, others with simple systems for accident avoidance/traffic routing and still others that account for today’s average car.

Appliances and sensors in smart homes are network-connected with seamless integration and intelligent collaboration between devices and analytics that puts homeowners in control, making them co-creators of customized experiences.

See also: Infrastructure: Risks and Opportunities  

From managing chronic diseases at one end of the spectrum to preventing disease at the other, the social network of things is revolutionizing healthcare, too. A person’s data is continuously being gathered and used to diagnose illness and to align the best providers and treatments as quickly as possible. Devices in the predictive realm have the potential to detect the onset of a wide range of health risks, such as high blood pressure and early signs of delirium.

See also: What Gets Missed in Risk Management  

As insurers, we are paymasters in the business of protection. Not only do we have a vested interest in mitigating loss, but we also have a huge responsibility to support and incorporate prevention and early intervention techniques to provide real value to our consumers. With devices that are highly networked and predict, negotiate and have an impact on outcomes, we find ourselves at the brink of redefining the underlying concept of insurance — from one of pooling risk to sublimating risk altogether.