Tag Archives: shareholder

InsurTech Can Help Fix Drop in Life Insurance

No one disputes that life insurance ownership in the U.S. has been on the decline for decades.

The question up for debate is what to do about it.

The emergence of an insurtech sector is an indicator of entrepreneur and investor confidence in upside potential. The hundreds of millions of dollars being poured into technology by carriers is another.

See Also: Key to Understanding InsurTech

But before piles of capital are poured into attempts to capture the opportunity, investors and legacy insurers should reflect on the root causes of this seemingly unstoppable trend and prioritize innovations that aim at solving the biggest issues:

  • Carriers have evolved, through their own cumulative behavior over decades, away from serving the needs of the majority of Americans to meeting the needs of a shrinking, high-net-worth population
  • A declining pool of independent agents are chasing bigger policies within this segment
  • The industry has, effectively, painted itself into a corner and is trapped in a business model that, given its own complexity, is difficult to change from within

How have carriers painted themselves into a corner? 

Carriers face what Clayton Christensen termed, in his 1997 classic, “the innovator’s dilemma.” While continuing to do what they do brings carriers closer to mass-market irrelevance, today’s practices, products, processes and policies don’t change. They deliver near-term financials and maintain alignment with regulatory requirements.

It’s worth acknowledging how the carriers have ended up in this spiral, particularly the top 20, which collectively control more than 65% market share, according to A.M Best via Nerdwallet.

  • Disbanding of captive agent networks for cost reasons has also meant the loss of a (more) loyal distribution channel. The carriers that used to maintain captive agent networks enjoyed the benefits of a branded channel whose agents were motivated to promote the respective carrier’s products. They chose instead to …
  • Shift to third-party distribution, increasing dependency on a channel with less control, and where they face greater risk of commoditization. Placing life insurance products in a broad array of third-party channels, including everything from wealth management firms to brokerages and property/casualty networks, has added complexity and increased emphasis on managing mediated, non-digital channels. This focus comes at a time when other sectors are accelerating the move to direct, digital selling, aligning with changing demographics, technology trends and consumer preferences for digital-first, multi-channel relationships.
  • Product cost and complexity has raised the bar to close sales and has increased the focus on a smaller base of the wealthy and ultra-wealthy. With the exception of basic term life, life insurance products can be complex. They can be expensive. And, as a decent level of insurance at a fair premium requires a medical exam including blood and urine sampling, it takes hand holding to get potential policyholders through the purchase process. For the high and ultra-high net worth segments, the benefit of life insurance is often as a tax shelter, not simply to protect loved ones from the catastrophic consequences of unexpected earnings loss. More complexity equals more diversion from the mass market.
  • Intense focus on distribution has come at the expense of connecting with the client. Insurance company executives have long insisted – and behaved as though — the agent is the client, if not in word then effectively in deed. The model perpetuated by the industry delegates the client relationship to the agent. This has its plusses and minuses for the client, and certainly has come back to bite the carriers as they contemplate a digital approach to the marketplace where client data and a branded relationship matter. Carriers certainly do not win fans with clients – overall Net Promoter Score ratings for the insurance sector broadly are even lower than Congress’ approval ratings, and for at least one major carrier are reportedly negative.
  • The number of licensed agents is on the decline. The average age of an insurance agent or broker has increased from 37 years in 1983 and is now 59, based on McKinsey research. Agents have a poor survival rate: only 15% of agents who start on the independent agent career path are still in the game four years later. Base salary is negligible, and it’s an eat-what-you-kill business. This is a tough, impractical career path for most and has become less attractive over time.
  • The industry is legendarily slow and risk-averse. Think about actuaries – the function that anchors the business model makes a living by looking backward and surfacing what can go wrong. That is a valid role, but the antithesis of what it takes to build a culture where innovation can thrive.

What is the path to opportunity?

Here are innovation thought-starters to create value for an industry undergoing transformation:

  • Clients must be at the center of strategy. Twentieth-century carrier strategy may have been grounded in creating distribution advantage and pushing product, but 21st century success will come to those who put the client at the center of all aspects of execution. “Client centricity” is a way of operating a business, not a slogan.
  • Innovation starts with a new answer to the question, “who is the customer.” The agent is a valuable partner, but she is not the client. There is white space in the mass market – the middle class – not being served by the current system beyond a limited offering. Life insurance ownership has been linked to the stability of the middle class. We should all be concerned with the decline in life insurance ownership and lack of attention paid to this segment.
  • The orthodoxy, “insurance is sold not bought,” sets a self-inflicted set of limitations that can and should be disrupted. The existing product set may have to be pushed to clients because of its complexity, pricing, target audience, channels and near-term performance dependencies.
  • Getting the economics right and meeting the needs of today’s clients will demand a digital-first offering – from being discoverable via SEO and social on mobile screens, to supporting application processing, self-service, premium payments, document storage and downloads and connection to licensed reps whenever clients feel that is necessary. It will require full digital enablement of agents to create the right client experience, and improve revenues and expenses. Ask anyone who has purchased life insurance about his or her decision journey, and invariably you will find out that shopping for insurance is a social, multi-channel experience. People ask people whom they like and trust when it comes to making important life event-based decisions. Aligning to how people behave already is a winning approach, and is what customer-centricity is about.
  • In a world of big data, it’s ironic that the insurance sector is one of the most sophisticated in its historical use of data. Winners will realize the potential of new data sources, unstructured data, artificial intelligence and the many other manifestations of big data to personalize underwriting, anticipate client needs and create positive experiences including multi-channel distribution and servicing. Amazon, Apple and Google have set the standard on what is possible in customer experience, and no one will be exempt from that standard.
  • Life insurance products may be an infrequent purchase, but the need to protect one’s loved ones can be daily. In today’s product-push model, a continuing relationship beyond the annual policy renewal is the exception. Consider the potential of prevention services as a means of boosting lifetime value and client loyalty. In a world full of insecurity, there is a role for a continuing conversation about prevention and protection. But the conversation must be reimagined beyond pushing the next product to one that places a priority on serving the client.

Radical Approach on Healthcare Crisis

I love health policy, healthcare technology and using “corkscrew” thinking to find solutions for big problems. Perhaps no problem looms larger today than our current healthcare crisis and its financial implications for our future.  

The U.S. healthcare system needs more than a healthy shot in the arm—it needs a cure. Premiums continue their upward surge. More Americans are going into debt because of healthcare. Fewer workers are funding a growing Medicare base. There is a heavy shift of enrollees to Medicaid coverage, drug prices keep climbing and people are living longer.

In the last decade, top healthcare analysts, industry leaders, medical school experts, bloggers, public policy wonks, foundations, think tanks and politicians have had plenty to say, but the American consumer continues to be hit hard.

Current (and evolving) solutions we have to fix healthcare include: the Triple Aim, affordable care organizations (ACOs), private- and public-sponsored medical research, disease fundraising, population health management, electronic health records (EHRs), high-tech abuse/fraud solutions, new drugs, end-of-life talks, Obamacare and the future of pay-per-value.

See Also: Why Employers Should Comply With Obamacare Mandate

Everything about our healthcare crisis screams for utilization that is more selective, has a greater efficiency and can lower costs. But the red light on healthcare’s dashboard says there is a bigger issue. It’s something that, when fixed, will provide a greater benefit for generations to come.

That red light alerts us to the fact that, out of the $3 trillion spent per year on healthcare, 86% is related to chronic disease—many of which can be prevented, delayed in their onset or better managed earlier. Per the Centers for Disease Control and Prevention (CDC), the costs and figures are simply staggering. If the world’s largest company was going under, its underlying financials couldn’t look any more crippled.

Everyone has been looking at our national healthcare crisis in the wrong way. The solution is not to provide everyone with health coverage but to take strong, legal steps to teach, coerce and even mandate that the majority of American children and adults become healthy, through individual accountability.

“Mandate” hits a nerve, especially to those like myself who value the strength of our individual freedoms. But, historically, a large number of American citizens have consistently shown they do not value their health. When value is lost, the effect is often poor choices and subsequent long-term management. This leads to the development of sustained drivers, culminating in the onset of chronic disease(s), the major cost driver of our healthcare crisis.

For starters, nearly 50% of all American adults (117 million) have a chronic disease, and 25% have at least two. More than a third of our country (35%) is obese. Nearly half of U.S. adults (47%) at least have uncontrolled high blood pressure or uncontrolled high LDL cholesterol or are smokers.

“Steve, that is the individual’s choice, and that person has to live with the results,” you say. Sure, personal responsibility is key. However, for the healthcare markets, one person’s chronic disease affects everyone in the system.

Subsidies and public coverage, such as Medicare and Medicaid, run off taxpayer money. Private insurance prices group and individual premiums from risk pools. Therefore, there is no misunderstanding—today’s unhealthy people cost healthy people money both now and in future generations.

Almost everyone agrees that eating a carrot is better than eating a donut, that running two miles a day beats chain-smoking a pack of cigarettes. If that’s the case, why aren’t people making the needed changes?

Simple : Those people do not value their health. Therefore, they do not take actions to improve or maintain it.

Having individuals value their health on a mass scale is the answer to lowering chronic disease rates. Lower disease rates lower cost for care, resulting in more affordable healthcare for everyone.

ACOs, EHRs, increasing pay-per-value reimbursement helps lower costs and creates efficiency but does very little to drive individuals to value their health.

When someone makes a decision on just about anything, there are only two reasons: to gain pleasure or to avoid stress or pain. You might eat a chocolate bar, craving the sweet taste. Or you might quit smoking, after the first heart attack, where the strong possibility of death has set in.

Here’s the thing. For most people 25 and under, if they already “feel good” physically, neither trigger is in play. By the time they “feel bad,” many chronic diseases may already have had an irreversible foothold for years or decades. Early detection for everyone is tremendously important and desperately needed.

Many young Americans don’t go to the doctor, because they “feel good.” The initial motivator to get people to value their health is not public education, throwing large data points at them, getting them on high-deductible healthcare plans or using fear marketing. Rather, we must create an instance where people will get massive amounts of pain from not going to get a checkup or screening. The law must require every insured and uninsured American to have routine physicals and screenings.

Basic Outline of Program:

  • There must be repetitive and selective screenings, depending on gender and age.
  • Those who do not get screened receive a financial penalty, paid directly by individuals from their taxes or through their paycheck, or deducted from their social program or subsidy benefits.
  • Subsidies would cover the patient portion for screening, whether insured or not.
  • Results would be tracked, individuals would be counseled and any further results on subsequent actions would be tracked.

Yes, this plan will drive up costs on the front end. Look, it took us a lot of time to get to this healthcare crisis, and it will take time to undo it. If we believe we can find a short-term solution to reverse this, we are kidding ourselves.

See Also: Endangered Individual Health Market

The most important result is gaining proper management for the long term, allowing affordability for future generations

There will be those who claim individual rights will be lost when such coercion takes place (just think about how the Affordable Care Act was positioned as a tax). In the end, if we didn’t have such nasty, costly surprises on the middle and back-end portions of our lives, we wouldn’t have to make these changes.

Perhaps if doctors, insurers, drug companies, hospitals and other medical services reduced their revenues, affordability would be in hand. But here’s a reality check: The U.S. healthcare sector is growing faster than any other sector in the country. Companies, employees and shareholders are not going to reduce their financial interests and current way of life for the average American consumer to afford care.

We need something new. We do not need something to work against businesses but something to work for people.  People can, then, with better personal health data, be motivated to gain more than ever in their current and future health.

Americans have always been strong enough to call upon resolve and forward thinking. Now, we live in the time of “what’s in it for me?” Sometimes, mandates are necessary to get people to see the importance of helping their fellow man, instead of themselves.

People are dying unnecessarily. This will continue if we don’t stand for more than ourselves. Let’s come together to give more people the chance to make better decisions and to live healthier lives.

Technology and the Economic Divide

Yelp Eat24 customer-support representative Talia Jane recently wrote a heart-wrenching blog about the difficulties she faced in living on her meager salary. “So here I am, 25 years old, balancing all sorts of debt and trying to pave a life for myself that doesn’t involve crying in the bathtub every week,” she wrote. Her situation was so dire that, on one occasion, she could not even come up with the train fare to work.  She lived on the junk food that they provide at work.

Her message was addressed to Yelp CEO Jeremy Stoppelman.

What did the company do? It fired her on the spot. Yes, Jane made a mistake in posting this message on Medium rather than sending an email to Stoppleman. But her situation isn’t unique. She outlined the contours of a life that are familiar to many of the people working on the lowermost rungs of technology’s corporate ladder.

After a social media backlash, Stoppleman acknowledged that the cost of living in San Francisco is too high and tweeted that there needs to be lower-cost housing.

But the problem is more complex than San Francisco’s housing costs. The problem is the growing inequality and unfair treatment of workers. And technology is about to make this much worse and create a cauldron of unrest.

Silicon Valley is a microcosm of the problems that lie ahead. Sadly, some of its residents would rather brush away the poverty than face up to its ugly consequences. This was exemplified in a letter that Justin Keller, founder of Commando.io, wrote to San Francisco Mayor Ed Lee and Police Chief Greg Suhr.  He complained that the “homeless and riff-raff” who live in the city are wrecking his ability to have a good time.

The Valley’s moguls do not overtly treat as inconveniences to themselves the bitter life trajectories that lead to experiences such as Keller complained of; but they have largely been in denial about the effects of technology. Other than a recent essay by Paul Graham on income inequality, there is little discussion about its negative impacts.

The fact is that automation is already decimating the global manufacturing sector, transforming a reliable mass employer providing middle-class income into a much smaller employer of people possessing higher-level educations and skills.

The growth of the “Gig Economy”—ad hoc work—is shifting businesses toward the goal of part-time, on-demand employment, with aggressive avoidance of obligations for health insurance and longer-term benefits. And the tech industry has a winner-takes-all nature, which is why only a few giant digital companies compete with each other to dominate the global economy.

A substantial part of the value they capture is concentrated at the center and mostly benefits a few shareholders, executives and employees. With technology advances and convergence, we are in the middle of a gold rush that is widening inequality.

Already, in Silicon Valley, the Google bus has become a symbol of this inequity. These ultra-luxurious, Wi-Fi–connected buses take workers from the Mission district to the GooglePlex, in Mountain View. The Google Bus is not atypical; most major tech companies offer such transport now. But so divisive are they that in usually liberal San Francisco, activists scream angrily about the buses using city streets and bus stops, completely ignoring the fact that they also take dozens of cars off the roads.

Teslas, too, have become symbols of the obnoxious techno-elite—rather than being celebrated for being environmentally game-changing electric vehicles. In short, there’s very little logic to the emotionally charged discussions—which is the same as what we are seeing at the national level with the presidential primaries.

Intellectuals are trying to build frameworks to understand why the divide, which first opened up in the 1990s, continues to worsen.

Thomas Piketty explained in his book Capital in the Twenty-First Century that the economic inequality gap widens if the rate of return on invested capital is superior to the rate at which the whole economy grows. His proposed response is to redistribute income via progressive taxation.

A competing theory, by an MIT graduate student, holds that much of the wealth inequality can be attributed to real estate and scarcity. Silicon Valley has both: an explosion in wealth for investors and company founders, and a real-estate market constrained by limits on development.

We need to immediately address San Francisco’s housing crisis and raise wages for lower-skilled workers.

Both are possible; the region has enough land, and the industry has enough wealth. In the longer term, we will also need to develop safety nets, retrain workers and look into the concept of a universal basic income for everyone.

It is time to start a nationwide dialogue on how we can distribute the new prosperity that we are creating with advancing technologies.

cyber

Cyber Threats and the Impact to M&A

As investment bankers and their lawyers pore over the details of a potential corporate merger, a new and troubling issue has emerged that could affect the terms of the deal, or even derail it. Cyber risk is now a top agenda item, not only for deal makers but for shareholders, regulators and insurance companies.

While assumption of risk is nothing new when acquiring a company, assuming cyber risk raises a whole new set of concerns that must be addressed early in the M&A process. Specific industries, such as healthcare, financial services and retail might require detailed attention to data risk as it applies to HIPAA (Health Insurance Portability and Accountability Act) standards, financial regulation and PCI (payment card industry) compliance. A thorough analysis of the target company’s network systems needs to be part of the due diligence process and may require the services of a network assessment vendor. Insufficient cyber security and the need for significant remediation of these networks could lead to unforeseen expense and may be a consideration in final negotiations of the target price.

Understanding the evolving face of hackers should also be a consideration. Hackers have traditionally been motivated solely by financial gain. However, as evidenced by recent cyber attacks against Sony, Ashley Madison and the Office of Personnel Management, hackers may be driven by political agendas or moral outrage or may be part of state-sponsored cyber espionage. If the acquired company comes with intellectual property or produces controversial products or services, it could be at higher risk of attack.

Regulatory Issues Affecting M&A

Increased regulatory risk for the acquiring company should also be of concern. Regulators in the U.S. and around the world have had a laser focus on privacy matters and have made their authority known in two recent court decisions.

  • On Aug. 24, 2015, a decision was made that will have profound impact on how the CIO, compliance officers, cyber security officials and others view what is an acceptable level of cyber security. In Federal Trade Commission v. Wyndham Worldwide Corp. et al. No. 14-3514, slip op. at 47 (3rd Cir. Aug. 24, 2015), the FTC alleged Wyndham failed to secure customers’ sensitive data in three separate incidents. As a result, 619,000 customer records were exposed, leading to $10.6 million in fraudulent charges. The Third Circuit Appeals Court affirmed the FTC’s authority to regulate cyber security standards under the “unfair practices” of the Federal Trade Commission Act. Therefore, key stakeholders in the acquiring and target companies need to come to terms regarding acceptable levels of cyber security before the deal is closed.
  • On Oct. 5, 2015, the European Union’s Court of Justice declared the U.S. and E.U. Safe Harbor framework invalid. The ruling abolishes an agreement that once allowed U.S. companies to move E.U. residents’ digital data from the E.U. to the U.S., and it will affect approximately 4,000 companies. For some companies, the ruling could drastically alter their business models. Therefore, an acquisition of any of these companies will require careful consideration as to how the company collects and uses the online information of the residents in the 28 countries that make up the E.U. An acquiring company could face regulatory scrutiny and costly litigation for noncompliance of their newly acquired entity.

Transferring Your Cyber Risk

One method to provide protection for the acquiring company would be to enter into a cyber security indemnity agreement with the targeted company. The agreement can exist for a period after closing, but there should be an expectation that—after a specified length of time long enough to remediate and integrate the target company’s IT networks—the agreement will expire. The liability protections should be as broad as possible and should include all directors and officers, who are often named in derivative lawsuits in the aftermath of a data breach. The agreement should address the many different actions that might be required after an unauthorized network intrusion of the target company. Costs related to defense attorneys, IT forensics firms, credit monitoring vendors, call centers, public relations companies and settlements should be anticipated. The firms to be hired, the rates they will charge and the terms of reimbursement to the acquiring company should be outlined in the agreement.

Many businesses have also turned to cyber insurance as a means to transfer cyber risk. In fact, the cyber insurance industry has grown to $2 billion in written premiums, with some expecting it to double by 2020. Cyber policies typically cover a named insured and any subsidiaries at the time of policy inception. Parties in a merger should be aware that M&A activity will likely have an impact on existing cyber insurance policies and often require engagement with insurance companies. When an insured makes an acquisition during the policy term, the insurance carrier often requires notification of the transaction pursuant to policy terms specifically outlined in the policy. Because cyber insurance policies are written on manuscript forms, there is no one standard notification requirement, and compliance terms will vary from insurance company to insurance company. If the target company has revenue or assets over a certain threshold, the named insured may be required to:

  • ƒProvide written notice to the insurance carrier before closing;
  • Include detailed information of the newly acquired entity;
  • Obtain the insurer’s written consent for coverage under the policy;
  • Agree to pay additional premium;
  • Be subject to additional policy terms.

Cyber risk can have a huge impact on any M&A activity. Legal liability and the means to transfer it should be a top priority during the transaction. There likely will be a big impact on existing insurance coverage. All parties need to focus on their rights and responsibilities and must engage the right experts to maximize protections in the process.

healthcare

Why Healthcare Costs Rise So Fast

This is the first of a two-part series, by David Toomey and me, on why healthcare cost growth has historically been much higher that general inflation. 

If you want to truly understand why corporate healthcare costs have risen faster than nearly anything else over the past 40 years, read this article.

In 2001, David was managing large accounts for a major carrier/TPA (third-party administrator) when the largest hospital system in the market issued a notice to terminate its relationship with the carrier, to begin negotiating for higher unit prices. (When hospitals want a very high fee increase, they sometimes start the process by terminating participation in a carrier’s network.) This notice began a tumultuous series of negotiations that involved the local press. The fee increase demanded by the hospital system was high single digits, above market and highly inflationary for the area. This system was already paid a premium because of its large market presence.

David moved quickly to engage major self-insured clients and educated them on the cost impact. They told him to hold firm, as they could not absorb the increases. When asked what they would do if this major hospital was not in the network of the carrier that employed David, many responded that they would turn to another carrier so as not to disrupt employees who used the hospital system!

There were no questions by employers on the quality of the hospital’s care or on its commitment to process improvement. Although they realized that they could not really afford the higher prices, they felt that avoiding disrupting employees (even in a fairly minor way, by having them use a different hospital system) trumps company profits and affordable payroll deductions. That position meant David had no leverage at all in negotiating with the hospital system.

As a result, employer and employee health costs ratcheted up in that market. That’s too bad, but this story is the norm.

We’ve seen this same scenario continuously in our careers. Even if a hospital or clinic is used by fewer than 5% to 10% of a company’s employees, getting complaints from employees—even just a few—trumps corporate profits, shareholder returns, rising payroll deductions, restraining rising deductibles and rising employee out-of-pocket health costs. Even though self-insured employers are the ultimate purchasers of healthcare, they usually just roll over when providers keep raising their charges year after year.

In every market, by definition, half the providers are below average. While company benefit managers profess to want the best-quality care for their employees, they willingly accept larger fee increases from the worst providers. Why? Avoiding a few employee complaints has always been more important than deleting poor-quality providers, ones with a high rate of harming patients. (By “harming patients,” we mean providers with high rates of misdiagnoses, high rates of prescribing bad or suboptimal treatment plans and high rates of infections, some of which are deadly.)

Sally Welborn, head of benefits for Walmart Stores, recently called for self-insured employers to take the lead in reforming how providers are paid and in making hard, value-based purchasing decisions. (The term “value” excludes providers that have a high rate of misdiagnosed patients and give them profitable but unnecessary treatments.)

Soon, you can read Part Two on how employers can obtain value from the provider community.