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Why Risk Management Is a Leadership Issue

From product scandals to data breaches to natural disasters, companies are dealing with constant risk. But how they prepare for those risks can make the difference between riding the roughest wave — or drowning in it. The field of risk management, once an afterthought for many companies, is getting renewed attention with a new book by two Wharton professors who want to help business leaders think more deeply about worst-case scenarios. Michael Useem, management professor and director of the Center for Leadership and Change Management, and Howard Kunreuther, professor of operations, information and decisions as well as co-director of the Risk Management and Decision Processes Center, recently spoke with the Knowledge@Wharton show on SiriusXM channel 111 about their book, Mastering Catastrophic Risk: How Companies Are Coping with Disruption.

An edited transcript of the conversation follows.

Knowledge@Wharton: How did the two of you come to collaborate on this book?

Useem: If you think about the two terms that Howard has referenced, risk and leadership, they go together in this case. Often, we think of those as something separate. Risk — we’ve got to be analytical and disciplined, and it’s often technical. Leadership — it’s all about having a vision and setting a strategy. But we concluded, after talking with quite a few people and companies’ directors, executives and senior managers that the time has come for the conjoining of these two terms. Many companies now are self-conscious about appraising risk, measuring risk, managing risk and ensuring the company is ready to lead through a tough moment the risk has caused.

Knowledge@Wharton: Is this a recognition that has developed recently, compared with the executive mindset of the 1950s, ’60s, and ’70s?

Useem: Yes. I think what really got us going on the book in terms of the timing is exactly what you’ve referenced. Ten or 15 years ago, no companies had a chief risk officer. Risk was barely mentioned. The term “enterprise risk management” (ERM) was not even around. But if you look at any trend line out there, what do people worry about when they get together at watering holes for senior management? Risk now is on the agenda just about everywhere, for good reason: Because the risk that companies have faced in recent years has gone up. The catastrophic downside of big risk also has increased. More risk, more downside, more people are paying attention.

Kunreuther: One of the really interesting issues associated with the study and our interviews with senior management is that, before 9/11, there was very little emphasis by the firms on low-probability events — the black swan events. Starting with 9/11 and continuing through to today, these issues now have become more important, and black swans are now much more common than before. As a result, firms are paying attention. When we interviewed people, they were very clear with us that now that the events have occurred, they are putting it high on the agenda. As Mike has indicated, the boards and all of senior management are now paying attention to it, so it’s a big, big change.

Knowledge@Wharton: Certainly, 9/11 was an impactful event on the country, but it was followed a few years later by the Great Recession. How did that change the view of risk?

Useem: We raised the question in these in-depth interviews with people inside the company, whether on the board or in the management suite, and they consistently said that four events became a wake-up call or an alarm bell. First, 9/11 got us thinking about the unthinkable. A couple of hurricanes came through, including Sandy, which was a huge event. The recession or the near-depression back in 2008, 2009. Who thought that the Dow was going to lose 500 points in a day? Who thought Lehman was going to go under? But it all happened. And finally, the events in 2011 in Japan with the enormous tsunami after a 9.0 earthquake that left probably 25,000 people dead and set a fire in a nuclear plant.

Even if you were a company that was not touched, just look at the four points on a graph. The costs are high. Many companies are impacted. Everybody thought, let’s get on with enterprise risk management. Let’s make it an art.

See also: How to Improve ‘Model Risk Management’  

Knowledge@Wharton: How have business leaders changed their thinking about risk management because of those four events?

Kunreuther:  Leaders are now saying, “We have to put risk on the agenda. We have to think about our risk appetite,” which they hadn’t thought about before. “We have to think about our risk tolerance.”

Financial institutions played that role, and they were very clear about that right after the 2008-2009 debacle. They had to ask themselves very explicitly that question. But I think this is now much broader than that. Leaders have recognized that they also have to think longer-term. This is one of the issues. We have a framework that we’ve developed in the book that tries to combine some of the work that has come out of the literature that Daniel Kahneman has pioneered on thinking fast and slow — by indicating that intuitive thinking is the mindset that we often have. Thinking myopically. Thinking optimistically. Not wanting to change from the status quo. Leaders have now recognized that they have got to put on the table more deliberative thinking and think more long-term. That is a change, and they tie that together with risk.

One of our contributions, with respect to the book, is to try to put together a framework that really resonates with the leaders and the key people in the organization so that they can respond in a way that makes sense.

Useem: We asked a lot of people who are in the boardroom, if they go back 15 years, was risk, cyber risk or catastrophic risk in board deliberations? The answer typically was no. Ask the same people about today, and they say, “Of course.” We watched with horror what has happened with some of the cyber disasters at Target and elsewhere, and no board worth its pay is these days unconcerned about risk. Now, you’ve got to be careful. The board works with management, sets the vision, does not micromanage. But what boards are increasingly doing is saying to management, “Let’s see what your risk tolerance is. Let’s see what your risk appetite is. Let’s see what measures you already have in place. Nobody wants to think about the unthinkable, but let’s think about it.”

Knowledge@Wharton: The fake accounts scandal at Wells Fargo and the emissions controversy at Volkswagen are two recent examples of risk that you document in the book. Can you talk about that?

Useem: We don’t mean to pick on any company, and we don’t mean to extol the virtues of any company. But we can learn from all. Howard and I took a look at the events at Wells Fargo, which were extremely instructive. No. 1, the company put in very tough performance measures. They told employees, you’ve got to get results, otherwise you’re not going to be here in 12 months. But there was not a recognition that very tough performance indicators without guardrails against excess of performance was a toxic mix. We’ve seen what happened to Wells Fargo. They’ve paid billions in fines. The Federal Reserve has a stricture right now that Wells Fargo cannot accept one more dollar in assets until it can prove to the Fed that it has good risk measures in place.

We also document in the book the events with Volkswagen, which had the so-called defeat devices intended to report if a VW vehicle was brought in for an inspection, that the emissions were meeting U.S. standards. In fact, the software just simply was fooling the person looking at the dials. That, apparently, went all the way up to the top. We’ll see what’s finally resolved there.

Wells Fargo and Volkswagen took enormous hits in terms of reputation, brand, stock price and beyond. We also document a bit the BP problems in the Gulf…. They’re instructive.

Kunreuther: We didn’t interview anyone with respect to Volkswagen, but we did have public information, and it’s included in the book. The reason that we felt it was so important is that VW felt that this was a low-probability event that they would be detected, and they put it below their threshold level of concern. They emphasized the optimistic part of this, which was to say, “Let’s see what we can do as a way of really improving our bottom line.” What we do in the book is give a checklist to people, to companies and to individuals. We see it as a broad-based set of checklists on how they can do a better job of dealing with that.

What we really say is: Pay attention to these low-probability events. If you think not only in terms of next year but over the next 10 years, what you can see as a very low-probability event would actually be quite high over a period of time. If you begin to think long-term, which is what firms want to do, you pay attention to that.

Knowledge@Wharton: There’s such an economic impact on the company when these issues can’t be resolved quickly. Toyota, for example, has been dealing with its airbag problem for several years.

Kunreuther: You tie the issue of getting companies and directors to pay attention to the low probability, and then you say to them, “Construct a worst-case scenario.” Put on the table what could happen if it turns out you were discovered, or if there is an incident that occurs, or an accident, as Mike was saying on the BP side. What’s going to happen to the company? What will happen to its reputation, its survival, its bottom line? Our feeling is that, if you can begin to get people to think about the appetite and tolerance in the context of these low probabilities that could be quite high, then I think you have an opportunity for companies to pay attention. And they’re doing that, as Mike and I have found out in our interviews.

Knowledge@Wharton: What about when the disaster is a natural phenomenon, such as the volcanoes in Hawaii and Guatemala? Companies have to be prepared, but they can’t control what happens.

Useem: As we’ve watched the events unfold in Hawaii and Guatemala, it’s a great warning to us all that the impact of natural disasters worldwide is on the rise. There’s just no other way to describe it except a graph that’s going up, partly because people are living closer now to some of the places that historically are seismic. Hurricanes are possibly being intensified by global warming. There are more people along the Florida coast. All that being said, natural disasters are obviously in a much bigger class of disasters.

[Since] we wrote this book for people to be able to think through their own catastrophic risk management, we offered [examples] from the experience of other large companies, mainly in the U.S. We have a couple of German companies that we focused on: Deutsche Bank, Lufthansa and so on. We suggest that the vigilant manager, the watchful director, ought to be mindful of 10 separate points. One is, be alert to near-misses. What we mean by that is, “There but for the grace of God go I.” If I’m an energy producer, watch what happened to BP in the Gulf. Let’s learn from what they went through.

The A-case for me is Morgan Stanley, which had been in the South Tower of the World Trade Center when 9/11 hit. Because of the events eight years earlier — in 1993, a bomb had gone off in the basement of the World Trade Center — the risk officer at Morgan Stanley said, “Who knows what else might happen? That was a near-miss.”

Rick Rescorla, [vice president for corporate security,] insisted that Morgan Stanley every year practice a massive drill of evacuating the tower. When 9/11 occurred, the North Tower was hit first. Morgan Stanley is in the South Tower. Rescorla said, “Let’s get out of here,” and he managed to evacuate almost all 4,000 people. He was one individual who did not get out. He went back in to check. He is a hero for Morgan Stanley and many other people, but the bigger point taken from that is: Learn from the world around us, because these developments are intensifying. The threats are bigger. The downside is more costly.

See also: 3 Challenges in Risk Management  

Kunreuther: Near-misses are important in any aspect. But the other point that I think is important for today is another part of the checklist: Appreciate global connectedness and interdependencies. That point really became clear with Fukushima and with the Thailand floods. We asked each company what was the most adverse event that they faced? They had the complete freedom to say anything they wanted. The death of a CEO could have been one. Kidnapping was another. But as Mike indicated earlier, Fukushima was a critical one, and so were the Thailand floods. These were companies in the S&P 500, but they were concerned about how they were getting their parts, so supply chains were very important. They recognized after Fukushima that they were relying on a single supply chain that they couldn’t rely on for a time.

Knowledge@Wharton: How can a company prepare for the unexpected death of a CEO?

Useem: From looking at the companies that are pretty far into it, all we’re calling for is getting those risks figured out, then having in place a set of steps to anticipate. It’s like insurance. The best insurance is the one that never pays off because the disaster has not happened. The best risk management system is the one that’s not invoked.

In the book, we get into the events surrounding a fatal Lufthansa crash. Within minutes, they were in action. Within minutes, they had called the chancellor of Germany. Within minutes, they had people heading to the scene, not because that’s what they do but because they had thought about the unimaginable, and they had in place a system to react quickly. You have to deal with an enormous amount of uncertainty when disaster strikes. Premise No. 1: Be ready to act. Premise No. 2: Be ready to work with enormous uncertainty, but don’t let that pull you back from the task ahead.

Ready for Telematics? 7 Considerations

Telematics has the potential to dramatically alter the auto insurance industry, from personalized premiums based on individual driving data to automated emergency services and entertainment-based add-ons to more immediate and active management of claims.

Risk Assessment

Value Proposition

Telematics has much to offer both consumers and insurers.

Solution Analysis

Technology solutions available today are similar in terms of what is possible, but there is a difference in the manner that information is collected, delivered and used. When selecting the most appropriate technology solution and provider to partner with, I recommend the following considerations:

1. Telematics Model (PAYD, PHYD, CYD, Embedded): Several telematics models are emerging with varying levels of consumer interaction and integration.

Pay As You Drive (PAYD) is a mileage-based system that has been around for some time in varying forms. A device is installed in the car to validate when and where a car is driven. More advance systems are available now.

Pay How You Drive (PHYD) considers driving style and behavior in addition to collecting mileage and GPS data. The average driver has one accident every 10 to 12 years, but more common are unsafe driving maneuvers that increase the likelihood of an accident. An accelerometer used in the PHYD models can provide event information such as abrupt acceleration, deceleration, hard braking and sharp turning, which help us understand driving behavior and predict accident claims better.

Control Your Driving (CYD) goes to the next level. While PAYD and PHYD models are about collecting data rather than interacting with consumers, therefore passive in nature, CYD uses the data to provide constructive feedback to drivers through mobile or in-vehicle interfaces and potentially improves driving habits. There is sufficient evidence that driving behavior can be improved with feedback. The teen and elderly markets are niches for early adopters of this model.

Vehicles embedded with telematics devices are the long-term aspirations of both automakers and insurers. These systems provide all-around safety and driving assistance. These systems usually include services such as adaptive cruise control, collision warning, lane assistance and blind-spot detection. This model is growing fast in the auto market, driven by the safety benefits of reduced driving risk. New technology can enable additional services and features like safety controls activated when poor road conditions are detected by the GPS. BMW’s connected drive is the first step in this direction. Mobileye is helping autonomous cars “see” via crowdsourcing; the company has outfitted 4,500 NYC Uber and Lyft cars with anti collision technology. Some analysts project that all major manufacturers will have embedded telematics solutions in their cars within the next five years.

See also: Game Changer for Auto Telematics  

2. Data Protection (collection, use, disclosure and storage of personal information): Telematics generates big data. Therefore, the ownership, collection, use, disclosure and storage of data becomes crucial in gaining trust and loyalty.

Privacy: The success of other industries indicates that people are willing to trade some of their privacy in return for the right services, in the right time at the right place. That has proved true in social media, Uber, online credit card use and internet banking. When it comes to telematics, though, the stigma of insurance companies and the fear that data about driving behavior could be misused are causing concern. To overcome this hurdle, we must be as transparent as possible up front, offer the right amount of value-added services and carefully position the offering with the right messages to win over consumers. The telematics solution selected must provide a feasible program that gets appropriate access to driving patterns without seeking access to too much data. Aggregated driving scores, limitations on driving history and GPS use and specialized onboard data analysis functions could mitigate these concerns. As long as we know about driver safety and potential risks, we don’t need to dive deep into consumers’ personal data.

Storage: Dynamically generating data within an automobile or mobile phone creates challenges. The sheer amount of data generated makes it difficult, if not impossible, to store it within the automobile or mobile phone itself. Thus, decisions about what to store, and where, become very important. This issue is amplified by the privacy concern of data storage. In cases where certain pieces of data are not stored within the automobile or mobile phone, the retention aspect of privacy policies becomes important. Once the data is destroyed, there is no way to recover it. Moreover, unlike static data, which is collected only once by any interested party, dynamic data is collected repeatedly by a service provider to keep it up to date. Thus, there has to be a continuous transfer of dynamic data from many vehicles through the telematics service provider to application service providers. This requires an efficient and scalable evaluation of constraints in the privacy policies.

Security: The growth of e-commerce on the web has been limited by the reluctance of consumers to release personal information. 94% of web users decline to provide personal information to websites at one time or another when asked, and 40% who provide demographic data have gone to the trouble of fabricating it. If potential auto telematics users share the concerns of web users, then a large segment of the potential telematics market, perhaps as much as 50%, may be lost. There is significant potential for misuse of data collected. Consumers may substitute false data or hack into vehicle applications. Telematics service providers may sell consumer data to third parties without the permission of consumers. Therefore, telematics applications will be successful if providers know that the data they receive is accurate and if consumers know that their privacy is assured. Data protection must provide both privacy and security protection. Telematics solutions that can achieve that protection while enabling the sharing of data are the most viable options.

3. Ease of Installation (solution access): Complex installation processes (like blackbox installation) result in lack of interest and conversions from the traditional insurance model to the telematics model. AXA launched a mobile telematics solution in some of its international markets but was unsuccessful in acquiring a buy-in from consumers as the app had to be switched on before a drive. Such a solution leaves room for anti-selection and requires additional effort in the day-to-day lives of consumers. Even insurers like Progressive have only managed to convert approximately 20% of their book of business to the telematics model despite more than a decade of marketing initiatives and spending.

4. Ease of Use (interaction and feedback): The telematics solution selected must be intuitive and easy to use for both consumers and insurers. It should help us identify the risk (item that is insured), peril (anything that could cause damage — breakdown, weather conditions, fire, water, ice, road conditions, accident, etc.) and hazards (anything that increases the chances of peril — speeding, hard braking, driving behavior, etc.). The solution must be able to answer questions such as who is driving, how well the person is driving and how much is the car being driven. Mobile telematics solutions must be able to distinguish driving from walking, riding a bike or hopping on a train, bus or boat, for instance. The right solution will employ real-time data analytics and feedback to engage consumers, improve driving safety and facilitate better claims experience and meaningful dialogue with insurers.

5. Accuracy (trust): Our business is built on trust. It is imperative that the telematics solution we implement helps build trust and value in the digital age. Data accuracy is crucial in acquiring a buy-in from consumers, assessing driving behavior, pricing and speed and quality of response during a breakdown or accident.

6. Notifications (auto alerts): Most fleet telematics solutions have failed to create value as the focus has been largely on collection of information alone. Such solutions require someone to run reports, analyze them and understand them before taking corrective actions. This results in delayed feedback to drivers and in most instances becomes reduced to just knowing where vehicles in a fleet are (dots on a map). Automatic notification and alerts facilitate information to be reviewed at the right time, in the right place and by the right person for improved service (safety, accident and roadside assistance) and quality of care.

7. Ease of support (cloud): Cloud-based telematics solutions facilitate the delivery of new or upgraded capabilities without stretching IT bandwidth and keep the total cost of data ownership low. This is imperative if we wish to own the data. If not, then partnering with a solution provider that can maintain and support the solution at scale in an economically viable manner is crucial.

Customer Engagement

Engaging customers to improve driving behavior calls for a change in human behavior.

Humans are not inspired to act on reason alone. You don’t connect with your audience by using conventional rhetoric, which in the business world usually consists of a PowerPoint presentation in which you say “here is our company’s biggest challenge, and here’s what we need to do to prosper,” while building your case through statistics, facts and quotes from authorities. The problem with rhetoric is two-fold. First, the people you are talking to have their own set of authorities, statistics and experiences, so, while you are trying to persuade them, they are arguing with you in their heads instead of being motivated to reach certain goals. Second, if you do succeed in persuading them, you’ve only done so at an intellectual level. That’s not good enough. The theory of rational action that claims human beings are abstract symbol manipulators much like computers that seek to maximize their self-interest has dominated most of the 20th century and is the foundation for major institutions, from stock markets to governments. Research in the last couple of years, though, has led to a profound shift in how we understand human thought and behavior.

Scientists have pieced together enough evidence to know that humans are embodied beings, which means we work the way we do because of the kinds of brains we have, the kinds of bodies we have and the typical experiences that pervade our evolutionary history. We know now how real human nature works (mostly). The big picture is that we are profoundly moral beings, and our behavior is shaped by value judgments, deeply held beliefs and assertions about right and wrong. We are profoundly social, and our behavior is influenced by the behavior of those around us through shared stories, common expectations and need for cooperation (and competition). We make decisions through context-based logic determined by how we understand the situations we find ourselves in and reason with our emotions. Try asking someone on a date without those subtle emotional cues of presence, enthusiasm and appeal.

I believe that something as simple as fun can influence human behavior for the better. In a series of experiments, Volkswagen tested this theory. Check it out…

The speed camera lottery

Can we get people to obey the speed limit by making it fun to do so? The winning idea was so good that Volkswagen, together with the Swedish National Society for road safety, actually made this innovative idea a reality in Stockholm.

Piano Stairs

Can we get more people to take the stairs instead of the escalators by making it fun to do so? Piano stairs created on Odenplan underground station in Stockholm have become a hit in cities worldwide from Milan to Santiago and more.

The way to persuading people and ultimately a much more powerful way is by uniting an idea with an emotion. It comes down to good design in our attempts to change human behaviour and will depend on our understanding of REAL human nature. Knowing where we went wrong in the past and what we know now is right, we can engage and design models to promote socially desirable outcomes like reduction in environmental impact and greater sensitivity to the needs of others.

See also: 5 Value Levers for Auto Telematics  

Using the fun theory to improve driving behavior is a tested formula that has worked globally and one that I would recommend as a first step. Create a competition that is built off recognition and rewards good behavior. Huge, safe-driving campaigns could be turned into beautiful marketing messages that people would be proud to be a part of. The intelligence and data we collect could change the way we do business altogether.

Liberty Insurance: Drive Well from Michael Hanson on Vimeo.

Delivery

Inventing a future and testing ideas is not enough. To bring auto telematics solution to life, models need to change from actuarial to actuarial plus big data. Implementation will require collaboration between solution providers, underwriters, actuaries and product and marketing teams to create economically viable customer propositions, storytelling and messaging that connects with your audience and keeps their attention long enough to convert.

Scale

Companies like Uber and Lyft struggle with public perception and regulations globally. Partnering with them and creating compelling value propositions for their drivers presents an opportunity for efforts in auto telematics to scale quickly.

Conclusion

The winners will be early movers that capture the safest drivers, take advantage of pricing power and strengthen customer relationships while easing privacy concerns.

New Risks Coming From Innovation

The triggers that have induced the insurance industry to innovate have dramatically changed in this millennium. Up until the 21st century, little innovation occurred, because insurers were looking to create products for emerging risks or underinsured risks. Innovation occurred most often as a reaction to claims made by policyholders and their lawyers for losses that underwriters never intended to cover. For example, the early cyber policies, which insured against system failure/downtime or loss of data within automated systems, were created when claims were being made against business owners policies (BOPs) and property policies that had never contemplated these perils. Similarly, some exclusions and endorsements were appended to existing policies to delete or add coverage as a result of claims experience. Occasionally, customer demand led to something new. Rarely was innovation sought as a competency.

Fast forward to today, when insurers are aggressively trying to develop innovative products to increase revenue and market share and to stay relevant to customers of all types. Some examples include: supply chain, expanded cyber, transaction and even reputation coverages.

With sluggish economies, new entrants creating heightened competition, emerging socio-economic trends and technological advances, insurers must innovate more rapidly and profoundly than ever. The good news is that there is movement toward that end. Here is a sampling of the likely spheres in which creativity will show itself.

Space

Insurers have already started to respond to the drone phenomenon with endorsements and policies to cover the property and liability issues that arise with their use. But this is only the tip of iceberg in comparison with the response that will be needed as space travel becomes more commonplace. Elon Musk, entrepreneur and founder of SpaceX, has announced his idea for colonization of Mars via his interplanetary transport system (ITS). “If all goes according to plan, the reusable ITS will help humanity establish a permanent, self-sustaining colony on the Red Planet within the next 50 to 100 years” according to an article this September by Mike Wall at Space.com.

See also: Innovation — or Just Innovative Thinking?  

Consider the new types of coverages that may be needed to make interplanetary space travel viable. All sorts of novel property perils and liability issues will need to be addressed.

Weather

Weather-related covers already exist, but with the likelihood of more extreme climate change there will be demand for many more weather-related products. Customers may need to protect against unprecedented levels of heat, drought, rain/flood and cold that affect the basic course of doing business.

The insurance industry has just taken new steps in involving itself in the flood arena, where until now it has only done so in terms of commercial accounts. Several reinsurers — Swiss Re, Transatlantic Re and Munich Re — have provided reinsurance for the National Flood Insurance Program (NFIP), for example. Insurance trade associations are studying and discussing why primary insurers should do more in terms flood insurance as a result of seeing that such small percentages of homeowners have taken advantage of NFIP’s insurance protection.

Sharing Economy

As a single definition for the sharing economy begins to take shape, suffice it to say that it exists when individual people offer each other products and services without the use of a middleman, save the internet. Whether the product being offered is a used handbag, a piece of art or a room in a private house or whether the service is website design, resume writing or a ride to and from someplace, there are a host of risk issues for both the buyer and seller that are not typically contemplated by the individual and not covered in most personal insurance policies. This is fertile ground for inventive insurers. How can they invent a coverage that is part personal and part commercial? Smart ones will figure out how to package certain protections based on the likely losses that individuals in the sharing economy are facing.

Driverless Cars

So much has already been written about the future of driverless cars, but so many of the answers are still outstanding. How will insurance function during the transition; who will be liable when a driverless car has an accident; who will the customer be; what should the industry be doing to set standards and regulations about these cars and driving of them; how will subrogation be handled; how expensive will repairs be; how will rates be set? A full list of unanswered questions would be pages long. The point for this article is – how innovative will insurers be in finding answers that not only respond to these basic questions but also provide value-added service that customers will be willing to pay for?

See also: Insurance Innovation: No Longer Oxymoron  

The value added is where real innovation comes into play. Something along the lines of Metromile’s offerings for today’s cars is needed, such as helping drivers to find parking or locate their parked cars. Such added value is what might stem the tide of the dramatic premium outflows that are being predicted for insurers once driverless cars are fully phased in.

Corporate Culture and Reputation

Recent events indicate that corporations need some risk transfer when it comes to the effects of major corporate scandals that become public knowledge. The impact from the size and scope of situations such as the Wells Fargo, Chrysler, Volkswagen and other such scandals is huge. Some of the cost involves internal process changes, public relations activities, lost management time, loss of revenue, fines and settlements. Reputation insurance is in its infancy and warrants further development. And though insurance typically does not cover loss from deliberate acts, especially those that are illegal, there is enough gray area in many scandals that some type of insurance product may be practical despite the moral hazard and without condoning illegal behavior.

And the Risk

All innovation poses risk. Risk is uncertainty, and innovation leads to uncertain outcomes. Just as insurers must create solutions, they must be willing to acknowledge risk, assess risk, mitigate risk and prepare for some level of risk to materialize. So, as insurers are now actively trying to innovate, they must make sure that their enterprise risk management practices are up to addressing the risks they are taking.

For each new product, some of these risk areas must be explored:

  • Is there a risk that projections for profitability will be wrong?
  • If wrong, by how much, and how will this shortfall affect strategic goals?
  • What is the risk appetite for this product initiative?
  • What is the risk the new product will not attract customers, making all development costs wasted expense?
  • What is the risk that price per exposure will be incorrectly estimated, hurting profitability?
  • What is the risk for catastrophic or shock losses relative to the product?
  • How will aggregation risk be handled?
  • What is the risk that litigation concerning the policy coverages will result in unintended exposures being covered?

Conclusion

Regardless of whether or not they have been dragged into innovation by disruptive forces, insurers are finally ready to do more than tweak products around the edges. The risk of not innovating appears to be greater than the risk associated with innovating.

The Next Frontier for Connected Cars

In 2006, UCLA Professor of Urban Planning Donald Shoup compiled the results of 16 surveys carried out between 1927 and 2001 on the time spent looking for a parking space. He reported that the average time spent looking for on-street parking was approximately eight minutes – a figure that has remained relatively unchanged since the 1930s.

This research also demonstrated that, on average, one vehicle in three in traffic is actually searching for somewhere to park. This figure has been confirmed more recently by a study from the San Francisco City Council, which concluded that an estimated one-third of weekday traffic was because of drivers looking for a parking space.

While solving the problem of road congestion via accurate traffic information has been looked at for decades – the RDS TMC protocol was invented in 1988 – and has already reached a good level of sophistication and accuracy, solving the parking problem via connected services is quite a recent topic and is still very much a work in progress.

As a matter of fact, most pure players in this field have been founded quite recently: as an example, JustPark in 2006; Parkopedia, ParkMe, Worldsensing and Anagog in 2009; and Parknav in 2011. The only companies to have emerged earlier are the parking payment companies, PayByPhone and Parkmobile, in 2000 and Pango in 2005.

On-Street and Off-Street

Parking essentially divides in two markets with two very different problems to solve: off-street and on-street. Connected services taking care of off-street parking are now quite advanced. In the three steps of information, booking and payment, the first is largely available (even if real-time data remains partial), but booking and advanced payment are still works in progress. Very few cars on the road today – or navigation apps – are able to find, book and pay seamlessly for a parking space in a garage.

The on-street parking problem is, by nature, more difficult to solve because detecting free parking bays in real time, at scale is complex and requires many sources of information. There are very different approaches to create this data.

Leveraging Traffic Probe Data for Parking

One is to make sense of the existing probe data currently used for real-time traffic. For example, Garmin is using this data to calculate the inflow and outflow of cars for each road segment in large cities and estimate availability (read here). The company has partnered with Parkopedia to include off-street parking information in their data model.

The GPS company launched this service in their mobile app during the third quarter in six German cities and is now adding cities in more countries: London, Amsterdam, Vienna and a few others coming in the U.S.

graph1

Inertial Data From Smartphones

Detecting parking and “unparking” events through inertial sensor data from drivers’ smartphones is another approach used by Anagog, which built a software development kit now embedded in several million apps (watch here). Through a signal processing algorithm, the company detects out of gyroscope, accelerometer and location data (GPS, etc.) parking events that are fed to a big data cloud that is now nearing 1 billion historical parking events.

Data From Car Sensors

Car makers such as Volkswagen (read here) or General Motors are also looking at producing data using car sensors.

In the case of Volkswagen, a pilot launched by the company uses the existing ultrasonic proximity sensors (used for parking) to assess the availability of free parking spaces on the side of the road when the car drives along a street. The data is uploaded in real-time and matched against map data to eliminate false positive (parking space for disabled people, etc.).

Parking Meters

Using data from on-street parking meters is another opportunity to get real-time, on-street parking information. Because a significant number of these meters are connected to the cloud, it is possible to build predictive data based on historical trends. Parkeon, a worldwide leader in parking meters, is among the companies enabling that opportunity and rendering this data through a mobile app, Path To Park (read more here), which is now available throughout France and in a number of cities in the U.S. and Germany.

Street-Based Sensor Infrastructures

Lastly, companies such as Worldsensing are placing sensors on each parking bay in the street, which obviously provides the most accurate data, but at a cost. Worldsensing, based in Barcelona, just closed a series B round of funding (for an undisclosed amount). Its largest deployment to date was in Moscow, where the company covered 13,000 spots. The next stage of the deployment will include more than 50,000 sensors.

Image processing is also a technology that could be used to sense free parking bays in streets. Data from fixed CCTV (used for security or traffic monitoring), smartphone apps, connected dash cams or even cars could be used for that purpose.

Obviously, the best information will come from the aggregation of these data streams (historical and real-time). Inrix, which announced in June that it will supply on-street parking data to BMW, combines data from cities, mobile payment companies, real-time parking data, connected car-sharing services and Inrix’s database of real-time vehicle GPS data (read here).

Parknav, a start-up based in the U.S. is also using a very diverse set of data (car-sharing, telecom, fleet, crowd-sourcing), including POI data (bars, schools, etc.) to infer probabilities about parking availability.

Accurate information about free on-street parking bays is a complex matter that will take many more years to solve, but the opportunities are huge for the whole car industry and beyond. The first opportunity is the time saved for drivers and the alleviation of stress and frustration. Once this first opportunity will be realized for drivers, its overall social impact will be big: less traffic, less pollution, less money spent on fuel.

Unused Parking Inventory

The last market opportunity in smart parking is to further eliminate barriers between the offer and the demand, between people circling in streets and empty parking bays, in enabling yield management of underused private parking inventory.

Residential buildings, companies, hotels, schools, hospital or churches have parking spaces that are empty or partially used during workdays, nights and weekends, vacations, etc. Companies like JustPark (UK) or Zenpark (France) are targeting this segment using connected technologies to unlock the value of this inventory and grow the total parking spots available.

On Jan. 28 in Brussels, the ConnecteDriver conference, in partnership with consulting firm Inov360, will gather the brightest minds and the most innovative companies to discuss the fascinating topic of smart parking:

– Hans-Hendrick Puvogel, COO at Parkopedia
– Anthony Eskinazi, head of product and co-founder, JustPark
– William Rosenfeld, CEO, ZenPark
– Bertrand Barthelemy, president of Parkeon
– Ruth Portas, sales manager, Worldsensing
– Ofer Tziperman, CEO, Anagog
– Martin Treiblmayr, product manager, Garmin
– Vincent Pilloy, co-founder and CEO, Inov360
– Parknow (speaker name to be confirmed)

2015: Pivotal Year for Emerging Technology

The Consumer Electronics Show (CES) has been the preeminent show for seeing, hearing and feeling what is emerging and hot in consumer electronics. It is the place to go to see new electronic games, mobile devices, TVs, home appliances and other electronics that will be coming to market to amaze and excite us. Remember Onewheel, a self-balancing, one-wheeled, motorized skateboard? Occulus Rift virtual reality? The curved HDTV? Or the best in laptops, tablets and smartphones?

The 2015 show may have been an inflection point, where CES also becomes the leading edge for emerging technology that should be of keen interest for businesses, especially insurance. It is the year where new products will go from science fiction and future thinking to Main Street reality and demand! Move over, George Jetson. For insurers, the future starts right now!

Emerging Technologies

The proliferation of emerging technologies seen at CES is considered by many to contain some of the greatest change agents since the introduction of the Internet, offering breakthroughs that will challenge businesses in many ways. In our 2014 research report, Emerging Technologies: Reshaping the Next-Gen Insurer, insight into the adoption, investment plans and opportunities for business of nine emerging technologies reveals the vast potential for transforming insurance. The research found that adoption is being led by the Internet of Things (IoT) followed by wearables, artificial intelligence (AI) and drones/aerial imagery, with driverless vehicles coming up quickly behind. In fact, five of the nine technologies are projected to arrive at or go well beyond the tipping point within three years, and all nine to surpass the tipping point within five years. CES has reinforced this view. Insurers that have not accepted as fact the fast-paced adoption and impact of these emerging technologies should take great pause. Here are a few reasons:

Autonomous vehicles became one of the hottest items during the show, and even before. Audi drove its autonomous vehicle from Silicon Valley to Las Vegas, generating pre-show buzz. Kicking off the show was Mercedes showing a concept car that looked more like a futuristic living room than a car. These and the other major automotive companies all demonstrated their acceptance, commitment and fast adoption of this new form of transportation introduced by Google just a couple of years ago. At this show, many of these automakers announced their plans to offer autonomous vehicles beginning in 2017! Note they did not make the announcement at the traditional Detroit Auto Show the following week. The future of autonomous vehicles will quickly be a reality, and so much sooner than most thought. So share the road, George J!

The Internet of Things (IoT) was everywhere, exemplified in the connected car, connected home and wearables … highlighting a fast paced market that is reinventing how we work, live and play in a connected world. Wearables with fitness and activity bands were prevalent, along with innovative devices like a pacifier that can monitor a baby’s health. Also included were wearables that were integrated with autos to enable the starting of parked cars. But it was the connected car and connected home that had the highest profiles.

The connected car was touted by many major car manufacturers. Ford, Volkswagen, GM, BMW, Toyota, Audi, Mazda, Daimler and others were showcasing their connected car capabilities and the growing array of services that come with them. The media noted that Mark Fields, Ford’s CEO, sees Ford as thinking of itself as a mobility company rather than an automotive company, delivering a wide array of services and experiences via the auto instead of the mobile phone. Added to this are Apple’s CarPlay and Google’s Android Auto systems that mimic and integrate the functions of smartphones on the auto dashboard touchscreen. Quite a reimagination of the automotive business!

All the devices and capabilities for the connected home added to the IoT’s momentum. Familiar tech companies like Google, Microsoft, Amazon and Apple, along with traditional companies like Cisco, GE, Bosch, Samsung and others, are powering ahead with innovative capabilities that will drive rapid adoption. In fact, Samsung Electronics CEO Boo-Keun Yoon indicated that, by 2017, 90% of all Samsung hardware (TVs, ovens, refrigerators, purifiers and more) will be connected, creating a home personalized to your unique needs. Many of the companies also announced the development of connected home hubs to integrate these wide arrays of devices from various manufacturers and third-party providers. Data from the connected home devices can be used to offer new services. The Jetsons’ home is finally here!

And drones were flying everywhere to demonstrate the high interest and potential for many businesses – from phone and video purposes to building inspections, surveying, delivery, weather data gathering, traffic and much more. The Federal Aviation Administration (FAA) had a booth at the event, announcing that it expects well over 7,000 drones in use by 2018. All of this indicated that, literally, the sky seems to be the limit for drones!

Insurance Implications

What does this all mean for insurers? The event emphasized the need for insurers to take these emerging technologies seriously and to quickly explore, experiment and consider their uses in the business. Why? Because traditional competitors like Progressive and USAA made announcements at the event concerning the connected car and connected home and the potential of new competitors that are looking at how they might leverage these new technologies.

The SMA 2014 emerging technologies survey indicated that these technologies would reach a tipping point in three to five years — or from 2017 to 2019. Based on the announcements at the CES about autonomous vehicles by 2017, home hardware being 90% connected by 2017 and large numbers of drones in use by 2018, the estimated arrival time at the tipping point is right on track, or could even come much earlier.

The results? New customer demands and expectations. Decreased risk. New insurance product needs. New service revenues. New competitors. Redefined customer relationships. Reimagined businesses and industries.

To stay in the game, let alone win it, insurers must aggressively find a way to embrace these technologies and uncover their potential. And, to do so, they must have modern core systems as the foundation to integrate the use of these technologies for innovation, as well as plans to pilot some of these technologies, because the future is coming fast.

The Consumer Electronics Show 2015 has foretold that 2015 will be a pivotal year for many businesses and industries, including insurance, for emerging technologies. Adoption of the emerging technologies is on track or accelerating toward the tipping point. It is no longer science fiction. It is science reality. Welcome to the future … today!