Tighter regulatory supervision, better detection technology and more complex supply chains are increasing the frequency and severity of food product recalls. Contrary to popular belief, property and general liability insurance do not always cover first and third party damages resulting from a product recall.
Editor in chief Rick Pullen sat down with Susan Hayes, principal at Chicago consulting firm Pharmacy Outcomes Specialists and head of Pharmacy Investigators and Consultants. She audits and investigates corporate prescription costs to help employers control medical expenditures.
Although “COLI” (pronounced co lee) is a commonly used acronym, it refers to any company-owned life insurance contract on the life of a company employee.
In the world of benefits brokers, one size no longer fits all. Clients today want benefits packages for workers from five different generations with five different desires.
As compliance issues mount, brokers have an opportunity to separate themselves from the field.
Employers want brokers to assume a stronger role in making decisions about human capital management systems.
HR is evolving into a strategic function that includes change management, company culture and workforce demographic shifts.
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Impressive though it may be, The Broadmoor—host to The Council’s Insurance Leadership Forum and Employee Benefits Leadership Forum during the last decade—is gaining some serious competition when it comes to delivering guest experience.
Inspired by The Council, The Broadmoor has begun donating food to the Springs Rescue Mission in Colorado Springs.
Ken Crerar, The Council’s president and CEO, assigned lawyers Scott Sinder and Josh Oppenheimer to analyze the legal issues.
Crerar brought their research to Jack Damioli, president and CEO of The Broadmoor, who worked with Larry Yonker, president and CEO of Springs Rescue Mission.
The array of voluntary benefits on the market is dizzying. Some are meant to make employees physically and financially healthy.
In today’s job market, companies are becoming more strategic about recruiting and retention. They’re also looking for solutions to rising healthcare costs and responding to changing consumer habits and demands.
Workforce competition demands that employers offer a wide range of benefits, some paid for by the employer and some by the employee.
Some design-build plans cover a broad swath of employees; some look to pinpoint specific groups of needs.
Know what employees want, and get their feedback to make sure benefits are having the desired effect.
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In today’s world, how do you define a brand? By definition, it is a name, a logo, a product or a service that distinguishes itself from others.
Aclaimant started with an app to report workers compensation incidents but realized technology has a much bigger role to play in managing risk in the workplace.
DirectPath recently released its “2018 Medical Plan Trends and Observations Report.” The organization analyzed research from Gartner, looking at more than 900 employee benefit plans to gauge trends in employers’ 2018 strategies. Of particular concern to employers was managing their consistently rising healthcare costs.
It all began in June 2003 when Pirates of the Caribbean first exploded at the box office, Dan Brown’s The Da Vinci Code was creating a buzz and Apple had just opened its iTunes store.
The Killers, the 1946 insurance movie made from an Ernest Hemingway short story, is an overlooked classic that practically invented film noir. It’s in black and white and spookily lit.
The dynamic M&A activity we saw through 2017 is still going strong, and with new private capital players entering the game, there is no shortage of opportunity for brokerages and agencies that are considering a play.
Some say, “Ignorance is bliss.” I say, ignorance is a formula for failure—especially when it comes to creating a more diverse and inclusive culture for your firm.
On May 25, the European Union’s new rules on personal data protection and privacy went into effect. And just what does that have to do with U.S. agencies and brokerages?
Did you know your high-potential employees are twice as valuable as other staff? This might explain why 66% of companies invest in programs to identify high-potentials and help them advance.
About 100 years ago, the last of the 48 contiguous American states were admitted to the Union, reaching from the Atlantic to the Pacific Ocean, and Henry Ford’s Motor Company soon began to pump out automobiles that drastically cut down travel through the country.
Last month, I wrote about the importance—and benefits—of a diverse workforce. That elevating women, people of different ethnicities and abilities, and LGBT individuals, helps deliver a competitive edge when selling products and services to diverse end users.
What’s so hard about building a sandbox? After all, what do you need other than some planks and sand?
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Hawaii Insurance Commissioner Gordon Ito has seen the future, and it includes insurtech sandboxes in the Aloha State.
When it comes to technology, state insurance regulators are definitely of two minds, depending on who’s implementing it.
The German prescription drug system known as AMNOG, the Act to Reorganize Pharmaceuticals Market in the Statutory Health Insurance System, is the country’s program for evaluating and pricing new medications entering the market.
What would happen to healthcare legislation if there were an insurance CEO in charge? U.S. Representative Tom MacArthur, R-N.J., is not quite in charge, but he’s trying hard to make waves in insurance legislation.
A lot has been said about disruption in the insurance industry, but to date, there has been very little in the retail market. Editor in chief Rick Pullen recently sat down with Samir Shah, CEO of Ledger Investing, to talk about the future disruptive nature of insurance-linked securities.
When Michael Rea worked as a Walgreens pharmacist, patients always asked him why their prescription medication costs were always rising. So many asked, in fact, that Rea created a canned response for their queries.
Prescription drug spending in 2016 accounted for about $330 billion, or 10% of the nation’s total healthcare costs.
Prices for common medications are as much as 117% higher in the United States than in other nations.
A U.S. company with 1,200 employees sent employees for treatment abroad and saved $1 million in a year.
We have made a conscious effort to recruit the best person for the job, and that is often a woman.
If you have not yet embraced the ideas of diversity and inclusion in your workforce, here is another reason: boosting your current financial performance. Surprised?
Facebook may become the textbook case on how a company’s poor governance and weak privacy practices cost it more than any breach in history. Congress, regulators (U.S. and international), state attorneys general, plaintiffs lawyers and the public at large have put Facebook in the crosshairs.
A midsize insurance firm sells to a private-equity backed company that is 50 times its size. At the deal table, there is an independent owner—an entrepreneur who worked hard at growing her business and team for a couple decades.
As the reality sets in of all that was and was not included in the generational tax reform legislation that was signed in December, one thing is clear: this is a terrific time to reconsider your agency perpetuation and estate plans.
We have all heard it said: money is king. There’s a song about it, a miniseries about it and even its own Facebook page. But no more. Move over money; there’s a new kid in town: knowledge.
In spite of a piddling 25 out of 100 review from Rotten Tomatoes and a Golden Raspberry “Worst Actor” nomination for its star, Ben Stiller, the 2004 film Along Came Polly was an audience fave.
The Council had the opportunity to attend the annual DC Blockchain Summit, hosted by the Chamber of Digital Commerce.
Private capital is more diverse, more long-term and more interested in the insurance industry than ever before.
Whether we are headed into a hardening market in 2018 remains an open question to MarshBerry for a number of reasons. Overall, the p-c insurance industry remains very strong on a relative basis, with all-time highs for policyholders surplus, which stands at $719.4 billion, and ratio of net premiums written to surplus, which was 0.76 as of September 2017.
When will the merger and acquisition bubble burst? This question has been looming over the rush of activity for the past couple of years—and 2017 showed no slowdown after a record number of deals and growing interest from new private capital players who are entering the insurance brokerage space as investors.
There was no shortage of excitement in the U.S. property-casualty and health insurance markets in 2017. Like seasoned boxers, the p-c markets were tested by several roundhouse punches in the form of large catastrophes in the third and fourth quarters, while health insurance markets continue to weave and bob with every new jab at the Affordable Care Act.
Integration—what does it really mean? This critical merger and acquisition transition process can feel like diving into murky waters for sellers, who often aren’t sure what to expect.
For those of you who have not been paying attention, private-equity backed brokerages have taken over the M&A world. They completed 316 announced transactions in 2017, which represented 57% of the total announced deal activity for the year.
The immediate aftermath of a mass shooting often leaves citizens and politicians in a mass gridlock of gun control versus the Second Amendment.
The most successful insurance companies are those leading the insurtech charge, IBM finds in a survey of 1,200 insurer, insurtech and venture capital firm executives. IBM found 81% of outperforming insurance businesses either have invested in or are working with insurtech businesses.
As he pored over millions of documents, Chris Cheatham decided there had to be a better way. His startup, RiskGenius, applies machine learning to speed policy review.
High-tech wizardry is revolutionizing our world. When insurers began selling auto and homeowners cover directly to clients over the internet long ago, thousands of agents were thrust out of work over a few short years.
New websites enable brokers to buy cover without sending a fax, opening an envelope or picking up the phone.
Ascent Underwriting of London receives tens of thousands of online inquiries each year from 90 brokers.
A process that has taken days or weeks using traditional channels can now be completed within minutes.
Omada Health has developed a 16-week digital behavioral-change program meant to help participants lose weight and reduce healthcare costs. Leader’s Edge sat down with Omada Health’s Rob Guigley to discuss the potential of digital wellness programs for combating obesity and its related health conditions.
It started with Harvey Weinstein. When The New York Times and The New Yorker magazine broke their explosive stories that dozens of women reported incidents of sexual harassment, abuse and even rape by the Hollywood film producer, the revelations lit a fuse that had clearly been waiting for this breath of oxygen to spark.
The business community is suddenly focused on its exposure for managers’ and employees’ atrocious behavior.
Since 1991, the year of the Clarence Thomas hearings, the number of carriers offering EPLI coverage has risen to more than 50 from five.
When cases result in defense and settlement costs, the average bill is $160,000. Jury awards often go much higher.
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Business and trade associations have long argued that companies can manage their cyber-security programs without government interference. Those groups seem perilously close to losing the argument.
While business has avoided government regulation of cyber security, U.S. and European authorities appear ready to prescribe controls.
Last year’s cyber attacks caused unprecedented disruptions and soaring losses.
The NotPetya malware, begun in Ukraine, crippled global organizations, including Maersk, Federal Express and Merck.
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This business is a journey without a destination.
It’s called reps and warranties insurance, and it once was used primarily in mergers and acquisitions between private equity funds. Today, it shows up in all segments of the M&A market, including insurance brokerage M&A deals.
What do an English major, a history major and a biology major all have in common? They can all end up working for an insurance agency.
For children, it’s a chance to explore and create within a confined space. Adults need a similar opportunity—including those in the no-child’s-play, multibillion-dollar insurance sector.
Are you a potential seller in today’s overcrowded M&A marketplace? If so, it is important to understand the market you are entering.
I think one of the fundamental, but not expressly discussed, debates driving our health policy discussions in the United States is this: should the objective be that everyone has access to the same healthcare, or should it be to ensure everyone has access to a minimum necessary level of care?
We find ourselves in a unique time. It’s clearer by the day that the pace of social change in our country is simply not fast enough, and the resulting effects are being underscored in the business world.
Hercule Poirot, Agatha Christie’s brilliant Belgian detective, made a bit of a comeback last winter when yet another version of Murder on the Orient Express hit the big screen, with a deadpan Kenneth Branagh as the detective.
The dismantling of so-called Net Neutrality rules regulating service providers that connect consumers to the internet may have unintended consequences for the rapidly growing telehealth industry.
In two years, Central and Eastern Europe (CEE) will celebrate the 30th anniversary of the fall of the Iron Curtain and the restoration of the market economy. The region has seen great change over the past 80-plus years.
Time is of the essence in the agricultural industry, given the short window of opportunity to harvest fruits and vegetables in their peak condition. When workers feel under the weather from a cold or stomach virus, they typically have to drive a long distance to a medical clinic or hospital emergency room for treatment. Time is spent waiting in the facility. An entire day’s work can be squandered.
Telemedicine is on-demand healthcare provided remotely by a doctor or other medical specialist.
Employees with non-life-threatening illnesses communicate their concerns to a medical specialist, who prescribes treatment.
The online consultation may involve video, phone, photos, a written exchange—or all of the above.
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To reach the office of the chairman of Lloyd’s of London, you must cross the cathedral-like room known as the Lloyd’s trading floor. It’s early afternoon when I pass through, so the usual buzz is absent. Only a few juniors with gourmet takeout sandwiches are on the box (in the underwriting booths).
In 2003, Carnegie-Brown said the future of London wholesale broking rested on its ability to embrace technology. Today, the same market faces the same challenge.
The goal isn’t new for Lloyd’s, but so far every comprehensive attempt to modernize the placement process has failed.
Under the plodding old ways of Lloyd’s, brokers still wait in queue to make their pitch to underwriters.
Paul Tyler moved to Hartford, Conn., in 2016 as chief marketing officer for Phoenix Life Insurance. Hartford has long been an insurance hub, and Tyler was eager to learn how the industry was responding to changes in consumers’ buying habits.
Accelerators have shown they can provide a range of benefits—jump-starting a local economy among them.
In addition to giving industry stakeholders in-person access to insurtech technologies, accelerators can help these stakeholders keep tabs on what competitors are doing or identify rising talent.
Startups that participate with an accelerator can gain valuable insight into what their products need to be a viable investment.
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When it came time to name his new startup, brokerage industry veteran Phil Edmundson thought of crows and their cousins among the birds.
I didn't want to be just the boss's daughter.
We know Peter Drucker’s line: “Culture eats strategy for breakfast.” But do we take it to heart?
You have heard the saying before, right? It typically is used in relation to aging athletes as they attempt to hang on and extend their careers.
After a number of significant cyber attacks last year, many organizations are looking for ways to make 2018 a “cyber secure” year. But coming up with a list of solutions to improve an organization’s security posture is no easy task.
Three of America’s most admired companies—Amazon, Berkshire Hathaway and JPMorgan Chase—representing close to two million employees, recently announced the formation of a company to tackle the unsustainable and surging costs of healthcare plaguing their businesses.
At the front end of our Legislative & Working Groups Summit last month was an attention-grabbing session on the customer experience, facilitated by Wharton Executive Education. Customer experience is something you’ve heard me talk about ad nauseam, but it really is that important. Customer demands are changing the way business is delivered.
Since at least the second Bush administration, association health plans (AHPs) have been touted as a magic bullet to combat rising healthcare costs and dwindling coverage options in individual and small-group markets.
In a follow-up to our recent feature, Council Chief Legal Officer Scott Sinder gives us the latest on this booming business.
The insurance data security model law adopted in October by the National Association of Insurance Commissioners moves to the states in 2018, and South Carolina is likely to be among the first to take it up, says South Carolina insurance director Raymond Farmer, chair of the NAIC’s Cybersecurity (EX) Working Group.
And now for something completely different: an insurance movie where the female lead is evil, promiscuous, snarky and vicious and stays that way throughout, without reform. (This role is usually given to the male CEO; see The Rainmaker.)
Denver isn’t a fly-over city anymore. We have an exciting downtown, great public transportation, four major sports teams and a zeal for fun, activity and wellness. The city is booming with construction and jobs across diverse industries. New restaurants and shops are popping up all over town, and there’s a thriving arts, culture and nightlife scene.
What’s to love
Denver is one of the healthiest cities in the country. We have four seasons, 300+ days of annual sunshine, and the largest public park system of any U.S. city, providing year-round activities for people to enjoy. It is truly a great place to raise a family.
Zagat ranked Denver No. 4 on the 2017 “Most Exciting Food Cities in America” list. Our dining scene is continuously growing, offering a diversity of cuisines, craft brews and spirits. We’ve embraced the market-hall food trend with The Denver Central Market and The Source.
Favorite new restaurants
Stoic & Genuine for caviar and oysters. Tavernetta for Italian food and great service. Tamayo for modern Mexican with flare (conveniently located next door to our office!).
You’ll find locals dining downtown at Cholon, an Asian fusion restaurant known for its delicious soup dumplings, and Guard and Grace, a steakhouse that offers happy hour specials and small plates. But to experience a true Denver classic, check out the Cherry Cricket in Cherry Creek. Go for the burgers and stay for the beer.
Williams & Graham is a favorite (be sure to make a reservation). From the front, it looks like a bookstore, but once you’re inside, it feels like you’ve passed through a time machine into a 1920s speakeasy. Ocean Prime has a fun martini selection. Dry ice makes for a crowd pleaser.
The Brown Palace Hotel and Spa in downtown is a must-see historic hotel. The surrounding area has so much to offer that is within walking distance or a quick ride share away.
Thing to do
Catch a Colorado Rockies baseball game. Coors Field is one of the most beautiful ballparks in the country. There’s not a bad seat or view in the house. The selection of beer and food is excellent and affordable. The Rockies are an exciting, up-and-coming team. Home runs fly out of the stadium, ensuring drama from the first inning to the last.
Everyone should experience Red Rocks Amphitheatre. Attend a concert, or just hike the actual amphitheater and surrounding areas. It is beautiful!
Industry titans, socialites, glitterati. Rockefellers, Vanderbilts, Astors. U.S. presidents, European royalty. The tony town of Palm Beach, Florida, has been attracting a wealthy, powerful and connected crowd ever since Standard Oil Company executive Henry M. Flagler leveraged his millions to buy and build railroads in Florida and develop the coast. He opened his first resort for the monied class in 1894. The Royal Poinciana in Palm Beach was a six-story, Georgian-style hotel, which eventually became the world’s largest. As the story goes, the hallways were so extensive that the bellhops delivered messages and packages from the front desk to guest rooms by bicycle.
Flagler opened The Breakers, one of the grandest of grand hotels, just after Christmas 1926, which then and now is the start of the Palm Beach season. The Florentine Fountain near the entrance to the hotel is reminiscent of one at Boboli Gardens in Florence. The twin Belvedere towers on either side of the Italian Renaissance building are a nod to the Villa Medici in Rome. The Great Hall of the Palazzo Carrega in Genoa inspired the intricate paintings on the ceiling of the expansive lobby, to which 75 artisans from Italy applied their talents.
For more than a century, Palm Beach has never gone out of style for society folks and the well heeled, but this island enclave has certainly received a lot more attention over the last couple of years. In case you have just awakened from a Rip Van Winkle nap, President Donald Trump spends about half of his weekends at his Palm Beach club, Mar-a-Lago, aka the “Winter White House.” So, if you haven’t attended a meeting at The Breakers or vacationed at this charming seaside village, there’s no time like the present to check it out.
While you can enjoy fresh ocean breezes, shop on the beautifully landscaped Worth Avenue, play golf and tennis, and lounge by the beach year round, plan to escape the cold by arranging your Palm Beach escape during the winter season (the end of December through April), when you can take in a Sunday polo match at the International Polo Club Palm Beach. The caliber of polo (it hosts the largest field of high-goal teams and the most prestigious polo tournaments in the United States) and people watching (it is truly a jet set gathering) is outstanding. With the champagne pouring freely, it is also an awful lot of fun.
Instead, specialist product recall insurance has evolved significantly in recent years and can provide better financial protection and a more effective crisis response.
Product contamination and recall is the central risk facing food manufacturing and distribution companies. There were nearly 450 food recalls in 2017. Trends toward stricter regulation and advancing analytics have continued as the FDA and USDA, in conjunction with the Centers for Disease Control and Prevention, use whole genome sequencing to assist in identifying the source of food and beverage contamination and outbreaks.
Whole genome sequencing reveals the DNA makeup of an organism, enabling precise differentiation between organisms. The FDA performs whole genome sequencing analysis on samples taken during inspections of food manufacturing facilities and food products in the market. During foodborne illness outbreaks, the CDC compares clinical isolates from sick patients against the FDA database, which helps identify the source of the outbreak and the responsible companies.
The 2011 Food Safety Modernization Act (FSMA) has shifted food safety focus from reaction to prevention and covers all parts of the supply chain. The FDA now has the authority to stop production and distribution of products. Improved analytics can trigger a cascade of secondary results if the contaminated ingredients are traced to other products. These developments have occurred as the food supply chain has become increasingly global and has, therefore, added complexity. From 2004 to 2014, U.S. foodstuffs and animal and vegetable product imports nearly doubled—from $66.9 billion to $126.6 billion. Although it may be economically sound to make products in regions that afford lower labor and ingredient costs, product quality can be critically affected. Moreover, food safety protocols and regulatory oversight may be very different, particularly in developing countries.
COUNTING THE COST
Product recall is costly. The financial consequences range from the immediate costs of the recall and the value of condemned products to damaged brand reputation that may continue for years. Those at risk include importers, manufacturers (including contract manufacturers and private-label companies), distributors (including storage warehouses and transportation) and retailers.
The cost of contamination depends on the nature and extent of the contamination; the regulatory response; the level of negative publicity; and whether the product is an ingredient or final manufactured good. Ingredients, such as spices, can contaminate a large number of third-party products. The aggregated cost may far exceed the value of the contaminated ingredient.
Expenses include clean-up costs, consultancy testing and analysis, product replacement or repair, and product recall and/or destruction. And don’t forget the distribution costs for replacement products. There may also be third-party property damage and the associated defense costs.
Food contamination and recalls are particularly susceptible to common exclusions and coverage limitations in property and general liability policies. There may be limited, if any, property insurance coverage if the damage If direct physical damage is absent, recovery against typical property or general liability insurance becomes problematic. The pollution exclusion and impaired exclusions may also bar general liability coverage.
A vast majority of food manufacturers rely on supplier or contract-manufacturer indemnity to cover product contamination and recall losses. But contamination often occurs during the manufacturing stage. Even if the loss is attributable to third parties, indemnity is far from certain. The vendor may crash under the weight of multiple claims and limited coverage. A recent spice recall triggered recalls affecting more than 100 brands and nearly 800 products with different packages. A similar sunflower seeds recall affected more than 100 products.
Specialist product recall insurance has evolved significantly in the last two decades. This provides first-party coverage, thus removing the uncertainty associated with third parties. The insurance contains the key building blocks of a property policy:
- Property damage: replacement of contaminated (recalled) product and recall expenses
- Clean-up costs: removal of the contaminant from the site
- Business interruption: loss of gross profit plus expense to reduce loss resulting from the recall of product or reduction in manufacturing output. The most significant development in recent years is the emergence of coverage that includes thirdparty losses resulting from the recall of a contaminated product—typically a private-label product or ingredient. For bulk ingredient manufacturers in areas such as sugar, flour and whey powder, third-party coverage may be the most important. The coverage has been increasingly broadened to protect against third-party costs not covered by general liability. As many manufacturers have found, the nature of food recalls and the sensitivities around consumer safety mean a significant share of third-party claims fall outside general liability.
Most policies provide crisis consultants’ services. Typically, these services help companies understand the nature and severity of an incident and make decisions about a recall or communication with customers and regulatory bodies. In particular, smaller companies stand to benefit from this advice. The nature and extent of the contamination must be quickly understood together with the health risk to the public as well as any potential damage affecting commercial customers. Prompt response to food contamination incidents is critical since social media has accelerated the speed and breadth of communication. Information and misinformation can be quickly transmitted to a wide audience.
A company’s response within the first 24 hours is, therefore, crucial.
Alexandru is U.S. head of crisis management at Aspen Insurance.
Susan is currently working on her Ph.D. at the world’s leading center in healthcare fraud, the University of Portsmouth in the United Kingdom. During her career, she has seen a lot, including her share of fraud, while saving her clients millions on prescription drugs. Her biggest concern today in the pharmaceutical sector of the healthcare industry is the lack of transparency in prescription drug pricing, and she is not shy about sharing her views. —Editor
Explain what you do.
We help benefits plan sponsors find pharmacy benefits managers, monitor their performance, review their clinical programs and review their contracts. I have a second firm, Pharmacy Investigators and Consultants, which essentially does fraud, waste and abuse analysis. We help managed-care organizations and some small PBMs uncover corrupt practices.
Describe the PBM landscape.
It’s dominated by three large PBMs that have 80-100 million lives covered under each one of them: Caremark, Express Scripts and Optum. Then there’s a second tier that includes MedImpact, Envision, Navitus, Marken Healthcare, WellDyne and Magellan. There’s probably a total of a dozen in this category. Finally, there are the tiny PBMs, which are basically resellers.
If I’m a corporation with 1,000 employees, how many PBMs do I have to choose from?
Realistically, probably 15 to 20.
CVS is about to buy Aetna. Cigna is about to buy Express Scripts. What does this hold for employers and the insurance brokers who represent them?
I don’t think it’s a good thing. The lack of transparency that is already in the industry will just get murkier. We now have an insurance company owned by a PBM, with the Caremark-Aetna deal, if it goes through. So you can underwrite a medical plan, keep all the rebates and it’s all within one company. You really have no ability to understand what the rebates are in the prescription drug plan.
Is the medical loss ratio meaningless in this case?
Exactly. The same thing has happened already with Optum merging with United Healthcare. That was the writing on the wall. Cigna’s claims processing system is owned by Optum. That meant Cigna had to find its own claims processing system not owned by a competitor. They needed to buy a PBM, so Express Scripts was something that was inevitable. It doesn’t bode well for employers or consumers, because there will be a lot less transparency.
How does CVS buying Aetna fit into this?
CVS is really two companies—a pharmacy chain and the PBM Caremark.
Anthem will be using Caremark while Caremark owns Aetna. There are geographic markets where Anthem and Aetna compete. I don’t see this relationship lasting long.
One reason reported for the Express Scripts deal was it would keep Amazon out of the PBM business. What is the threat?
Amazon announced it’s getting into the PBM business last year. The scuttlebutt is they’re now looking for a backbone claims processor.
The Affordable Care Act is not what it used to be when Obama was president. Amazon’s thinking is we have all of these young millennials in high-deductible plans. They’re going to want to purchase drugs cheaply, and they’re going to want them delivered next day—just like they get their groceries and everything else from Amazon.
I think that’s Amazon’s play. But it will need a claims processing system to adjudicate that and tie into other PBMs. The question is will other PBMs play nice with Amazon?
I know from experience with my PBM that they’ll say a prescription has been shipped, yet it takes a week or 10 days for it to arrive. Are PBMs high-tech at all?
No. They can’t get the drugs out the door because of their legacy systems.
You’ve got all these different legacy platforms and huge 70,000-square-foot mail order facilities, which are just nothing but overhead. You don’t need to house these medications in one central location. That’s how Amazon gets things to you quickly. It has the product out in the field, and it never really takes possession of it.
I ordered a book on a Saturday, and literally it was in my mailbox the next day. That’s what millennials are expecting from their prescription drugs, and that’s what Amazon promises to deliver.
When we help an employer with a pharmacy benefit plan, if it’s a traditional or spread contract, it’s difficult, if not impossible, to figure out what the PBM is going to make.Tweet
What do you predict will happen?
About 10 or 15 years ago, when the whole concept of banking went online, people said, “Who needs tellers? We can just have an online bank. We’ll keep your money, and you just do transfers over the internet.” Fifteen years ago people were skittish about that, but now it’s caught on. I think the same thing will happen in the prescription drug industry. Which kind of begs the question: what happens to the role of pharmacist? If you’ve been on a drug for a period of time, you don’t need a pharmacist telling you how to take it.
Does that might mean pharmacists will be working in PBM warehouses instead of at your local pharmacy?
I think so or a lot of retail pharmacies will go to dispensing and delivering in their area. Amazon will transfer the prescription to the local Walgreens, which will deliver it to me within hours. They’ll use Whole Foods or some variety of retail pharmacies they can get to deliver things quickly.
Brokers are complaining about transparency. Where is the lack of it, and where does it exist?
Everywhere within the cycle of a prescription drug there is lack of transparency. I think most notably when people say there’s lack of transparency what they’re talking about is a lack of understanding of prescription drug pricing.
Here’s an example. You buy your Lisinopril. You have a $10 co-pay, and you pay the pharmacist. She gets another $2. It’s a $12 prescription. And then your employer gets charged $25. The PBM takes the $13 spread and does not disclose it to the plan sponsor or to the pharmacy. Neither understands where the money went. Who made $13 on that prescription? They just never tell you.
When we help an employer with a pharmacy benefit plan, if it’s a traditional or spread contract, it’s difficult, if not impossible, to figure out what the PBM is going to make. You also don’t know what fee they’re going to take behind my back on claims.
I’ve read examples where the consumer pays “x” amount, which is actually more than the actual cost.
Yes, that’s right.
Let’s say it costs $5 for a prescription and the sponsor is paying $25. Where does the money go?
In your example of a $25 co-pay, say the member has paid the entire co-pay based on the contract between the PBM and the plan sponsor. That contract allows them to take the entire co-pay, even if the cost of the drug is lower. Certain contracts allow that. That’s one side of it.
And then you go to the pharmacy and they’re not being told what’s going on. The pharmacy’s arrangement with the PBM is to be reimbursed a lower price—or the lower of the cost of the drug and the co-pay. Then the PBM claws back the amount that the pharmacist has already taken as part of the co-pay.
The pharmacist gets what?
The pharmacist gets $5 or whatever. He initially collected $25, thought he was going to get $25, and then he gets $20 taken back, or $5, or $2 or whatever it is, taken back.
What kind of profits per prescription do PBMs make?
It’s estimated in the research that we’ve done that it’s about $15 to $20 a script. Some may only be $1 or $2—like a generic—but the brands may be $40 or $50.
PBM salespeople’s commissions are based on profitability. They know exactly what the profitability of each new sale is going to be. The PBM salesperson plays a delicate game. If he sets the price low enough to obtain the business, he then faces the conundrum that he must get the margin as high as possible so he can be compensated.
What kind of profits do PBM companies make?
It depends on each individual PBM. There are probably some making 3% to 5% profit, but then they’ve outsourced everything. The more insourcing, the more ability they have to make profit.
Express Scripts now even owns a wholesaler. Do you realize how bizarre that is? Because wholesalers are the ones that establish pricing. When your PBM owns a wholesaler, think about that. They buy drugs from that wholesaler. That wholesaler sets the price. You’re buying from a wholesaler you own and control and you tell what to do.
It’s fair to say they raise the price of drugs.
Absolutely, it’s fair to say that.
And pharmaceutical companies can charge anything they want in there.
When your PBM owns a wholesaler, think about that. They buy drugs from that wholesaler. That wholesaler sets the price. You’re buying from a wholesaler you own and control and you tell what to do.Tweet
If the insurer is independent, it would be on the other side of this equation.
And it would be fighting for better pricing.
Absolutely. But when they’re buying PBMs there’s no incentive. In fact, their incentive now becomes to play the game with everybody else.
Are smaller PBMs more transparent?
You have smaller PBMs that have their own retail network contracts, and those can be transparent because they own the contract between their company and the pharmacy chain. They know exactly what they’re going to be reimbursing the pharmacy chain.
Some smaller PBMs resell other PBMs’ networks. A small PBM may go to Magellan, for example, and Magellan owns their own contracts. Magellan will then sell them the retail network. At that point, the PBM that’s using Magellan does not know what Magellan’s spread is. So, yes and no. Some of these smaller PBMs are transparent, and some aren’t.
You’ve got to ask some really deep questions. Do you own your own retail network? Are you leasing another PBM’s retail network system? Do you know what spread the networks are taking? And then do the same thing with rebates.
How can everyone be satisfied: consumer, sponsor, pharmacy, PBM, carrier? People need to make a profit.
I totally agree. I want that on the record. PBMs need to make a profit. We want them to make a profit because they provide a very good utility in the industry. We want them to be viable, we want them to be profitable, but we don’t want them to have undisclosed spread where you can’t evaluate how much they’re taking on your pharmacy bill.
Are mergers with insurers a conflict of interest?
Absolutely. In my view of the world, I think it’s absolutely a conflict of interest. When you’re hiring your medical carrier or you’re hiring a PBM, you don’t think the two are in cahoots. There’s no separation of duties here, where the PBM says, “Maybe you don’t need all those high-cost drugs.”
Isn’t the PBM supposed to be representing the corporate client and the consumer?
I think originally in 1985 that was their mission. I think their mission today has become much murkier. They changed their allegiance somewhere between 1985 and now—depending on the company—to the drug manufacturers and insurance carriers as they merge.
If you are a very large health plan and you want to have a PBM relationship, you don’t have many choices. There’s not a middle tier that’s going to have the ability to take on five million or two million lives. That’s probably why Kaiser does it themselves. But others don’t have that ability.
For most employers between 1,000 and 10,000 lives, you don’t want to go to those big PBMs. Big PBMs are already serving 80 million lives. They’re not going to love a client with 5,000 or 1,000 lives. They’re not going to give them attention or account service or be beholden to them.
If you’re a 1,000-life employer, you’re going to probably go to the middle tier and get very good service. And then it’s going to depend on you and where you are and who’s your account rep. If you’re a hospital, you probably would go to American Healthcare. They excel in that line of business. If you want to go with Magellan, you’re probably some kind of government. You know, they do really well with government plans.
Each one of these middle-tier PBMs has a personality. You can’t really say who the best is. It depends on you and who you are and what your baggage is.
What excuses do PBMs give for not being transparent?
They say it’s none of your business. I contract with you for a certain price— you, in this case, being the corporate client. You either like that price or you don’t. And I may contract with a pharmacy for another price, and that’s nothing to do with you.
What can brokerages do to help clients with this?
Most of the national brokerages have PBM experts. They understand this. Smaller brokerages need to be able to plug into some kind of expertise. This is an extremely complicated industry with extremely complicated contracts, and you need to know all the little angles within the contract to advise your client.
A lot of states are digging into PBMs. What do you think they find?
That is a whole can of worms. The state of Arkansas passed legislation that basically told PBMs they couldn’t reimburse a pharmacy less than what you could buy that drug for. Arkansas is pretty unique. Arkansas has a lot of rural pharmacies. You don’t have a lot of big chains buying in huge bulk. The state is saying PBMs can’t reimburse anyone less. The trade association representing PBMs sued Arkansas to stop this. I think they will prevail.
They are a utility we desperately need in America, and they ought to be regulated like a utility where there aren’t these gross and excessive profits. That’s the kind of thinking we need to evolve around.Tweet
South Dakota has similar legislation. Alaska has talked about it. It is nuanced because it is so spread out. One of the things PBMs forbid their pharmacies in network to do is mail prescriptions. They don’t want competition with their own mail order facility. But in Alaska, where you have to go an hour and a half to get a prescription drug—that’s the local pharmacy—a lot of the local pharmacies there mail drugs, and PBMs want to kick them out of the network. I mean, how else are these people living in small villages in Alaska going to get their prescriptions?
Connecticut is considering legislation promoting transparency, saying you need to be able to understand prices. If you ask your PBM, they have to explain the differentials in pricing as well as you may choose an auditor of your choice. I don’t know where that’s going in Connecticut, but Hartford is the insurance capital of the world. Will that affect transparency?
What about the feds?
I think the feds have missed the boat. I think when President Bush passed Medicare Part D, the federal government could have required they negotiate pharma pricing. They did not. That’s unfortunate because now we’ve got Medicare Part D where you’ve got the same thing going on with spread pricing. Allegedly, there’s not supposed to be spread pricing in Medicare Part D, but there are all kinds of other games that are being played.
The federal government had the opportunity to negotiate drug prices, just like Canada, just like England, just like every other first-world country. Instead, they let the market compete, and that was a mistake. Can the feds ever catch up now that the cat’s out of the bag? I don’t think so.
What’s the biggest problem we face with PBMs that we can do something about?
I think when PBMs became publicly traded entities where they had to make Wall Street earnings every quarter, all of a sudden they had perverse incentives. They are a utility we desperately need in America, and they ought to be regulated like a utility where there aren’t these gross and excessive profits. That’s the kind of thinking we need to evolve around. We have seen where 25 to 30 years of market pressure has done nothing to control costs.
As a consultant, how much money can you save your clients?
Probably 10-15%, easy. And, you know, like for one of my clients, we have been auditing them and their PBM for 12 years. You would think that by this time the PBM would be aware that we were auditing and that we’re going to have findings every year and that they would do things the right way. And every year we have money coming back to our clients because we audit.
To give the PBMs credit, this is a hard business to come up with a financial projection. Because you have a bunch of employees on January 1 and even after a completely transparent pass-through arrangement, you don’t know where those employees are going to go. You don’t know if they’re going to go to Walgreens or independent pharmacies. You have to bet on where they’re going for their prescriptions and then come up with a discount off average wholesale price that’s going to meet that.
PBMs are not always accurate in their forecasting. They’re going to make mistakes. They’re going to make projections that they know they can’t meet just to get the business. That’s where we come in to audit these programs. And that is a major problem right now of auditing.
How do PBMs charge their employer clients?
In a transparent arrangement, they have an administrative fee where they may charge $5 per member per month for services for account management and their eligibility maintenance and their rebate negotiation. We audit performance guarantees. If they don’t meet them—maybe because the retail brand claims aren’t at 15% as projected but come in at 14.76%—that 0.25% difference we’ll get back for our clients.
And that’s substantial?
Even a half a point or a quarter of a point is substantial when you’re spending $100 million a year.
Do most businesses of that size hire someone like you to do this?
No. Probably less than 1%. And the PBMs are making it harder and harder to audit. Four of them decided about a year ago they were not going to let audits proceed. And so they came out and said my firm and other firms like mine— independent, small auditors—would not be allowed to audit them. Now, they can supposedly give clients fantastic discounts off average wholesale price and they’ll never be held accountable.
Can we operate without PBMs?
No, not in the current healthcare system. The government isn’t going to get involved. We don’t have a national health service like the United Kingdom. So we need PBMs, but we need them to operate similar to the 401(k) fiduciary role. That’s what’s going to change PBMs. When they have to act solely for the benefit of the member—the beneficiary—that’s when the PBM industry will change. And I predict that will be the demise of some of the biggest in the business.
Is there any movement to put pressure on PBMs?
I think there is within the Department of Labor. I think there’s more of a move than I saw four or five years ago. It was under the Trump administration that ERISA, what’s called the fiduciary rule, got implemented for 401(k) plans. I’m hopeful that within the next three years that happens to PBMs.
Brokers are trying to lower costs for clients, and they’re really frustrated with the current system.
I guess if I was to advise consultants, fellow consultants and brokers, I would say educate yourself, get expertise. These contracts are really complicated. These are 40-50 page documents full of “I gotchas” and “get out of jail free cards.” They’re very complicated. I think attorneys who work in this area often don’t understand the nuances of these contracts. I’ve had top-shelf attorneys look at a contract and read right through where it says, “mutually acceptable auditor.” That seems like nice language. Yet you don’t want an auditor who is somebody’s brother-in-law that’s never been in the PBM industry. But if you have 22 years’ experience in the PBM industry, a PBM can still block you from an audit.
What’s one of your most interesting cases?
We’ve done some really interesting work with hospitals. A lot of the rural hospitals in America are small and typically contract for pharmacy benefits with Blue Cross/Blue Shield and whatever PBM comes along with a big carrier. What we’ve done is carve out those PBM relationships. In one case, we eliminated the spread pricing at the hospital pharmacy for its employees. That did two things: it eliminated spread, which was about 15%, and it enabled better bulk purchasing because we’re driving all that volume from the employees into the hospital pharmacy.
When a bank owns COLI, it is referred to as BOLI (bank-owned life insurance), and when an insurance company owns COLI, it is often referred to as ICOLI (insurance company-owned life insurance). No matter what terminology is used—COLI, BOLI or ICOLI—it is simply life insurance owned by and payable to an employer on the life (or lives) of one or more of its employee(s). In this context, we use “COLI” to mean any type of employer-owned life insurance on one or more of its employees.
Businesses purchase COLI for a variety of reasons. These are the most common.
It is common practice among closely held businesses to have the company purchase life insurance on each owner to fund a buy-sell agreement. When an owner dies, the company receives a tax-free life insurance death benefit that is used to purchase the decedent’s share of the business from his or her heirs. Using cash value life insurance may also provide the company with a source of tax-free income to buy out an owner when he or she is ready to retire.
Key person protection
The death of a key employee can be disruptive to the business, and it may take a long time to be able to find a replacement. Life insurance can provide cash to the business to ease the financial stress while recruiting and training a new employee to replace the decedent.
Economic benefit (endorsement) split dollar life insurance
To help executives obtain personal life insurance coverage, as well as provide the employer with key person coverage, companies often purchase COLI on their key employees and then “endorse” a portion of the death benefit to the employee, usually for only as long as the employee is employed. Each year, the employee must pay tax on the value of the death benefit that would be paid to his/her personal beneficiary. That value is measured either by the IRS Table 2001 rates or by the carrier’s annual renewal term rates.
Nonqualified deferred compensation plans
COLI has long been a financial asset used by companies of all sizes and industries to informally fund a nonqualified deferred compensation plan (NQDCP). The employer owns and is the beneficiary of life insurance contracts on the lives of the executives who are eligible to participate in the NQDCP. Most plans permit participants to allocate their NQDCP balances among a variety of notional investment options. The employer chooses those options from among sub-accounts in variable universal life COLI and allocates the COLI cash values to match the participants’ balances so that the NQDCP liability and the COLI cash values move in tandem on the company’s balance sheet. In addition, the COLI cash values can be withdrawn or loaned to the employer on a tax-free basis and used to pay benefits to employees in future years. Finally, tax-free death benefits can be used to recoup some or all of the costs of the NQDCP.
Funding other employee benefit plans
COLI is also purchased, primarily by banks and insurance companies, to fund the costs of other employee benefits, such as a 401(k) matching contribution, employer-provided medical and disability insurance, among others. When COLI is purchased for these purposes, the employer asks employees who fit within the categories outlined in Code sec. 101(j) (discussed later) to consent to being insured.
Funding an ESOP’s repurchase obligation
Companies that are wholly or partially owned by an employee stock ownership plan have a responsibility to purchase stock that is distributed to ESOP participants upon the participant’s termination of employment, death, disability, when the participant diversifies his/her account balance and when the participant is due an in-service distribution or required minimum distribution from the ESOP. There are a number of ways in which companies fund to meet this obligation, including the purchase of COLI on the lives of key executives. Similar to when COLI is used to offset the costs of a NQDCP, the tax-free withdrawal and loans from cash value along with tax-free death benefits make COLI, either alone or in conjunction with another asset, an appropriate and cost-efficient method for funding the repurchase obligation.
The owner of a life insurance contract must have an insurable interest in the person who is insured when the policy is purchased. This means that the policy owner (or the owner’s named beneficiary) would suffer a financial loss in the event of the insured’s death. Any individual is permitted to purchase a life insurance contract on his/her own life and designate the beneficiary.
Each state has its own statutes regarding insurable interest in the life of an insured individual. There is no federal statute specifically addressing this issue, so it is important to know and understand the statute of the state in which a life insurance policy is issued. In some states, a policy issued to someone who lacks insurable interest and where the insured did not consent, may be paid to a person who is equitably entitled to the proceeds and who is someone other than the named beneficiary, if a court so orders.
Code Sec. 101(J): Make Sure Death Benefits Are Income Tax-Free
Under Code section 101(j)(2)(A), death benefits paid to an employer will be free of income tax if notice and consent were obtained from the employee and that employee falls into one of the following categories:
- The insured was an employee at any time during the 12-month period before death
At the time the contract is issued, the insured is
o A member of the board of directors
o A highly-compensated employee
o One of the five highest-paid officers
o A shareholder who owns more than 10% in value of the stock of the employer
o One of the highest paid 35% of all employees.
When determining if an employee falls into one of the exempt classifications above, the date the contract is issued controls, not the date a consent to insure is signed. In this context, “issued” means the latest of: (1) the date of application for coverage; (2) the effective date of coverage; or (3) formal issuance of the contract. If an employee signs a consent form but terminates employment prior to the issue date, that individual does not fall into one of the exceptions above.
The employer’s notice to the employee must state the maximum face amount for which the employee can be insured, that the employer (or policy owner) will be the beneficiary and that the coverage may continue after the insured is no longer employed by the employer.
Every taxpayer that owns one or more COLI policies issued after Aug. 17, 2006, must file a Form 8925 with its tax return showing the number of employees insured at the end of the year, the total amount of insurance in force at the end of the year, and stating that each insured consented to the insurance.
COLI products are specifically designed and institutionally priced for the corporate market. These products generally have lower upfront loads, high early cash values and lower insurance costs than products designed for the individual market.
COLI is a valuable asset to companies that have a long-term need for protection against financial loss due to the death of a key employee or owner of a business; to informally fund nonqualified retirement plans; to recover the cost of those plans through the receipt of tax-free death benefits; and to provide a source of tax-free income through cash value withdrawals and loans to the company. COLI products are specifically designed to provide the purchasing company with income on its financial statements in the early years to satisfy the needs of shareholders, partners and potential creditors. When designed properly, a COLI program may help mitigate losses due to the death of key person or because of costly employee benefit plans.
Companies that integrate their HR technology can make better use of their data to gain insight into what their employees want. By being able to analyze reports and learn from benchmarking, brokers can offer clients actionable insights that can help:
- Find opportunities to improve their benefits strategy and allow their people to take control of their options
- Bridge the gap between perception and reality by strategically addressing employee engagement and communication
- Understand how they compare to other companies and take action to stay competitive.
ADP believes a benefits technology solution should allow clients to streamline employee eligibility, benefits calculations, communication and workflow management within a safe and centralized digital environment. One way brokers can help advise clients on what their employees want is to encourage the client to review HR and benefits technology systems to determine:
- What information is available and how current it is
- What reports can be pulled and what they can tell someone
- What kind of functionality there is for integrating data and automating those reports
- What actionable insights the people-data suggest
- What’s missing and what can be done to get it
- What the employee experience is like
- If an intuitive enrollment experience and tools are in place to help employees select the plan that best meets their needs
- If there is a mobile app for easy access to benefits information for employees.
That can be good news for brokers: the increasing amount of regulation and compliance issues that HR departments must deal with gives brokers an opportunity to separate themselves from the field.
As human capital management matures from leading edge to must-have for many clients, employers want brokers to assume a stronger leadership role in gathering information and making decisions about HCM systems. That’s according to the “ADP Employer & Employee Benefits and Human Capital Management Study,” conducted by SourceMedia Research in 2016.
Bruce Whittredge, ADP vice president of channel sales for major accounts, says the workplace is evolving at a rapid rate and brokers increasingly are asked to lead conversations regarding their client’s HCM strategy, systems, people and resources, strengthening the broker’s position as a trusted advisor.
It’s a trend Darren Brown, executive vice president for employee benefits at ABD Insurance & Financial Services, has seen developing over the past decade.
“Over the last 15-plus years, we’ve seen an emergence of the employee experience and how technology can play a key role in the retention and recruiting of employees,” Brown says. “Procurement of insurance programs is probably the easiest part of the job today. It’s the strategy, buildup and delivery of the programs that provides the most value today to people managers and requires the most thoughtful work. Today’s leading brokers and consultants understand how technology plays a prominent role in this cycle and are right in the middle of how to improve this experience for HR and the employees they support.”
For many clients, HR is transforming from an administrative role that operates in silos and is tactical in nature to a strategic function that includes change management, company culture, workforce demographic shifts, process improvement and more. Benefits brokers are recognizing the need to extend their ability to add increased value around this HR transformation.
“Brokers have always been front and center on the benefits administration process for employers,” Brown says. “The great news is that technology over the last 20 years has replaced paper and improved this process for all parties. The trend over the last 15 years has been identifying and introducing software-as-a-service-type product to the rest of the employee life cycle—onboarding, recruiting, performance management, etc. This is the challenge of the business but also the most rewarding, because as a trusted business advisor, you are addressing much broader themes for the clients you serve.”
It’s the strategy, buildup and delivery of the programs that provides the most value today to people managers and requires the most thoughtful work.Tweet
A company’s benefits package can be a tool to separate it from its competitors to find and retain the best talent. Because there are many options and clients have different needs, brokers increasingly must create more specialized packages. Today’s workers aren’t only switching employers for higher wages, they’re considering other factors like ﬂexibility, meaning in their work, philanthropy and company environment. Keeping workers happy can be the difference between retaining them and losing them.
A 2016 study by Guardian Life Insurance found 84% of employees who have high satisfaction with their benefits also have high job satisfaction. That means the brokerages that stand out from competitors will be the ones that can help employers create benefits options specific to the client’s workforce.
“What’s the cost of not having a great benefits package?” Whittredge asks. “It could be more turnover or losing the war on talent. What your benefit package says is a direct reflection of the culture you are trying to build as more people look at benefits as a huge play for them.”
Determining what is a good benefits option for the client is challenging. But big data can offer brokers precise insight for helping craft a benefits program. It can help them understand more about what a client’s employees need and want and then begin to tailor a package. One of the leaders in compiling workforce-related data is ADP, which administers benefits for one of every eight private sector employees in the United States.
ADP is the largest provider of HR services in North America, Europe, Latin America and the Pacific Rim. It pays 26 million workers in the United States and 13 million elsewhere. In 2016, it processed nearly 60 million W-2s within the United States and electronically moved $1.7 trillion in client tax, direct deposit and related client funds in the United States. It has more than 650,000 clients worldwide and access to 30 million people-records.
These data can provide employers more clarity into what benefits their workforce wants. That can be critical as employers try to manage five generations of workers.
THE SILENT GENERATION consists of workers ages 71-89 and makes up less than 1% of the U.S. workforce. According to the Society for Human Resource Management, these workers place a strong emphasis on rules, lead with a “command-and-control” style and prefer face-to-face interaction but communicate best formally.
What your benefit package says is a direct reflection of the culture you are trying to build as more people look at benefits as a huge play for them.Tweet
BABY BOOMERS, ages 54 to 70, make up 27% of the U.S. workforce, but their numbers are declining. Baby boomers are retiring at a rate of 10,000 per day, yet many can’t afford to retire and want to work part-time or seek contract work.
The ADP Research Institute notes baby boomers are delaying retirement, making it more difficult for workers in subsequent generations to reach senior-level positions and key leadership roles. However, baby boomers have an immense amount of knowledge and skills and are looking for a way to share them before they retire.
GENERATION X, ages 34 to 53, make up 35% of the workforce. Data indicate they prefer independence and fewer rules and want to balance work and family. These workers are sandwiched between a large population of baby boomers and an even larger population of millennials. This group is starting to focus on future-oriented areas like retirement, while also climbing the career ladder and looking for ways to continue advancing. Coaching and leadership development are critical for these workers.
MILLENNIALS, ages 20 to 33, make up 37% of the workforce. They tend to take an entrepreneurial approach to work, prefer direct communication and feedback, and want a social, friendly work environment. Data from the ADP Research Center indicate these workers want opportunities to learn, grow and advance their careers. Their reputation for changing jobs often reflects the failure of organizations to train them.
GENERATION Z workers, under 20, are just entering the workplace and make up 1% to 2% of the workforce. According to SHRM, they are likely to use Twitter to find jobs and communicate best by smart phone/email. They came of age during the recession and put money and job security at the top of the list.
A 2017 study found few senior executives and HR professionals can translate human capital management data into predictive insights. According to the Mercer 2017 Global Talent Trends study, nearly one in five is generating only basic descriptive reporting and historical trend analysis. Brokers who can analyze big data can help their clients identify emerging trends and make better-informed business decisions.
ADP, the largest provider of HR services in North America, Europe, Latin America and the Pacific Rim, pays 26 million workers in the United States and 13 million elsewhere.Tweet
Whittredge says brokers who can dig deeper into data will be able to identify areas where clients should consider changes. For example, he says a company may think employees want a high-deductible plan with certain options but the data indicate only boomers are using the plan as intended. Upon examination, the data may indicate that millennials require different healthcare options and that segment is growing by 10% a year. Brokers who are armed with these numbers can make plan recommendations that will better serve their multi-generational employee population in the years to come.
Just a few miles away from the five-star luxury resort in Colorado Springs, the Springs Rescue Mission endeavors to treat those experiencing homelessness with dignity, respect and honor. That might mean they sit down to dinner at a table adorned with tablecloths and flowers. Or it might mean they get to use high-end towels to dry off after a shower. Or they receive a delicious banquet-quality meal.
The mission, home to Mission Catering (the organization’s for-profit social enterprise) and a culinary arts program for men in addiction recovery, recently added a rich new source of meals and ingredients. Local hotels, led by The Broadmoor, have begun donating banquet extras to the mission in significant quantities.
The initiative has taken almost a year to pull together. The Council provided help in dealing with legal issues. The hotel worked to garner community support. And the mission was able to secure donations for a new refrigerated truck for deliveries. And it all began with a question posed at a Council event.
Making It Work
Molly Cohen attended the June 2017 Employee Benefits Leadership Forum at The Broadmoor with her husband, Rob Cohen, then chair of The Council. She noticed the considerable amount of leftover food prepared for the meeting and spoke with her husband about it. As a pediatric nurse who worked for 31 years at Children’s Hospital Colorado, Cohen had long taken an interest in issues of global hunger and poverty. “It’s something I’m mindful of every day,” she says. She has volunteered with Denver-area food banks, making sandwiches with her church group for residents of low-income housing, and was bothered by the waste.
Rob Cohen, chairman and CEO of The IMA Financial Group, in Denver, mentioned it to Ken Crerar, president and CEO of The Council. Crerar previously had seen food recycling efforts work through the DC Central Kitchen—a community kitchen that works to reduce hunger and poverty. Crerar had casually mentioned the possibility of food recovery to the hotel before, but the conversation hadn’t gone far; there had been many unknowns, including concerns about potential liability. Now, however, the time seemed right to revisit the opportunity with a more formal, researched approach.
This time he decided to dive in headfirst and brought a small legal team on board to explore the possibilities before presenting the idea to The Broadmoor.
“We go to Colorado Springs twice a year for meetings, and this was our 16th meeting in eight or nine years,” Crerar says. “We’re invested in the community, and people were excited about giving something back.”
On the surface, it would seem to be a no-brainer: people are hungry, and others have food to share. But it’s not so simple. Packaged donations are one thing; excess prepared foods are another. Restaurants and hotels often have been reluctant to donate these items, concerned that they might result in food poisoning due to improper handling.
We were able to meet the needs of the more than 300 guests that we shelter every night with this extraordinary food. There was a lot of protein. A lot of vegetables. And it would have been thrown away.Tweet
That’s where Scott Sinder and Josh Oppenheimer entered the picture. Sinder, a partner in the Washington, D.C., office of law firm Steptoe & Johnson, is chief legal officer for The Council. He previously joined Billy Shore, founder of Share Our Strength, a nonprofit that aims to end childhood hunger, in working on the 2004 John Kerry presidential campaign. That experience, Sinder said, provided a “conceptual perspective” of food rescue efforts.
But it wasn’t until Crerar approached him about the legalities of making it happen at The Broadmoor that Sinder learned about the multitude of laws in place. He discovered Good Samaritan legislation that protects donors who give without malicious intent or knowledge of contaminated food.
“I’m an American lawyer, so the idea that, if something goes awry, people will sue you does not surprise me,” he says. As there are interlocking state and federal laws in place, one being more straightforward than the other, “we had an internal process in working this out.”
When Oppenheimer, an associate at Steptoe & Johnson, performed much of the initial legal analysis with Sinder’s assistance, they discovered a distinct lack of case law. It’s possible people haven’t sued because restaurants and hotels have not been willing to take the risk in the first place. It’s also possible the beneficiaries of such programs don’t want to bite the hand that feeds them.
In 2016, the Food Waste Reduction Alliance reported 25% of retail/wholesale respondents to a survey—and 39% of restaurant respondents—were concerned that food donations would expose them to liability. The FWRA also reports that up to 40% of the food grown, processed and transported in the United States will never be consumed and that nearly 50 million Americans, including 16 million children, are short of food.
And yet, Sinder and Oppenheimer were able to do what Crerar asked. They found a way to make it work. “It reminded me why I love working for Ken,” Sinder says. “It was another example of how he gets you into good things.”
Crerar brought the team’s research, combined with strategy from DC Central Kitchen, to Jack Damioli, president and CEO of The Broadmoor. He asked about donating surplus food items to an area organization during The Council’s next meeting. Damioli, already familiar with the good work of the Springs Rescue Mission, contacted Larry Yonker, the organization’s president and CEO. The Broadmoor confirmed it would be able to certify the food for donation to meet health requirements and even volunteered to deliver it.
“It’s such a wonderful thing to be able to do,” Damioli says. “I just wish it hadn’t taken so long to implement. I’m a resident of Colorado Springs, and I see what happens in the city on a daily basis. I see the need.”
Teamwork, Recovery and Growth
Springs Rescue Mission, founded in 1996, provides about 600 meals a day, seven days a week, to those experiencing homelessness. That’s nearly 220,000 meals a year, not counting special events at Thanksgiving, Christmas and Easter. The organization has seen the need rise significantly since 2014, when it provided 104,000 meals.
Less food waste is going to the landfill and, in turn, helping those in need—a true win-win situation for all.Tweet
“The number of people experiencing homelessness here has doubled in the last few years,” Yonker says. “Everybody wants to blame the legalization of marijuana. I do think that has an impact on the behavior of our guests and the hopelessness they feel. It has brought transients to town, but I don’t think it has affected the chronically homeless.”
Yonker points instead to the fact that Colorado Springs is a “big military town,” with Fort Carson, the U.S. Air Force Academy, Peterson Air Force Base, the North American Aerospace Defense Command (NORAD) and Schriever Air Force Base all nearby. Recent expansions and increases in housing prices have had a significant impact, as have the number of veterans challenged by post-traumatic stress and alcohol or drug addictions.
As part of serving its community, Springs Rescue Mission offers a behavioral, trauma-based residential recovery program in addition to job skill training in facilities management, warehouse management, customer service and culinary arts.
As for the meals, however, the mission spends between $100,000 and $120,000 annually on its food budget in addition to receiving items from the area food bank and other organizations. Receiving banquet excess, then, could mean an extensive drop in costs and the ability to expand.
In several trial runs last fall, starting with The Council’s Insurance Leadership Forum in October, The Broadmoor donated more than 3,500 pounds of food to the mission. The resort’s traditional practice is to prepare extra food for banquet buffet meals to ensure various items won’t run out, so none of the food donated had been previously served—or even taken out of the kitchen.
These donations, however, are not just about quantity; they’re also about quality. Beef tips and leg of lamb, for example, may be served as prepared or, more importantly, repurposed in other recipes to feed more people. Some guests, Yonker says, have tasted asparagus for the first time.
“You would expect the food from The Broadmoor to be great,” he says. “From the standpoint of the impact it had on us, with that first trial, for four days we were able to serve our homeless guests with these items.
We were able to meet the needs of the more than 300 guests that we shelter every night with this extraordinary food. There was a lot of protein. A lot of vegetables. And it would have been thrown away. It was an amazing experience.”
An Awesome One
But Damioli wasn’t finished. In early January, he met with the Pikes Peak Lodging Association, which includes hotels in the Colorado Springs area. He explained the program and asked for assistance, and four additional hotels immediately stepped up to participate. “I’m still working on other properties,” he says. “It’s still early, and it’s taking everyone a little while to work through the logistics and figure out this is a good thing for everyone. Less food waste is going to the landfill and, in turn, helping those in need—a true win-win situation for all.”
According to the Food Waste Reduction Alliance, nearly 50 million Americans, including 16 million children, are short of food.Tweet
A refrigerated truck has now been purchased with a combined $50,000 donation from the El Pomar Foundation and Anschutz Family Foundation. The Denver-based Anschutz family owns The Broadmoor; the foundation is the charitable organization co-founded by Spencer Penrose, the Philadelphia-born businessman who settled in Colorado Springs in 1892 and opened The Broadmoor in the summer of 1918.
There have been other collaborations, too. Guests from Springs Rescue Mission and other local nonprofits helped serve hot chocolate at an event at The Broadmoor’s Seven Falls attraction during the holidays and received proceeds from admission. The resort’s owners have contributed to a current expansion project at the mission to accommodate increasing demand. And Damioli hopes for further collaboration and training opportunities between the culinary staff of both organizations.
“This was just a great example of teamwork, where one person comes up with an idea and somebody else jumps on it and then somebody else takes it to the next level,” Rob Cohen says. “We get together as an industry, and the meeting is phenomenal from the standpoint of us exchanging ideas and information. But if you think about the fact that we can affect and change the world at the same time, that takes an already great meeting and turns it into an awesome one.”
Yonker, always happy for additional resources and compassionate hearts, knows that stereotypes and misconceptions still exist about those experiencing homelessness. In whatever way possible, the mission works to meet people where they are and help them get back on their feet. In the last two years, 40 men have graduated its addiction recovery program gainfully employed. Even on the mission’s campus, there’s a focus on optimism with bright colors and well maintained facilities—with all of the cleaning and facilities work performed by those the mission serves.
“You see smiles,” Yonker says. “Sometimes they’re toothless smiles, but they feel like they have a purpose again. They feel like they have value. And serving really nice food like this, it’s kind of over-the-top as far as giving people the sense of being just like anybody else. It’s nice to be treated that way…. We try to make the experience as positive as we can so they can see hope and they can see their lives differently.”
In coming days, Yonker says, he sees “a lot of things blossoming” in the relationship between the mission and the resort. “They’re the five-star hotel, and we’re the no-star hotel,” he says. “But with this kind of food rescue, we just might turn into a two-star.” An added bonus: The Broadmoor donated the luxury towels that mission guests use after showers.
“I joke that 70% of the people in Colorado Springs have never dried off with a Broadmoor towel,” Yonker says. “But I’ve got 300 guests using them here. It’s kind of funny, but it’s also fun. These little touches affect people in ways we can’t explain. It’s really neat to see The Broadmoor understand how blessed they are and how unique they are in a community like this.”
Soltes is a contributing writer. email@example.com
Some manage speeding tickets. Some pay for adoption services. The following are just a handful of benefit options and how they work.
Purpose: Six years ago, Peerfit was created to redefine the way employers were engaging in wellness. Emma Maurer, vice president of enterprise health, says the company sought an answer for employers subsidizing unused big-box gym memberships.
Peerfit built a network of fitness studios offering yoga, Pilates and boot camps. Employees have access to any of the available classes via credits an employer purchases. Employees can go online, check out their options and book the classes.
“This is important in the age of personalization because they can customize it for each employee,” Maurer says. “People can do things they are interested in and can physically do.”
Cost: Employers pay only when people go to classes. They typically make one class each week available to an employee. The cost varies depending upon the location and the number of credits purchased, but Maurer says a 500-employee company in New York might expect to spend $10,000 per year for coverage.
ROI: Wellness programs can be difficult to measure, Maurer contends, because it’s hard to measure when something like cardiovascular disease is prevented through exercise. But Peerfit can show employers exactly how money is being spent, who takes part and the percentage of overall engagement.
Extras: Part of the engagement process is enabling people to invite others to attend classes. An employee can send invitations to others, and with the click of a button, the class is reserved for them as well. Maurer says this encourages the social aspect of the classes, like a healthy happy hour.
Purpose: The company introduced its first legal plan to the market 46 years ago. The goal was to provide assistance to people “in the middle,” says Emily Rose, LegalShield’s senior vice president of broker and partnership sales.
“People with lower incomes can get legal aid, and those on the high end probably have a private attorney on retainer,” she says. “Plans were brought to the marketplace to ensure the general public had reasonably priced access to attorneys.”
The program has evolved into a package of services covering common legal matters like speeding tickets, estate planning, adoption and bankruptcy.
Cost: Everything is covered in one plan from initial consultation to legal representation, if needed, for a $200 annual payroll deduction. This covers the employees, spouses and dependents.
ROI: Money in versus money out is the best way to figure ROI, Rose says. On average, someone would be charged $300 per hour for an attorney (as opposed to $200 annually for their services). Uptake is typically 12% to 15% of employees in the first year and grows in subsequent years.
Extras: The organization takes a white-glove approach to customer service, according to Rose. Attorneys in the network respond to calls within eight hours; the industry standard with legal plans is 48 hours, she says. They also have a mobile app that allows clients to take a picture of a speeding ticket and send it to their attorney “before the police officer is back in his cruiser,” she says.
Healthy Paws Pet Insurance
Purpose: Pays for unexpected accidents and illnesses for cats and dogs. Healthy Paws helps pet owners save up to 90% on veterinary bills. Employees take their pets to the veterinarian of their choice, pay up front and get reimbursed for the expense.
Rob Jackson, Healthy Paws CEO and co-founder, says the insurer doesn’t cover preexisting conditions, wellness and preventive services. The company aims to cover accidents and long-term, chronic conditions which can easily add up to thousands of dollars.
Cost: Rates start around $15 a month for cats and $30 a month for dogs.
ROI: Pet insurance is an increasingly requested voluntary benefit, with a more than $2.5 billion market in 2016, according to Research Nester. The organization says much of this growth is because more than 65% of Americans have pets in their homes. Spending on the health of household pets has increased 11% in the past decade.
Extras: Employees can upload a photo of the vet bill through the phone and get reimbursed for the care within days. There are also no maximum limits or caps on payouts.
Purpose: The new kid on the benefits block, Sum180 offers a dizzying array of financial wellness options, from budgeting apps to student loan repayment. Sorting through this can be confusing for many employers.
“It is the Wild West, and we are still in the early days of figuring it out,” says Carla Dearing, CEO of Sum180. “Companies want to know what is offered in the marketplace and what they can hope to provide.”
Because of this, Sum180’s program aims to cover all of the most common financial issues in one stop—from beginning budgeting to paying off debt and saving for retirement. Participants in the program enter information, including what they make, spend, own and owe, and are given “next steps” for their finances. The program also provides tips, advice and support.
Cost: The fee is $1 per employee paid monthly or $12 per employee paid annually.
ROI: Engagement in this kind of behavioral-change program is often low, Dearing concedes. The information is confidential and participants aren’t outwardly ranked, but there are internal categories through which an employee moves up as his financial situation improves by paying down debt or fully participating in a 401(k) program.
“Over time, as people come back in, you monitor their situation,” Dearing says. “Ideally, you can report that people have moved up in their financial health.”
Sum180 uses a “gamified” approach to financial assistance. This essentially means it’s easily understandable. Users can access information simply by swiping their phones or can dip their toes in by watching short videos or getting tips, then move up to budgeting and saving.
“It’s about small steps and positive reinforcement, which are powerful features for change across all kinds of behaviors,” Dearing says.
The need for a design-build approach to benefits is here, and it’s beginning to play out among employers large and small. These days, brokers must increasingly work to uncover their clients’ unique needs and pull together the resources to serve them.
“Employee benefits are getting deliciously complicated,” says Joe Ellis, senior vice president of CBIZ’s Employee Services Organization.
But it can be a challenge to determine the right package to offer, especially when brokers are fielding offers from hundreds of vendors. How do you figure out where the value is?
Ellis says the key is creating an overall benefits strategy. “You have to build out a plan that will meet the needs of as many people as possible,” he says. “But you have to do it in a way that isn’t just the company giving out more and more money.”
Jack Wilkinson, a senior vice president in the Benefits Advisory Group at J. Smith Lanier & Co., says the move beyond traditional benefits has changed the way he does business.
“I was recently with a prospective client and had an hour and a half scheduled to meet. We were 50 minutes in before we talked insurance,” Wilkinson says. “Before that, we talked about how we engage employees and if they have focused action to manage specialty pharmaceutical costs. The insurance wrapper is around everything else we are offering.”
Ellis says the design-build world hearkens back to the formerly popular cafeteria plans, in which employers offered a range of benefits and employees decided where to spend their money. The market is different today, and many cafeteria plans have gone by the wayside. But competition for a solid workforce demands that employers offer a wide range of benefits, some paid for by the employer and some by the employee.
Some cover a broad swath of employees like legal assistance, pet insurance, wellness programs and tuition reimbursement. Some look to pinpoint specific groups of needs like fertility insurance or adoption assistance.
A wide group of offerings allows for self-selection by employees. This is desired specifically by millennials who may not need long-term care insurance but might want to cover veterinary expenses for their 80-pound Labrador. It allows them to choose benefits that are tailored to their lifestyle over time. From a broker’s perspective, Ellis says, it’s good to have a “generationally balanced team” to tease out what the employer and employees want. He tries to ensure this happens at his organization. That way, when he comes in with employee feedback for one of his clients, he gets input on the results from millennials to baby boomers.
“One group can offer what they teased out of the results, and another generation can say, ‘This is what I’m hearing,’” Ellis says. “A good, broad benefit plan would have the ability to cover a wide population, and the only way to find out what they want is to ask.”
Still an Uphill Battle
IMA Financial Group has nearly 700 employees scattered across four states. Their needs and desires vary as widely as their individual personalities. But through dedicated data collection and benchmarking, IMA has been able to gain a clear understanding of what benefits they value and what will continue to make IMA a desirable place to work.
They have days allocated for biking to work, volunteering at a charity and even raising funds with an outdoor ping pong tournament. Another popular benefit is the firm’s internal dream coach. His job is to help employees accomplish whatever goals they may have, big or small, work-related or not.
“This is something they wanted and cared about,” says Jessi Ryan, IMA’s Total Rewards practice lead. “It’s very unique and could only have been known by using our data.”
Like identity theft protection—who would have thought that would be something employers would be thinking about? But whatever the consumer is purchasing—and employees are consumers—you can let them buy it at work.Tweet
The company’s Total Rewards Program employee benefits package was created using feedback from its employees. IMA is vigilant about benchmarking—to find trends in the employee benefits industry, understand what its competitors are doing and, most importantly, understand what is valuable to its employees.
IMA’s program demonstrates the expanse of options for employers who want a custom package, but Wilkinson says the industry is still far ahead of where many employers currently stand. Most, he says, still prefer to offer traditional benefits and nothing else. Paying up front for benefits that might lower their total spend (like reducing healthcare costs over time or improving retention to lower administrative spending on new hires) can be a tough sell for many employers. “Getting them to spend nickels to save dollars has been more of an uphill battle than we expected,” he says.
But that doesn’t mean brokers should give up on offering a wide array of options. In fact, good ones should be able to walk into a meeting and say, “Here are things you probably don’t know about but you should,” Ellis says. “Like identity theft protection—who would have thought that would be something employers would be thinking about? But whatever the consumer is purchasing—and employees are consumers—you can let them buy it at work.”
This approach also benefits brokers. Instead of just working with an employer for one or two products, brokers become consultants, advising clients on their entire benefit portfolio.
Brokers should also be motivated to stay abreast of benefit trends by the fear of missing out. The last thing a broker needs is clients knocking on the door asking why they hadn’t been told about a new benefit they heard about through another agency.
Sorting Through Options
Whether employers are asking for abundant benefit packages or brokers are (or should be) introducing them, options are nearly endless. So how does one wade through the possibilities? Very carefully.
Wilkinson has a small checklist of considerations when choosing which products to bring into the fold. He tries to determine if the program or service is new to the market or another iteration of what is already available.
“There is lots of duplication on the market,” he says. “You have to wade through vendors to figure out which products are truly disruptive. And our market is ripe for disruption.”
Brokers need to understand if the programs and services put in place are actually working to attract and retain employees. Given the nature of many products, this can be yeoman’s work. IMA relies heavily on employee surveys for this task and, while the staff specifically asked for a dream coach, IMA often finds that the core benefits are still highly relevant for its employees.
“In our data set, we find that medical benefits and options for retirement, savings and rich, paid time off are still popular,” Ryan says. “These are all things we are continuing to see rise to the top in terms of value.”
Some of the initiatives offered at larger companies, such as “napping pauses” and buses to transport employees to work, may not have value at other organizations. At IMA, for example, employees value paid time off more than pet insurance.
Ryan stresses the importance of understanding what employees want and how those products may fit into the workforce culture. Then, use employee feedback to make sure they are having the desired effects on retention, recruitment or employee health.
“Brokers can use tools to do the heavy lifting and compile data, but they need in-house expertise to make sense of it and come back to the client and say, ‘Here are our recommendations based on employee feedback,’” Ryan says.
Vetting the Vendors
There is lots of duplication on the market. You have to wade through vendors to figure out which products are truly disruptive. And our market is ripe for disruption.Tweet
Joe Miller, president of Shortlister, in Park Ridge, Illinois, says his organization was created out of necessity. Coming from a background in wellness, he understood that brokers and employers couldn’t manage the ever-increasing number of vendors knocking on the door trying to get face time.
So he began compiling lists for brokers. Soon after, others were knocking on his door for more information. His lists now cover more than 40 different categories of vendors. And doing this for a living has made him sympathize with brokers attempting to do it on their own.
“We are the experts behind the experts, and we have a hard time,” he says. “Employers expect brokers and consultants to have a good understanding of the selection out there, and that’s not even possible right now.”
Shortlister is aptly named because it provides lists to self-insured employers and brokers seeking to find vendors for different aspects of their benefits program. An employer group takes a quick survey discussing its goals, philosophies, demographics and other pertinent information. Shortlister compiles this and returns with a list of prequalified vendors that might fit the employer’s needs. The brokers analyze that and narrow it to a handful of options. Then, Miller gets quotes, meets with the vendors and has them answer questionnaires. That information is then returned to the client, enabling the client to choose its best option.
Dave Kerrigan, founder and managing director of Sante Nasc, in Woburn, Massachusetts, is also working to help brokers wade through the vendor sea. He has designs to build a searchable database, primarily of early-stage vendors, for brokers to peruse. He hopes to make the market easier to navigate by centralizing intake and standardizing the evaluation of vendors and then compiling that information in one place.
“Some of these vendors are better than others, and brokers and consultants may not be equipped to evaluate these companies,” says Kerrigan, a former broker. “Brokers out there are going to be able to go into the database and search for companies based upon key criteria.” For example, a broker could search for a category of company such as property and casualty or student loan services. Then within that, they’ll be able to dig down deeper into specifics, such as mental health services within the health and wellness sector. “They will be able to find new things, differentiated offerings or new vendors in the spaces where the usual players aren’t cutting it,” he says.
If brokers want to keep the process in-house, Ryan says, research is a must. She uses a site called Owler.com. On Owler, brokers type in the name of a vendor, such as Gradify, which helps repay student loans. Owler provides some company information, news on the organization and a list of competitors in that space.
One good marker to use during the vetting process is inquiring about a vendor’s dedication to employee engagement. Benefits can be added to a program, but if employees don’t know about them, they’ll go unused. Both vendors and brokers need to understand new, interactive ways to talk to employees.
“A blue-collar employee might not use the internet” on the job, Wilkinson says, “but they do have a smart phone, so they need to have built-out apps to engage them. Engagement should be year-round, not just at open enrollment.”
In fact, Kerrigan says a vendor’s fees could be based on engagement, whereby employers pay only for the employees who use a program instead of an across-the-board fee.
Brokers can also ask if vendors will return fees if they fail to bring people into the fold. No employer wants to spend a lot of money on a program only to find no one is using it. And there are ample resources to get employees on board—chatbots, mobile apps, texting and artificial intelligence can all be employed to get the workforce engaged.
On the employer’s side, decision support tools are an increasingly important resource, even using artificial intelligence to help employees sort through benefit options.
Businesssolver’s Sophia and Jellyvision Lab’s ALEX are both AI systems that walk employees through the enrollment process virtually. These are intuitive programs that ask employees questions, such as their family history of cancer or how many dependents they have, and use that information to determine what kind of benefits are best for them.
“Benefits are confusing, especially to the younger generations,” says Jamie Hawkins, president and CEO of Benefit Technology Resources in Tampa. “They didn’t grow up with union benefits like their parents. And they aren’t going to read a book about their options. This dynamic education is what they need.”
It’s the decade of bright and shiny objects, and brokers need to be able to figure out what is pyrite and what is gold.Tweet
And on the healthcare side alone, there are copious applications and programs to help employees take better care of themselves.
“Brokers are overwhelmed because the sky is dark with the number of tools and applications and capabilities” in this space, says Michael Turpin, executive vice president and managing consultant for USI Insurance Services. “It’s the decade of bright and shiny objects, and brokers need to be able to figure out what is pyrite and what is gold.”
There is technology that targets people with high body-mass indices, women with high-risk pregnancies and people taking costly specialty prescription drugs. Offerings range from telemedicine office visits to smart phone apps that help diabetics regulate blood glucose levels by being more compliant with their healthcare plans.
“There is a whole side of consumer engagement communication tools to speak to a person who doesn’t have more than two minutes to listen to a message and understand what to do to be a better healthcare consumer,” Turpin says.
The many options on the market are only working to make benefits procurement more complicated as brokers try to administer custom plans for every client. It used to be common among larger organizations, Hawkins says, but even smaller companies are seeking this flexibility.
This change has left brokers analyzing internal processes like benefit procurement, onboarding customers, enrollment meetings, communication and renewal. And they are increasingly looking at technology to make the process smoother for themselves and their clients.
Hawkins, for instance, worked with an agency in New Orleans that was sending a staff member to enrollment meetings in five different locations. During his entire day presenting in various conference rooms to employee groups, he mostly saw people staring at their phones while he was talking. “It clicked for them that today’s workforce learns and wants to access information differently,” Hawkins says.
The firm implemented a benefits administration system where employees could upload videos on various benefits. This allowed employees to decide which programs they want to explore and then watch at their leisure. Not only is this a time saver for the brokerage, but the employer doesn’t have to pull people away from work for tedious enrollment meetings.
This newer technology can help improve processes, engagement and benefit reporting and analysis. But there is so much on the market that brokers definitely need to determine what will work with their organization’s culture and use it to its full potential.
“The technology is there,” Turpin says. “But, like anything, theoretically it enhances or makes processes better. But it can also fall flat on its face if not used correctly.”
Programs like TechCanary’s agency management system can customize operations for an array of uses. Reid Holzworth, founder and CEO of the Milwaukee-based company, says the system was built inside Salesforce, so it enables brokers to streamline the process of working with various vendors by adding them into one system. Then, on the back end, brokers can build out analytics that show whether each product is truly helping to attract and retain employees.
One important note for any technology that is adopted, Turpin says: it has to be used systemwide. Historically, brokerages with a national presence have tended to work in silos. Consolidations have resulted in firms with offices in various states banded under one umbrella but operating under completely different systems. A firm in Atlanta might find a great new product for its clients while its sister organization in California has no idea the program exists. Some of the newer technologies can help link those offices and share institutional knowledge.
“We need to eliminate the 100-year-old practice of each producer having their own way of doing things, with their own team and a million redundancies,” Turpin says.
There are probably few brokers who got into the employee benefits industry because they were lovers of math and technology. It’s inherently an occupation guided by Excel spreadsheets, handshakes and customer relations. But technology is changing the way business is done.
“Lots of large brokers like Marsh & McLennan, Lockton and Gallagher have entire tech divisions,” Hawkins says. “It has definitely changed the structure of brokerage firms.”
These newer divisions both implement the technology brokers use, such as Employee Navigator, and vet new technologies on the market. Smaller brokerages may not be able to afford entire technology divisions, but they do have options, Hawkins says. Often, they can partner with consultants or choose one technology and focus on learning it well.
“Honestly, it is hard for smaller brokerages without some help,” Hawkins says. “The HR/tech landscape is changing so fast even the large brokerages are struggling to keep up.”
The industry has reached a tipping point at which productivity is going to have to come from somewhere other than “the backs of people,” Turpin says. For the most part, there is already a high level of productivity, and there’s not a lot of spare time or energy on the part of brokers to do more.
So the industry will need to change for the sake of its survival, Turpin says. Customers no longer want to meet over a long lunch to discuss their plans. These days, they want to talk by text.
When it comes to technology, a lot of brokers are “fast followers.” No one wants to be first in line, but they aren’t going to be fifth either, Turpin says. His organization has chosen to be decisive about its adoption. “You can’t blink when people push back,” he says.
CEOs will need to be “bilingual” in technology instead of delegating the issue to someone else. This is, in part, because the marketplace is crowded with tools; some of them work well, and others are over-engineered and hard to adopt. It’s going to be crucial to know the difference.
Organizations will have to understand how to move into the digital age, and part of that change may be cutting some jobs considered of lower value.
But Turpin tempers that outlook with caution about making too many changes at once. At least, in the near future, technology will require the use of people to understand, interpret and relay it to clients.
“At a certain point, people are saturated with change, and you have to decide when to put a stake in the ground and when to be patient with adoption,” he says. “The best firms can improve their productivity if they can automate their business, but sales will always be where they are looking someone in the eye. Trust is currency when someone is hiring eyes and ears in the marketplace.”
Worth is a contributing writer. firstname.lastname@example.org
But in the evolving world of marketing that bar is set much higher.
A brand is more than your age-old unique selling proposition (USP), that long-valued mainstay essential to every good marketing campaign. Today, branding is about your voice, knowing what you stand for and what you value. It’s your story. Can you tell it?
We are all competing for best in class talent, a larger market share and stronger customer engagement. The marketplace is constantly changing and saturated with options. So how do we get their attention? How do we tell our story so customers will want to do business with us and employees will want to work for us?
Our customers continue to be more diverse. They are likely multigenerational, of varied race, gender, ethnicity and sexual orientation. They speak various languages and one of those will probably be digital. They have skills we aren’t familiar with and have deep expertise in areas we barely understand. If our workforce doesn’t reflect this diversity, how can we meet their needs? Or know how to reach them?
It’s not as simple as just expressing our core values or revising our mission. People want to align themselves with companies that share similar values and beliefs. They want to see themselves in your brand. Will you be able to identify with them and respect them? Will you infuse these values in the way you talk about your firm, in the way you approach hiring new people? Seth Godin, an author and lecturer on the digital age has said, “being able to connect with customers and meet them where they are on a mental, emotional, or spiritual level, rather than trying to bring them in to where the brand is will allow for them to feel like they are being seen, heard, and respected. When a customer or, even more broadly, when a person feels respected, their affinity for the brand will build, and they will talk about it.”
In marketing, this means ensuring messaging and materials reflect these values and beliefs. Our Customers are changing and so should the way we portray them. In an Ad Age magazine story, Shelly Zalis writes, “It’s not just about making sure ad campaigns feature different races, genders and ages; it’s about making sure that different kinds of people are portrayed in a fair, accurate and realistic way—instead of cynically or lazily relying on age-old stereotypes that prey on and reinforce society’s existing biases.”
This may seem obvious, but are you auditing your website, marketing and promotional collateral and social media channels regularly to ensure you aren’t using dated stock images or generic copy that is not representative of the values you want reflected back to your customers?
Starting on the Inside
Messaging alone, however, won’t bring a diverse workforce to our doors. Before you start selling your story externally, you have to truly build the culture internally. From the moment recruiting begins, you have an opportunity to shape your story and help define your culture. How you sell your firm and what you do matters. If customer service is paramount, then put a marker right up front about the value your firm places on building long-term relationships. Your sales process will not be a one and done event. If you value an entrepreneurial spirit, craft a job description around rewarding new ideas and putting them into action even if they result in failure the first go-round. Infusing your brand into the things you value and the ethos your firm honors, will give your employees the voice to share and reinforce it with everyone they connect with.
We must also broaden our recruiting channels and experiment with different approaches to successfully target new talent. We have to be creative in seeking them out and suspend the tried and true methods we’ve relied upon. One initiative yielding great success is a re-entry paid internship created by The Society of Women Engineers. This STEM Task Force brings women engineers who are ready to re-engage in the workforce after taking a career break. In a male dominated field, the program gives employers to the opportunity to increase the number of mid- to senior-level women in their ranks and it gives these talented women a chance for re-entry. In two years, the Task Force is gaining traction with conversion rates of over 60% along with some firms hiring 100% of their interns.
Targeting and recruiting candidates of varied backgrounds, experiences and perspectives will illustrate the value you place on those who bring diverse thinking into your organization. Studies show that diverse teams deliver results that enhance performance metrics and foster innovation.
A study by Garr, Atamanik, and Mallon, High-impact talent management, finds that companies with inclusive talent practices in hiring, promotions, development, leadership, and team management generate up to 30 percent higher revenue per employee and greater profitability than their competitors.
Your employees are your single, most effective brand resource for your organization. They convey trust and extend your voice to a broader audience. Aligning them around your values, right from the start, makes their barometer for success more tangible. It gives them a standard to uphold and to share.
“It doesn’t matter if your company culture is friendly or competitive, nurturing or analytical. If your culture and your brand are driven by the same purpose and values and if you weave them together into a single guiding force for your company, you will win the competitive battle for customers and employees, future-proof your business from failures and downturns, and produce an organization that operates with integrity and authenticity,” says Denise Lee Yohn in “Why Your Company Culture Should Match Your Brand,” in Harvard Business Review.
She also says it helps to break down organizational silos because everyone is singularly focused around the same priorities. Yohn asks: “how can you tell if your culture and your brand aren’t interdependent and mutually reinforcing?” There are telltale signs, she explains:
- A disconnect between employee experiences and customer experiences. If you engage your employees differently from how you expect them to engage your customers, your firm is operating with two set of values.
- A lack of understanding of and engagement with your brand. Your employees should understand what makes your brand different and special from a customer’s perspective. They should clearly understand who the company’s target customers are. They should use your brand purpose and values as decision-making filters and should understand how they contribute to a great customer experience—even if they don’t have direct customer contact.
The 2016 Edelman Trust Barometer revealed employees are among the “most trusted of all company spokespeople—even more than the CEO.” They are essential advocates for your firm. Ensuring they understand and can articulate your values and beliefs not only enhances your brand equity but strengthens your competitive advantage. Equally as important, it helps you hire the right people, develop and grow your employees and create a more engaged and committed workforce. Aligning values and beliefs equals a better customer experience.
What more could you want?
Rushford is The Council’s SVP of Marketing and Communications. Susan.Rushford@ciab.com
What was the driving idea behind Aclaimant?
A family friend was running a work comp captive in the staffing industry. At the time, I was at the Lightbank venture fund in Chicago, and he, just like many people in the workers comp industry, was experiencing all kinds of problems related to getting claims filed on time, accurately, with complete information, and having policyholders who knew what to do when something went wrong. One day, he asked me as a technology guy if I could help him build an app because he thought it was crazy he could get an Uber on his phone but he couldn’t get somebody to report a work comp claim. We began to dig into this space, and that nugget led us to what became Aclaimant.
Can you talk about Aclaimant’s evolution from a mobile app?
Our initial hypothesis was a mobile app to report work comp claims was the solution. We realized the problem was actually significantly larger than originally thought. It wasn’t just about claims and getting claims reported. It was companies either don’t know how to manage risk at their business or don’t have enough resources to do it effectively.
We felt we had to address this holistic problem and not the symptom. We revisited the technology approach and built what we now call resolution performance systems. The idea is to help companies see risk more clearly and do something about it. Effectively, that means streamlining every phase of workplace safety, incident and claims management into a single tool to help these clients supercharge their safety, risk management, claims and incident management programs to become a better risk by optimizing every step of the process.
Walk us through those steps.
Obviously, it starts with prevention. On the workplace safety side, we’re helping companies do digital safety initiatives—everything from observations, site inspections, audits, job hazard analysis or job safety analyses—that kind of holistic safety approach. When things start to go wrong, we’re starting at the near hits and near misses, walking through every phase of that incident management piece, the reporting, the documentation, the internal management triage and follow up, and ultimately producing analytics for reporting and understanding what’s happening. Think about the data capture, the workflow, the task management, the material creation. That’s the area that we live in and the area that creates the most paperwork for safety and risk managers. It’s also the biggest opportunity to help them enhance their risk profiles.
Why does improved incident reporting matter?
We find the most common challenge is lag time in reporting. Can I get a claim reported more quickly? Statistically, if I can get it reported more quickly, it should cost less. If I can get in front of it, better things happen. Very often companies that want to get things reported more quickly want to make their reporting experience better but don’t really know how. It’s because the people who are involved in this process are generally outside that risk management suite. Very rarely would someone get hurt sitting right next to a risk manager. They’re getting hurt out in the field. They’re on a job site. They’re on a truck. They’re working at a branch or a different facility. You have this gap, both spatially and cognitively, between the knowledge center of risk management and the actual risk-inducing event.
For us, being able to find a way to help democratize that knowledge throughout the organization is where you begin to drive meaningful improvement. Not only do you get that event reported immediately, our real finding is how you can improve those outcomes. When an event has happened, it’s happened, but the companies that are really differentiating themselves are the ones that are being proactive with injured employees, that are immediately doing everything to address the potential liability for the company, and protecting their employees and their P&L.
What’s important is being able to truly help these companies effectively streamline their risk management process, because the people who are doing a better job of managing those processes are actually doing a better job of protecting their businesses and consequently doing a better job of reducing risk and reducing the cost of risk to the business.
What markets are you working with?
We initially thought we would be a fit for the small and mid-market. We actually found we apply to large enterprises as well as medium to small enterprises and also brokers. We are targeting industries that either have a focus on safety and prevention or have a frequency or severity problem when it comes to incidents and claims. We’re geared toward industries like staffing, construction, and the insurance agencies and brokerages that they work with.
Can you talk about your work with agents and brokers?
Agents and brokers are always looking to find new ways to add value for their clients. On the one hand, they look at us as a tool to help their clients help themselves. A lot of times, they’ll offer consulting services—loss control, risk-management type activities—to help those team members they’re working with do better. We kind of close that gap very nicely. The other way we work with agents and brokers is that, if they are involved in that claims submission process, for example, we can plug in as that workflow management tool and manage the intake, the submission and the follow-up through our tool.
How is technology changing the role of agents and brokers?
We’ve seen an incredible groundswell coming from the brokerage community, where people are no longer afraid of technology in this space. Brokers and agents are being leaned on more and more to help vet technologies for their clients. Whether or not they want to be in that position, they’ve positioned themselves to be almost a consultant or a true advisor to the companies. In the last handful of contracts we’ve closed, the agent has been brought in as part of the buying process. Agents’ roles have evolved from simply being somebody to help place insurance to helping to manage risk in a business and now extending beyond that. It’s a very interesting trend to watch in an industry that generally has been a technology laggard but is now accelerating into the future.
What’s Aclaimant’s history?
The conversation that sparked the idea was in June of 2013. The first line of code was written January of 2014. Our first five customers came on in the same week in June 2015. We took our first investment round about two months later. Our first major carrier partnership was CNA, which we announced in early 2017. We’ve been off to the races ever since.
Chicago seems to be pretty hot for insurtech. Why?
Chicago is one of those overlooked tech and insurance hubs. Here, we have the right set of ingredients to produce a ton of really great companies. You have the headquarters for a number of large corporations that have big risk management and insurance problems. You have the headquarters for a number of large insurance companies and agencies. On top of that, you also have an incredible supply of talent, a number of great universities and a cost of living that I think is appropriate for attracting a good amount of talent. There is a lot of ecosystem support here. Even looking at the change in the past six years—the number of venture funds, the number of meet-ups, the number of co-working spaces, people’s reception to new technologies and the desire to innovate and collaborate together—it all kind of caught steam. If you’re starting an insurance technology company, Chicago is one of the best cities based on who’s here and who you can get to within an hour’s flight of here.
This survey has been done for a number of years. What trends have you seen over time with employer benefit plans?
I’ve been in this business going on 40 years and with DirectPath for 10. So it’s been interesting over the decade to see how some things have changed and others stayed the same as employers grapple with healthcare costs. Every few years, there is a shiny new toy that’s going to solve all of the problems. Back in the day when I first started working, there was an indemnity plan, and then they introduced HMOs, and then it was managed care plans and then PPOs and then high-deductible plans and then private exchanges.
I think we are just starting to wrap our heads around the fact that there is no silver-bullet solution to healthcare costs. Every case is going to be individualized whether it’s to the company, to the industry or to the geography. So every tool that works for any given organization is going to vary.
So there’s no real answer to the problem?
I think the thing that would potentially have an impact on healthcare costs is providing better education to employees. I’ve seen statistics on healthcare literacy and health insurance literacy in the United States, and they are pretty abysmal. Until we help people understand how insurance works, how to select the right plan, how to use that plan, how to budget for healthcare costs, proactively work with their provider and shop around for cost-effective care, I don’t think we’ll ever really solve the healthcare cost issue.
Organizations used to have large and robust human resource benefits departments and a person who could sit down with employees and walk them through their benefits questions and answer them. But now employees don’t know where to start. Now we have regulations like HIPAA making it impossible to do that even if we had the bandwidth to have these conversations. Increasingly, employers and brokers are coming to companies like us for assistance because they know they can’t handle all of that, but it is an increasingly critical part of the puzzle. Particularly with each new generation of health plans, it’s becoming more complex.
High-deductible health plans are thought to be a potential panacea for employers’ rising costs. But your study found just a moderate uptake of these plans. Any idea why?
The responses are a little deceiving here. Some 78% of employers offer high-deductible plans, but they represent only 30% of the plans in our database, which essentially means employers are offering a lot of other options as well. When high-deductible plans were first rolled out, there was a lot of talk of these being the only option available, but there was a lot of pushback from employees. Initially, people were attracted to the low premium, but then they came up against the high deductible.
Particularly now that we have five generations in the workforce, each generation has different preferences and priorities. That’s why one size doesn’t fit all. And it does vary somewhat by generation. For instance, really young people may like high-deductible plans because they don’t have a lot of medical expenses. Or baby boomers may be inclined to go for a high-deductible plan because they may have more discretionary income. Older generations may also understand that an associated health savings account may give them a place to save more money for retirement.
Have you seen any evidence that people are foregoing important care to save out-of-pocket costs, particularly with HDHPs?
The Kaiser Family Foundation released a report finding 43% of people were having a hard time affording deductibles, 27% put off needed care, 23% skipped a test, and 21% didn’t fill a prescription because of cost.
The notion was that the HDHP was going to drive down the cost of healthcare by making people shop around, but it drove down utilization. That’s horrifying that so many people skipped care because they were afraid of how expensive it was going to be.
Are there other options employers are using instead of HDHPs to lower costs?
I think at this point employers are shifting away from whole new plan designs and toward tweaking the elements of their plans. We’re seeing things like narrow networks or accountable care organizations, changing a pharmacy plan to include things like mandatory generics or step therapy, surcharges for spouses who have care elsewhere and tobacco charges.
Pharmacy costs are a big concern, particularly with specialty drugs. What are employers doing to save in that space?
I was really surprised we didn’t see more interesting things around that. I’m wondering if we’re going to see that shift over the next couple of years. From the specialty drug perspective, it appears employers are absorbing much of the price increase. They seem to realize if someone is on a specialty medication, they have a chronic condition or something pretty severe. They want to protect that employee or family member to the extent they can.
The study also found the number of employers offering wellness programs dropped from 50% to less than a third in a year’s time. What do you think is behind this change?
First, there were some questions when wellness plans first came out about whether they worked, and there are still some questions there. Second, I think employees aren’t really sure they want their employer to have that kind of personal information about them. And I think employers think they are a fun thing to do for their employees but any real cost benefit will just be a bonus.
What are some other voluntary benefits being offered? What direction are these going, and what is causing the movement?
We are starting to see more of these because they expand the options employees can offer at little or no cost to them. They can say, ‘See all of these other benefits we offer you?’ Some of these are providing an additional safety net to those scary high deductibles, so you’ll see things like critical illness, cancer and disability coverage.
A new one getting more attention is identity theft protection. Supplemental life, accidental death and disability always remain popular for voluntary benefits, but the percentage of those dropped dramatically this year. But I’m thinking that’s because more employers are treating those as standard benefits now instead of part of the voluntary offerings.
The survey noted that telemedicine is on the rise, which purportedly cuts costs and increases access. How can employers and brokers increase utilization?
I think that, as more and more people see the value of it, it will become more and more popular. It’s certainly less expensive than going to the emergency room; you don’t have to wait in a waiting room; and if you are sick at 11 p.m., chances are your doctor will not be seeing you. We are seeing some employers setting the co-pay for a telemedicine visit equal to an office visit, and sometimes even below that, just to drive use of that program.
With all of the changes going on in the healthcare and benefits industries, what are employers looking to brokers for to reduce costs and increase employer satisfaction?
I think in general they need to be prepared creatively. We are going to see more employers going to brokers and saying, ‘This is my situation. What arsenal of tools can you provide to solve these problems?’ They need to start thinking outside of the box a little more than changing health plans or increasing employee costs a little bit. The employee’s share of costs can go only so far before employees are going to rebel.
I remember seeing some statistics that, over the past five years, salaries have gone up an average of 1.9%, but medical costs have gone up 9%. So you know employees are falling behind. And in a tight job market, that can be challenging for employers who are trying to attract and retain top talent.
I think employers are looking for partners. Human resource departments and benefit departments are getting smaller, and they just don’t have the level of bandwidth to provide the support they would like to. They’re looking for the brokers to come in and help them—whether it’s the brokers themselves or the brokers identifying partners they can work with. We’ve certainly had a number of brokers reaching out to us to see if we can support voluntary benefits, sales, uptake or helping with the engagement process. There’s a lot more demand to tailor to the needs of the individual employees, and brokers need to determine how to do that well. Going back to there being five generations in the workforce, we’ve got to work with baby boomers down to students graduating from college who have always been able to personalize everything from their coffee to their cell phones.
Behind the scenes, I had just gotten the go-ahead to begin working on a new magazine for The Council, what would soon become Leader’s Edge.
The Council’s president and CEO Ken Crerar and I put our heads together to come up with a plan. He thought up the name, we agreed on a concept, and he gave me six months to pull it all together.
Starting next month, my tenure as editor in chief of Leader’s Edge will end, and Sandy Laycox, our associate managing editor, will take the helm. To ensure a smooth transition, I’ll be working with Sandy and the staff until the end of the year. In the meantime, I’ll have the chance to do some writing for the magazine—something I haven’t been able to do for 15 years.
But come January, I will shift my focus to other forms of writing, namely books. I started writing novels in 2011 and have enjoyed it more than I could have ever imagined. Currently, my third thriller is scheduled for publication in September, and I’m working on a fourth. I will no longer need to rise at 5 a.m. to write for a few hours before leaving for the office, although I’ve discovered it’s a nice, quiet time of the day, and it’s a habit I might not want to break.
I’ve been a journalist since 1978. I started at a small weekly in Springfield, Virginia, and then went on to dailies and news services, finally ending up in the magazine business. I’ve started two magazines during my career, and believe me, it’s a lot more fun using other people’s money. I’ve worked at The Council longer than anywhere else—15 years. During that time, I went from being one of the younger staffers to one of the oldest.
Pat Wade was my first colleague when we started Leader’s Edge. She became our business manager. Today, she still sits by my side in the office as my co-pilot of the ship. For a while, it was just the two of us. I hired freelance writers, artists, advertising salesmen and even a printer—well, several printers until we finally found our perfect fit in Royle Printing of Madison, Wisconsin. Pat figured out how to deal with postal regulations, invoicing, advertising insertion orders, a circulation list pulled from our membership database and finally the annual circulation audit for advertisers—a real beast. She is a saint. No other word adequately describes her.
Jacquetta Williams later joined us as ad trafficking manager. Both had other duties at The Council for many years until we grew to the point where they became full-time magazine employees.
For nearly 13 years, I was the only full-time editorial employee. To say the least, Ken prides himself on running a tight ship.
During the past 15 years, we’ve angered some readers and received many accolades. We fought with the Post Office over obtaining our periodical postage permit. It took so long, that when we finally received it, the Post Office owed us six months of free postage. I guess that was a good year financially for the magazine, but it put Pat through hell to get there.
We wrote about everything from corrupt state regulators to the havoc wrought by Eliot Spitzer on innocent people to further his political ambitions. We published stories about some of the nicest, most charitable people I’ve met—our readers. We recognized the first 100 game changers in our industry during The Council’s 100th anniversary year. And we continue that tradition every December.
And as your world changed, we changed with it, focusing more on technology, leadership, benefits and looking forward trying to figure out what will be the next incoming salvo to hit our industry. Somehow, our readers always manage to find the answers. And for all of the comments about how staid and boring insurance is, change in this business really is the one constant.
We’ve gone through many changes in staff during our journalistic lifetime at the magazine, but several have stayed with us throughout. Maureen Brody, our news editor and copy chief, came with me from my previous tour at Independent Agent, as did our humor columnist Jonathan Hermann (aka Jonathan Spence). Others who have been here from the beginning include Michael Fitzpatrick (Tech-No-Savvy), Leslie Hann (editor at large), Adrian Leonard (foreign desk chief), Scott Sinder (legal column) and Joel Wood (politics). Two designers remain with us, Brad Latham (creative director) and Ted Lopez (associate art director), as well as our panel cartoonist Ted Goff. In a transient world, it’s hard to believe so many talented writers and artists have been such steadfast friends and colleagues.
We couldn’t have done this without our Royle printer representative, Steve Szoczei. He helped us with a lot of creative printing ideas. Remember the face on our tech issue that was cut out with a laser? Or how about our feature story that folded out like an accordion? Remember that translucent page that changed messages when you flipped it? All of that may look easy to produce, but there was actually months of planning to pull it off.
In a media world that has struggled to survive, we are happy to report our advertising sales have been among the best in the industry. Revenues have grown almost every year in recent years. We have our advertising directors, Dave Bayard and Scott Vail, who work diligently with our industry, to thank for that.
Most of all, though, I’d like to thank Ken. It took a lot of guts to hand over his vision to someone else. We weren’t strangers at the time, but we didn’t know each other well. Yet we saw eye to eye from the beginning. Remarkably, when Ken would—how should I say this—“vigorously” point out some flaw in our coverage over the years, I would remind him how we agreed on 95% of the magazine’s contents. Sometimes reluctantly, he would shake his head and concur.
So it has been a shared a vision for 15 years to create something starkly different from what was already out there. We wanted something bright and new that highlighted our business for what it really is but did so in an engaging fashion.
Now it’s my time to start the process to disengage and let Sandy take her turn at keeping the vision alive. I recently interviewed Steve De Carlo, who just stepped down as chief of AmWins. He said we all need to understand when it’s time to move out of the way and let others take over. He set a great example I hope to follow.
For my part, it’s been a good run. I hope you found as much enjoyment out of reading Leader’s Edge as we did creating it.
Thank you to my staff, The Council staff and especially our readers for your support over the years.
Editor in Chief
Everyone searching for an in-network doctor will appreciate this. Five of the largest healthcare organizations are launching a pilot blockchain program to improve data quality and reduce administrative costs. Humana, MultiPlan, Optum, Quest Diagnotics and UnitedHealthcare say they’re looking into how blockchain can help ensure the most current healthcare provider information is available in plan directories. An estimated $2.1 billion is spent each year in the healthcare system acquiring and maintaining provider data, according to Health Plan Week.
B3i is getting down to business. Founders of the Blockchain Insurance Industry Initiative (B3i) have formed an independent Zurich-based firm, B3i Services AG, to commercialize blockchain solutions for insurers and reinsurers. Until now, B3i had been a collaborative effort of 15 global insurers and reinsurers. “The transition of B3i from consortium to independent company is a concrete step forward to realizing the enormous potential of blockchain for the insurance industry,” says Gerhard Lohmann, CFO of reinsurance at Swiss Re, who has been appointed as chairman of the new company.
Proof of insurance is a new target for blockchain technology. Marsh is developing blockchain-based commercial proof of insurance in collaboration with IBM, ACORD and ISN. Since this is often a key business requirement in many industries, the companies say this blockchain solution opens up the possibility to provide verification on a much broader scale.
Marsh has also joined the Enterprise Ethereum Alliance, the world’s largest open-source blockchain initiative with more than 400 member companies. The alliance seeks to create open industry standards and frameworks for blockchain applications based on the Ethereum platform.
“We see the potential of blockchain technology as having a game-changing impact on the risk management and insurance industry,” says Sastry Durvasula, Marsh’s chief digital officer.
Written premium for the commercial cyber liability market will reach $6.2 billion by 2020 with uptake rates growing 20% to 30% over the next several years, a new Verisk analysis estimates.
“Cyber liability risk is rapidly permeating every business that has any dependence on digital technology—which means very few enterprises are exempt,” says Maroun Mourad, president of commercial lines at Verisk’s ISO. “We see rapid growth being powered by gains in small and midsize accounts as the market matures.”
There’s plenty of room for growth for cyber in small and midsize businesses. Nearly six in 10 small and medium enterprises don’t have a cyber insurance policy, but almost two thirds of such business have been the victim of at least one cyber incident during the last 12 months, according to a study by Argo Group. The study found that 81% of brokers say many of their clients don’t understand the significance of cyber threats and aren’t allocating sufficient resources to defend against them.
It’s not just business. About one third of U.S. consumers have been notified that their data have been breached, and one in five have been victims of identity theft, according to a survey from Hartford Steam Boiler. Almost half of those who received a breach notification had been informed within the past 12 months, the nationwide poll conducted by Zogby Analytics found. “On the positive side, forty-eight states now require that affected individuals be notified, and more consumers are taking advantage of credit monitoring and identity restoration services offered by businesses and insurers,” HSB vice president and counsel Timothy Zeilman says. Almost two thirds of those whose information had been breached were offered such services, and 41% took advantage of them, the survey found.
Among new data breaches, UnderArmour says about 150 million user accounts for its MyFitnessPal food and nutrition app were potentially exposed, including data such as user names, email addresses and passwords, but not Social Security numbers and payment information.
It’s got that rude, choppy dialogue that Hemingway liked, and it introduced two mega movie stars to the big screen: Burt Lancaster, hopelessly hunky at age 32, and Ava Gardner, age 23. He plays Swede, a gangster, who gets murdered in the first 10 minutes. She is Kitty, the gorgeous, flirtatious, and cold-hearted dame who leads him into the lowlife. (“I’m poison, Swede,” she says, “to myself and everybody around me.”)
Swede gets mixed up with a crime kingpin and two of his henchmen, delightfully named Blinky and Dum Dum. But the hero is insurance investigator Reardon from Atlantic Casualty, who gets involved in Swede’s murder because of a $2,500 life insurance payout to a chambermaid who is Swede’s beneficiary.
The insurance boss tells Reardon to forget investigating the murder with its peanuts payout. But he knows that the obsessed Reardon will work for Prudential for more money if he doesn’t get his way. (Seriously.) Reardon, playing at being a real detective, pulls together zillions of plot threads, solves an old robbery, and does not go to work for Prudential.
The Killers made tons of money and was nominated—fruitlessly—for four Oscars. But it wrote the rules for the film noir genre, with its fedoras, frosted glass office doors, cheesy rooming houses and greasy diners. It also introduced a classic piece of scary music that was plunked out every time the bad guys showed up on screen. For reasons currently unknown, it became the theme music for the TV show “Dragnet” in 1951. Now that is a contribution.
But what we haven’t talked about in this buy/sell whirlwind is the mental hang-ups that many agencies bring to the table:
- Selling my firm is selling out.
- If I sell, I’ll betray my staff. They trust me—they’re depending on me for their future.
- Everyone else in my region is selling. That makes this is a great time to fish for their clients and employees.
These are some of the misconceptions we face in the market every day. But there’s good reason for this thinking. Often owners open up a file of what-ifs when the conversation moves to “What’s next?” Where do you see yourself next year, and what about five years down the road? What is the succession plan, and how will you execute it?
But what if you thought differently about succession—about selling, buying or persisting independently in this market?
In The 4 Disciplines of Execution: Achieving Your Wildly Important Goals, authors Chris McChesney, Sean Covey and Jim Huling talk about how to focus your team’s energy on a winnable game in the midst of distraction. They suggest a mindset shift. Instead of asking, “What’s more important,” reframe the question to: “What is the one area where change would have the greatest impact?”
That’s a different way of thinking, isn’t it? By looking at goals through this lens, you very well could identify a different initiative—one that can make an impact on your organization. When we apply this type of thinking to M&A and planning for the future, we can also think differently about our strategy and what actions can make a marked impact on our businesses.
So let’s take a look at those common M&A hang-ups and how thinking differently could prompt us to act differently and more strategically.
Selling My Firm Is Selling Out If this is true, then why are so many firms choosing to sell? The reality is, many agencies are selling in this attractive market because they believe in the power of leveraging the strengths of an organization that has already established and built out resources. They’d rather combine forces and tap into those resources than build it themselves, and this makes sense. Then, they can focus more on selling and serving clients.
It’s not about selling out—it’s about plugging in.
The bottom line here is, as an owner, you built an asset that has value, and you took the risk by being an entrepreneur. You have every right to sell your business and monetize that asset. Selling can be an opportunity for you to maximize the value of your business and create growth opportunities for your employees and community.
Selling Is a Betrayal of Commitment to My Staff This is a common rationalization and stress that owners struggle with because they feel they owe it to their people not to sell. However, many small businesses hit a growth ceiling, and as a result there are limited opportunities for talented employees to rise in the ranks. Your good people could end up leaving for other opportunities if they don’t find what they want at your organization. Selling can actually create more fulfilled careers for your employees—and the key is to communicate these opportunities to your staff so they understand how the deal could potentially provide them with a better career path. You have the ability to control the narrative. Your comments and attitude toward a future combination can help set the internal tone when the inevitable happens.
Everyone Else Is Selling, So We Can Recruit Competitors’ Employees and Clients A likely scenario when other agencies in your area sell and get larger is that they gain more resources and bring more opportunities to their people and their clients. They get stronger. They have a bigger brand name and more influence. Your competition gets better—and harder to beat.
So, while your perception might be that you can grab your competitors’ best people and woo their key clients away because they decided to sell, that’s generally not true. Instead, you’ve got local competitors who gained access to more resources and sophisticated solutions. You’ll likely have to work harder to keep your team members and retain your book of business.
Many businesses sell because they want to get better.
Instead of second-guessing those who sell, have you asked yourself why you haven’t considered it? If the goal is to remain independent, what are you doing to get better?
There’s no better time than now to review your goals. What are you doing to improve? If everything at your organization stayed the same, what’s the one area you could change that would make the greatest impact?
Focus there. If that’s expanding your geographic footprint, how will you do it? If that’s getting into a niche line of business, how will you develop that expertise? If that’s growing volume, how will you gain the resources and talent to do it?
Many organizations today are answering these questions by selling—they’re leveraging the resources of organizations that are already implementing these goals. They’re not “selling out,” they’re building out.
The second quarter of 2018 began with signs of increased activity, with 29 announced deals compared to the 23 in March. The 2018 year-to-date total is 128. While deal activity still appears to be slowing compared to the same period in 2017 (182 vs. 128), buyers remain active, and we still see revisions to monthly deal counts due to delays in public announcements.
Hub International jumped into the lead with 10 deals this year. It is followed closely by Alera Group (nine) and BroadStreet Partners (eight). Private-equity backed brokerages remain the most active buyers, accounting for nearly 55% of deals in 2018.
While USI Insurance Services remains in the headlines after its March agreement to purchase the insurance operation of KeyBank (Key Insurance & Benefits Services) and its 2017 acquisition of Wells Fargo Insurance Services, more big news has emerged. BB&T Insurance Holdings agreed to acquire Regions Insurance Group, and Alliant Insurance Services is acquiring Crystal & Company. Crystal was ranked the 25th largest brokerage in 2017. Regions was ranked 33rd. Keep an eye out for more large transactions throughout 2018. The market continues to be filled with rumors of other pending transactions of top-100 brokerages.
Trem is EVP of MarshBerry. email@example.com
Securities offered through MarshBerry Capital, member FINRA and SIPC. Send M&A announcements to M&A@MarshBerry.com.
At Texas Christian University, you were executive director of Frog Camp. What’s that?
Frog Camp is a new-student orientation program that helps incoming students prepare for college life at TCU. Incoming students spend a week together. They could be rock climbing in Colorado or stay in Fort Worth doing community service. Now they have a chance to go to London and other places abroad.
You and your wife, Katie, met at TCU?
We met at Frog Camp. She was actually one of the directors. Katie was also incredibly involved at TCU. She’s a natural leader. I’d love to say it was an immediate connection for both of us, but I had to pursue her.
And you’ve stayed in Fort Worth. Why?
Fort Worth is an interesting mix of cowboy and culture. My wife and I fell in love in Fort Worth and hope to never have to leave.
What is the best thing about living in Texas?
The people. Texans have a very untamed spirit. There’s a sense anything can be accomplished here, and that makes it a fun place to live.
You and Katie have four kids ages 4 to 8. That’s got to be a tricky balancing act.
At one point, we had four children under 5 years old. If it were up to my wife, we’d have a hundred children. Last summer, we hosted three orphans from Ukraine. Two of the three children are currently in the process of being adopted. It was a fantastic experience. It gave my kids a greater appreciation for the world beyond what they are accustomed to in Texas.
What’s the secret to maintaining sanity when you’re outnumbered?
A good partner, for one. I think having a healthy appetite for laughter helps. My wife and I find humor in a lot of situations other people might find crazy. I came home last year from a hard workday, a Friday, and a friend comes walking out of the back hallway. She looks at me and says, “I am so sorry, Matt.” The kids had gotten into a paint fight in the playroom. They had covered the ceiling, floor, couches, walls and each other in paint. If I hadn’t had such a bad day, I probably would have been mad. Instead, I took out my phone and just started videotaping it. By Sunday morning at church, it had 5,000 views. Complete strangers were coming up to us saying, “I would have killed them.” In the moment, my first reaction was, “At some point, we’re going to think this is funny.”
You’re an avid fisherman and hunter. Where do you like to fish and hunt?
I go fly fishing for trout in Colorado. My favorite type of hunting is bird hunting—dove, duck. I do some deer hunting, mainly in Texas. I went dove hunting in Argentina with a guide for a week. It was incredible. Next year, I’m heading to New Zealand for red stag.
And you’re a downhill skier. How does a Texan become such a proficient skier?
My father is a great skier. I grew up skiing with him and my brother. We’d ski on spring breaks and different holidays. We still ski together when we have the chance.
When you talk about company culture at Marsh & McLennan Agency, what does that mean?
I think culture has to do with the heart of the people who work here. It’s about caring for the person next to you and going the extra step to make sure everything is done so they can get home to their families. To me, culture is how you treat people.
What’s the best advice you ever got?
There’s a plaque on my desk from the Ronald Reagan Presidential Library. It says: “There’s no limit to what a man can do or where he can go if he doesn’t mind who gets the credit.” I absolutely love the quote. I think it speaks to your culture question. It’s not about one person. It’s about many people pulling together.
If you could change one thing about the insurance industry, what would it be?
I think the industry as a whole has largely been reactive. The last five years we’ve become more proactive. I think that’s the biggest thing I would change—the energy level toward proactivity.
What gives you your leader’s edge?
My energy and passion for the people in the business. I love what I do, and when you love what you do, it’s not work.
The Stadler File
Favorite Family Vacation Spots
Seaside, Florida, and Durango, Colorado
Favorite Ski Resort
Park City, Utah
The Thomas Crown Affair
The Count of Monte Cristo
“Right now, I really like Sturgill Simpson.”
The Boys in the Boat
Ford F-150 King Ranch
As I wrote last month, diversity without inclusion doesn’t do anyone much good. We need to take steps to make all employees within our organizations feel welcome and included, celebrate their differences and encourage their ideas and perspectives. Because as we well know, new thinking breeds new opportunities.
The Council’s board of directors recently gathered for an intense work session on diversity and inclusivity. The discussion was thoughtful and direct. We talked about needing a diverse workforce to meet the demands of increasingly diverse clients, hiring the right people instead of simply meeting quotas, changing where we look for talent and, importantly, creating a culture of inclusivity.
One area of focus during our discussion, and something that is coming to the forefront is pay equity. A handful of states are already making changes around robust pay equity laws (which are already in place in the UK), including California, Maryland, Massachusetts, New Jersey, New York, Puerto Rico and Oregon. These new rules and regulations around pay transparency and reporting, designed to make it easier to prove pay discrimination, will no doubt create an increase in lawsuits. But that’s not the only reason you should be paying attention.
Topping our many takeaways from this conversation was the importance of conducting a full-throttle workforce assessment for diversity and inclusion. Such an assessment helps identify key metrics in your firm that paint the full picture of your firm’s talent lifecycle—everything from prospecting and hiring to pay equity and terminations, rate and timing of promotions, and more. This exercise is useful (and I recommend outside expertise to truly create a holistic and independent report) because it’s difficult to move forward if you don’t realize or recognize your friction points and gaps, and perhaps even some systemic issues.
Uncovering hiring and recruiting trends doesn’t give you the full story, but it’s a start. How and where do you advertise your positions? What criteria do you use to make hiring decisions? Is it objective or subjective?
When you hire, who determines whether the individual is assigned to benefits or property-casualty? How do you determine starting salaries? Do you use prior salary in your decision-making process? How do you determine a merit increase? Do you pay for performance? How are employees promoted? Do you promote from within?
The deeper you dig, the easier it is to see areas to improve.
Understand that there is no magic roadmap. Every firm has different factors to deal with—size, location, clientele, specific skill sets required for specific positions. The point is, you won’t be able to design an effective plan of action without first understanding where you have holes. It’s hard to make changes if you don’t know what to change. A diverse workforce assessment arms you with data and information to help you start results-driven discussions and track gains and losses along your talent lifecycle, holding you accountable for real change.
Admission and awareness of this ever-present diversity and inclusion initiative is the first step, but an action plan and follow up is what is needed. You don’t know what you don’t know until you do something about it.
That’s not being ignorant. That’s knowing what it takes to achieve a competitive business advantage.
Potentially quite a bit if you have any EU operations or customers or if personal data in your business is flowing between the EU and the United States.
The General Data Protection Regulation sweeps in non-EU-based insurance intermediaries through its so-called “long arm” jurisdiction. There are two key pieces at work here:
- The framework applies to all controllers and processors of natural persons’ data (i.e., anything that could be used to identify an individual, like name, address, etc.). It is not specific to the insurance industry. “Controllers” determine the purposes and means of the data processing, and “processors” process the data on behalf of the controllers. The distinction matters because it determines your specific obligations and liability parameters under the regulation. The respective roles are determined on a case-by-case, fact-specific basis. Under U.K. guidance, for example, indicators of a controller include making the decisions regarding collecting information in the first place, how much and what data to collect, purposes for which the data are used, whether and to whom to disclose data, and how to manage the data.
- The regulation applies to controllers and processors outside of the EU when their data processing activities are related to the offering of goods or services to individuals in the EU or to the monitoring of individuals’ behavior if that behavior occurs in the EU. And notably, the regulation’s consumer protections and requirements travel with the data, so any transfers of personal data from the European Union to the United States will require compliance with the regulation on the U.S. side.
So what does it mean if you’re covered as a U.S.-based intermediary? At a high level, it means additional complexity and the potential for increased exposure on multiple fronts. For instance, with respect to the data rules you must follow, it will require reconciling existing insurance-focused rules like HIPAA with this broader regime. All this as Congress continues to explore its own data-security standards and breach notification requirements.
It also portends a new dynamic between intermediaries, sub-intermediaries and carriers as these entities figure out how to limit their own liability exposure and establish new, top-to-bottom processes and procedures to comply with the EU regulation. There are real consequences for how you structure the controller-processor roles, and sub-agents, third-party service providers—everyone in the data processing chain—will have to be considered.
It means dealing with new supervisory authorities beyond U.S. insurance regulators (e.g., national authorities in the EU) and the risk of multiple or disparate enforcement actions. And the enforcement stakes in the EU are high. In addition to civil damages for violations, hefty administrative fees are in play—up to the greater of €20 million or 4% of a company’s worldwide annual revenue.
At an operational level, the regulation is extensive and multifaceted, governing the circumstances in which you can process data at all, the purposes for which you can process data and how much of it, how to store and protect data and consumers’ privacy, and what to do in the event of a data breach. There are special rules for certain categories of data like health data and criminal history. The rules and responsibilities get even more onerous in these cases.
To give you more of an idea of the sheer breadth of the EU construct, here are its seven fundamental principles for processors of personal data—each of which drives buckets of onerous regulatory standards:
- Lawfulness, fairness and transparency
- Purpose limitations
- Data minimization
- Storage limitations
- Integrity and confidentiality
Additionally, consumers are given robust rights with respect to their data, including access, “the right to be forgotten,” the right to correct data, portability and various notifications.
With the compliance date now here, covered entities are expected to be able to demonstrate and document full compliance with the regulation or face substantial enforcement and financial consequences. This is, to say the least, a very big deal for U.S. businesses with EU ties.
Sinder is The Council’s chief legal officer and Steptoe & Johnson partner. firstname.lastname@example.org
Jensen is an associate in Steptoe’s DC office. email@example.com
Shenk is a partner in Steptoe’s London office. firstname.lastname@example.org
Soussan, email@example.com, and Woolfson, firstname.lastname@example.org, are partners in Steptoe’s Brussels office.
But 73% of those programs show no ROI, and 95% fail in their follow-through, according to the Corporate Executive Board.
For most companies, the talent is there, but many organizations haven’t fully figured out how to develop prospective leaders. Ignoring or demoralizing internal talent can have dire consequences. It can result in low engagement and high turnover. More than half—51%—of managers feel disconnected from their job, and 55% are looking for outside opportunities, says Gallup. If the employees jumping ship are your high-potentials, it can get extremely costly. So as competition for smart talent heats up, organizations can’t ignore their internal talent. They must grow their own leaders.
“Turning Potential into Success,” an article in Harvard Business Review written by Claudio Fernández-Aráoz, Andrew Roscoe and Kentaro Aramaki, offers a road map to help employers. To prevent your talent from walking out the door, identify the competencies that are most critical for your top roles. A competency is measurable or observable knowledge, skill, ability or behavior that is important to successful performance in a job. Here are eight competencies Fernández-Aráoz feels are important for leaders, along with baseline and extraordinary measures for each.
- Results Orientation—At its most fundamental level, this is completing assignments and working to make things better. At an extraordinary level, this is redesigning practices for breakthrough results and transforming the business model.
- Strategic Orientation—The baseline is to understand immediate issues and define a plan within a larger strategy. At its highest level, it creates high impact and/or breakthrough corporate strategy.
- Collaboration and Influence—At a basic level, this is demonstrated by responding to requests and supporting colleagues. At its highest level, this competency establishes a collaborative culture and forges transformational partnerships.
- Team Leadership—This is exhibited at a fundamental level as directing work and explaining what to do and why. At the extraordinary level, it motivates diverse teams to perform and builds a high-performance culture.
- Developing Organizational Capabilities—This competency, at a baseline level, supports development and encourages others to develop. At the extraordinary level, it builds organizational capability and instills a culture focused on talent management.
- Change Leadership—Accepts and supports change at a fundamental level, drives firmwide momentum for a culture of change, and embeds that change.
- Market Understanding—The baseline for this competency shows up as knowing immediate context and knowing general marketplace basics. At its highest level, it identifies emerging business opportunities and sees how to transform the industry.
- Inclusiveness—At the baseline, it accepts different views and understands diverse views. At the highest level, it strategically increases employee diversity and creates an inclusive culture.
The second step in the road map to high-potential leadership development is to assess the potential of your aspiring managers. The authors suggest you “check their motivational fit and carefully rate them on four key hallmarks—curiosity, insight, engagement and determination.” Fernández-Aráoz defines these hallmarks in Harvard Business Review’s “21st Century Talent Spotting”:
- Curiosity: a penchant for seeking new experiences, knowledge, and candid feedback and an openness to learning and change
- Insight: the ability to gather and make sense of information that suggests new possibilities
- Engagement: a knack for using emotion and logic to communicate a persuasive vision and connect with people
- Determination: the wherewithal to fight for difficult goals despite challenges and to bounce back from adversity.
You can assess your potential leaders through a deep review of their work experience, direct questioning and conversations with their bosses, peers and direct reports.
In the third step, you create a growth map that shows each person’s strengths (hallmarks) and how they align with the required competencies. This will allow you to predict where each person will succeed. According to the authors, curiosity correlates with all eight competencies, so it is critical to be considered for a promotion. The other hallmarks—insight, engagement and determination—correlate with different competencies.
For example, people with high determination exceed at the competencies of results orientation and change leadership. Those with high engagement scores are strongest in team leadership, collaboration, influence and developing organizational capabilities.
Step four is where the work is done to turn high-potentials into leaders. This can be done by giving them opportunities, coaching and support to help close the gap between where they are and where you need them to be in the eight critical competencies. Job rotations, stretch assignments, coaching, mentoring programs, and formal and informal training are all ways to help your high-potential leaders succeed.
“When companies take this approach to leadership development—focusing on potential and figuring out how to help people build the competencies they need for various roles—they see results,” say the authors.
Having a defined approach to talent development can be an extraordinary competitive advantage. It allows you to hold on to your top talent and helps your most valuable employees turn into invaluable leaders.
McDaid is The Council’s SVP of Leadership & Management Resources. email@example.com
Early this year, however, two incidents involving automated cars raised questions about the self-driving revolution and whether it’s time to pump the brakes…or at least lighten up on the accelerator. In March, automated cars caused two deaths: one pedestrian hit in Arizona by an Uber automated Volvo and another car accident involving a person sitting in the driver’s seat of a self-driving Tesla in California. Both accidents involved cars that, while having automated features, still require a passenger in the driver’s seat to take control of the vehicle if something goes wrong.
According to Thom Rickert, vice president for Trident Public Risk Solutions, a large misconception people have about self-driving cars is they don’t need a fully present driver. He explains the difference between automated vehicles with self-driving features and fully autonomous cars that don’t rely on a passenger for assistance. “They have these automated features, whether it’s braking, lane controls, et cetera, and there always has to be a driver ready to take over,” Rickert says. “With the Tesla accident, it was reported that the indication was that the extreme sunlight in front of the vehicle kept it from recognizing the tractor trailer rig…. An autonomous vehicle would allow a vehicle to drive without a driver and to do that in all conditions—i.e., all weather conditions, types of roads, rural roads, freeways, downtown surface streets.”
A minor investigation into the Uber accident found there weren’t enough sensors on the company’s Volvo SUV, which recently replaced Ford Fusion automobiles in Uber’s self-driving fleet. While transferring sensors, Uber failed to take into account the SUV’s higher off-the-ground elevation, which led to more blind spots and the need for more sensors. That said, footage from inside the car shows the driver not paying attention and looking downward as opposed to in front of her.
Martial Hebert, director of the Robotics Institute at Carnegie Mellon University in Pittsburgh, believes these accidents are inevitable but could provide valuable information for the industry’s future. “There are certain things that can happen that cannot be prevented, no matter how precise the system is,” Hebert says. “What we need to have, and what I believe is happening, is complete analyses of those accidents and full transparency. A little like the airplane industry. When there’s an accident, you know there is an investigation and a full disclosure of all the data and the circumstances and the amenities.”
Although both self-driving car accidents have set back the industry temporarily—Arizona took away Uber’s license to test self-driving cars in that state, for example—Ryan Harding of the Arizona Department of Transportation believes this new technology could save lives. “With public safety ADOT’s top priority, we are advancing efforts that can reduce crashes and deaths on our roads,” Harding said. “In 2016, there were more than 37,000 fatalities on U.S. roads, with nearly all being the result of human error…. Arizona recognizes that, and our approach to self-driving technology is one of cooperation, common sense and embracing innovation.”
The mass integration of self-driving cars could ultimately lead to market disruption for the insurance industry. “If you reduce the frequency of accidents and pay fewer claims for bodily injury and property damage, the rates over time will begin to decline,” Rickert says. “Automated vehicles will begin to reduce the frequency of accidents by notifying the driver, ‘You’re approaching this car, I’m going to hit the brakes; you’re weaving out of your lane, get back in your lane.’ That type of thing will begin to reduce auto accidents over time. If you do reduce accidents by 20%, you should see a commensurate over-time reduction of rates.”
“There are also the insurance considerations for the manufacturers, because there is an expectation that these systems are safer—when there’s an accident, it’s the software’s fault; it’s the hardware’s fault,” Rickert says. “So those types of product liability suits could increase…. [There’s] the potential for cyber hacking, blocking a vehicle’s connection to the stop light. That liability and how the insurance industry reacts to it will drive the availability and development of that equipment.”
Ian Sweeney, general manager of mobility for the insurtech startup Trov, agrees that insurance liability will switch from current drivers to auto manufacturers or self-driving fleet operators. Trov currently works with Waymo to insure its self-driving car passengers in case of harm. Waymo, which began in 2009 as Google’s self-driving car project, became an independent self-driving technology company in 2016. “Our ability to offer comprehensive protections comes from innovative partnerships, technologies and the points at which they converge,” Sweeney says. “Trov’s platform uses signals of ‘state change’ that come from any source (smart phone, vehicle state, beacon, etc.) to trigger the best-fit coverage for that context in real time. Next to this technology are Trov’s insurance wizards and partners, whose collaboration gives birth to new services, policies and value for both consumers and companies alike.”
Rickert believes that we are still three decades away from having a driverless car show up to our house to take us to our destination; however, it is important for the insurance industry to prepare for the mass integration of automated vehicles as this wild and promising market matures in years to come.
What’s to love
Porto is a charming, small city, where life is very easy. We have great food, nice restaurants, a vibrant cultural life, and temperate weather. It is a very historic city, where everything is close together, but it is also modern and trendy. We have both a mighty river and a coastline running along the Atlantic Ocean, which is quite unique.
Portuguese cuisine, especially fish and seafood, dominates the culinary scene. But new restaurants are creating diversity. Italian and Japanese restaurants are popular, and we now have some great “Author’s Cuisine” restaurants, where chefs incorporate unusual textures, aromas and flavors in innovative ways.
Favorite new restaurant
Euskalduna Studio is an intimate and very sophisticated place. Chef Vasco Coelho Santos serves creative Asian and Portuguese dishes.
Favorite classic restaurant
DOP, definitely. It is a handsome restaurant in the heart of the city. I love the consistency and innovation of Chef Rui Paula’s food (he is a Michelin star chef), and they have a great wine service. My favorite dish is lobster rice with fish.
Casa de Chá da Boa Nova, one of the most beautiful restaurants you will ever find in your life. It is another of Paula’s restaurants, and here he offers tasting menus. Designed by the famous architect Álvaro Siza and situated “on” the rocks, facing the Atlantic and the waves, it is FABULOUS.
Casa Vasco is a very nice bar to have a cocktail or glass of wine or Port. It is located in a chic area of town called Foz. There are lots of beautiful people.
InterContinental Porto – Palacio das Cardosas is a new hotel housed in a historic building that has been restored. It overlooks the Liberdade Square, a great location in the main historic zone.
Porto is a city of modern architecture, kind of the Chicago of Portugal. Taking a tour of some of our iconic buildings is highly suggested.
The beach is wonderful in the summer, but we sail and surf, run and bike the whole year.
The Broker Smackdown Midwest 2018 will be held in Chicago from July 10 to July 12, the perfect time to explore the city’s newest attraction, the Chicago Riverwalk. Stretching 1.25 miles from Lake Street to Lake Michigan along the south side of the Chicago River, the third and final phase of construction on this riverfront park was wrapped up at the end of 2016. Among the many honors it has received are two from the American Institute of Architects (AIA), one for Architecture and the other for Regional & Urban Design. AIA was effusive in its praise: “This is an exemplary urban intervention; the design and execution are perfect. The impact on the community is transformative.”
This is no small feat. The river used to be an open sewer. In 2002, the city started working to clean it up, and in 2015, it opened a new water treatment plant, improving the quality of the water significantly. It is now extremely popular with a variety of birds and locals. One of those locals, Carol Ross Barney, is the architect behind the 15-year waterfront project. As she said in an interview in the “2017 Chicagoans of the Year” issue of Chicago magazine, “The big success of the Riverwalk is it has repurposed this really important urban asset and basically returned it to the people.”
You can stroll unimpeded for the six blocks of coves, or “rooms” as they are called, which are found in between the bridges that cross the river. Under the bridges, curved panels of polished steel buffer the street noise and reflect the water. Each of the rooms has a distinctive design and purpose. The Marina connects the Vietnam Veterans Memorial to the new portion of the Riverwalk. You can dock a boat here and enjoy the view from the upper dining terrace and built-in bar. At The Cove, you can stop for a snack or rent a kayak. Concerts are held at The River Theater, where a slope of trees, steps and seating leads down to the river. The Water Plaza is a sunny cove where children can play in the fountain. The Jetty has floating wetlands gardens and seven piers where people can fish, bird watch and learn about the river’s ecology and canals. Finally, at The Riverbank, floating gardens meet the confluence of the three branches of the Chicago River.
There are many places to eat and drink along the Riverwalk. You can grab a hot dog from Lillie’s Park Grill to enjoy while sitting on a bench by the water or sit on the patio at City Winery for a glass of wine and some charcuterie. Keep in mind that all the chefs nominated in the Great Lakes region for the 2018 James Beard Awards for best chef are from Chicago. Their restaurants include Boka, Elske, Fat Rice, Parachute and Roister (the first three are included below). That’s five good reasons to venture further afield.
All of that is true, but it’s not as simple as making good hires.
You may boast a diverse workforce with all the talent in the world but that doesn’t necessarily mean it’s a booming environment. Diversity and inclusion, while often used interchangeably, are not the same thing. The first step toward implementing successful D&I initiatives in your organization is understanding the difference between the two.
Diversity equals representation and that’s pretty straightforward to measure by analyzing HR and recruiting data. Defining and quantifying inclusion on the hand, is a bit more complex. First, you have to identify where barriers are emerging in your systems, then you have to bust them up from the inside out. That brings into center focus the hard challenges that come with change management.
Inclusion is the only scalable way to build diversity within an organization. Numerous studies show, in fact, that without inclusion there’s often a diversity backlash.
What that means to us as leaders is that recruiting and hiring a diverse pool of employees is just the beginning of a continuous journey that requires support from the top. Leaders can begin a top down revolution on the way and sequence in which critical matters are discussed by putting talent and finance on equal footing.
Leaders of companies have long recognized that it’s easy to talk about D&I in abstract terms but it’s really difficult to take that talk and turn it into action. And without practicing the active efforts of inclusion—such as making people feel welcome and involved; celebrating their differences, ideas and experiences; and elevating different people for key opportunities and high-profile assignments—energy, productivity and dollars will be wasted, and innovation and growth will stall.
Harvard Business Review research finds that employees with inclusive managers are 1.3 times more likely to feel their innovative potential is unlocked; employees who are able to bring their whole selves to work are 42% less likely to leave their job within a year; employees with mentors are 62% more likely to have asked for and have received a promotion; and nearly 70% of female employees say they would have stayed at their company if they’d had flexible work options.
Keeping diversity and inclusivity a consistent part of the conversation is important for your culture because it’s the right thing to do, but it also drives business results. There is a huge opportunity to boost your firm by leading a culture change that brings in all kinds of very talented people who ultimately will reflect the changing patterns of customers going forward. As you’ll read in this issue (flip to The I’s Have It), diversity and inclusion done right (or wrong, I suppose) is linked to your current financial performance. Companies with high D&I rankings had 2.3 times higher cash flow per employee, were 2.9 times more likely to identify and build leaders, and were 1.7 times more likely to be innovation leaders in their market.
The visible backing of leadership coupled with more awareness and competency around D&I is necessary to create and sustain a truly diverse and inclusive workplace. Don’t let your time, money and talented people go to waste because of the nuances between the two. With better understanding comes better results and stronger organizations.
Well, if the sandbox in question happens to be an insurtech regulatory sandbox, the process can be difficult indeed.
A regulatory sandbox is a method to give flexibility to companies to develop a product and to determine whether the product has any market legs, says Patrick McPharlin, director of Michigan’s Department of Insurance and Financial Services and head of the National Association of Insurance Commissioners’ Innovation and Technology Task Force. For example, sandboxes might tackle such issues as how coverage reduction/cancellation notices would apply to on-demand insurance.
But there’s not a single one in the United States. In fact, across the country, there’s not even agreement as to what an insurtech sandbox looks like. The issue is critical because Insurtech has become a more important part of the insurance landscape, and with the potential to touch virtually every nook and cranny of the business, it will only become more important.
“Our definition of insurtech is technology-fueled innovation anywhere within the insurance ecosystem,” says Jennifer Urso, vice president of market intelligence and insights at The Council. “Our stance on this is the innovation and evolution that technology is bringing to the table is helping the industry align with consumer expectations and preferences that have been shaped by other industries.”
The American Insurance Association has drafted a proposal calling on the NAIC and state legislatures to actively encourage the pilot-testing and implementation of innovative new insurance technologies, products and services. The AIA is asking the NAIC to consider authorizing insurance regulators to grant targeted relief giving state regulators broad discretion to attach consumer protections and other conditions to any grant of relief and to adopt clear protections for trade secrets while including measures to maintain a level playing field.
But Jillian Froment, director of the Ohio Department of Insurance, says she isn’t sure how a sandbox would differ from Ohio’s approach of actively encouraging innovation. She says Ohio already promotes Insurtech innovation without having to construct a regulatory sandbox.
McPharlin takes a similar stance in Michigan. “We’ve had a handful of people come and talk to us, those who have real questions about a product they wanted to innovate. We were able to tell them there was no problem.” They hadn’t asked before, he says, because they thought they’d be turned down.
But because these conversations are happening in some states, that doesn’t mean they’re happening in all. “At this point, this is a state-by-state approach,” says John Fielding, general counsel for The Council.
“There’s no uniformity in the way states are coming at this.”
While this reflects how insurance is regulated in the U.S., some say such an approach might hinder sandbox progress.
DOING OUR OWN THING
While the United States continues its individualized approach to sandboxes, several jurisdictions outside the United States have created them with shared characteristics. According to the AIA, those in the United Kingdom, Australia and elsewhere all provide a supervised process for experimentation with insurance innovation. And under some circumstances, they offer relaxed legal and regulatory requirements that otherwise might be hurdles to forward motion.
Some observers fear the United States will fall behind its competitors if regulation does not catch up with digital reality. “We currently see on the global level competition for investment and talent,” says Vladimir Gololobov, The Council’s international director. “It’s all about pairing innovation with insurance services, an opportunity for countries to claim their leadership in the financial segment they want.”
Things have gone “a lot farther overseas than here in the U.S.,” says Mike O’Malley, senior vice president for public policy at AIA. He notes the United Kingdom established its sandboxes in 2016 and has already had more than 150 applications. “They’ve been very active,” O’Malley says.
“It’s about trying to support industry and their use of innovation while balancing that with consumer protection. That’s not easy, but it’s not impossible.Tweet
And despite the experimentation happening in some states, some sandbox proponents believe the state-based insurance regulatory system doesn’t give room for enough meaningful innovation to allow the United States to follow international competitors’ lead in creating sandboxes. One main roadblock “is that basically you can’t have a national sandbox,” says Vikram Sidhu, a partner at law firm Clyde &Co. in New York. “Any sandbox that is created would have to be in a state. But states don’t have meaningful flexibility in being able to give exemptions to startups from the various insurance laws that exist.”
The fragmented nature of U.S. insurance regulation is an impediment to creating sandboxes, Gololobov says.
“Regulators historically are worried about their turf,” he says. “Fragmented regulatory structure takes away from the whole idea of insurtech globally, which is all about scale and breaking down barriers.”
However, some regulators say it’s easier for innovators to deal with a single state than to try coordinating efforts nationally. McPharlin says it’s easier to innovate on a one-state basis because innovators and state regulator scan meet one-on-one and get to know each other. “With a federal agency, I’m not sure you’re going to get that same level of personal service,” he says. “I think the state format is an advantage. We’re talking about having some sort of coordination among the states. We’re not at any decision yet.”
Many regulators say they have nothing against innovation, provided it affords consumers adequate protection. In fact, over the past few years, regulators have begun to agree a regulatory sandbox isan important and effective tool, says Andy Mais of Deloitte’s Center for Financial Services.
“It’s important to allow testing of innovative ideas but in a supervised environment,” O’Malley says. “For example, you don’t want someone to sell policies in a sandbox who can’t cover claims.”
“We also want to make sure that we don’t inadvertently create an unlevel playing field,” says Dave Snyder, vice president at the Property Casualty Insurers Association of America.
“Most commissioners are very positive on innovation,” McPharlin says.“ But if someone comes in and wants to be free of paying taxes during the development process, no legislature will allow that.” He also raises concerns about consumer protections regarding personal data. “Who owns information and profits from it?” he asks.
“It’s about trying to support industry and their use of innovation while balancing that with consumer protection,” says Ohio’s Froment. “That’s not easy, but it’s not impossible.”
Sandbox proponents have an educational job ahead of them, Fielding says. “It’s a quickly evolving area. It’s a big task for insurance regulators to getup to speed on the constant change and regulate it very quickly. Education and understanding are the biggest parts.”
“The general feeling on the part of state regulators is they will not fall behind the curve,” Mais says. “I think there is openness despite what some regard as a fragmented system.”
And regulators have a stake in encouraging innovation, notes Scott Sinder, The Council’s chief legal officer and a partner at Steptoe & Johnson.“ The big threat to state regulation is, if they’re not able to keep up with the innovators, then as an innovator, you say, ‘Maybe I need to rethink this,’ and come up with something that allows the transfer of risk but is not an insurance product.”
That insurance is governed by decades-old regulatory approaches is another obstacle. “When I talk to regulators, they think they’re doing a lot,” Sidhu says. “They are really trying, but our system of insurance laws and regulations grew up over 150 years. It’s trying to address issues that arose a long time ago, but how we do business has changed dramatically. The issues arising from the 19th- or 20th-century approach to regulating the insurance business clash with the 21st-century ways of doing the business and are only going to get bigger.”
WE’RE NOT GOING BACKWARD
With a federal agency, I’m not sure you’re going to get that same level of personal service. I think the state format is an advantage.Tweet
One factor that could give the U.S. some breathing room in the race for Insurtech expansion is the size of the nation’s insurance market. “When you’re comparing us to other countries, we have by far the largest insurance market in the world,” PCI’s Snyder says. “We’re going about this in a careful way, and we’re convinced that in the end we’ll be up to the challenges as we have been in the past.”
“You can prove a concept in Hong Kong, you can go to Australia and develop an interesting product—but America is still the largest insurance market,” Sidhu says. “Insurtech will still come to these shores.”
While the U.S. is still the leader in technology, O’Malley says, the country needs to take action to remain ahead. “I worry if we in the U.S. don’t get on the sandbox bandwagon soon, we are going to fall behind,” he says. But he adds that AIA “is very confident we’ll get to the point where we have sandboxes in the U.S.”
In fact, legislation that would create insurance-specific sandboxes has been introduced in Hawaii and Illinois, while less-targeted but applicable bills have been introduced in Arizona and Massachusetts. “We’re not going backward,” Fielding says. “You’re going to see more and more talk at the state level and more and more talk at the NAIC. I think it will move from education to actually doing something. The market’s just going there. They’re going to have to figure it out.”
Hofmann is a contributing firstname.lastname@example.org
You’re going to see more and more talk We Will Innovate at the state level and...at the NAIC.Tweet
Ito, who has testified before state legislative committees in favor of bills that would create a sandbox, says realizing the sandbox concept would bring economic benefits to the state.
“It could create growth in our tech sector by attracting innovators to work with insurance companies in Hawaii,” Ito says, “as well as encourage insurers outside of the state to use Hawaii’s sandbox to test innovations for use in the United States or Asia.”
He says technological advancements in mobile platforms, artificial intelligence, data collection, storage and the “continuing transformation in our economy are factors that attracted our interest in creating a sandbox in Hawaii to encourage innovation in the insurance sector. Hawaii’s unique location could result in the state becoming an insurtech center that facilitates collaboration between tech innovators, insurers and even other insurtech countries that are already fostering innovation.”
Ito points out that Hawaii has built a reputation as an insurance regulatory innovator. “Back in 1986, Hawaii was one of the first states to adopt captive laws, resulting in the state’s becoming one of the premier captive domiciles in the world,” he says. If the current legislation becomes law, “Hawaii would be the first state to pass a law specifically dedicated to creating an insurtech environment.”
Not surprisingly, Ito does not share the concern of some sandbox supporters that state-based regulation stifles innovation such as sandboxes. “The state-based system does encourage innovation,” he says.
He says states will either pass insurtech laws or will work within their own frameworks and provide flexibility by granting exceptions. He believes the insurance and technology sectors will work together to create efficiencies and new products, underwriting processes, and sales and payment methods. The blending of insurance, technology and other sectors will also occur.
“Insurtech or regulatory flexibility will be the rule and adopted in many states rather than the exception,” Ito says.
Carrier legacy systems, he says, need to be replaced. “Attracting tech companies to work with insurers in not only upgrading existing systems but implementing entirely new processes is an example of the talent and technology that could bolster the insurance sector,” Ito says.
“There is an infinite number of possibilities, which could benefit consumers by creating more choices and improving efficiencies in the insurance area,” Ito says. “They are already evident in other sectors of the economy. The U.S. is a technology leader and has the largest insurance market in the world. Changes are constantly happening in both worlds. It’s exciting times in the insurance and technology areas."
Regulators willingly embrace technology to enhance their own operations, according to the Deloitte Center for Financial Services. But the regulators remain guarded about how carriers employ new technology.
“In a time of rapidly increasing technology adoption, a growing number of regulators are likely to use the latest technology to enable the kind of deep, broad, and real-time oversight of the insurance market that could not have been dreamt of even a decade or two ago,” says the 2017 Insurance Regulator Technology Adoption Survey. However despite those predictions, the survey found regulators are implementing new technologies in their departments mainly to automate manual processes and replace or integrate legacy systems. The fact that 69% of them cited legacy systems as a driver could indicate they still need to modernize current systems before considering more advanced technology. Not surprisingly, nearly three quarters of the respondents cited budgetary constraints as the main roadblock to adopting technology.
“Generally speaking, everybody sees technology will change the interaction between the regulators and the industry,” says Rich Godfrey, principal and U.S. insurance advisory leader at Deloitte & Touche.
But the survey also found regulators "seem unlikely to give insurers the benefit of the doubt regarding new technology uses, so insurers would need to display greater transparency in their relationships with bold customers and regulators.”
Nearly half the respondents said new technologies create more need for regulatory oversight. Among the chief concerns are data security and fair market conduct. Regulators also seemed somewhat cool to the idea of insurtech sandboxes.
“While most agree engaging with different stakeholders—insurtech start- ups, insurers, consumer-protection groups, and other regulators—to pursue innovation would be a positive step, more than four in 10 only somewhat agree,” the survey says. “So if sandboxes are to be a useful tool, state insurance regulatory leaders may need to educate their colleagues on their potential.”
Can you tell us about Bluzelle and its mission?
We are a technology company, and our mission is to use blockchain technology to basically allow a new set of people to use financial products by lowering the cost of entry. In terms of insurance, what we believe is that blockchain can bring new insurance models. Theoretically, you have a generation that’s going to grow up not owning the same type of insurance that I did. My kids are probably never going to buy car insurance. They’ll live in a city like Singapore or New York, a major metropolis, where they’ll just use Uber or public transit. For an insurance company, that’s a major problem of how to get this person to buy insurance. With blockchain, you can start doing pay-per-use, short-term insurance and small insurance products that, before, might not have made a profit margin for them. Now, if you do daily insurance or pay-per-use insurance, blockchain takes a lot of the operational cost away so they can still make money on it.
For developing markets, you have this untapped world of people who want to use insurance, but previously it was way too expensive, and the cost of entry was too high. Blockchain can reduce those costs. Bluzelle provides the infrastructure technology to allow for that to happen. We work with insurance companies, and we built a middleware technology that allows us to build those use cases or products better. For insurance, we can do smart contracts, which allows them to issue insurance policies onto the blockchain and then do real-time claims management. With that type of model, you can apply it to several different use cases, whether it’s personal injury insurance, travel insurance or short-term bike insurance.
Are we on the verge of a major shift to blockchain technology?
Initially, everybody was aiming at enterprises and saying let’s get going, but the big companies have been pretty slow to adopt. That’s just the nature of being a big company. I think the major shift that’s happening now is companies are getting funded faster through token sales and ICOs [initial coin offerings] and now they can experiment and go direct to the customer for a lot of these financial technologies or applications that use blockchain. That should be a catalyst for the bigger enterprises to say we have to catch up now because these guys are actually moving ahead without us. Before, a lot of the companies that wanted to do these products were underfunded and had to rely on the banks and insurance companies to get the customers. Now it’s kind of the other way around.
How does Bluzelle use blockchain technology?
We do it in two ways. One is we built our own infrastructure, our middleware, a platform that allows big banks and insurers to get some of these customers or build these products. The other way is we are building a new decentralized database that is needed by all blockchain companies to store their data, instead of using a company like Oracle. What we’re saying is a decentralized database from us is going to be more secure, safer and far more reliable.
Can you explain how a decentralized database works?
For a traditional database—let’s say a centralized cloud—all your customer data is stored in one cloud. If any part of that cloud goes down or part of the network goes down, you have limited access to your data and you have to wait around. If somebody breaks in and steals all that customer data, that’s going to lead to data breaches and leaks.
In a decentralized manner, we’re taking that data and spreading it to hundreds of thousands of servers or nodes out there and only storing bits of data on all those networks. Even if a node or one server goes down, all the data is still present and alive, and you have access to it. You can’t steal any of it because you’d have to take over the entire network to put all the pieces of that data together. It’s similar to the way bitcoin, ethereum and blockchain technologies work. It’s decentralized and in multiple places and has encryption on each level.
In our situation, let’s say you have insurance customer data sitting there; it’s basically like Airbnb. What we’ve done is empowered hundreds of thousands of consumers to download our protocol, put their computer storage space up, and an insurance company can pay with a token to have all their data spread out on these hundreds of thousands of computers everywhere.
How secure is a system using individual computers?
We have confidence that once we deploy our protocol, it has the necessary security. The protocol itself has encryption built into it. We have encryption advisors. Once our consumer downloads it and they put the Bluzelle protocol onto their computer, it comes with that encryption built in. It would be the same as downloading the Bitcoin protocol and turning my computer into a mining space. The Bitcoin protocol itself has all the security built in.
How scalable is this kind of system?
Before, people used to look at it as, say, let’s take one of the blockchains—ethereum—and build it on there and put all the data on there. That isn’t scalable, because ethereum is good for smart contracts and validations of transactions but it can’t store large amounts of data, because the cost is too high to retrieve it. Now with products like ours, we’ll build up the database that’s needed by all these products. Now you can have that scalability and a more fluid system. You’re basically breaking it up and not having everything sit on one blockchain. You’re breaking all the technology components into different layers.
How is decentralized database storage going to change how companies operate, and will it have an impact on insurers and brokers?
It’s going to be a big change in the sense that consumers are almost going to demand it: Equifax gets hacked and a bunch of records are stolen; Uber the same thing. It’s just going to be a necessary response. Data breaches are getting worse and worse; the current centralized infrastructure isn’t working. Consumers are going to want their data in safer places, and they’re going to demand that. I think it will be a fundamental thing. As companies like us get out there and more blockchain projects are built on a decentralized database, companies may decide a decentralized system is better to store their data on.
Tell us about Bluzelle’s history.
We were founded in Vancouver and started in August 2014 to get going on blockchain projects. In February 2016, we moved to Singapore to focus on enterprises, like banks and insurers, and to get them to understand what this technology is. We did a bunch of projects for them, like payments on the blockchain, insurance on the blockchain, digital identity on the blockchain. Doing those projects, we realized there is a core database system missing in a decentralized internet, or the blockchain. We ran into this problem while doing these projects. We realized that, if we’re having that problem, other people are going to have that problem, so why don’t we just create the solution for it.
It was really because we looked at where we were in Vancouver and said if enterprises and financial enterprises are the early adopters for blockchain, we didn’t see enough customers in Canada and we realized Asia would probably adopt this faster. Singapore is a financial hub, so we’ll have more customers in a centralized area. From there, we could prove ourselves there and move into the rest of Asia. It’s really a matter of where those customers are in a smaller area that we can get to in a concentrated way.
Being in Asia and Singapore for the past two years, we realized a lot of the adoption of blockchain applications will come from Asia and Southeast Asia because there are a lot of developing markets there. They can skip technology generations, and they’re really understanding this much faster. You have this huge market. In Indonesia, you have almost 300 million people, and fewer than 5% have insurance. India, the same. Vietnam, the same. Insurance companies can really try out these lower-priced products and have a consumer base to test them on.
Initial coin offerings, or token sales, raised some $5.6 billion in 2017—more than 20 times the $240 million raised in such sales in 2016, says Fabric Ventures and TokenData. Unlike in an IPO, investors don’t buy shares of the company but, rather, purchase cryptocurrency “tokens” that provide access to the firm’s goods or services or its network of users.
ICOs take a crowdfunding approach that stands in contrast to the more traditional process of convincing venture capitalists to fund a startup, developing the company through early stages and later going public or being bought by a larger, more established company.
“A good way to look at it is cryptocurrency meets Kickstarter,” says Pavel Bains, CEO of Bluzelle, which works on blockchain projects with insurers and is developing a decentralized data storage system. The Singapore-based startup raised $19.5 million in a January ICO. “It’s a way for companies like ourselves to raise the capital that we need to build out our product. To do so, what we’re saying is we’re going to give you a coin or a token that you need to pay for the service or the product. We’re creating our ecosystem around that.” (See Tech-No-Savvy’s Q&A.)
While the coin or token doesn’t represent a share of the company, investors may still be hoping for a profit as the company’s service gains traction and its tokens appreciate.
“What a lot of buyers will do is that, as this product gets used more, the price of that token or currency will go up and they can keep it as an asset,” Bains says.
That’s an aspect of ICOs that’s attracted attention from the U.S. Securities and Exchange Commission, which takes the view that, whether investors are buying a “utility” token or a share of stock, an instrument that offers the promise of future profit is a security. It was widely reported earlier this year that the SEC had issued subpoenas in connection with some ICOs.
“It seems that regulators—the SEC in particular—have taken note of ICOs,” says Caribou Honig, CEO of 3rd Act Ventures and co-founder and chairman of InsureTech Connect. “It’s hard to say whether their intent is to put a mild chill on ICOs or a deep freeze, but either way, I won’t be surprised if we’ve already seen ‘peak ICO.’”
While ICOs enjoyed explosive growth last year, longer-term they may represent more of a niche rather than a broader market transformation. And they don’t likely herald a disruption of the venture capital industry.
“There are a number of legitimate challenges for VC firms over the next decade, but ICOs would be low on my list,” Honig writes in an email interview. “While ICOs might be an extraordinary opportunity to raise capital for a handful of companies, I think they will be the exception and not the rule.”
Venture capital firms don’t just write checks, Honig notes, but also nurture startups with critical expertise.
“Many of the best entrepreneurs will welcome what VCs can bring to the table—fresh eyes, industry or operational experience, a network, and more—that makes VC money more than just money,” Honig says.
ICOs, however, seem to be a natural fit with some blockchain-focused startups.
“Stepping back a bit,” Honig says, “ICOs ought to be most interesting where a company wants the users, or customers, themselves to have a stake in the whole business succeeding, particularly network-effect businesses. Communication platforms expanding functionality beyond messaging, for instance, are one of the areas looking at ICOs.”
For blockchain startups, it can be difficult to raise money from traditional venture capital firms, Bluzelle’s Bains says.
“It requires a lot of education for them [VC firms] to understand,” Bains says. “There is a cryptocurrency world of enthusiasts who understand the technology and understand the risks, and they’re more open to supporting companies like ourselves that might be the next big thing in the decentralized world that they are envisioning.”
While investors are always looking for the next big thing, caveat emptor remains the rule.
“The biggest concern is about scams and false products,” Bains says. “Just like in any asset class that arises, people come in and have not done their homework—do not understand the technology and what’s behind it—and just get in because of fear of missing out. It’s really important for any token buyer to educate themselves on the fundamentals of blockchain technology, the company whose token they’re buying, what is the technology and is the team credible.”
For its part, the SEC acknowledges that, although ICOs can provide needed capital for startups, investors should proceed with caution because they offer substantially less protection than traditional securities markets, SEC Chairman Jay Clayton said in December.
“At best, investors need to be very diligent to assess what they are actually buying when they participate in an ICO,” Honig says. “At worst, it’s the Wild West, and investors need to be mindful of the risk of outright fraud.”
What is AMNOG?
It’s regulations crafted in response to Germany’s historical high drug prices. It was very similar to the United States; Germany’s drug prices were historically, on average, 26% above the rest of Europe’s.
Germany passed legislation in 2011 with the intention of improving the value of pharmaceutical spending. They were facing a lot of pressures similar to many other countries—healthcare costs that were increasing, in particular pharmaceuticals.
How does the AMNOG system work?
All new drugs in Germany have to go through an assessment process to determine how their benefit compares to the other drugs on the market. The thing that is groundbreaking about AMNOG is it requires first an assessment of the clinical benefit of new drugs and then a determination of what that means in terms of prices and reimbursement.
When a new drug hits the market, it can be introduced at any price and is reimbursed by all insurance plans at that rate for the first year. During that time, the Institute of Quality and Efficiency in Healthcare (IQWiG), compiles data and analyzes dossiers created by the drug manufacturers.
Once IQWiG has assessed the dossier, it makes a recommendation to the private Federal Joint Committee (made of payer, provider and patient representatives). IQWiG makes a recommendation on whether the drug is therapeutically superior to what’s already on the market. If it isn’t, it goes into the country’s reference pricing system to be reimbursed like other generics in its class. If it does get a superiority ranking, that information is used to negotiate between drug makers and an organization representing Germany’s insurance providers. The agreed-upon price is what payers pay for the new drug.
Since the new system began, how many drugs have gained the superior ranking?
About 63% were determined to have additional benefits (to those already on the market) between 2011 and 2016. But that means more than a third of drugs didn’t.
There are a variety of reasons why an additional benefit is not always proven. Sometimes there is not enough data, and the drug industry has the option of resubmitting down the road. Sometimes there is just not enough benefit. There are a number of reasons, but a meaningful number of new drugs have been deemed not to be therapeutically superior.
Is that an indication of what would happen in the United States under a similar system?
There are a lot of innovative drugs here. But there is absolutely good reason to believe a number of the new drugs in the United States aren’t cost effective. And what I mean by that is the prices they set aren’t worth the additional benefit those drugs offer over others on the market.
It’s complicated, and this is where the science needs to come in and do rigorous evaluations that the current system in the United States doesn’t have. We need to have a systematic approach to looking at these new drugs and what their benefits are relative to their new price across different patient populations.
What kind of undertaking was it to create the AMNOG program?
Legislation started around the turn of the century in Germany, and there were a few waves aimed at pharmaceutical cost control that ultimately led to AMNOG. For certain aspects of it, the building blocks were there before. They had a system of referenced pricing for some drugs, and IQWiG was already there.
The big move that made this possible is the legislation that put the cost of compiling these dossiers on the manufacturers. It’s the drug companies that have to submit these dossiers and conduct these studies and gather data on whether new drugs are therapeutically superior. To evaluate every new drug is very challenging from a resource perspective. Putting that task on the industry in Germany is what allowed it to go into effect right away.
If we were going to have something similar, we would have to think about where those resources would come from. Right now, the FDA approval process focuses on safety and a drug’s effect compared to placebos. Comparing them to the next best drugs is a whole different study.
How has AMNOG affected the price of new drugs?
In 2015, Germany saw savings of $1 billion in new drug spending. There is an average of a 21% discount off the price of new drugs.
Under AMNOG, if insurers don’t agree with the price and rebate of manufacturers, there is an arbitration panel that can set that price. It’s typically a cap compared to what the price is in a basket of European countries. They have a nuclear option when there is disagreement on pricing, but it rarely gets to that point.
Legally, manufacturers can set whatever price they want. If they want to bypass AMNOG, technically they can set the price above other referenced prices. But then the patient has to pay the difference, and historically where drug companies have done this, there is a complete collapse in market share because patients aren’t willing to pay the difference.
We often hear this kind of system would stifle innovation. Have you seen that in Germany?
Pharmaceutical companies pour a lot of money into all of their drugs, and they don’t always know ahead of time which will be superior. They are in a race with other pharmaceutical companies to come out as quickly as possible. They could come out with a drug and two months later another comes out and they don’t get a superiority designation. They argued that would stifle innovation. Whether it actually does, we haven’t seen any clear evidence. From its launch in 2011 to August of 2016, 146 new drugs were assessed.
The whole notion of innovation and incentives for them and what drives that becomes an international discussion. There is some fear our system would be such a large part of the pharmaceutical market that it could be the straw that breaks the camel’s back if we implemented something like AMNOG.
But some think it would be a good thing and encourage companies to invest specifically in the really innovative drugs we want rather than investing in some that aren’t as innovative. That it would force them to allocate their resources more efficiently.
What did the German pharmaceutical industry think about the program initially?
The pharmaceutical industry feels compiling these dossiers is very burdensome, and they really fought against this in Germany.
But Germany had some strong-willed politicians who really pushed this legislation through. The tide had shifted there. The situation was different there than it is in the United States now. Lots of states have proposed legislation, and a small number are doing things. But federally, the political will is a different issue when it comes to lobbying and the pharmaceutical industry.
How did they go about choosing the committee to evaluate the drugs? Did they have a lot of buy-in from different areas of the industry?
Germany has something called corporatism, where they have associations that represent hospitals, physicians, insurers and patients. They have a lot of experience coming to the table together and working things out in a consensual process.
Any other differences in our system that might make implementation here challenging?
Structurally, the German system is very similar to ours. IQWiG and the joint committee are private institutions. That’s similar to what the United States would do.
With the price negotiations between the manufacturers and insurers, it’s pretty similar to our price negotiation and rebates. But the drug prices of superior drugs aren’t linked to their efficacy. It is based on complicated market factors.
We also don’t have reference pricing. In the 30% of cases where drugs aren’t deemed superior, they get classified with others in their therapeutic class. If they aren’t deemed superior here, how would you get those prices? Saying they have to be the same as others in their class would be a big political change here.
Something like AMNOG would be possible in the United States. We would just have to look at things differently on reimbursement and pricing to reflect the nature of our healthcare system.
It wouldn’t be difficult to sit down and come up with a beautiful piece of policy that could accomplish these goals and adapt AMNOG to the United States in a way that is fitting for us. I have yet to see any real piece of legislation in Congress that has a realistic sense of passing. I’ve been tracking this lately, and I haven’t seen anything big on a federal level that is meaningful and close.
An atypical congressional newbie, MacArthur, 57, came to Washington in 2014 after 11 years as chairman and CEO of York Risk Services Group. His reported assets come to some $31.8 million, and he is the wealthiest member of the New Jersey delegation. He and his wife have three homes, all in New Jersey. His transition from mayor of Randolph to congressman involved $5 million of his own money.
Starting fresh out of Hofstra University as a $13,000-a-year insurance adjuster, he spent 30 years in the industry. Under his leadership, York grew from a small local firm to an international leviathan with thousands of employees.
It didn’t take long for MacArthur to put his leadership to work in Congress. He voted against repeal and replace because the replacement wasn’t ready. Then, last April, he proposed the MacArthur amendment to that month’s version of the Republican healthcare bill. It includes provisions that would unravel some core components of the ACA by allowing states to waive essential health benefits and ending the prohibition on charging different premiums to people in the same area.
“It’s a high-risk game,” Ross Baker, a Rutgers University political science professor told NJ.com. “He’s willing to take the risk that his stands will not alienate his constituents.”
MacArthur says he’s in Congress to do more than repeal the ACA. “That to me is not helpful. To boast about inaction is a very, very poor substitute for solving problems.”
How did you get here in the first place?
It wasn’t a straight line. I became a pension actuary by accident and then moved into general management consulting. I’m probably one of the few people who worked across HR and risk management, across pension, life and p-c insurance and banking. I became chief risk officer for Scottish Re, at the time a global life reinsurer, and it was an interesting business model. They essentially wanted to be the Fannie Mae of the life insurance industry, buying huge blocks of life insurance and then securitizing them. Unfortunately, they were doing this right in the middle of the crisis and a lot of their securitization structures had collateral that was with Lehman Brothers. So they got caught up in the subprime crisis just as I was joining them in 2008. I learned a lot.
Then, I became chief risk officer for Validus, a global property cat reinsurer soon to be part of AIG. I left Validus and joined AIG in 2010, initially as the first chief risk officer of their global p-c business. I built the risk management function at AIG p-c and did the first allocation of the cost of capital. I then became chief reinsurance officer and the head of insurance capital markets. I started observing a lot of things that were happening in the capital markets, which led to a lot of the ideas underpinning what we’re doing now with Ledger Investing in leveraging capital markets.
Why Ledger Investing?
When I took the reinsurance role in late 2011, there was a fundamental shift in the investor base in the insurance-linked securities (ILS) market—from sort of opportunistic investors, like hedge funds, who were seeking reinsurer type returns to more stable long-term investors, like pension plans and endowments, who were seeking some relative value compared to other fixed-income investments. Interest rates had been low, and they were expected to stay there. So they were seeking some yield.
As they started coming into the market, they observed the performance of the securities was not correlated with the rest of the markets. In distressed markets, everything becomes correlated. And yet, even during the crisis—you can see statistics on this thing—insurance-linked securities were not correlated.
We started tapping that market and noticed its cost to capital was much lower than reinsurance. I started examining why. I wanted to know whether that was simply opportunistic, cyclical or something fundamental. I realized what was happening was that ILS investors were pricing in the diversification benefits of risks, which are completely uncorrelated to the traditional asset classes. So they were OK with lower returns instead of the returns insurance stock investors needed.
For example, insurers’ cost of capital is around 10%, but ILS investors don’t need 10%—instead needing only 3% to 6% to create relative value compared to their fixed-income investments.
Especially when interest rates hover around 1%.
Exactly. Insurance risk should naturally have a much lower cost of capital because of diversification, but when you put it on an insurance company balance sheet, two things happen: first, it is mixed with all the other risks and becomes opaque. As a chief risk officer, it was hard enough for me to understand all the risk in the insurance company much less being able to convey that to the management team and then to the board. Investors are so far removed they really have no clue. That opacity has a cost.
Second, for large p-c companies, you know, it’s not unusual to have maybe 30% to 50% of capital there simply for investment risk that by definition is fully correlated to the capital markets. So if you’re an investor and you buy insurance company stock, you need a 10%+ return. But if you invest directly in cat risk, you may need only a 5%-6% return.
Also, when you hold risks on a balance sheet, even though the entire insurance industry or reinsurance industry in total has $2 trillion, let’s say, it’s still concentrated, and there’s a cost of that concentration. When you place this concentration into the deep pool of the capital markets, it diversifies, and the cost goes down. So that’s another reason why the cost of capital on an insurer’s balance sheet is artificially high.
In 2012, I saw this as fundamental. It was not cyclical. This was an enduring trend. I thought, in fact, the prices should go down even more until they converged to equivalent rated risk in the traditional asset classes, like high yield, fixed income. And that’s what happened over the next four years. And every year in Monte Carlo the reinsurers would say, “Oh, I think it’s at its bottom and it’ll go back up.” They were treating it like a cycle because historically that’s what’s happened in the markets. Capital flows and prices have been cyclical.
I observed this fundamental shift and realized it’s not just for cat risk. In fact, all insurance risk is uncorrelated. Over the long term of the business cycle, things can get highly correlated. But from an investor perspective, correlation has a different time frame. Investors are really focused on short-term volatility—daily, weekly, monthly, annual. And from that perspective, almost all insurance risks—loss ratios—don’t bounce up and down like stocks and bonds do.
I saw an opportunity to source capital for all the insurance risk and try to make the case to do that within AIG. But that is difficult to embrace in an industry that for a couple hundred years has thought of itself as a warehouser of risk, where it’s gone to market by saying, “I have the biggest balance sheet.”
Insurance companies used to leverage that, and to all of a sudden tell them “you shouldn’t be a warehouser of risk” is very difficult. But that’s the opportunity I wanted to chase. So I started recruiting big investors. There’s already a market of insurance-linked securities funds. There are maybe 50 or so in the market, and they’ve grown. But it’s still a niche asset class.
I went to big investors and said, “Why don’t you come into the market? We can issue securities.” And they replied, “We understand this whole premise. The thesis is sound. However, you guys understand your risk better than we do. So you could pick us off.”
So I focused on that. I saw how to make risk more transparent and reliable for investors and how to standardize the structures by focusing on using this for capital management rather than risk management. The industry still thinks of all this in terms of reinsurance. And reinsurance is thought of as a risk management tool.
But here’s the capital management perspective: you need 100 units of capital to take on 100 units of risk. You have to figure out what’s the cheapest capital. Is it your balance sheet, the reinsurer balance sheet, or the capital markets? And that’s the game. It has nothing to do with risk management, which is a separate objective; you need reinsurance for that.
You have to keep this independent of an insurer; otherwise, investors will say, “You’re going to keep the best risks.”
Exactly. So the risk analysis has to be reliable and transparent. What’s happening around the same time is the use of technology that has improved data, analytics and predictive modeling. I saw an opportunity to leverage that to improve transparency.
Ledger Investing creates a platform that allows insurers to securitize all of their risk classes—life insurance, health insurance, property-casualty insurance, short tail, long tail—by applying analytics that are much more transparent. Portfolio analytics are much more transparent and reliable. Their reliability can be gauged by investors without them having to become underwriters, and the structures are standardized for capital management purposes.
Every insurer, for reinsurance purposes, wants to negotiate their terms because what they’re saying is, “I want these risks, and I don’t want those risks.” But capital is fungible across all risks, so you don’t need the reinsurance kind of complexity. There’s an opportunity to standardize from a capital management perspective.
And the risk is spread among many investors.
Yes, the more reliable and transparent the risk analysis and the more standardized the structures, the greater the number of investors who would be interested in investing in ILS. This is key to commoditizing insurance capital to achieve lower costs while increasing capacity.
We’re not creating a brand-new product. We’re taking an existing product that’s a niche market that was focused on reinsurance and expanding it to all of insurance by standardizing, making things more transparent, and making it efficient and positioning it as capital management.Tweet
So instead of going to their balance sheet to cover risk, carriers would be going out to the markets.
Yeah. So, the opportunity is that, if an insurance company securitizes its risk, it has a bunch of different benefits. First, it has a smaller balance sheet. By the way, I’m not suggesting they securitize everything. I think 25% to 35% of the capital should be securitized.
Why not more?
Because there is a downside. Let’s say you have $1 billion of capital and 10 product lines, and let’s say $100 million in capital is attributed to each product line. And I take one of the product lines and I securitize that $100 million. Well, now, that $100 million is available for only that product. If I had kept it on the balance sheet, that $100 million would have been available for all products. So if you securitize too much, you lose fungibility—essentially the diversification benefit of your portfolio.
The good thing, however, is you have less on your balance sheet so you get a higher return on equity. The stuff you are writing that goes off balance sheet, you’re earning a spread on that. You’re earning some profit commensurate with the value you created originating and underwriting it and servicing that risk. You’re just not holding it.
You do need to get paid something, and that’s essentially what that spread represents. And so it’s essentially a fee business. Insurers have tried to grow their fee business. It’s extremely difficult. This is the easiest way to get fee business for a huge portion of your portfolio. That would give you a much higher return on equity.
Also earnings become more stable when you have less risk on your balance sheet. And most importantly you can write far beyond the limits of your balance sheet. This is one of the biggest problems in our industry. The industry says it has a lot of excess capital, but at the same time there’s a huge insurance gap—the difference between economic losses and insured losses. The difference is because of the cost of that capital.
People don’t talk about this. A couple of years ago, I was at a Bermuda conference where some very prominent CEOs were saying, “We have excess capital. You brokers should go out and write more business.” But they failed to touch on the fact their capital was very expensive.
There’s opportunity for the industry to organically grow instead of just stealing from each other by leveraging cheaper off-balance-sheet capital through securitization. The higher ROE, more stable earnings and ability to grow increase the valuation of the company.
You say carriers are reluctant to change their business model.
There is a significant cultural constraint there, even though there is a meaningful percentage that really believe in the capital markets as opportunities. I found brokers are one step ahead of carriers. They don’t have the same constraints, because they have always been looking for the cheapest capacity. They were never warehousers of risk.
Are you going to disintermediate insurers?
That’s not my objective. The insurance industry is huge. We’re a tiny little blip. We’re not going to disintermediate the insurance industry. I am suggesting that only 25% to 35% of capital should be securitized, because if you securitize too much, then you suffer the loss in fungibility of capital. So we will always need rated balance sheets that insurers provide.
However, sourcing capital and regulated entity/issuing paper will become a commodity. It’s just a question of how quickly. Capital has become a commodity in every other major industry, and the only reason it hasn’t in insurance is because risk is opaque. If we can break through that, capital becomes a commodity. It already is in cat. So it will happen.
Pension plan consultants are advising clients to put 1% to 3% of their assets into this class because of the lack correlation. Fixed-income investments in the world account for $80 trillion. So, that’s easily $1 trillion to $2 trillion in new capital for insurance. Compare that to all the capital in the insurance industry, now. Property-casualty insurance is less than $1.5 trillion, and the reinsurance industry has about $500 billion. So the potential is huge. I think of this as a tsunami of capital.
People talk about the disruption of technology, but the capital has already created new business models, whereas technology has not—yet. Technology has made things efficient. But all the major reinsurers are now asset managers investing for third-party capital for a fee. It’s clear this is a business that their shareholders had, and now third-party capital has it. So it’s already disrupted.
There are brokers who have arranged private deals directly into the capital markets. The NY MTA, Amtrak, Kaiser Permanente and many Caribbean countries have bought insurance directly from the capital markets. They skipped the entire value chain. So this is hugely disruptive. And we don’t have to create this. We just ride it and position it to channel to the insurance industry.
Then the question for all players is if you’re an insurance company, what are you going to do. There’s an opportunity for insurers to become what Scottish Re was, essentially the facilitator to the capital markets. But we can’t do 100% into the capital markets. There always needs to be risk on a balance sheet.
Since 1997, there have been cat bonds. So the regulatory and rating agency treatment already exists. Life insurance risks have been securitized, as well. So we’re not creating a brand-new product. We’re taking an existing product that’s a niche market that was focused on reinsurance and expanding it to all of insurance by standardizing, making things more transparent, and making it efficient and positioning it as capital management. In fact, by collateralizing more of the risk and making insurance more accessible and perhaps cheaper, regulators may look favorably at securitization.
How can brokers ride this wave, and what does that mean to carriers if they do?
You have to decide which part of the value chain you want to play on. Brokers need to invest in technology and compete on the basis of the connectivity with the customer. One thing they need to do that’s been missing is to gather data. They handle clients, but they’re missing the loss and exposure data. And when I talk to brokers, I ask, “Do you have any data?” They say, “No, we don’t. The insurance company has it.”
So this is going to be a fight. Who’s going to be able to keep the data? That data is gold. Not only account-level data, but given the state of analytics today, there’s lots of third-party data that could be brought to bear. Brokers have the opportunity to maintain control and service the policy with claims. If they can do that, then it’s easy to connect up to somebody like us or anybody else who furnishes them the pipeline to capital.
Historically, tech has disrupted other industries by getting control of the customer. The number of startups that are focused on that connectivity in insurance is huge. And that means brokers are under attack from both sides. They’re squeezed by insurers and also getting competition from this new source.
They can defend themselves against insurers by pursuing this kind of a new, more efficient channel. Yet insurers have a decision to make as well. They can either continue what they’re doing and try to be that big balance sheet and hold on to some of the flow, or they can facilitate this flow into capital markets and make money because, as I said, not all the risk can go into capital markets.
Insurers who facilitate the flow into the capital markets rather than fighting it are in a position to control much more business than the size of their balance sheet currently can. So, whether you’re a $10 billion company or a $1 billion company, it’s conceivable you can have 30%, 40%, 50% of a market. That was previously impossible to fathom given the fragmentation of the industry. There’s nothing that stops you if you’re efficient at this value chain.
If you’re an insurer, if you buy into this proposition, you can control a huge portion of the market. Very much like how other tech companies have suddenly dominated their markets, there’s an opportunity for insurance companies to do the same.
Brokers can do this too by getting the connectivity of the customer and the data. Then, they can attach to this pipeline.
So what you’re telling me is that brokers could disintermediate 25% to 30% of insurers?
I’m talking about over a 10-year time frame. I mean, the pace is the only thing that’s uncertain. There’s no limitation, there.
Insurers who facilitate the flow into the capital markets rather than fighting it are in a position to control much more business than the size of their balance sheet currently can.Tweet
What does this do to premiums?
Pricing, naturally, is a market phenomenon. You go to a market, people buy and sell from each other, and you get a price. So price is something that you observe. It should not come out of a model, yet in the insurance industry, that’s what happens. That’s because those who actually hold this risk—the investors—don’t know anything about it. Because the risks are opaque, they generally say, “I want 10%+ return.” Yet, they can’t tell you how much return they want on workers comp, homeowners, commercial property or aviation. They don’t know the risks.
But if you securitize the major risk classes and create transparency, then investors, through their actions, price those securities—different prices for different risk classes based on their risk profile.
You see this in cat bonds. You see curves where the cat bond price will go up and down. An insurer can take those prices and transfer them to insurance buyers directly, so pricing no longer comes from a model but instead from interactions between investors on the one hand pricing securities and consumers on the other hand buying insurance based on those prices.
There’s a reason why when you want to get a good mortgage, every day the price changes, because that risk ends up in the capital markets where prices move every day. So why can’t we envision insurance pricing working the same way? Can’t you imagine in 10 to 20 years you go to some website—to the originator—and you get prices for a bunch of insurance policies based on capital market prices?
So if you’ve reduced pricing—
When cost of capital decreases, capacity increases significantly. Even now, there isn’t sufficient capacity. I saw commercial accounts where they wanted $500 million in peak cat coverage and they could only get $100 million. The industry was only willing to give them $100 million. There’s a reason why New York’s MTA [Mass Transit Authority] went to the capital markets. They couldn’t get capacity that they wanted at a reasonable price.
My point is that not only does the price go down to its naturally occurring and most efficient level but the capacity increases incredibly. If you have a limited amount of capital, you focus on risk selection; when you have unlimited capacity, you focus on pricing all risks.
Does this mean lower premiums and smaller commissions for brokers?
No, no. Rates go down, but the volume increases, which means bigger commissions. There’s a subtlety here that needs to be understood. I think everybody acknowledges there isn’t sufficient coverage. I mean, you see this all the time. Only a fraction of the economic loss is insured. Why is that we say that we have a lot of excess capital?
How will rising interest rates affect the capital that’s going to flood into insurance?
That’s a good question. So, first of all, let’s break up interest rates generally into two parts. One is the risk-free rate. It’s Treasuries. And the other one is the spread on corporate fixed income.
When Treasurys fluctuate, it doesn’t affect insurance-linked securities’ pricing, because these notes are actually not fixed interest rate notes but variable. The capital that’s raised to cover the risk sits in a fund earning the risk-free rate. So if the risk-free rates go up, the investors get whatever the returns are in that risk-free account. Plus, they get the risk spread on the notes—that’s the reinsurance premium.
Risk-free interest rates going up doesn’t affect this. It’s when spreads of comparable risk, securities and other asset classes widen. Pricing will still go up and down, except it will go up and down with the capital markets, not with insurance markets.
We will no longer have the insurance cycle?
Exactly. Part of the logic in the insurance and reinsurance industry is if you have a loss, I’m going to raise your price. Not because I think there’s more risk next year. Not because exposure has changed but because you have a loss, so I’m entitled to charge you more. That’s not risk management. That is not really insurance. That’s like financing your loss.
You are starting to see in the market now that when you have big losses prices don’t go up much. That’s because the capital markets have come in and put pressure on this dynamic. So they will not follow the underwriting cycle, which, quite frankly, I don’t think was a real cycle.
When you have a lot of permanent capital, you have no choice but to deploy it. So if I’m an insurer, I have permanent capital, and I want a return of 10%. That’s what my investors want. So I price my policies to meet that goal.
For whatever reason, let’s say that you, a competing insurer, have a lower assessment of the risk and your price is lower than mine. So I’m going to lose some business to you. Now, if I lose business to you and if I can’t replace it, because it’s a zero-sum game in the industry, I have to lower my price. I can’t just sit and not change my price because otherwise I’ll have capital that will get zero return. And so I lower mine. And the next guy then lowers his. That’s what drives the soft market.
It’s not really a cycle. There’s a permanent dynamic that softens prices, and this is a huge problem. But if you had securitization, you could write a little bit less and securitize less. You can flex the capital, and you’re in a better position to protect against a soft market and manage to get the returns for your investors that they really want.
There’s also double taxation that securitization avoids. As you know, the insurance company gets taxed, and then the investor gets taxed on dividends. But if you securitize this risk and you give it directly to the investor, the profits were never in the insurance company. They go to that investor instead. It gets taxed once.
And the insurance company gets a fee for making it happen.
They get a fee for the value they create. They’ve originated the business, they service the business, they gather data, they do analysis and they make risk transparent. They’re entitled to make money on that. In fact, there’s an opportunity for insurance companies to be like tech companies. If you can imagine this going to the extreme, you have less and less capital. You have less and less risk. Most of your focus is on origination and gathering data and analyzing risk. That’s all tech activity.
You become more like a tech company. So you can get a tech multiple valuation rather than an insurance company valuation. Instead of being a highly regulated, very opaque, capital-intensive company, you’re now capital lite, very tech oriented, a fee-based business that makes multiples.
Does this mean you could finally get larger limits on something like cyber insurance?
No, not yet. Remember, the constraint here is that the risk must be transparent and the risk assessment has to be reliable.
Because we don’t understand cyber yet?
That’s right—from everything I’ve known in cyber, and I certainly understood the need for capacity. The issue with cyber is there are people who will say we know how to model cyber. But I don’t think there are investors who will buy that kind of modeling and say it’s objective, back-tested and reliable. Until you achieve that, I think it will be difficult. Remember, you need standardization, transparency and a reliable risk.
I can see our top brokers can easily step into this and work with somebody like you. Would it be more difficult for our regional and smaller brokers?
Well, if they don’t have the staff to do the data gathering and analytics.
They don’t have to do that. That’s my point. We have been spending a lot of time and effort on analytics. This is my background: modeling risk. We don’t need brokers to do the analysis.
Our analysts can deliver account-level underwriting pricing models to brokers. Data science, quite frankly, is becoming commoditized. All the brokers we work with just need to have strong connectivity with the customer and get historical exposure and loss data.
You take the data and put it into your model and then price the securities?
On the investor side, we would do it as a portfolio. We don’t give investors detailed, account-level information. We give them portfolio analytics. We can back-test it. For example, we now have a client portfolio for which we have data for the last 10 years. We can back-test our risk models on this in many different ways. The investors will see the strengths and weaknesses of different models, just like they do now for cat, and they will price it.
On the other end, for the brokers, we take that portfolio price and convert into account-level prices so that they can price the individual policies. And what they essentially need to do is control the customer. By controlling the customer you should be able to get all the data.
So, predict the future. How are brokers and carriers going to react to this?
It’s soon going to become a free-for-all. In the very near term—I’ve already seen this. Until now, everybody respected their position in the value chain. You’re my client. I don’t go around you. Reinsurance doesn’t go around. But soon, everybody will be going around everybody.
I think capital and operating licenses are increasingly going to become commoditized. It’s a question of pace. I can imagine 10 years from now you will have some people who have large market shares in certain product lines. They will grow the market by writing new business, not just taking it away from others. So there will be natural growth.
The front end is entirely tech activity. All risks are priced rather than focusing on risk selection. The idea that I have to choose between higher risk and lower risk is a little bit frustrating for people outside the insurance industry. Let the investor price both. The higher risk actually may be more profitable because it also has the higher premium. Only when you have finite capital and you are a price taker, then you have to choose, and you would likely choose the lower risk.
It’s like investing in fixed investments. The risk and return of Treasurys versus corporate bonds.
It’s exactly the same thing. That’s what happens in credit, right? You have a credit score.
What about carriers? Sooner or later they’re going to have to do something about their business model. They can’t just ignore this.
I think the carriers are focused on predictive modeling on the origination side. They have not embraced the capital side. I think they’re going to be caught off guard because reinsurers were caught off-guard. They thought this was cyclical and then they all immediately turned. Within a few years, they all became asset managers. I think this will quickly become an issue. Because all these ILS funds are starting to go around insurance companies.
Are you talking about pension funds?
Pension funds invest through specialist ILS funds. Those funds are starting to have a lot of capital that must be deployed. So they have connected with fronting carriers that are essentially pipelines from MGAs directly into the capital markets. It’s small. It’s a niche. It’s going to grow exponentially. And the way it will grow exponentially is once they break into a new product line and set a precedent, the trajectories will be exponential, just like it has been over the last five years for cat.
The defining characteristic of the insurance industry is that it is not great at leading innovation but it is a very good follower.
Most technology is just making something more efficient. It’s not a disruptor. This idea, what you’re doing with the capital markets, it appears to actually be disruptive.
The business model hasn’t changed. This changes the business model from the carrier side or from the broker side. It defines the insurance 2.0 value chain. Insurance 1.0 has been very efficient for a couple hundred years. I agree with you that a lot of the technological improvements are simply things that were due. They should have happened 20 years ago when all other industries did this, and so now they’re due. All the hype about technology and insurtech, they have not actually changed business models. And the insurance company corporate venture capitalists—for the most part—who support this and finance this are doing so for ones that will make their current business model more efficient, not blow it up.
I think securitization is disruptive. It’s already disrupted reinsurers. Go and talk to reinsurers and ask how many of them are asset managers now. Three years ago, this did not happen, right? This is a tsunami, and it’s going to continue.
Disruption doesn’t come from within. That is one reason we went to Silicon Valley. We wanted to learn from them how they built marketplaces in other areas. We don’t think we can learn from the insurance industry.
So, I think the disruption will come from the outside and it’s a question of who will embrace it. It’s a free-for-all. These next five years are going to be interesting. And because it’s a free-for-all, it also, I think, creates a lot of opportunities in terms of business models, which could emerge in many different ways.
“I would refer them back to their insurance partner or PBM or HR department,” Rea says. “That was the extent of the input or help I could give them in the few seconds I had to talk in a busy pharmacy.”
But in 2008, one patient stopped his hamster wheel. The woman asked him which of her eight medications she should skip that month. She was living paycheck to paycheck and had an unforeseen expense, prohibiting her from buying them all. But she was diabetic, she had high blood pressure and cholesterol, and there wasn’t a lot of give.
Rea decided to see what he could do for her. He went home that night and spent the evening calling pharmacies to find out the cash prices of her medications. He analyzed her insurance and drug plans, seeking alternative ways to accomplish the same goals as her current medications did but in a more cost-effective way.
The next day, Rea gave her the information. She took it to her physician and was able to change medications and doses and include other health treatments. After this medication review, the woman was able to save $3,000 on prescriptions over the next year.
Rea decided he might have identified a need in the market and created Rx Savings Solutions, based in Overland Park, Kansas, to meet it. He’s now the CEO. Rea has created a patented algorithm that evaluates patients’ demographic and clinical information and then provides an individualized road map for the most clinically sound, cost-efficient prescriptions for each person.
Rea isn’t the only one out there looking to lower prescription drug costs. Employers, consultants, nonprofits and think tanks alike are trying to figure out how to manage the ever-increasing cost of prescription drugs in the United States. Greater cost-effectiveness analysis and drug importation are just two of a wide range of options being used to reduce spending for individuals and businesses.
According to the Centers for Medicare & Medicaid Services, prescription drug spending accounted for about 10% of the $3.3 trillion in total healthcare costs in the United States in 2016. The percentage of healthcare costs spent on medication is even higher for employers, with experts estimating prescriptions make up at least 30% of their health expenditures.
And there doesn’t appear to be an end in sight. A 2017 report by healthcare information and research firm QuintilesIMS estimates prescription costs will increase by up to 5% annually through 2021, to $405 billion.
And Americans are singular in their healthcare spending. A 2017 report by the Commonwealth Fund found Americans spend 30% to 190% more on prescription drugs annually than nine other high-income nations, including Australia, the United Kingdom, Germany and France. The study’s authors compared four main factors to determine a nation’s medication costs: population, per-person usage, type of medication and cost.
While the United States has a large population, we use about the same number of drugs per person as the other countries. And 84% of medications prescribed in the United States are generic—more than any country except the United Kingdom.
So where is the outlier in the U.S. market? Cost.
Prices for common medications are 5% to 117% higher in the United States than in other nations. Blockbuster and specialty medications are the main culprits for our extensive spending. The Commonwealth report highlighted six popular brand-name medications and found Lantus, an insulin injection for diabetics, costs up to $67 per month in other countries and $372 in the United States. Advair, an inhaler used to prevent asthma attacks and treat chronic obstructive pulmonary disease, costs as much as $74 elsewhere but rings in here at $309. And the controversial hepatitis C drug Sovaldi tops out at about $17,000 in Germany, yet it costs $30,000 in the United States.
The report’s authors attribute the lower prices in other countries to their use of tactics like centralized price negotiations, the creation of national drug formularies and drug pricing based on comparative effectiveness research.
But the U.S. market is more complicated, and many groups—manufacturers, distributors, insurers, pharmacy benefit managers—have their hands in the cookie jar. So it’s difficult to pinpoint how the industry has been able to increase prices, essentially unchecked, for years.
“Fundamentally, drugs are expensive because they can be,” says Ronny Gal, a senior research analyst covering the specialty pharmaceutical industry at New York-based Sanford C. Bernstein & Co. “It is a superior good—people don’t have a lot of choice.”
Gal says he rejects a lot of assumptions made in the debate over why prescription medications are so costly. Intermediaries like PBMs and wholesale distributors, he says, aren’t responsible for the high prices. Nor are drug manufacturers barely scraping by as they claim, trying to recoup massive costs of research and development.
Between 2006 and 2015, about 67% of the largest drug companies’ profit margins increased 15% to 20%, while profits among large non-drug companies worldwide increased 4% to 9%, according to the Government Accountability Office. Yet between 2008 and 2014, spending for drug research and development increased from $82 billion to just $89 billion. At the same time, federal spending was stable, but other incentives, like the orphan drug credit for medications that treat rare diseases, increased more than fivefold from 2005 to 2014.
Gal also says it’s not necessarily the pharmacy benefit managers, pharmacies and others in the distribution chain that are at fault for rising prices. They are trying to maximize their profits and get their piece of the pie. But their take is based on the original high price.
Fundamentally, drugs are expensive because they can be.” —Ronny Gal, senior research analyst, Sanford C. Bernstein & Co.Tweet
As the Commonwealth report notes, generic drugs are relatively well utilized and are often (not always) a less expensive alternative to name brands. But it’s the new, specialty medications—which have little to no competition and lots of marketing clout—that are breaking the bank.
“As old drugs become generic and new ones come in, those newer ones are being priced 10 times more than the old drugs,” Gal says. Often, there isn’t much patients can do about prices. “If you are in anaphylactic shock and I’m holding an EpiPen in my hand that can save your life, how much is that worth?”
The cost of medications used to treat such maladies as cancer, rheumatoid arthritis, asthma and diabetes have risen in the past five years “more than anyone could have expected or some think is warranted,” says Shawn Bishop, vice president for the Controlling Health Care Costs program at the Commonwealth Fund in New York.
Specialty drugs have boomed in the past couple of decades. In 1990, there were only 10 on the market, says the Pew Charitable Trust. Now there are more than 300, with nearly another 700 in development. More than 500,000 Americans are plagued by annual drug costs greater than $50,000, an increase of 63% since 2014.
And employers are paying the lion’s share of those expenses. It has been estimated that about a third of total healthcare spending is attributable to drug costs. And Chris Labrecque, president of the employee benefits group at Insurance Office of America, says about 85% of those costs can be traced to the specialty market.
Part of the issue is groundbreaking new drugs like Kymriah, approved by the Food and Drug Administration in 2017 for the treatment of childhood leukemia. It has been shown to be highly effective for about 20% of patients who don’t responded to other treatments. The manufacturer, Novartis, set the cost for the treatment at $475,000. Manufacturers set prices by amortizing the lifetime value of a cure, which is something not seen in other areas of medicine, Labrecque says.
“I broke my leg when I was six, and the doctor reset it,” he says. “Should I have paid him for the lifetime value of not limping? I think it’s price gouging and they have positioned themselves financially to defend it.”
Managing these costs is increasingly challenging for employers because they don’t want to employ cost controls. They worry it will look like rationing or cost-shifting to employees. But rationing is already occurring naturally when people like Rea’s customers are forced to forego needed medications because of the costs.
Though businesses are typically conservative when it comes to making changes in healthcare, Bishop says enthusiasm for change has increased as costs continue to rise. Employers are in a good place to affect the market because not only do they pay the bill, they also have a vested interest in keeping costs down. They may want to retain good benefits for their workforce, but Bishop says employers understand that raising deductibles and increasing co-pays on medications (enabling them to keep rich benefit plans) result only in employees paying more for drugs and other healthcare services.
“We are on the precipice of getting some more expensive drugs into the system, and how are we going to manage it?” he says. “We are already starting from a pretty high base if you are looking at employers’ spend.
They want broad access to care, but at the current price points, they just aren’t sure they are paying for it correctly.”
One way to cut costs is through state and federal legislation. To date, the federal government has done little to sway the prescription drug market with the exception of some movement in Medicare. States, on the other hand, have taken up the torch.
Some are doing simple things that don’t require legislation, like pooling public employees with prisoners to leverage a greater number of covered lives for negotiations with pharmaceutical companies. Some are joining purchasing pools to get the same result.
But Jane Horvath, a senior policy fellow at the National Academy for State Health Policy, says these are short-term measures. “Those net some discounts but not enough to change the trajectory of what is going on,” Horvath says. “They are staying one step behind the band. When prices go up, they are still just getting a 10% discount on those higher prices.”
Some states have taken the legislative route. Horvath says more than 100 bills were introduced in 2017 and nearly as many already have been in 2018. Some are focused on curbing high prices—New York passed a law to cap Medicaid drug spending. Maryland, known for its progressive healthcare market, is considering creating a commission to set ceiling rates for high-priced drugs. States are also focusing on increasing transparency, requiring pharmacy benefit managers to disclose their manufacturer rebates and forcing manufacturers to justify prices that seem unusually high.
Other states save money by importing drugs from countries such as Canada and Australia. Unlike busloads of seniors crossing the border to Canada to buy their prescriptions before Medicare Part D was enacted, passing important legislation would allow states to do it on a wholesale basis.
The cost savings of looking to other nations can be substantial. In 2016, Kaiser Health News compared the cost of some popular brand-name drugs in Canada and Brooklyn. Most drugs in Canada were 50% to 75% cheaper than the same drugs in the United States. This savings can be small, as in the price of the generic version of the cholesterol drug Crestor, costing $6.82 here for a 30-day supply (the same amount in the name brand is around $175) and $2.58 in Canada. It can also be more significant, as with the leukemia treatment Gleevec, where the name brand runs around $336.33 per 400-mg. pill in New York and $48.77 in Canada (the generic is closer to $125 per pill).
Horvath says importation is not the ultimate solution but state legislation pushing it does place pressure on the industry and federal government to do something. The National Academy for State Health Policy has its own model drug importation program to guide states and smaller groups or just for certain medications, such as those in the expensive specialty market. To cut costs, employers are using this option more frequently.
Gary Becker, founder and CEO of Baltimore-based ScriptSourcing, has spent 33 years learning how to help businesses mitigate risk and cut spending. Three years ago, he added international health tourism and mail-order programs to his other offerings and has written more business than in his three previous decades in the industry.
The things we are doing are not status quo, but we have had a tremendous amount of success.Tweet
“There is a huge appetite for savings and helping employees better adhere to their medications by cutting the high cost of prescription drugs,” Becker says. “The things we are doing are not status quo, but we have had a tremendous amount of success.”
ScriptSourcing comes into an organization and gets a detailed PBM report so it knows which medications each employee is taking as well as the dosage and cost. Then, the company identifies drugs that are eligible for its solutions and works with employers to encourage employees to take part in a voluntary plan.
Its mail order option (in which the company sources medications from “tier-one” countries Australia, New Zealand, Canada and the United Kingdom) reduces the cost of brand-name drugs such as Wellbutrin by an average of 70%, Becker says.
ScriptSourcing also works with a network of healthcare centers around the world where it sends people for treatment and medication. Because of the high cost of some specialty drugs, employers can save thousands by flying people elsewhere for treatment.
For example, a patient in Becker’s program went to San Diego, traveled an hour south to Mexico two days in a row and received the chemotherapy treatment Revlimid. Each day, he returned with a six-month supply of the brand name medication for around $100,000. In the United States it costs $160,000. Another of his employers saved more than $30,000 by sending an employee to Mexico for injections of the immunosuppressant Humira. In the Cayman Islands, patients can save $60,000 for a 90-day supply of Harvoni, the hepatitis C drug.
Not all specialty medications are available internationally, but for those that are, he says, pharmaceutical tourism saves 25% to 75% of the cost of U.S. medications. One client with 1,200 employees recently saved $1 million in its first year. Another, with 65 employees, saved $2.1 million in seven years.
Not everyone is sold on traveling to receive medications. According to the Centers for Disease Control and Prevention, patients have to be aware of some issues that include errors that can occur when dealing with healthcare providers and pharmacists that aren’t native English speakers and the potential that medication could be poor quality or counterfeit. Also, according to the U.S. Food and Drug Administration, it’s technically illegal to import medications that aren’t approved by the FDA. The organization concedes, however, it does not enforce the policy as long as the drug is considered safe, it’s for the patient’s use and not for commercialization, and an individual brings in less than a three-month supply.
“About 80% of workers live paycheck to paycheck, and 70% of families have $1,000 in savings or less,” Becker says. “There are people out there making a choice between food and other expenses or medication.”
Employers don’t want to see their workforce making these kinds of choices. And they know reducing healthcare spending can make them more competitive.
“People value that pharmaceutical companies are curing diseases and prolonging life,” Becker says. “But it doesn’t quite sit well with an employer whose spending is so out of control and across the border medications are one third of the cost.”
Not everyone has to shop in Canada to save money on prescription drugs. Consultants and other organizations are working to cut spending in different ways. The term “value-based” is the current darling in healthcare. In the prescription drug realm, it can mean a few things. One is value-based contracting, where drugs aren’t paid for if they don’t meet the outcomes promised by their manufacturers. Another is value-based benefit design, in which patients pay lower co-pays for medications perceived to have a high value and keep costs lower by reducing hospitalizations and complications down the line.
The San Francisco-based Pacific Business Group on Health (PBGH) is piloting its own value-based option, the waste-free formulary. According to Lauren Vela, the organization’s senior director of member value, most formularies created through PBMs get value by optimizing rebates, which is different from actually creating value.
“If a drug is $100 and you are getting a $50 rebate, that’s great…unless there is an equivalent $7 drug out there that is just as good,” Vela says. “That is what is going on in the system, and it’s happening a lot.
Employers are getting a bigger rebate, but they are actually paying more to get the drug.”
The PBGH definition of value for this project includes finding drugs that are the same clinically, then putting the ones in the formulary that are the least expensive, minus rebates. Their goal is to get waste out of the formularies by subtracting high-cost drugs that don’t add value. Most of the culprits in the system fall under a couple of categories: combination drugs that are cheaper if taken separately; “me-too” medications, which are chemically similar to a drug already on the market but tweaked slightly; and drugs that have less expensive, over-the-counter equivalents.
The challenge with many of these, Vela says, is patients are paying the price for a new drug when less-expensive generics, or even name brands, are available. A 2008 analysis of 42 new drugs approved over 18 months found nearly three quarters offered no new treatment advantage over options already on the market. Some were more convenient to use, but only 13% addressed an unmet need or were more effective than existing medications.
“That is part of why drug prices are trending upward,” Vela says. “Employers just pay whatever they think they need to pay. They need to just get rid of drugs on their formularies that add no value and are high cost. It’s simple math.”
Consultants in the industry work with employers to comb through data, track drug use and spending, and search for waste or areas where they can save on particular medications. If consultants have been successful in doing this with individual businesses, Vela questions why it couldn’t be done en masse.
PBGH is currently piloting its waste-free programs in California, looking at data from a range of employers to get a sense of whether the process would work across larger groups with different pharmacy benefit managers and formularies. Vela says they start by reducing the drugs on a lot of formularies that shouldn’t be there—culprits like the combinations and me-toos. Those are easy to find and remove. Then, they analyze spending more closely to see what other medications are covered that shouldn’t be. The template for most would look very similar, with some slight differences depending on the workforce makeup.
If a drug is $100 and you are getting a $50 rebate, that’s great…unless there is an equivalent $7 drug out there that is just as good.Tweet
“Ultimately there would be one formulary with the highest-value drugs available,” Vela says. “They would look much the same, but if one organization has a bunch of diabetics, their insulin benefit might look a little different.”
PBGH would create this formulary and offer it across employer groups. And a key to its success will be its use by physicians—getting doctors to prescribe the most high-value drugs at the beginning. Vela says physicians appear to like the idea but need to have the information at their fingertips or it won’t be used. She is working with groups to create a point-of-care decision-making tool to help providers with this task.
It’s too early to have a lot of data on the PBGH program, but Vela says the first few case studies they have done have been highly successful at cutting employers’ costs.
Rea says the algorithm his company created has also helped reduce prices for a lot of employers. The company takes claims information for an organization, puts it into the system and considers local pharmacy costs and other therapies to find the best therapies for the lowest cost. Then, the company sends employees a link that explains how to get those savings. Rea says the company tends to find savings in areas similar to those in the PBGH program—substituting a pill for a capsule to save 40% or using two medications instead of combination drugs.
During his time analyzing medications, Rea says he’s learned saving money is about breaking down preconceived notions about what drugs cost and why. He also stresses more knowledge is always better. “The chance consumers can be taken advantage of is high,” Rea says. “The less information they have, the less chance they are going to find the route to the lowest-cost medications.”
Absent using his software or a program like PBGH’s, he says insurance brokers need to look not only at the sticker price but also at where the variances are in cost and at the use of generics. He says there are tremendous savings to be had if purchasers look deeper into the system.
IOA’s Labrecque agrees with this assessment. He has spent time talking with frustrated clients, brokers and employers large and small all seeking greater transparency. “Warren Buffett said it’s not until the tide goes out that you see who’s swimming naked,” he says. “We need to make the tide go out. It’s on us to develop solutions out there instead of just pointing to the side of the road and saying, ‘Look, there’s a car wreck.’”
Worth is a contributing writer. email@example.com
Your company is based in Tampa. What would non-Floridians be surprised to learn about your state?
For the 40% of Americans who haven’t been to Florida, they may be surprised to learn we don’t really have Southern accents. We mostly sound like Midwesterners, except for our incessant use of the term “y’all.”
You’ve been in Florida most of your life. What’s been your scariest hurricane experience?
Irma, without a doubt. We dodged a cannon, but it gave us the opportunity to test our preparations as an agency, proactively supporting our thousands of Florida-based clients, and as an employer, caring for and keeping track of our 175-plus colleagues.
Two of your firm’s three principals are women. Do you think that affects the way BKS conducts its business?
Yes. Laura Sherman, a co-founding partner, and I have a shared mindset of bringing our whole selves to everything we do. To support this, we are launching the BKS Passion Project, which financially supports colleagues to pursue their non-insurance-related interests, whatever they may be.
Have you made a conscious effort to recruit and advance women?
We have made a conscious effort to recruit the best person for the job, and that is often a woman. Attributes often associated with women, such as being community-minded, nurturing and encouraging, are often the same attributes that help forge a strong sense of esprit de corps in the workplace.
What did your parents do?
My parents owned a nuts-and-bolts distributorship. It taught me a lot about fasteners as well as a lot about business, which at its cornerstone is about relationships. We’re fortunate to have clients in manufacturing, so the smell of a production floor is just like home to me.
BKS also has colleagues spend a day in the workplaces of new key clients. Is that a common practice?
It may be unique to us. We started doing this years ago with large restaurant groups. We would work in their kitchens as they prepped for the day—carefully cutting vegetables, measuring servings, understanding how the kitchen was organized. When you work in a business, even for just a few hours, you realize their challenges.
Last year, you took a month to travel with your husband. Where did you go?
We took our two sons out west for a few weeks, then dropped them off at camp. We then went to Germany, Austria, the Czech Republic and Hungary. It was a little overscheduled, which is kind of the story of my life. We were away 31 days. My husband and I have been together for 31 years, so it seemed like the right number.
How did the firm manage without you?
Very well, actually! The firm cut me off of technology, which made it delightfully difficult to stay engaged with the day to day. The highlight of the trip was realizing I enjoyed unplugging. I never doubted that everything was taken care of.
I don’t imagine a lot of firms would accommodate a 30-day absence.
We had planned it for seven or eight months. Planning put deadlines in place and allowed us to get things done faster. When I came back, people were more excited to hear about the trip than lament my absence.
BKS has won several “Best Places to Work” awards, including one focused on millennials. How do you attract young people to your firm?
They are attracted to the new challenges available to them as a result of our high growth, our understanding that a new way might actually be the best way and, of course, because they can wear jeans and sneakers every day.
Who was your most influential business mentor?
Lowry Baldwin, one of our co-founding partners. He is a phenomenal listener, and he’s not judgmental. We’ve worked together since 1988. He always thought I could be more than I thought I could be. And I hope I’m doing the same for other people.
What’s the best advice he ever gave you?
“No one knows how good you are until things go bad.”
If you could change one thing about the insurance industry, what would it be?
The mentality that some people have that this is just the way it’s always been done. The industry is continually evolving.
What gives you your leader’s edge?
Living the Azimuth, which is our core set of values. I’m inspired by how fiercely protective our colleagues are in keeping it in the forefront of everything we do. We give and, more importantly, we receive continual feedback from one another on how to improve.
The Krystyn File
Favorite Vacation Spot: “My next, wherever it is, will be my favorite.”
Favorite Movie: Shawshank Redemption
Favorite Actor: “I’m a big Denzel Washington fan. I like chase scenes and all the James Bond movies. I’m kind of low-brow that way.”
Favorite Musician: “My favorite band is a punk band called X. I also like Patsy Cline, and I listen to contemporary Christian music—just to keep things interesting.”
Favorite Book: The World According to Garp and anything by John Irving
Wheels: Lexus SUV
According to a study by Deloitte, “Companies that embrace diversity and inclusion in all aspects of their business statistically outperform their peers.” In fact, multiple studies conducted across different organizations all came to the same conclusion. Global research analyst Josh Bersin reports that companies with high inclusion and diversity rankings reap the rewards. They saw 2.3 times higher cash flow per employee (over three years) and were 2.9 times more likely to identify and build leaders, 1.8 times more likely to be change-ready and 1.7 times more likely to be innovation leaders in their market.
Why is this? I believe it has to do with the intersection of diversity, inclusion and innovation.
Many often think of inclusion and innovation as two separate initiatives. However, after working on inclusion and innovation concurrently over the past year, one thing has become evident to me: the overlap and connectedness between these two areas is not only important, it is necessary.
Innovation requires a culture of openness that fosters dialog across various experiences and backgrounds. That same foundation of openness helps create an inclusive environment for diverse hiring. This is the intersection of inclusion and innovation and the very reason that the two must be combined. Together, they can bring a diverse group together and foster open collaboration and critical thinking for robust problem solving.
So how do you build a more diverse and inclusive workforce? One way is to look at your recruiting practices and consider widening the net. Look at which organizations you connect with at a given college and rethink your requirements for that list. Recruit with innovation in mind, looking for skill sets like curiosity, creativity and a history of “innovative successes,” says William Craig, who writes about company culture in Forbes. In addition to considering a candidate’s educational background and work experience, know what you can teach versus what skill sets are required (e.g., detail-oriented) from the beginning.
Review your job postings to ensure they reflect only the necessary skill sets. Be careful not to over articulate what the job requires. You might think you are doing potential candidates a favor. However, studies have shown that some candidates will opt out of applying when they do not meet all the listed requirements and word choice. Lean In, an organization that works to empower women, cites that men apply for a job when they meet 60% of the qualifications whereas women apply only if they meet 100% of them. Textio, a software company that uses analytics to optimize job descriptions, has found that word choice can be gender biased, limiting the audience it reaches. To address this problem, Textio assesses job postings and offers feedback on layout and language for optimal performance.
It’s no secret that recruiting in the insurance industry is challenging, and many admit they came to the industry by accident. But we can speed up the crossover into insurance by reaching out to a wide market early on. I discovered this accidentally when I created a Girls in IT program (GET IT: Girls Educating Themselves about Information Technology) to educate middle-school aged girls about IT careers. In addition to starting early, I found that describing the career in a simple and relatable way and focusing on the skill sets involved were also helpful. For example, by having a one-hour conversation about all possible IT careers, we increased interest in the field by a whopping 75%. By focusing on skill sets, you will connect with your candidates and help them find a path that is successful for both themselves and the agency. Focusing too heavily on job descriptions can result in candidates self-selecting out of a given role or industry for a lack of connection.
But a company can only truly be inclusive and diverse over time if it creates a culture of awareness, understanding and openness. You may be able to hire diverse talent, but in order to keep those hires, you have to foster a culture of inclusion. Upper management support, employee resources groups (voluntary, employee-led groups to foster diversity and inclusion, like Women’s BRGs [business resource groups], LGBTQ BRGs), and diversity training programs are just a few examples of what is necessary to create a foundation of inclusion. It should be noted that the effectiveness of diversity training programs is the subject of much debate.
However, I believe the key is finding the right training that focuses on unconscious bias, cultural sensitivity, appreciating individuality, and ways to communicate about diversity-related topics.
Inclusion Brings Innovation
To innovate, a culture of inclusion is necessary. According to research done by The Conference Board, “Inclusive cultures are four times more likely to be innovative.” But how do you create a corporate culture of innovation in an industry founded on risk mitigation? That is a common question and a common myth. Innovation is not the result of taking risks but, rather, in mitigating risks.
Here is where the IT industry can be helpful. Iterative development, known by its several variations of Agile, Lean Startup, or Scrum to name a few, is a concept the insurance industry can borrow that the IT industry has been laying out and perfecting over the past two decades. These methodologies all share the same core concepts. Work is done in short segments with end deliverables shared and tested along the way.
Feedback is expected, and a high degree of open communication is necessary for success. Being active in the build process makes it easy (and less expensive) to incorporate changes along the way rather than waiting until a project is fully complete.
The days of “build it and then they will come” are over. The new normal of instituting change includes constant collaboration, sharing and feedback—including from your end users. This approach will not only validate if a change is beneficial but also provide further insight into the needs and other considerations for your work. Ultimately, this approach creates a new closeness between parties and fosters a strong connection with your end users, who will feel connected to the product because you incorporated their feedback. Additionally, bringing them into the process highlights all the work that goes into building a product or service, creating a mutual understanding and appreciation.
When forging ahead, recognize that a single person alone cannot cultivate change in an organization. Indeed, there must be a leader to head up communications, oversee the governance of projects, and manage the budget. However, building a corporate culture of innovation is the cumulative result of working with a diverse group within your organization, which starts with establishing an inclusive workplace. In fact, a study done by decision-making platform Cloverpop shows that inclusive teams make 87% better decisions two times faster with half the meetings.
When looking to build your innovation team and change agents, there is a community right within your organization that can help. Enter the “intrapreneur.” The term—launched back in 1987 by an economist—is largely new to the insurance world but is now experiencing newfound interest as a recruiting tactic. An intrapreneur is a person who behaves like an entrepreneur within an organization, typically characterized by taking risks and innovating to solve problems. To cultivate innovation in your organization, locate those intrapreneurs who thrive on change, are curious and think creatively to establish a foundation of innovation. Not only does this serve as an inclusive practice by giving a non-traditional group the opportunity to drive change, but it also gives your employees the ownership and autonomy to create and experiment, offering new meaning to their job. Utilize this movement within your organization to help with your recruiting efforts. New hires to your organization will see this as a differentiator and a draw.
With matters of inclusion and innovation, it is all about striving for progress, not perfection, because with continued and consistent progress, we will have the most impact.
Conroy is IT manager at M3 Insurance and Inclusion and Diversity Committee chair. firstname.lastname@example.org
On March 17, The New York Times and The London Observer reported data on 50 million Facebook users was impermissibly shared with Cambridge Analytica, which used it to help Donald Trump shape campaign messages and win the presidency. Unlike earlier reports, which surfaced in 2015 and 2017, the articles provided information from a former Cambridge Analytica employee, Christopher Wylie, who blew the whistle on how the Facebook data were used.
“We exploited Facebook to harvest millions of people’s profiles. And built models to exploit what we knew about them and target their inner demons. That was the basis the entire company was built on,” he said.
Within days, a former Facebook employee, Sandy Parakilas, followed suit and regaled U.K. members of Parliament about Facebook’s refusal to heed his warnings of lax data protection policies. The whistleblowers added credibility to the stories and blunted Facebook’s ability to respond using its usual statements about taking privacy seriously and investigating any allegations.
Path to a Crisis
By way of background, from 2007 to mid-2014, Facebook routinely allowed application developers to scrape the data of Facebook users who used their apps, as well as data about all of their friends. This “friends permission” policy attracted developers to the Facebook platform because they were enticed and rewarded by access to a rich mine of data. Parakilas estimated the feature was used by developers to gather data on “hundreds of millions” of Facebook users.
Parakilas, who was responsible for enforcing violations of Facebook policies by third-party application developers in 2011-2012, detailed how the company never monitored, audited or investigated how any developer was using Facebook data. “They felt that it was better not to know. I found that utterly shocking and horrifying,” he explained.
During the period “friends permission” was allowed, a U.K. company called Global Science Research (GSR), developed a personality application that was used by 270,000 Facebook users. In return, GSR was able to scoop up data on the users and all of their friends, resulting in a database full of personal details on 30 million to 50 million Facebook users (original estimates were 30 million, later ones are 50 million). In 2015, GSR’s founder violated Facebook’s terms and conditions and gave the data to Cambridge Analytica to use for data analytics and targeted campaign messaging.
All Hell Breaks Loose
The New York Times and The London Observer reports in March created a firestorm. The news came in the midst of a broad recognition that Russia really had meddled in the 2016 elections and this had occurred—in large part—through fake Facebook pages, ads, and deceptive and manipulative messaging that reached 126 million Americans. Through the press, people were beginning to understand the enormity of the privacy violations that had occurred and the power of big data.
Around the same time, The New York Times reported Alex Stamos, Facebook’s chief information security officer, was being pushed out of his job because he had compiled massive amounts of data about Russia’s misuse of the platform during the elections and had repeatedly urged Facebook to be transparent about what it had discovered. Stamos reportedly put together a team of engineers in June 2016—the same month the Democratic National Committee announced it had been hacked—and by November 2016, he had uncovered evidence that the Russians had “pushed DNC leaks and propaganda on Facebook.”
The Times article details the increasing amount of evidence uncovered by Stamos, his drafting a memo that was subsequently scrubbed, and his futile but continuing entreaties to Facebook’s management to disclose the findings. Parakilas said, “The people whose job is to protect the user always are fighting an uphill battle against the people whose job it is to make money for the company.” Others interviewed by the Times noted senior management’s desire to protect their legacies and reputation.
Facebook tried to cut off the head of the snake by reassigning Stamos’s 120-member team to two divisions—product and infrastructure (not, by the way, where information security should be located within an organizational structure). Stamos reportedly was asked to stay until August because Facebook’s senior executives were concerned his leaving would look bad.
Here Comes the Hammer
Facebook’s lack of governance of its own corporate practices, its blatant attempt to sideline an officer of the company to avoid disclosing evidence its users had been manipulated, and its mismanagement of the public relations crisis created by the news reports has been stunning. In less than two weeks, Facebook found itself under siege, not only in the United States but also around the globe. The Federal Trade Commission confirmed it was investigating Facebook’s privacy practices and whether it violated a 2011 FTC consent decree. A group of 37 state attorneys general sent Facebook a letter “demanding answers…about the company’s business practices and privacy protections.” The Senate Judiciary Committee, the Senate Committee on Commerce, Science, and Transportation, and the House Energy and Commerce Committees asked Mark Zuckerberg to testify on Facebook’s data privacy and data use standards. (Hint to the Hill: You need to ask Alex Stamos to testify.)
Canada’s privacy commissioner launched an investigation into whether Facebook mishandled Canadians’ personal information and announced that Britain’s privacy office had begun a similar investigation and the two offices would be coordinating. On the same day, the EU’s data protection chief called the allegations against Facebook the “scandal of the century” and called for EU data protection authorities to join together in a task force to investigate Facebook’s activities.
In just six days, Facebook lost $75 billion in market capitalization, and before it could even blink, a federal class action securities lawsuit against Facebook, Zuckerberg and CFO David Wehner was filed alleging:
[Facebook] made false and/or misleading statements and/or failed to disclose that: (i) Facebook violated its own purported data privacy policies by allowing third parties to access the personal data of millions of Facebook users without the users’ consent; (ii) discovery of the foregoing conduct would foreseeably subject the company to heightened regulatory scrutiny; and (iii) as a result, Facebook’s public statements were materially false and misleading at all relevant times.
Securities suits are a new tactic taken by plaintiffs attorneys in response to cyber incidents. In the past year, securities class action suits have been filed against Equifax, Yahoo and PayPal following highly visible breaches, exposing directors and officers to substantial liability.
The Facebook debacle does present opportunities for agents and brokers. The sting from Facebook will raise the bar for privacy protections and good corporate governance. Insurance professionals should reach out to clients and help them evaluate their current D&O coverage. Also, encourage them to review their privacy policies and develop compliance procedures to ensure their privacy obligations are upheld.
Westby is CEO of Global Cyber Risk. westby@globalcyberrisk
And there is a goliath, a big-guy buyer whose assertive merger and acquisition strategy is known.
After the ink dries, the seller, reflecting on the deal, says she assumed the buyer would implement its own systems, do everything its own way. But there was a conversation—and the buyer wanted to hear the seller’s ideas. The goliath was interested in how the hard-driving owner of this small firm had honed a certain niche and how the combined organization could grow it.
The seller figured the much larger buyer would have it all figured out. But actually, the buyer was interested in the owner because of her expertise, talent and experience. The seller was surprised—shocked, actually. She just assumed the buyer knew it all.
What did this scenario mean for the seller?
Well, there was a welcome seat for her in leadership at the large firm if she wanted it. Her intellectual capital was more valuable than she ever realized and something the buyer identified and wanted. There was a balance: the seller fulfilled the buyer’s desire to move the business to the next level, and the buyer brought a specialty and entrepreneurial spirit—a growth mentality—to the leadership team that the seller saw as a huge asset.
This situation is not unusual. It’s not an anomaly that the seller finds the buyer does not have it all figured out. We see this all the time, which is why we emphasize that high-performing firms help drive value, no matter their size. When a firm operates efficiently and profitably, when it grows a great culture and talent, it is seen as much more valuable at the time of sale. And there is more opportunity for the seller, because it is entering an organization that wants to leverage its skill set and put the sellers in a position to grow their careers, if they choose that route.
So, as a seller, what are you bringing to the table?
We know that high-performing firms experience double-digit organic growth—based on our proprietary database, that growth averages 10% to 15% annually. They operate at a 25% or higher EBITDA (earnings before interest, taxes, depreciation and amortization) margin. Specifically, in 2017, according to our proprietary financial and productivity benchmarking system, high-performing firms grew an average 14.9% organically and had an average EBITDA margin of 28.5%.
Where do you stand?
Sellers often get more value for their firms if they are operating like well oiled machines. Buyers have their eyes on “assets”—they are looking for expertise, talent, knowledge and systems they can adopt to make their organizations run more profitability. They’re looking for great people. In turn, sellers can find leadership opportunity and career growth for their teams. We have seen balance in the most successful deals, with both sides giving and taking.
And sellers are looking for value beyond the numbers. To position your firm to gain the most value, whether or not you decide to sell down the road, stay focused on creating value in your firm. Your organic growth matters. Your profitability and EBITDA are critical. Your people are the key to success. Your culture as a forward-thinking, growth-minded organization will help set you apart from peers.
Buyers don’t know it all. That’s why they look for savvy sellers of all sizes.
Any seller can be in the position that our example was—sitting at the table with new leadership, adding value to an organization many times the seller’s size. What our hypothetical seller did right was treat her business as if it were on the market well before it ever was. She focused on building value and organic growth. She concentrated on developing producers and leadership. She was operating a firm with a plan and the ability to execute. And now, she’s helping lead a goliath.
By operating with a value-driving mentality, you could do the exact same thing.
The first quarter of 2018 is showing signs of a slowdown in deal count, but we believe it is just a matter of slow announcements. The 23 announced deals in March bring the three-month total to 92 transactions. This is in line with totals in 2014 but well behind 2015-2017 numbers, which ranged from 120 to 145 deals in the first quarter. If you talk to most buyers, however, they will tell you that they are as active as ever.
Alera Group is leading the charge with eight announced acquisitions year to date. It is followed closely by BroadStreet Partners and Hub International, both tied at seven announced domestic deals through March.
The big news on the street currently is the announcement that USI Insurance Services is in line to buy the insurance operation of KeyBank (Key Insurance & Benefits Services). This is a top-100 brokerage and formerly the insurance operation of First Niagara Risk Management prior to the bank’s being acquired by KeyBank in July 2016. There are currently rumors of at least one other top-100 bank-owned agency on the market. If both of these deals go through, that would be three top-100 bank-owned agencies sold in the last 12 months—Wells Fargo Insurance Services USA being the other when it was sold to USI in 2017.
While banks dominated the M&A space in the mid-2000s, they have been relatively quiet since coming out of the Great Recession. Bank-owned agencies completed 22 deals in 2017, which was roughly 4% of all announced deal flow. Year to date, there have been five acquisitions by five different bank-owned agencies. We believe that bank-owned brokerages are still a very viable buyer segment; there are just fewer dominant acquirers than a decade ago.
Securities offered through MarshBerry Capital, member FINRA and SIPC. Send M&A announcements to M&A@marshberry.com.
As you are probably aware, the legislation doubled the lifetime exemption from gift or estate tax to $11.18 million per person or $22.36 million per couple. What you may not know is this is a “use it or lose it” benefit, as the exemption is slated to decrease back to the pre-2018 level ($5 million per person or $10 million per married couple) in 2026. So what can you do to take advantage of this windfall?
First, dust off your business succession plans, which may be sitting on your shelf, because, well, let’s face it, no one likes to think about winding down or dying. And you should be considering whether this might be the right time to gift some of your ownership interests (or other assets) to the next generation. Failing to take advantage of this tax-advantaged window would be a lost opportunity, especially when planning sooner generates significant additional tax benefits by removing both assets and their appreciation from your estate.
For those who take full advantage of the increased cap before 2026, you need to prepare to navigate the potential uncertainty should the exemption cap revert to 2017 levels. Worst case: the estate tax ultimately would be calculated on the remaining estate plus the extra amount gifted during this window. Proper planning can minimize or eliminate this potential consequence.
For those implementing a gifting strategy now, this allows you to make gifts as tax efficient as possible. A number of techniques allow discounting of the transferred assets so you can “stuff” the $11.8 million or $22.36 million (or some lesser amount) with the most value possible. To take advantage of these discounting opportunities, you should look for assets you own that are ideal for discounting. One of the most ideal is interest in closely held businesses, such as privately owned insurance brokerages.
If you have children or other potential heirs who have joined the firm and you transfer minority interests in the firm to them, those interests can—if properly structured—qualify for a minority discount as well as a lack of liquidity discount. These combined discounts can be as high as 40%-45% of the current fair market value. A $1 million interest transfer could be valued at as low as $550,000 for calculating the gift tax exemption. Use of such discounting strategies allows you to get the most bang for your buck from your tax exemptions, and interests can be transferred outright or in trust.
There are many advantages to using trusts to hold business interests and other assets, including asset protection and centralized management. Many do not want their children to receive assets outright immediately, or sometimes ever, because they are worried the child will not know how to manage them or may lose them for some reason. Keeping the assets in the family line is another common concern. Trusts address all of those issues and can be tailored with great specificity to suit each person’s concerns and personal situation.
In addition to these benefits, some jurisdictions—Delaware, South Dakota, Nevada and Florida, for example—allow the trust settlor or others selected by the settlor to retain certain powers over trusts created there and can also be structured to avoid state income tax, which is a significant benefit.
Because the current 40% estate and gift tax rate is now not significantly higher than the maximum combined federal and state income tax rates, you must do proper income tax planning at the same time as your estate planning. Assets held by you at your death will receive a “step-up” in value to the property’s value at your date of death. So if your children or other recipients of assets at your death want to sell the assets they receive from you soon after receipt, there will be little to no income tax on those assets. In deciding what to transfer and what to give away, it may make sense to hold on to highly appreciated assets so they receive a basis of their fair market value at your death.
The recent changes to the individual income tax laws are also important elements of current estate planning. There are certain planning techniques that can be considered to offset the loss of the state and local tax (SALT) deduction for individuals. In high-tax jurisdictions, the loss of the SALT deduction can lead to significant increases in personal income tax. The use of multiple trusts to hold real property and increased charitable gifting can help to mitigate additional income tax liability.
One technique that combines estate and income tax planning is “upstream planning,” which involves using your extra gift exemption to create a structure that will benefit your children and future generations but will be included in a senior generation family member’s (say, your father’s) estate. If your father’s assets are minimal, the inclusion in his estate of the value of your gift will not cause any estate tax liability for him. But the inclusion will allow the tax basis of the assets to be stepped up to the fair market value at the time of your father’s death.
The bottom line is that there are many unique planning opportunities out there now to use in planning for the transfer of your assets and succession of your business interests. Now is the time to jump on this!
Sinder is The Council’s chief legal officer and Steptoe & Johnson partner. email@example.com
Tractenberg chairs Steptoe’s Private Client Practice. firstname.lastname@example.org
Back in 1970, Alvin Toffler foretold that the ability to acquire knowledge would be a key differentiator. “The illiterate of the 21st century will not be those who cannot read and write but those who cannot learn, unlearn and relearn.”
Michael Simmons, in a story on Medium.com titled “5-Hour Rule,” calls knowledge the new money. He says we are beginning a period of rapid demonetization, a term coined by futurist Peter Diamandis.
“Technology,” he says, “is rendering previously expensive products or services much cheaper or even free.”
A device for video conferencing in 1982 cost $586,904. Today, we video conference for free. A video camera cost $2,600 in 1981, and today it comes free with your phone. The encyclopedia cost $1,300 in 1989, but today it is free online.
“While goods and services are becoming demonetized, knowledge is becoming increasingly valuable,” according to Simmons. The great part about knowledge is that, unlike money, when you use it, you don’t lose it! Moreover, it could convert into things like authentic relationships and a feeling of well-being, the kinds of things money can’t buy.
There are some great side effects to acquiring knowledge. It helps you think bigger and better as your brain works more effectively. It expands your vocabulary, making you a better communicator. You could become more interesting and charismatic and possibly even more independent and handy, depending on what you decide to learn.
So how can you cash in on this knowledge economy? Apparently, Bill Gates, Warren Buffett, Oprah Winfrey and Barack Obama know the secret. It’s called the “5-Hour Rule,” devoting five hours a week to learning and increasing your knowledge. Warren Buffett spent 80% of his time reading and thinking. Bill Gates reads a book a week and takes a two-week reading vacation each year. When he was president, Barack Obama spent one hour a day reading. Simmons says if you are not spending at least five hours a week learning something new, you are being irresponsible. Even if you work hard, if you don’t take the time to constantly and deliberately learn, you will be part of a new “at-risk” group simply because it’s hard to keep up in our rapidly changing world. Simmons is so serious about this he has created a webinar to help you, called “Learning How to Learn.” There is also a “Learning How to Learn” course on Coursera taught by Barbara Oakley, from the University of California San Diego, and Terrence Sejnowski, from the Salk Institute.
If the busiest people in the world find one hour a day to learn, shouldn’t you? As motivational speaker Simon Sinek says, “The hardest part is starting. Once we get that out of the way the rest of the journey is much easier.”
Simmons explains starting your learning ritual begins with three easy steps:
- Make time to read even when you are overwhelmed and too busy
- Stay true to your learning time—don’t procrastinate or get distracted
- Apply the learning right away to help you remember what you learn.
In “Why the Best Leaders Are Full-Time Learners,” in Forbes, Kelsey Meyer, president and co-founder of Influence and Company, suggests:
- Plan out your learning and have goals for what you want to learn.
- Set aside time each day just for learning.
- Read, read, read—including publications in your field as well as topics outside your area of expertise.
- Reflect on your day—this is an important part of learning.
- Listen to podcasts or books on tape. (Go to The Council’s Resource Center and watch a micro learning at ciab.com/talent-development/resource-center.)
Simmons likens continuous learning to the habits we form for our physical health. “Just as we have minimum recommended dosages of vitamins and steps per day and of aerobic exercise for leading a healthy life physically, we should be more rigorous about how we, as an information society, think about the minimum doses of deliberate learning for leading a healthy life economically.”
Knowledge is more important than ever, but lifelong learning is not a new idea. In a recent biography of Leonardo Da Vinci, his passion and commitment to lifelong learning is always apparent. He never considered his paintings finished, and he never saw an end to acquiring new knowledge. For him, the biography says, “Learning is the only thing the mind never exhausts, never fears and never regrets.”
We may feel we can’t afford to take the time to learn new things, but the truth is we can’t afford not to! So take five!
McDaid is The Council’s SVP of Leadership & Management Resources. email@example.com
Playing senior risk analyst Reuben Feffer, Stiller knows that an average of 39 people have put their filthy hands in the nut bowl on the bar and that only one in six washed those hands before that.
“I’m a risk analyst,” he says. “It’s my job to worry.”
Poor, exacting Reuben. Even without his beloved risk/reward software, he can spot a bad idea—except in love. His wife runs off with a French scuba instructor on their honeymoon, and Reuben soon takes up with Polly Prince (Jennifer Aniston), an itinerant waitress who lives in a bad neighborhood, drags him to iffy ethnic restaurants, and dances at dodgy salsa clubs.
She slashes open his throw pillows when Reuben notes that removing and replacing the pillows on his bed costs him 56 minutes per week. The spicy foods at her favorite spots make him desperately ill. Can this work?
When Reuben’s wife returns to him, he runs the risk/reward software on both women. In the end, of course, he ditches the math and goes with his gut. He even agrees to insure Leland van Lew, a young zillionaire with a penchant for very dangerous sports, on the grounds that the man has cheated death a thousand times.
Whoever ran the risk/reward software on financing Along Came Polly perhaps knew that the flimsy romcom would be roundly booed but the megawatt stars would be a draw. Made on a $42 million budget, it grossed more than $173 million. But it is charming, and part of that charm is Reuben’s endless recitation of the odds. Who knew insurance could be this much fun?
While it is clear blockchain remains in its infancy, especially for commercial uses, the technology has the potential to increase transparency, cut costs and streamline inefficiencies along the insurance value chain. Experts estimate that blockchain technology could save the insurance industry up to 30 percent in administrative costs alone.
Insurance aside, blockchain technology addresses a number of existing challenges the online world faces, such as systemic risk and resilience, the problem of identity verification, the protection of critical data, and ensuring that users of technology retain control of their data. Privacy, security and transparency are three inherent components of blockchain technology that will likely transform the way data is stored and shared.
At the Summit, Microsoft, in partnership with The Chamber of Digital Commerce, released its whitepaper: Advancing Blockchain Cybersecurity. In the video below, Aaron Kleiner of Microsoft addresses how blockchain can improve the state of global cybersecurity and how Microsoft plans to enable the use of blockchain among governments and enterprises around the world.
This article originally appeared in The Council's Insurtech newsletter.
For those of you who have not been paying attention, private-equity backed brokerages have taken over the M&A world. They completed 316 announced transactions in 2017, which represented 57% of the total announced deal activity for the year. The demand that continues to drive activity within the industry seems to be endless. And it has led to more investor diversification, creating a new category of investor—private capital.
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Insurtech funding in Q4 2017
Increase in funding from $271 million in Q4 2016
Total Q4 2017 transactions, second-highest quarter on record
U.S. share of Q4 transactions, compared with an average of 62% since 2012
U.K. share of transactions
Share of Q4 investment rounds focused on front-end processes (product and distribution)
Share of Q4 investment rounds focused on back-end processes
$30 million-plus funding rounds in Q4 2017
Half the top 10 Q4 funding rounds went to companies outside the United States
Source: Quarterly InsurTech Briefing from Willis Towers Watson and CB Insights
Although most cyber-security regulation has been targeted at specific data or industry sectors, one of the most effective ways to push requirements out to all businesses is to impose regulations, or “guidance,” on government contractors and public companies. The Securities and Exchange Commission and federal procurement regulators have chosen this path and have become increasingly specific with respect to cyber-security requirements.
The Federal Information Security Management Act (FISMA), enacted in 2002, imposed cyber-security requirements on agency and contractor systems and compliance with certain Federal Information Processing Standards. It requires risk-based information-security measures and applies to data and systems operated by a contractor on behalf of an agency.
In 2016, the Federal Acquisition Regulations (FAR) on Basic Safeguarding of Contractor Information Systems was implemented, which requires 15 security controls. The regulation applies to all government contractors and is effective when included in contracts.
Following a series of breaches at agencies and defense contractors, the Department of Defense, in 2013, created its own cyber-security procurement regulations, which require contractors and subcontractors to safeguard computer systems and report data breaches within 72 hours. The rule does not apply to contracts for commercial off-the-shelf technology. The Defense Federal Acquisition Regulation Supplement (DFARS) now requires defense contractors to comply with NIST guidance on protecting controlled unclassified information, notify the Defense Department of incidents within 72 hours, save all data associated with an incident for 90 days to enable the Defense Department to review or inspect the system, and notify the department if a cloud provider will be used.
“Concern grew exponentially as the end of 2017 approached and contractors realized they were not in compliance with DFARS requirements, particularly NIST 800-171,” says David Bodenheimer, a public contracts partner at Crowell & Moring. Bodenheimer points out that the Defense Department has several avenues to enforce its cyber-security requirements, including refusing to do business with the contractor or disqualifying it; giving the contractor a negative past performance review, thereby reducing its opportunities for future awards; suing the contractor for breach of the cyber-security safeguards clause in the contract; blacklisting or debarring the contractor; and bringing a False Claims Act suit against the contractor if it falsely implied in its proposal that it was in compliance with 800-171.
“Subcontractors are particularly vulnerable, as their prime contractors may cut them from contracts if they are not in compliance with 800-171,” Bodenheimer says.
The SEC formally entered the cyber-security regulatory realm in 2011 with its “Corporate Finance Disclosure Guidance: Topic No. 2,” which guides public companies on disclosure of cyber-security risks and cyber incidents. The SEC advised companies to disclose cyber-security risks if these risks are among the most significant factors that make an investment in the company speculative or risky. In February, the SEC issued “interpretive guidance” to assist companies in preparing disclosures about material cyber-security risks and incidents. The guidance expands on what cyber risks may be material and puts more responsibility on directors and officers for managing cyber risks.
In 2014, the SEC conducted a series of examinations of the cyber-security programs of registered broker-dealers and investment advisors to identify cyber-security risks and assess cyber-security preparedness in the asset management industry. The following year, the commission issued “Guidance to Registered Investment Funds & Advisers on Cyber Security,” which discusses a number of measures funds and advisors may wish to consider when addressing cyber-security risks, including risk assessments, cyber-security strategies, and policies and procedures.
In 2017, the SEC established a cyber unit in its Enforcement Division to focus on targeting cyber-related misconduct. The unit wasted no time. Last December, it obtained an emergency asset freeze to stop an initial coin-offering fraud that had raised $15 million from thousands of investors.
The SEC means business (even though it took until September 2017 to disclose its own breach, which took place and was detected in October 2016). “Businesses should take seriously the SEC guidance on cyber security and the need for well tailored and consistently implemented policies and procedures around data, vendor and network risk management,” says Gwendolyn Williamson, a partner with Perkins Coie who represents investment and business development companies.
While the financial services sector has seen heavier cyber regulation than other industries, the federal government has acknowledged the importance of cyber security across industries. In 2013, President Obama issued an executive order calling for the National Institute of Standards and Technology (NIST) to lead the development of a framework to reduce cyber risks to critical infrastructure. The NIST Framework, released in 2014, was meant to “provide a prioritized, flexible, repeatable, performance-based, and cost-effective approach,” according to the executive order.
Thomas Finan, client engagement and strategy leader for North America at Willis Towers Watson Cyber Risk Solutions and former senior cybersecurity strategist and counsel for the Department of Homeland Security, credits NIST with helping set in motion a flexible mindset and approach that provides a road map for what industries should think about and prioritize for cyber security. “And what NIST recognized…is that every organization is unique and has a unique cyber-risk profile. But there are shared common approaches and issues.”
Finan believes the NIST Framework provides the backbone an organization of any size and in any industry can use to build on and further develop as needed. And, according to Gartner research, 30% of U.S. organizations had implemented the framework two years after it was released, with 50% predicted to implement it by 2020.
“I think the federal government has spoken through NIST with the cyber-security framework,” Finan says. “And I think what you are likely to see, and what you are seeing, is that industry sectors and associations are responding to the framework with their own interpretations on how best to implement it. That’s what’s getting traction right now.”
- Sexual harassment
- Wrongful termination
- Breach of employment contract
- Negligent evaluation
- Failure to employ or promote
- Wrongful discipline
- Deprivation of career opportunity
- Wrongful infliction of emotional distress
- Mismanagement of employee benefit plans
Source: Insurance Information Institute
1. Accommodation and food services 14.23%
2. Retail trade 13.44%
3. Manufacturing 11.72%
4. Healthcare and social assistance 11.48%
Source: Center for American Progress
Number of Republicans who sit in districts won by Hillary Clinton in 2016
Average number of seats lost at midterms for the president’s party since the end of World War II
Average number of seats lost at midterms for the president’s party when the president’s job approval is below 50% (Depending on the poll you read/believe, the president’s job approval rating was hovering around 40% on March 1.)
The industry appears to be well capitalized and able to withstand large payouts. The headwinds and potential trends toward a hardening market include: (1) a significant increase in catastrophic claims, (2) larger underwriting losses, and (3) a rise in premium rates, especially for personal lines and commercial auto.
Catastrophe. Although it is too soon to finalize full-year 2017 U.S. catastrophe claims, the impact of hurricanes and California wildfires and mudslides is expected to lead to insured losses in excess of $90 billion. This would represent the highest level in the past 25-year period.
Underwriting. The combined ratio jumped to 104.1 for the first nine months of 2017, up from 100.7 at year-end 2016, according to the Insurance Information Institute. The significant increase in the industry’s underwriting loss is due to high claims and claim-adjustment expenses as a percent of earned premiums. This is not a surprise given the year’s catastrophe claims.
Premium Rates. Compared to prior years, we saw in 2017 a decrease in the positive development of loss and loss-adjustment-expense reserves among U.S. p-c insurers. Higher premium rates and pricing looking forward is supported by a combination of lower reserve levels and higher reinsurance rates based on U.S. natural catastrophes. This is especially the case in certain lines of business such as personal lines and commercial auto, as carriers might be compelled to readjust pricing for risk and exercise greater underwriting discipline.
Private Equity Continues to Drive M&A
The merger and acquisition space continued to see high levels of deal activity in 2017, resulting in a record year. Within its proprietary tracking deal database, MarshBerry recorded 557 announced brokerage transactions, up 26% year over year and up 22% from the prior record-breaking count in 2015 of 456 deals.
Private-equity backed buyers—including those with private capital backing—continue to be the main driver of deal activity and value, representing 57% of all deals (316 deals) in 2017. Out of the top 21 most active buyers (defined as those completing five or more deals in the year), which represented more than 61% of total deal activity, only six do not have PE or private capital backing.
In fact, again in 2017, nine of the top 10 buyers were PE-backed, including those with private capital backing (read more on that in the “New PE Players” story). There has been a significant increase in PE-backed buyer activity during the past 10-plus years. Private equity represented just 7% of deal activity in 2007.
Interestingly, the number of PE-backed buyers in the marketplace in 2017 was similar to that of 2016, with 26 in 2017 compared to 27 the previous year. However, these buyers were more active in 2017 and completed 316 total deals, up from 242 in 2016—an average of almost one per buyer, per month.
The top 11 PE-backed buyers (including a tie for 10th place) represented 48% of the total 2017 deal activity in the industry and 85% of the total private-equity backed deals. Although there are indications that interest rates are on the rise, the availability and relatively low cost of capital continued to help drive PE-backed buyers to target insurance brokerages at an accelerating rate, driving activity within the industry overall. With investors searching for higher yields in a low interest rate environment, we are seeing that there continues to be heightened interest and demand among private equity in the insurance brokerage space.
The top five buyers in 2017 included four of the top buyers in the prior year. Of the five top buyers, one does not have private equity backing. The top three buyers are identical to 2016.
The top five most active buyers accounted for 35% of all transactions in 2017 (195 of 557).
Acrisure was the top buyer for the third year in a row with 72 announced deals. Acrisure typically does not announce the target name of any acquisitions, and 2017 was no exception—only a handful of targets were named. It is likely that Acrisure successfully completed more than 72 transactions during the year.
Hub announced 42 U.S. deals and five deals in Canada, bringing its total North American deal count to 47. Its U.S. deal count was up more than 30% from last year’s 31 deals. Almost 17% (7) of its 42 U.S. transactions were managing general agents or non-traditional brokerages, which have made up Hub’s historical acquisition activities. Nearly 25% of its announced U.S. transactions were California-based agencies (10 of 42), but interestingly, the next two most active states were Alaska and Maryland, where Hub completed four acquisitions each.
BroadStreet Partners has been consistent the past few years, with 26 deals announced in 2015, 28 in 2016, and 32 in 2017. BroadStreet has a somewhat unique capital structure with the Ontario Teacher’s Pension Plan as its main source of private equity funding (among other minority investors), although these medium- to long-term investors are becoming more prevalent within the space. The firm has completed approximately 286 transactions including core agencies and tuck-ins since 2001, with a compound annual growth rate since 2010 of 23%.
Gallagher reported 25 U.S. deals during 2017, tying for the fourth most active buyer in the U.S. market and earning it a place back among the top five most active buyers for the first time since 2014. The agency indicated on earnings calls throughout the year that competition remains high for deals and, through the third quarter 2017, it had paid a blended rate of about 8x EBITDA.
AssuredPartners also announced 25 U.S. transactions. Completing a reported 190-plus acquisitions since its founding in 2011, AssuredPartners has grown annualized revenue to more than $940 million. The company has 200 offices in 30 states and London.
We also saw continued interest from PE firms entering or expanding their portfolios within the insurance distribution space with first-time acquisitions made by the following private-equity backed buyers:
Baldwin Risk Partners (four deals) was founded in 2012 as a holding company above Baldwin Krystyn Sherman Partners, a middle-market multi-line insurance brokerage and consulting firm that was founded in 2006. See “New PE Players” for more on Baldwin Risk Partners and its funding structure.
U.S. Retirement Partners (two deals) is a national financial services company that specializes in employer-sponsored retirement and financial planning needs. It entered into the brokerage acquisition marketplace in 2017. Its private equity sponsor is Centre Partners, which invested in the firm in 2008.
AIMC (one deal) serves the senior market as a national developer and distributor of Medicare Supplement products. It merged with Integrity Group, a broker of L&H insurance products with financial backing from middle-market PE firm HGGC.
DOXA Insurance Holdings (one deal) is entirely focused on acquiring MGAs with less than $75 million in annual premiums. DOXA Insurance Holdings is backed by private funds and investors.
Gravie (one deal) entered the brokerage M&A market with its acquisition of Breitenfeldt Group in 2017. It received private funding from several sponsors during the year.
In addition, the following firms changed or added new private equity sponsors during 2017:
USI Holdings was backed by PE firm Onex Corp, which announced in January 2017 it was exploring the sale of USI. It hoped the deal would value the firm at $4 billion—nearly a 12x multiple based on reported EBITDA of $347 million in the 12 months leading up to the end of the third quarter of 2016.
In May 2017, KKR and Caisse de dépôt et placement du Québec (CDPQ) announced they would acquire USI from Onex, as equal partners, at a $4.3 billion valuation. CDPQ is a long-term institutional investor that manages funds primarily for public pension plans, which indicates there is not likely to be a quick flip of the investment as we typically see with more traditional private equity sponsors. We believe that this may signal an emerging trend of buyers with longer investment time horizons entering the insurance brokerage market. See “New PE Players” for more.
OneDigital Health and Benefits entered into a new sponsorship with New Mountain Capital, which purchased a majority ownership from Fidelity National Financial Ventures in mid-2017. OneDigital is exclusively focused on employee benefits and support, with more than 9,000 employees and more than 35,000 companies as clients.
NFP Corp. entered a definitive agreement with HPS Investment Partners to make a substantial minority investment in NFP. Announced in 2016, the deal successfully closed in February 2017. HPS invested $750 million in NFP. Madison Dearborn Partners, NFP’s previous sponsor, maintained its controlling stake in the company.
We also saw continued interest from PE firms entering or expanding their portfolios within the insurance distribution space with first-time acquisitions made by the following private-equity backed buyers:
Baldwin Risk Partners (four deals) was founded in 2012 as a holding company above Baldwin Krystyn Sherman Partners, a middle-market multi-line insurance brokerage and consulting firm that was founded in 2006. See “New PE Players” for more on Baldwin Risk Partners and its funding structure.
U.S. Retirement Partners (two deals) is a national financial services company that specializes in employer-sponsored retirement and financial planning needs. It entered into the brokerage acquisition marketplace in 2017. Its private equity sponsor is Centre Partners, which invested in the firm in 2008.
AIMC (one deal) serves the senior market as a national developer and distributor of Medicare Supplement products. It merged with Integrity Group, a broker of L&H insurance products with financial backing from middle-market PE firm HGGC.
DOXA Insurance Holdings (one deal) is entirely focused on acquiring MGAs with less than $75 million in annual premiums. DOXA Insurance Holdings is backed by private funds and investors.
Gravie (one deal) entered the brokerage M&A market with its acquisition of Breitenfeldt Group in 2017. It received private funding from several sponsors during the year.
In addition, the following firms changed or added new private equity sponsors during 2017:
USI Holdings was backed by PE firm Onex Corp, which announced in January 2017 it was exploring the sale of USI. It hoped the deal would value the firm at $4 billion—nearly a 12x multiple based on reported EBITDA of $347 million in the 12 months leading up to the end of the third quarter of 2016.
In May 2017, KKR and Caisse de dépôt et placement du Québec (CDPQ) announced they would acquire USI from Onex, as equal partners, at a $4.3 billion valuation. CDPQ is a long-term institutional investor that manages funds primarily for public pension plans, which indicates there is not likely to be a quick flip of the investment as we typically see with more traditional private equity sponsors. We believe that this may signal an emerging trend of buyers with longer investment time horizons entering the insurance brokerage market. See “New PE Players” for more.
OneDigital Health and Benefits entered into a new sponsorship with New Mountain Capital, which purchased a majority ownership from Fidelity National Financial Ventures in mid-2017. OneDigital is exclusively focused on employee benefits and support, with more than 9,000 employees and more than 35,000 companies as clients.
NFP Corp. entered a definitive agreement with HPS Investment Partners to make a substantial minority investment in NFP. Announced in 2016, the deal successfully closed in February 2017. HPS invested $750 million in NFP. Madison Dearborn Partners, NFP’s previous sponsor, maintained its controlling stake in the company.
Independent Brokerages Edge Up Slightly
Independent agencies and brokerages completed 136 deals, or 24% of all activity, in 2017. It was proportionately the same rate of acquisition as in 2016 (24%) but slightly higher in absolute terms from the 107 deals completed the prior year. There were 106 buyers (up from 83 in 2016), approximately 14% of which completed multiple transactions and 67 that announced their first acquisitions in 2017.
Cross Insurance, based in Maine, announced five deals in 2017 (one fewer than the previous year)—three located in Massachusetts and one each in Maine and New Hampshire. Cross is family owned and operated and has historically focused on the New England area. Cross has “absorbed” over 120 operations since its founding in 1954.
World Insurance Associates, based in New Jersey, announced five transactions in 2017 (in line with its five announcements in 2016), continuing its expansion of retail agencies in New Jersey and New York. Four of the five agencies acquired in 2017 were multi-line agencies. World Insurance Associates specializes in transportation, hospitality, coastal properties and high-net-worth individuals.
Ryan Specialty Group, based in Illinois, also announced five acquisitions during 2017, up from two in 2016. RSG is a specialty distributor, focused on the wholesale and MGA space. All five of its acquisitions during the year fell into these categories (four MGAs and one wholesaler).
Leavitt Group Enterprises, based in Utah, announced five acquisitions during the year, which varied across the western states of Washington, Colorado, Texas and California and included p-c firms, employee benefit firms and multi-line agencies. Leavitt is a top 100 p-c agency, with p-c revenues of almost $150 million in 2016.
These independent agencies each announced three transactions in 2017:
- Florida-based Acentria Insurance completed three deals in Florida.
- New York-based Evergreen P&C Insurance Agency completed one deal in Florida and two in Nevada.
- Arizona-based RightSure Insurance Group completed one deal in California and two in Arizona.
Seven other buyers reported two acquisitions each in 2017, with newcomers including Linnett Group and Hanson Insurance Group, which both announced acquisitions for the first time in 2017. We believe that the increase in the number of buyers in this category indicates that, despite the stiff competition in terms of agency valuations from the private-equity backed buyers, independent agencies are continuing to find ways to convince sellers there is more to life after the deal than purchase price.
Public Brokerage Share Remains the Same
Public brokerage activity was up 12% in total deal count during 2017 (37 announcements versus 33 in the prior year). However, the overall proportion of deals represented by public brokerages did not change from 7% in 2016. There were four public brokerages in the market during 2017 (unchanged from 2016 and 2015), compared to nine public brokerage buyers in 2005 and more than 100 independent buyers in the marketplace in 2017.
Gallagher announced 25 U.S.-based transactions, up from 23 in 2016. Last year was its most active acquisition year since 2014 and earned it a place among the top five most active buyers during 2017. Gallagher also announced eight international brokerage acquisitions, bringing the total count to 33 brokerage acquisition announcements.
Brown & Brown announced seven transactions during the year, a step higher than the four announcements from 2016.
Marsh & McLennan Companies completed four U.S.-based transactions in 2017, compared to five reported deals from last year. All four were completed by subsidiary Marsh & McLennan Agency, which is focused on the middle market.
The fourth public brokerage, CBIZ, completed only one deal in 2017, the same number as in 2016.
While activity was suppressed for some buyers, we expect public brokerages to continue seeking external growth opportunities to supplement their organic growth rates and meet investor expectations. The newly minted tax law has brought lower corporate tax rates that should have a positive impact on the after-tax cash flow of the public companies. Thus, we expect them to be more competitive in the market.
Rounding Out the Field
The buyer segment of Insurance Carrier & Other includes PE firms (direct investments from private equity firms themselves and not the previously described acquisitions through PE-funded insurance brokerage aggregators), underwriters, financial technology firms, specialty lenders and other unclassified buyers. Activity within this buyer group increased to 46 deals in 2017, up from 39 in 2016; however, proportionately, buyers in this group did not change much, representing 8% of deals in 2017 compared to 9% in 2016.
- PE companies accounted for 15 deals within this category, including some PE firms acquiring their second or third insurance brokerage business.
- Insurance carrier buyers completed 18 deals, compared to 13 the prior year.
- Non-PE, non-insurance companies (mostly credit unions, private investors and other undisclosed buyers) represented 13 deals within this category.
Banks and thrifts completed 22 acquisitions in 2017, largely unchanged from the 22 announcements in 2016, but represented only 4% of the total deal count, down from 5% in 2016. Acquisition activity in this segment has steadily declined over the past decade, as banks have either typically divested themselves of insurance operations or stopped acquiring at the same pace.
- There were 19 bank acquirers in the market in 2017 (seven of which announced their first transaction), with only three completing multiple transactions.
- Fifth Third Bancorp, Cashmere Valley Bank and OneGroup NY announced two acquisitions each in 2017.
International Activity Down
International M&A activity was not as robust as the domestic market during 2017. The total number of recorded announced international transactions, completed by both domestic and foreign buyers, during the year was 80, down from 98 in the prior year. There were 44 unique buyers internationally in 2017, down from 63 in 2016.
- Fifteen buyers were based in either the United Kingdom or the United States, representing nearly 70% of the international deal activity.
- Of the 80 deals announced internationally, 37 were independent agency/brokerage acquirers, 29 of which were PE-backed. In all, PE-backed agencies represented 36% of the international deals in 2017, far less proportionately than the domestic market.
- Public brokerages had a larger share of the market, making up 24 of the acquirers, or 30% of all deal activity.
Aon and Gallagher were the most active acquirers internationally, with nine and eight announcements respectively. One of the larger transactions announced during the year was Aon’s purchase of Netherlands-based Unirobe Meeùs Groep. Announced in August and completed in November, the acquisition was valued at €295 million, or roughly $350 million. Aon noted that the acquisition would help strengthen its small to midsize enterprise and consumer capacities within the geography.
The United Kingdom was the most active M&A market outside the United States and was home to 41 of the 80 target companies, or just over half of all international deal activity. Several holdings of Tosca Penta Endeavour Limited Partnership, a PE-backed firm, completed six of the 41 U.K. acquisitions, making it the most acquisitive in the geography. Nevada Investments Topco Limited (under the Finch Commercial Insurance Brokers Limited name) and Aon rounded out the top three buyers in the United Kingdom, with four and three acquisitions during the year, respectively.
Canada was the second most active venue during the year, though a distant second to the United Kingdom, with nine deals. Hub acquired five of the nine targets in Canada. Founded by the merging of 11 brokerages in 1998, Hub has its original roots in the Ontario and Quebec provinces of Canada.
Costs Drive EB Acquisitions
In 2017, employee benefits and consulting (EB) firms were involved in more M&A transactions than in any of the prior five years, at 123 deals (with another 144 deals involving multi-line firms). Ten acquirers completed two thirds of the announced EB transactions in 2017, with the five most active acquirers closing more than half of the announced transactions.
The top buyers of EB firms in 2017 included Acrisure, Hub, OneDigital Health and Benefits, Alera Group, and NFP and Gallagher (tied for the 5th most active acquirer). The next five most active buyers represented roughly another 15% of the transactions.
Employee-benefits firm owners who consider selling may be motivated by a number of things, including:
- Continued Market Uncertainty. The Affordable Care Act did not put EB firms out of business, but the lack of solutions to address the key problems related to the cost of healthcare have not been addressed, and that leaves the industry vulnerable to continued politicking. As a result, while the EB market continues to evolve, it is considered less stable by some, as compared to property-casualty, and that continues to drive many owners of well run, high-quality EB firms to consider a sale of their firm. That sale brings diversification and, frequently, access to p-c markets and the ability to cross-sell, as well as access to additional EB resources.
- Lack of Investment in New, Competitive Resources. The vast majority of employers with more than 50 workers continue to offer health benefits (90% of firms of 50-99 workers and 96% of firms with 100 or more workers), according to a survey conducted by the Kaiser Family Foundation in 2017. As health insurance costs continue to rise and premiums continue to increase, EB advisory firms are looking for ways to help employers keep costs in check and still provide a competitive benefit plan to their employees. This has led advisors to move from recommending fully insured medical plans as the bedrock of the benefit plan to offering more creative solutions, often involving self-funded plans, partially self-funded plans and captives, and tailored offerings of ancillary benefits and voluntary benefits.
As a trend, employee benefit plans are becoming more comprehensive of employee well-being and may include employee financial wellness, personal information protection and identity theft protection, and flexible work arrangements, in addition to the traditional medical coverage, employer-paid ancillary coverages, and voluntary benefits.
New Buyers with a Compelling Story. The number of buyers of EB firms has held consistent over the last few years, with Hub and Gallagher repeatedly in the top five. In December 2016, PE-backed Alera Group emerged on the scene by bringing together 24 independent agencies. Alera completed eight EB deals (of 15 total deals) in its first 12 months of operations, which is no small feat. This past year brought an additional uptick in activity in the employee benefits space from Acrisure, with 24 employee benefits deals (of 72 total deals) compared to three EB deals in the prior year, and from newly recapped EB firm OneDigital, with eight deals compared to three employee benefits deals in the prior year.
The most active buyers, which generally have large EB practices, have developed solutions and resources for their broker base nationwide, making them attractive to smaller firms struggling to finance and develop the resources required in the current competitive landscape. Buying firms continue to look for high-quality EB firms to join their organizations. High-quality firms typically have consistent organic growth, a youthful ownership group, strong operating profit, a sophisticated client service model, and/or some unique attribute to add to a larger organization, such as geographical presence, specialty expertise or programs, an innovative leadership team, or a unique approach to the market. These types of firms typically command higher valuations
Specialty Distributors Remain Attractive
Entering 2017, the environment for specialty distributor M&A was muted due to concerns about, among other things, the economy, political and regulatory uncertainty, market volatility and valuations. Those concerns waned as the year progressed due to the increasing prospects of significant pro-business legislation, including tax reform, which materialized at the end of the year.
As a result, deal flow in 2017 went gangbusters. Of the 557 announced transactions in 2017, specialty distributor deals represented approximately 13% of this total, or 74 deals. In absolute terms, the number of specialty distributor deals in 2017 (74) was up 7% year over year; however, on a percentage basis, 2017 continued a decreasing trend of specialty distributor deals as a percentage of total announced transactions.
Specialty Distributor Transactions (% of Total)
- Year-end 2017: 13%
- Year-end 2016: 16%
- Year-end 2015: 18%
- Year-end 2014: 20%
Notwithstanding this trend, we are seeing that specialty distributors continue to rank high on acquirers’ depth charts for a multitude of reasons, including:
- Inventory. Inventory of sellers remains high, particularly property and casualty sellers.
- Age. The average age of owners exceeds 54 years, and many baby boomers lack functional perpetuation plans.
- Valuation. The delta between internal and external valuations is significant.
- External factors. The economy is robust, and interest rates remain relatively low.
- Demand. Investors are plentiful and capital abundant.
Cost of capital. Debt capital remains cheap and access thereto easy.
Consistent with recent years past, private equity represented the largest buyer group of specialty distributors in 2017. Of the 74 deals, PE and/or PE-backed brokerages represented 37, or 50%. Private equity is now a household name with potential sellers.
Furthermore, many established consolidators are now pursuing investments in the specialty distribution sector. Traditionally, only a few consolidators—namely Gallagher (via Risk Placement Services), Brown & Brown, and Ryan Specialty Group—put their proverbial money where their mouths were in terms of specialty distribution platforms. Their consolidator competitors seemingly kept to the retail sector. However, this trend is noticeably transitioning. For example, last year we saw the following consolidators (all PE backed) acquire specialty distributor operations:
- Alliant Insurance Services
- Hub (via Program Specialty Group)
- Risk Strategies Company.
Specialty Distributor Top Buyers
The top five buyers of specialty distributor operations accounted for 23 (of 74) deals, representing 31% of the total specialty distributor deals consummated in 2017.
Leading the charge on the buy side was Hub’s Specialty Program Group, the specialty distribution arm of Hub, with six deals. Next in line was Ryan Specialty Group with five deals, followed by NFP, Assured Partners, and US Risk, each with four deals.
- Specialty Program Group (“Hub SPG”) = 6 deals
- Ryan Specialty Group = 5 deals
- NFP = 4 deals
- AssuredPartners = 4 deals
US Risk Insurance Group (“US Risk”) = 4 deals
Program Administrator Top Buyers
All six of Hub’s specialty distributor deals last year represented program administrators with significant contract-binding authority commission revenues. In other words, they took a pass on the traditional wholesale brokerage model, thereby ameliorating channel conflict with their large retail operations. Hub was consistent throughout 2017, closing one or more transaction(s) each quarter end. Hub’s acquisitions included a diverse mix of industries, p-c lines of coverages, and geographies, including:
- Transportation commercial lines via the acquisition of Paul Hanson Partners Specialty Insurance Solutions, based in California
- Financial and professional liability covers via the acquisition of Capitol Special Risks, based in Georgia.
Sharing the silver medal in terms of program administrator deals was the traditionally retail-focused consolidator Assured Partners, which made a large splash in the program administrator space with four acquisitions, and serial acquirer Ryan Specialty Group, also with four deals. Rounding out the top five were retail consolidators Acrisure and NFP, each with three deals.
- Specialty Program Group (Hub) = 6 deals (2 deals in Q4)
- AssuredPartners = 4 deals (3 deals in Q4)
- Ryan Specialty Group = 4 deals (3 deals in Q1)
- Acrisure = 3 deals
- NFP = 3 deals
Wholesaler Top Buyers
On the wholesale side of the equation, AmWINS Group, Gallagher, and US Risk each consummated two wholesale brokerage acquisitions.
Transaction Pricing and Structure
2017 wrapped up another seller’s market. High values remain prevalent, and the leveling of prices we saw in 2016 gained further momentum with platform, stand-alone and roll-in transitions all showing an increase in average total realistic purchase price multiples. However, in conjunction with the increase in purchase price multiples was an increase in the required growth rates to achieve the earnouts seen across most platform and stand-alone acquisitions.
Pricing Structure Breakdown
Two forms of purchase price are generally referenced in the industry: multiples of EBITDA and multiples of revenue. Here, we refer to multiples of EBITDA. To analyze transaction pricing, we’ll break the price down into three key components:
- Base Purchase Price: The dollar amount paid at close plus the live-out the seller is expected to receive.
Paid at Close: The amount of proceeds paid at closing, including any escrow for potential indemnification items.
Live-out: The amount a buyer may initially hold back but which is paid as long as the seller’s performance does not materially decline. This may also be paid at closing but could be subject to a potential adjustment. If the live- out is not paid at closing, this payment is usually paid within one to three years, contingent upon delivering on the seller’s pro forma revenue or EBITDA.
- Realistic Earnout: The anticipated purchase price to be achieved in the future based on a number of factors including seller historical and expected performance, buyer and seller realistic discussion of earnout metrics, etc.
Realistic Purchase Price = Base Purchase Price + Realistic Earnout
- Maximum Earnout: The additional earnout above the realistic earnout that, if achieved, would generate the maximum possible earnout payment.
Maximum Purchase Price = Base Purchase Price + Realistic Earnout + Maximum Earnout
Purchase Price Trends
For sellers, a key goal is to maximize the purchase price paid up front, or base purchase price. Buyers realize that how a company performs after the transaction is critical. The earnout, or “at risk” component, should fairly reflect the risk profile the buyer supposes that, for the seller, will ultimately help drive shared risks and rewards.
>> Earnout: A provision of the purchase agreement that states the seller is entitled to future compensation if it achieves certain goals, typically related to growth of revenue or EBITDA. In past years, stemming from the overall market- and industry-specific conditions, buyers sometimes reduced the base purchase price and shifted a larger portion of the total purchase price to the earnout. We saw this shift most recently in 2012.
However, up until last year, we saw continued increases in the amount sellers were paid up front, with gradual increases in the earnout potential as well. This past year showed a renewed increase in both the base purchase price and the earnout, with a more notable shift seen in the platform and roll-in acquisitions. However, buyers are also expecting greater growth hurdles for sellers to achieve higher earnouts due to the increase in base valuation.
>> Pricing Ups and Downs: In 2017, the average base purchase price increased nearly 0.24 times EBITDA (or 3%) to 7.97 times EBITDA. The average realistic purchase price was 8.84 times EBITDA in 2017, up 0.31 times EBITDA (or 4%) from 8.53 times in 2016. The additional maximum earnout potential in 2017 was slightly lower than last year (0.07 times, or 4%), resulting in an average maximum purchase price of 10.37 times EBITDA in 2017, which in total is up 0.25 times (or 2%) compared to 2016.
Industry Close-up: A Look at Purchase Transactions
Agency and brokerage transactions are classified into three major categories: platform, stand-alone and roll-in.
A platform agency is typically a larger agency that has a well-established territory, brand recognition, seasoned professionals and scalable infrastructure, among other attributes. The buyer of a platform agency is typically looking to establish a presence in a specific region or niche.
A stand-alone entity may be based on size or geographic location. The firm is large enough to maintain its physical presence but likely reports into a larger platform within the given region.
Whereas multiples for these firms dropped in 2016, we saw in 2017 an increase back up to levels consistent with those of 2015. Both the average base purchase price and realistic purchase price increased 3% over the prior year to 7.93 times EBITDA and 8.79 times EBITDA, respectively.
A roll-in transaction typically involves the sale of a small, privately held agency or book of business, which gets physically rolled into the buyer’s existing operations, either at closing or within a reasonably short period of time.
In 2016, we saw a shift in focus for many buyers who acquired smaller roll-in firms with one assumption: that buyers were looking to complement their network of platforms. Another assumption made was that, due to the high valuations that have continued to increase over the last five years, buyers were looking to blend the average multiple paid across their acquisitions. We believe this trend continued through 2017. The average base purchase price increased 9% in 2017 to 7.20 times EBITDA, and the realistic purchase price increased 6% to 7.81 times EBITDA.
While purchase prices remained relatively flat in 2016, we saw a renewed increase in valuations in 2017, climbing to an all-time high despite rising interest rates and an uncertain tax environment. If early 2018 transactions are any indication, we believe the valuation environment will continue to blaze despite the continued economic uncertainty.
Just like in 2016, nine of the top 10 buyers in 2017 were backed by private equity—with one public brokerage rounding out the group. There has been a significant increase in private-equity backed buyer activity during the past 10-plus years—PE represented just 7% of deal activity in 2007. Each buyer has a unique approach to acquisitions. We asked them to share a bit of their strategy.
Last year, an uncertain political climate and concern over how tax reform would impact valuations led many to believe those factors would be the needle that popped the so-called bubble. But in fact, valuations are holding their ground for now.
We expect the total number of deals in 2018 to still be strong. And we anticipate seeing a fair number of larger firms potentially selling this year, with rumors of these significant deals supporting an outlook that 2018 will be a dynamic, exciting year for M&A.
What will continue driving M&A in 2018? Aside from attractive multiples and valuations, we are seeing a diversification of buyers. New private capital includes family offices, pension plans, sovereign wealth funds and long-term equity that is giving agencies an opportunity to focus on strategic growth. And it’s giving agencies options—more players at the table in addition to traditional private equity, which we expect will continue its assertive role in insurance brokerage M&A.
As the U.S. economy stays on a path of moderate growth—with positives like consumer and business spending and tax cuts freeing up disposable income—we do expect some higher interest rates in 2018. That said, any increase would bring rates to more “normal” levels. We believe that the moderately growing economy along with a potential hardening rate environment should result in more organic growth for agencies.
There is an undeniable uncertainty related to U.S. trade regulations, the stock market, government spending and regulations. No one is sure of the timing of changes—but what we can say with confidence is the factors we thought would potentially put a dent in M&A activity have not done so…yet.
We are beginning to see growing concern that the slow, steady fire that was burning in the economy may be flashed out by a number of different accelerants. The biggest concern is the long-term effect of the new tax code. While it may not have an immediate impact on 2018, it is our opinion that valuations are going to take a hit leading up to 2022.
The new tax code created lower corporate tax rates but also put a limitation on the deduction companies can use for their interest expense. Currently, they can deduct interest expense equal to only 30% of the firm’s earnings before interest tax depreciation and amortization (EBITDA). This is a significant change for firms that are heavily leveraged with debt. Some firms in the industry have debt equal to 7-8x their EBITDA on their balance sheet. This creates a lot of interest expense.
In today’s marketplace, the reduced tax rates offset the impact this limited deduction has on buyers. However, in 2022, the 30% limit starts to measure off of earnings before interest and tax (EBIT), which is a much smaller number for acquirers in the marketplace because of the significant amount of amortization they have from all of their historic acquisitions.
So what does all of this mean to you? It means that the cash flow of buyers is likely going to be significantly reduced in 2022 and beyond. Buyers are going to have a few options. They will likely either deleverage (which means reduce the amount of debt on their balance sheet) or be willing to take lower returns.
As we take a step back and look at this logically, the second option doesn’t seem like a real option. Firms putting private capital into the insurance distribution market are in the business of making money. Hoping that these financially oriented investors will make a lower return so that high valuations can continue is not the most prudent bet in our opinion.
What is more likely to happen? Buyers are going to use less debt in their deals. This means they are also likely to reduce valuations because they are not going to want to put more equity into their investments.
Additionally, the Fed intends to increase interest rates, which will likely exacerbate the problem. You can expect PE-backed firms to trade out their sponsors in the next couple of years because, if they wait and increased interest rates coincide with lower leverage, the larger firms are not going to get the valuations they counted on when they raised their capital from their current sponsors.
The sky isn’t falling yet. But we think you can expect changes in the market—and most likely very soon. We believe the volume of deals will continue at a record pace—59% of ownership still sits in the hands of baby boomers, and more and more private capital thinks insurance is a solid investment. We are confident, as are many of the private-equity funded buyers, that valuations will decline rapidly as we march toward 2022.
What’s to love
The weather! Further, downtown has gone through a dramatic change in the last 20 years and is a busy place 24 hours a day. There are new restaurants, hotels and attractions. It’s a safe city and a great place to live and work.
There are so many restaurants opening these days. You can find any kind of food and atmosphere you might want.
My favorites are two family-owned Italian restaurants, La Bruschetta Ristorante and Guido’s Restaurant, both of which are on the West Side. La Bruschetta is more elegant. The chef and owner, Angelo Peloni, has been making his homemade pastas and breads for 35 years. Guido’s serves more traditional, family-style dishes. But I like both of them for the same reasons. Everyone is friendly, the service is excellent and the food is delicious. Guido’s also has an outstanding wine list and a well-stocked bar. I love to entertain clients there.
My favorite watering hole is The California Club, which is in a landmark building in Downtown, across the street from my office. It’s one of the friendliest places I’ve ever been. While it is private, many of our “visiting firemen” stay here. The third-floor bar has an outdoor patio. In excellent L.A. weather, it is a delight in the evenings. I’ve never made a request that the staff hasn’t happily accommodated. As we say around the Club, what makes it special is that “it works.”
If you want to stay downtown, I’d recommend the J.W. Marriott Los Angeles L.A. Live, which is in the heart of things. You can walk to many good restaurants and the Staples Center. On the West Side, the only place to be is The Peninsula Beverly Hills. It’s a beautiful hotel and close to the shops on Rodeo Drive.
I love to hike with my dog, and there are many delightful areas to hike in the hills in town and up in the Santa Monica Mountains. Temescal Canyon is one of the easier places to hike. Most trails are about two hours up and down. The views are incredible. On a clear day, you can see all the way from Century City to Manhattan Beach.
Remember that everybody on our freeways are the survivors, so they’re much better drivers than most people think.
April 4, 2018, marks 50 years since Martin Luther King Jr. was assassinated while standing on a balcony at the Lorraine Motel in Memphis, Tennessee. Today, the motel is part of the National Civil Rights Museum, where interactive exhibits, oral histories of civil rights foot soldiers, and emotionally charged historical documents, objects and images tell the story of the American civil rights movement as well as five centuries of history preceding it.
As you walk to the museum’s entrance, along the motel, past room 306, where King stayed, you can stop at listening posts to hear the personal stories of people who were there in 1968 during the sanitation strike and other events that led to his death. It is a powerful experience.
What most people don’t know is that the Lorraine Motel is also entwined with the city’s musical history. An African-American couple, the Baileys, purchased the motel after World War II, creating an upscale place for black musicians to stay and play when they were in town recording at Stax Records. They also welcomed white guests (Steve Cropper, the guitarist for Booker T. and the MG’s, wrote “Knock on Wood” here) and served home-cooked meals to soul greats like Wilson Pickett, Otis Redding and Aretha Franklin. As Isaac Hayes was quoted as saying about the Lorraine, “We’d lay by the pool and Mr. Bailey would bring us fried chicken and we’d eat ice cream… We’d just frolic until the sun goes down, and [then] we’d go back to work.”
You can learn more about this chapter in Memphis history, a strand of the city’s DNA, at the Stax Museum. The self-guided tour begins with a short film that includes archival footage of performances and interviews with the musicians who worked at Stax, many of whom, like Cropper and David Porter of Sam & Dave, lived in the neighborhood. The tour lays the foundation for exploring the fascinating exhibits that document the evolution of the Memphis sound.
Jim Stewart, who founded Stax with his sister, Estelle Axton, was inspired to become a music producer by Sam Phillips, a Memphis radio technician who founded Sun Records and Sun Studio, where Elvis Presley made his first recordings. A stop here is another don’t-miss Memphis experience. A plumbing business and auto parts store set up shop in the studio during the two decades it was closed, but today the studio appears much as it did in its heyday. Among the cool features of this birth-of-rock-’n’-roll tour: listening to the original audio of Elvis, Johnny Cash, Carl Perkins and Jerry Lee Lewis bantering during an impromptu jam later dubbed the “Million Dollar Quartet” session.
Both markets, however, benefitted from underlying improvement in the U.S. economy and relatively strong capital markets. In short, both are in decent fighting form entering 2018.
The U.S. p-c industry has been in an above-average financial position for most of the past 20 years, with the exception of the late 1990s to early 2000s. During this time, rates dropped considerably, and the U.S. entered a recession, causing financial distress at a number of large p-c organizations. The hard market pricing that ensued from 2000 to 2004 resulted in strong earnings and larger net capital gains, both of which helped repair balance sheets.
ALIRT has developed an industry composite score derived from 45 financial metrics that measure individual insurers on a holistic basis. These composite scores mark the financial pulse of the entire industry over time. Since the global financial crisis of 2008-2009, the industry has bumped along the long-term industry average score of 50, except for the period of 2013-2014, which benefitted from both low catastrophe losses and a “mini” price firming cycle. Gradual improvement in the U.S. economy has also helped boost exposure units.
As of nine-month 2017 financials, despite the large catastrophe losses, personal lines saw a higher ALIRT score than commercial, reflecting stronger net capital gains and improved parent company growth and earnings. The commercial lines score, however, saw a seven-point decrease due to weaker underwriting and operating profitability.
In 2018, aggregate industry rates should trend up slightly for commercial lines and somewhat higher for personal lines (largely in auto) while prior-year reserve releases remain positive but ease for both sectors.
In a “normal” catastrophe environment, look for near break-even underwriting results for commercial lines, with the personal lines industry perhaps a bit worse than break-even. While the relationship of rate versus loss-cost trend is important, much will also hinge on expense control and the quality of selected risks.
The contribution from investment income may continue to wane as current money yields catch up to portfolio yields. However, higher interest rates should ultimately boost operating profitability. Equity markets remain a wildcard.
Financial performance differs across the board in the commercial lines arena, with subsidiaries of Chubb, The Hartford and Travelers tending to outperform, while those owned by Liberty Mutual and AIG currently exhibit weaker financial profiles. Absent any extreme loss event, capacity remains ample for commercial and personal p-c sectors, dampening upward pressure on pricing; however, overall, the U.S. p-c market seems disciplined.
Larger Health Insurers Stable
The health insurers tracked by ALIRT have shown more stable scores than their p-c counterparts, reflecting relatively narrow swings in underwriting and operating profitability and a stable surplus/capital base. These scores have also trended above the long-term average health insurer score in each of the past 12 years, indicating that the 100 companies comprising the composite tend to be larger and more stable than the many small health insurers tracked by ALIRT.
Membership and premium growth have trailed off for the composite since 2012, with the exception of 2015, when both metrics rose due to higher enrollment in public exchanges. Premium growth, however, has consistently exceeded membership growth, given the impact of steady rate increases. The industry’s risk-adjusted capitalization has deteriorated somewhat over time, and insurers report more aggressive net premium leverage and large dividends paid out to parent companies.
The uptick in the composite’s score in the third quarter of 2017 largely reflects a sharp improvement in underwriting and operating profitability, as both medical loss and expense ratios improved (the latter helped by a one-year suspension of the Affordable Care Act’s health insurance tax).
In 2018, aggregate industry premium growth remains in the mid-single digit range while plan membership lags. The industry will continue to report a larger mix of government-sourced business while traditional commercial and individual health enrollment flatlines or declines.
Outsized underwriting profitability may fall back to longer-term averages, in part due to the return of the ACA fee, which will put upward pressure on expense ratios. That said, incremental improvement in the medical loss ratio over the past several years could well persist.
The industry will remain adequately capitalized despite the likely continuation of sizable shareholder dividends paid to large publicly traded parents.
Scale remains important, benefitting the large national health organizations. Almost all of the large national carriers tracked by ALIRT exhibit financial profiles substantially stronger than that of the industry average. Smaller health insurers, which lack the necessary scale, often exhibit much weaker financial profiles, resulting in scores well below composite average. Large groups should continue to make investments in technology/data mining as well as pursue additional strategic acquisitions, including provider groups.
David Paul is principal at ALIRT Insurance Research. firstname.lastname@example.org
What will happen with the brand, technology and human resource functions? How will the coming together of two organizations impact the culture? What does it mean for the people?
Without thoughtful consideration of the following different integration items and approaches, sellers may find themselves facing challenges to preserving their culture during the transition from independent agency to third-party ownership. If expectations are not clearly set or communicated in an effective way, changes in staffing, policies and procedures may negatively impact the culture an owner has worked so hard to build. It can be very easy in the event of a sale to create a perception of secrecy and exclusion if the impact to employees’ roles, responsibilities and compensation is not clearly communicated in a timely manner.
To be sure, integration means different things to many buyers and sellers, and that’s because there are several different approaches to the process. In our experience, buyers generally can be categorized into three buckets in terms of how they view integration: centralized, decentralized or somewhere in between. (See what we mean by murky waters?)
- Centralized: Buyers operating under a more centralized structure integrate acquired companies into a larger corporate infrastructure in all functions, including IT, accounting, HR, claims and licensing.
- Decentralized: Buyers in a decentralized structure absorb few, if any, duties on the local level. Usually after the deal closes, day-to-day operations do not change.
- Somewhere in Between: Not all buyers fall into the completely centralized or hands-off categories. Plenty of buyers take a hybrid approach and will roll in certain operations (accounting and HR, for example) while leaving other areas up to local offices.
The reality is sellers typically do not know what to expect when it comes to integration, even though they often have goals they want to achieve. Some sellers relish the idea of getting rid of all things accounting/finance, while others have a strong, strategic accounting/finance function and want to maintain that at a local level. And sellers can mistakenly assume that by “giving up” functions to corporate, they’re eliminating a cost. However, responsibilities that the buyer decides to centralize often come at a cost to the seller’s income statement, impacting the earnings before interest, tax, depreciation, and amortization (EBITDA) at closing and during an earnout period. So while a seller might think an operating expense is eliminated, the buyer is actually replacing that with some type of cost allocation. For this reason, among others, it’s important for buyers and sellers to come to the table with a clear understanding of each other’s integration expectations and goals.
Four Key Integration Areas
We believe branding, IT, HR and accounting/finance are key to integration. Here’s how different acquirers treat those operations based on their approach.
Branding: Branding integration can take on many different forms. Some buyers are quick to transition letterhead, logos and websites—they want to maintain brand continuity and leverage a strong national reputation in the marketplace. Others make little to no changes to marketing or branding. Buyers might allow acquired businesses to maintain their logos, websites and trade names in the marketplace. These buyers might even forgo a public announcement of the transaction or reference to the change in ownership. Finally, there are acquired agencies that carry two sets of business cards—depending on the client or prospect they are visiting, they may use whichever one they feel gives them an advantage at the table.
When there is a transition, we often see the buyer and seller work together to gradually implement branding initiatives. An acquired business might use its own brand and/or co-brand as a “division” or “partner” of the acquiring agency. The co-branding phase can last months to a year, depending on the circumstances.
Information Technology: There are several phases of IT integration. First come simpler tasks that are tackled soon after a transaction—like creating new email addresses or redirecting website traffic to a new landing page. Other IT-related issues, such as getting the seller under the same contract for duplicative software and systems (e.g., agency management systems, ratings software, subscriptions), may not be so easy. The acquirer might have to let the term of the current contract with the vendor run out before consolidating onto one master agreement. Other applications may be so unique to a seller’s niche that the buyer doesn’t currently utilize anything substitutable, so nothing changes. Hardware like phones, printers and computers tend to be handled case by case, with some larger national buyers utilizing national contracts but many leaving these to be managed locally. Some buyers do not even require a common agency management or accounting system if monthly reporting can be completed in an acceptable format.
Human Resources: Some buyers synchronize timing of raises and reviews, standardize titles and paid time-off allowances, while others allow acquired agencies to keep their own schedules and policies. Nearly every buyer in the marketplace will require a seller and its employees to terminate their benefit and 401(k) plans and join the parent company’s plan. Often, there are concerns about employment discrimination or fairness that could be raised if different benefits are being offered to different employees of a parent company. Recruiting and onboarding are also handled differently by different buyers, with some opting to use national/corporate resources to potentially draw a larger pool of candidates and others leaving these tasks up to local offices, where there is a greater knowledge of the community and available talent.
Accounting and Finance: Accounting and finance tends to be the area most integrated by buyers, regardless of size. There are often meaningful efficiencies to be gained by consolidating functions like accounts receivable, accounts payable and direct bill reconciliations. Most buyers have a corporate chief financial officer who will either manage a corporate team of accountants or the agency’s local staff. Accounting policies and procedures are often standardized to make sure reporting across agencies is consistent.
Is Integration Really a Dirty Word?
Integration can be the elephant in the room during an M&A transaction. There are plenty in the marketplace that view integration as a dirty word, and they’re reluctant to discuss it in detail early on in the transaction. Many integration details do not emerge until after a letter of intent has been signed. But having the talk sooner and maintaining open communications is key. Sellers should know how and in what ways their organizations will be integrated after the deal is done. How will the transaction impact the operations and culture? Do the buyer’s goals and objectives align with their own?
Some sellers are eager to release themselves of certain corporate responsibilities and decisions, while others are interested in maintaining complete autonomy after a sale. Not having a clear understanding of where a buyer may fall on the spectrum could lead to either a deal that does not close or disappointment and resentment after the fact when expectations fall short of reality. So talk about integration early and often. Make this discussion a part of the M&A transaction process so there are no surprises after the ink dries.
The demand that continues to drive activity within the industry seems to be endless. And it has led to more investor diversification, creating a new category of investor—private capital.
The typical private equity structure includes funds that deploy capital raised from multiple sources. The PE firms focus on a strong return that is created through earnings growth and an exit strategy typically three to seven years long. Private capital includes traditional PE players, and it extends to other sources, including family offices, pension plans, sovereign wealth funds and independent capital. These investors, who typically are investing directly into PE funds, are recognizing the value of buying into the insurance brokerage space: recurring revenue, stable performance, a must-buy product, relatively low risk. They are making the decision to bypass the PE fund and are investing directly. Additionally, many of these private capital investors bring a long-term perspective to the table. For example, when BroadStreet Partners aligned with the
Ontario Teachers’ Pension Plan, it was told an average hold was 18 years.
How are these new private capital players partnering with insurance firms? What opportunities are they providing in the industry, and how do they complement private equity as we know it? The deals that follow showcase the different types of private capital.
The Long View
USI Insurance Services
“We wanted to get off the treadmill of trades that happened every three to five years,” says Ed Bowler, chief financial officer at USI, an insurance industry leader that started in 1994 as a single office of $6.5 million in revenue and 40 associates and today is approaching $2 billion in revenue with more than 7,000 associates in 150-plus offices.
While the ongoing buy/sell cycle with PE meant a “mark on the equity,” Bowler explains that it also can be distracting, time-consuming and expensive. “We had been hearing about more permanent capital, or evergreen capital, coming in, so we took it upon ourselves to reach out in the marketplace.”
USI interviewed pension plans and long-term equity funds that put capital out over a 10-year period—double or more what USI had been experiencing with traditional private equity.
Then, the KKR/CDPQ proposal came forward. KKR had accumulated a healthy sum on its publicly traded balance sheet that it wanted to invest long-term. It created a joint venture with Caisse de dépôt et placement du Québec (CDPQ), and their core private equity partnership (including KKR’s funds and CDPQ’s pool of capital) allows for attracting investment opportunities with a longer duration and lower-risk profile.
This was exactly what USI was seeking—a partner that could support strong management and long-term strategic business building. And for KKR/CDPQ, the insurance industry and USI were enticing because of the stability of the industry and USI’s history of high performance. “We reached out to them and had the discussion and really liked what they had to say,” Bowler says.
In March 2017, KKR/CDPQ acquired USI from Onex Corporation. “This is the final owner of USI, as far as I’m concerned—and we’re real excited about that,” says Bowler, who has been with the firm through seven owners.
The long-term investment means internal rates of return (IRRs) are not as important, Bowler says—it’s more about “money on money.” Bowler points out, “I can’t spend IRR; I can spend money on money, so I’m happy with that focus and growing that capital.” While IRRs are critical to traditional PE funds for raising capital for the next fund, “they are less important to pension plans,” Bowler says. “And with what KKR has on its balance sheet, they were looking more for multiples of money over time.”
What will change at USI with a longer-term owner? With new acquisitions, will those owners have equity in the deal, and what does liquidity look like for management and future leaders in the firm?
After five years, there will be a potential for internal trades. But, Bowler says, “most of our people aren’t selling their shares, and we don’t have the cry for liquidity now. We will likely have an internal process not dissimilar to what an employee stock ownership plan does if people do want to cash in and gain liquidity.”
If USI meets its goals, it will begin paying out dividends five to six years out from the time of the trade. “Assuming we achieve our plan, this will be a dividend-performing stock because of the cash flow,” he says. “So, if you hold your shares, you are going to start getting chunky dividends in years five, six, seven and so on.”
The business will prosper as it continues strategically growing without being on the “PE toll road,” which results in costly trades every few years, Bowler says, noting that he envisions more pension plan and long-term equity opportunities for the insurance industry. “They like the insurance brokerage world for all the reasons we know—the recurring revenues, it’s a product that needs to be bought and there isn’t the obsolescent risk.”
Greg Williams believes that Acrisure is unique. And as co-founder and CEO, he wanted to keep it that way. But the rolling ownership of PE made that difficult. In early 2016, when the company’s private equity partner Genstar Capital had decided to exit, Williams began discussing ownership options with his operating partners. The company had acquired 150 agencies over a three-year period, so a prosperous and meaningful exit was contemplated by all parties.
“I asked two simple questions,” Williams says of his conversation with his agency partners: “Are you interested in rolling equity assuming we secure a new capital partner that supports our objectives? And if so, how much equity would you be interested in rolling?”
Williams was pleasantly surprised when 99% of his agency partners said yes—they were in. And he was thrilled their aggregate equity roll was approximately 60%. So Williams did the math and figured that, with a slightly higher equity roll, he could present to a new investor a capital structure that would result in Acrisure’s management team and its operating partners becoming the majority shareholder of the business, including governance control.
“I felt strongly if we had majority interest and board control, it would help us grow from an M&A perspective, given there would be permanence in our capital structure. This permanence would ensure our unique and highly appealing operating model would not change, and our agency partners would not have to concern themselves with another sale of the business. We would be officially off the private equity train,” Williams says.
The value proposition was important, as Williams later had to go back to his operating partners with a specific request—he needed 75% of equity. For two and a half weeks, Williams and Acrisure’s chief acquisitions officer, Matt Schweinzger, did a “road show” for the company’s top 60 shareholders individually. They hit four or five cities a day, holding personal meetings. “We laid out a proposed capital structure if we rolled 75% of our equity,” he says.
It was a highly attractive scenario with a very positive reaction. “It gave me the opportunity to then go to potential investors in the market and say, ‘Look, we are more of a buyer than a seller. We are rolling approximately $700 million in equity.’” Williams offered a preferred equity position in exchange for governance control. “I received a number of interested parties,” he said of third-party investors. What resulted was a $2.9 billion management-led buyout. Today, the management team and its operating partners own 82% of the common equity, with outside investors owning 18%. Further, “we control the governance of the company, which is translating to comfort internally and externally because current and prospective partners don’t have to worry about that flip in three years,” Williams says.
The ultimate objective: “We want to own 100% of the business—and we are well on our way to achieving that.” Ownership and governance control is a competitive advantage in the marketplace, Williams says. “It makes us unique—it’s the private equity model turned upside down,” he says. “Value creation benefits owners, so our operating partners benefit from our growth at a disproportionate rate as compared to our competitors,” Williams says. “And, given our international expansion, our story is now being told in different parts of the world,” he adds.
Acrisure will continue to build the business both organically and through M&A, driven by a great deal of enthusiasm with its operating partners. Williams added “the excitement for being part of Acrisure is very high, evidenced by the number of employees that desire to become shareholders. We have an internal market that allows employees, based on certain criteria, to register to buy shares. Currently, the number of registered buyers to sellers is 10 to 1,” Williams says.
Looking at the value of the Acrisure stock today compared to 2013 when Genstar acquired the firm, the operating partners have realized over 11 times multiple on their equity, Williams says. “This has created wealth beyond their wildest dreams.” And, because of that dynamic, there is “extreme enthusiasm to continue growing the business both organically and inorganically,” Williams says.
Head of the Class
For more than five years, BroadStreet has been aligned with the Ontario Teachers’ Pension Plan (Teachers), the largest of its kind in Canada, with more than $200 billion in assets. As an investor, Teachers provides BroadStreet with a long-term capital base that has helped drive consistent, high growth for the company.
It all started in 2012 when BroadStreet began exploring alternatives to support its growth plan, says Rick Miley, who founded the business in 2001. At that time, State Automobile Mutual Insurance Company (State Auto) was BroadStreet’s primary partner, and its funding appetite was not as strong as BroadStreet’s desire to grow. Both agreed that a change was necessary in order for BroadStreet’s model to flourish.
With State Auto’s support, BroadStreet began to explore a number of options, which included meeting with several private equity firms. “We had upwards of 10 individual PE companies come visit with us and discovered that they weren’t a good fit,” Miley says. The three- to five-year investment time frame was not appealing to BroadStreet, which was looking for a more stable capital base. “We needed a financial partner, not an investor with a pending flip date. Our business is based on a co-ownership model, which gives our core agency partners the freedom to run their businesses independently. In order to do this effectively, we needed a financial sponsor with a long-term outlook.”
Then, Teachers approached Miley. “They said they wanted to get involved in the insurance distribution business, and we connected—and that connection developed into them buying out State Auto’s interest,” Miley says. As for taking on a pension plan as a financial sponsor, “they think in decades rather than years,” Miley says. “We found out that their average hold time for a direct investment far exceeded the typical private equity time frame, and that was music to our ears.”
Teachers’ long-term investment horizon has made all the difference. “Alongside our core agency partners, we are developing this business knowing that Teachers has a desire to hold it a long time,” Miley says. “They encourage our core agency partners to bring on new producers, and they support capital expenditures in technology and scalable resources. They are averse to high amounts of debt and leverage, so we have a lower leverage ratio than most of our peers. In turn, our core agency partners generate significant free cash flow, and we use this cash to fund acquisitions, distribute dividends to our core agency co-owners and reinvest in the business.”
BroadStreet’s co-ownership approach is an important distinguishing feature of its model that aligns interests and pairs well with a long-term view of the business. Importantly, BroadStreet creates and encourages liquidity for co-owners. “Our business thrives when ownership transitions among core agency leaders. Having an available market for our core agency partners to enter and exit equity holdings is critical for succession planning and reinforces the culture of ownership at our core partners,” Miley says.
Looking toward the future, BroadStreet anticipates a continued long-term relationship with Teachers and continued growth, which includes supporting its core agency leadership teams and creating opportunities to develop the insurance brokerage industry’s next generation of talent.
All in the Family
Baldwin Risk Partners
Aligning with a family office to provide long-term capital has given Baldwin Risk Partners a “forever partner” with multi-generational investors and complete control over their business. “We are insurance entrepreneurs and want that freedom and flexibility,” says Trevor Baldwin, president.
The model is a significant differentiator in the marketplace, according to Baldwin. “We want to build an organization that is a true partnership,” Baldwin says. “So what we have created is the best of both worlds: we have the operating environment and flexibility of a boutique privately held firm with the economic engine of a PE-backed business that allows us to create liquidity for partners and supercharge returns on the business.”
Baldwin Risk Partners’ share price has increased 450% during the last five years. “That doesn’t include the dividends we paid, which were substantial,” Baldwin says. “Factor that in, and you’re looking at close to a 700% return in five years, which you’re pressed to find anywhere. We expect that in the long-term, over the next five to 10 years, we can continue to generate annual returns in the 30-50% range for our shareholders.”
Baldwin says the ultimate goal is to be recognized by clients as a firm that delivers industry-leading innovative advice, ideas and solutions. When the time came in 2015 to bring in additional capital, they had to think outside of the box. Baldwin joined the organization in 2010, when the business was about four years old. He led a restructuring, the formation of the Baldwin Risk Partners holding company and the plans for strategic growth. “We were at a point of raising third-party capital, and we spent the next few years preparing for larger-scale growth—building out infrastructure, recruiting the right talent.”
Baldwin Risk Partners’ capital-raising efforts were not at all focused on liquidity, Baldwin says. “In fact, no shareholders of the business received any liquidity when we raised capital—it was all about growth, expansion and the creation of scale,” he says. The company recognized it was at a point where it needed to sell into the wave of consolidation happening in the industry or consolidate itself, “because scale was, and is, increasingly important,” Baldwin says. “We needed the ability to invest in and afford the type of resources necessary to remain relevant and impactful to our clients, and we needed the scale to access capital markets in a manner where we could leverage our balance sheet to create value for current and future shareholders.” What Baldwin did not want was a five-year turn.
They approached a number of capital providers—pension funds, sovereign wealth funds, family offices, and money center banks. The firm ultimately chose to partner with a family office for a couple of reasons: (1) it had an ability to provide continued capital; and (2) Baldwin Risk Partners could maintain control over the business. “The family office investor is essentially a passive investor,” Baldwin says.
The company accomplished its partnership with the family office in 2016 in the form of a preferred equity security that offers a fixed-rate return investment for the family office investors as well as some minority equity that vests over time. “It looks and feels a lot like debt but is structured like preferred equity as far as how it sits in our capital stack,” he says.
This tool gives Baldwin Risk Partners the flexibility to use leverage in a way that provides economic parity to its private-equity backed peers and the freedom to operate the business as a long-term independent brokerage firm, Baldwin says. “It’s the best of both worlds.”
Unlike private-equity peers, Baldwin distributes annual dividends. “Our capital is such that we don’t need to reinvest that into M&A, so our partners continue to get dividends on the equity they roll into the business, which is a nice way to access continued cash flow and makes the experience of ownership feel like what they’re used to as a sole proprietor or closely held private agency,” Baldwin says.
Last year, Baldwin Risk Partners’ organic growth was approximately 25%. It’s expecting similar growth this year. Baldwin says, “By being insurance-entrepreneur owned and controlled, we can generate great returns and create terrific results and outcomes for our clients.”
A True PE Partnership
In 2013, NFP embarked upon a pivotal $1.4 billion go-private transaction with Madison Dearborn Partners (MDP), a leading PE firm. This provided NFP with significant opportunities for future growth. In 2016, just three short years later, NFP had been so successful in executing on its five-year plan that a second PE firm decided to invest. The interest from a second PE sponsor was a gratifying validation of NFP’s strategic approach. “We were extremely proud of what we had accomplished. In particular, the real proof of our success occurred when other PE suitors came knocking at our door so soon after the initial go-private transaction,” says Adam Favale, senior vice president of M&A at NFP.
The company was prepared for the quick turn typical of PE investors when it entered into an agreement with HPS Investment Partners, a global investment firm, in which HPS assumed a substantial minority investment in NFP. MDP maintained a controlling stake in NFP alongside its management and employees.
Rather than the traditional PE-backed arrangement with one investment firm in the picture, NFP has two PE players at the table, and each brings valuable perspectives, says Carl Nelson, executive vice president of M&A at NFP. “They really act collaboratively,” Nelson says of MDP and HPS. “We feel fortunate to have two exceptional sponsors that are constructive, thoughtful and supportive partners,” he adds.
At NFP, employees and management, including the entrepreneurs that sold their businesses to NFP, own approximately 20% of the equity. “So we have a pretty big stake,” Favale says, noting that the remaining PE partners own the rest of the shares.
What about entrepreneurs who sell to NFP in the future? Many of them will become equity owners of NFP in connection with the sale of their businesses, and the equity is all one class of stock. This means it’s the same for all investors, employees and executives. “The single class of stock is important,” Nelson says. “It’s the same valuation, same terms.”
Nelson relates how NFP has built the business for the long term and maintains that point of view with liquidity. “We don’t have a view on the timeline of a future liquidity event,” he says. “If you build the business for the long term, liquidity will come at the right time and place.
Favale adds, “We have enjoyed partnering with like-minded investors. MDP and HPS have fully embraced our vision on how to grow the company, which allows us to execute on the strategic business decisions that not only align our employee and client interests but also reinforce the values that are core to our company philosophy.”
The New Faces of Private Capital
Whether an agency is planning to sell or perpetuate, these new private capital players are making a marked impact on the industry, and we believe they’re here to stay. They provide more options to sellers, and they will challenge firms that are perpetuating to constantly raise the bar, evolve and build value. It continues to be an exciting time in M&A, and we expect the momentum to continue in 2018 and beyond with a range of private capital getting involved in the insurance industry. As you consider your new partner, make sure you understand the capital structure and what type of reinvestment opportunity is available to you. More importantly, understand how you can monetize the asset. There are pros and cons in each structure. It is becoming increasingly more important for you to understand not just the business plan your future partner has developed but also how that ties into their long-term capital structure and your liquidity options.
Trem is EVP at MarshBerry.
As Washington continues to debate policy over solutions to help resolve mass shootings, local churches and insurance companies are taking direct action to protect their communities from future devastation.
For many religious institutions, the deadly church shootings of Sutherland Springs, Texas, and Charleston, Va., were a wakeup call to reevaluate their security and insurance. Many churches have turned to religious-based insurance companies for guidance in coverage, cultivating preemptive strategies and safety.
“Over the last two years we have really been working to develop these materials, webinars, and presentations to assist our customers to help them become more aware, to help them become more knowledgeable in what they should do,” said Cheryl Kryshak, vice president of risk control at Church Mutual Insurance. “We have received a large increase in calls particularly since the event in Sutherland Springs.”
Insurance company Brotherhood Mutual has also seen more demand recently. Assistant Vice President of Marketing Jeff Renbarger says that since January of this year, about 26,000 views on Brotherhood Mutual’s website have stemmed from its content detailing information on security and safety in churches.
“Mass shootings sadly have become commonplace in the country now, and so it certainly heightened our awareness of it,” a pastor of a D.C. Presbyterian church who wished to remain anonymous said. “Some religious communities, particularly African American religious communities and Jewish religious communities, have been familiar with security concerns for many years. For a church like ours this is something new, and so we are currently in the middle of a process to develop a security plan.”
According to the University of Maryland’s terrorism analytics program START, religious extremist terrorist attacks have more than tripled since 2000. However, Renbarger says terrorist attacks like these are not the main cause of church shootings. “Today, even though terrorism grabs the headlines, the biggest likelihood for risk in churches still comes from people in the church,” Renbarger said. “An attack is always going to come from someone knowing someone in the church, more so… than a terrorist attack.”
Even if terrorism is not the main cause of attacks on places of worship, it still seems to push spikes in coverage. According to Paul Felsen of Felsen Insurance Services, Inc., many religious institutions, especially Jewish places of worship, have been investing in coverage since early 2000. “Right after 9/11 there was an increase in premiums because the insurance industry was nervous and skittish on all religious institutions, not just those of the Jewish faith. But now, our clients are affected because they are held to a higher standard.” Felson added that these higher standards are similar to the security standards required of a large-scale business, such as a manufacturing plant.
Similar to the large spike in premiums post 9/11, anti-Islamic hate crimes also skyrocketed—from around 50 to more than 500 reported in 2001, according to CNN.
To provide data and recourses to their customers, insurers in this market like Church Mutual, partner with crisis management and security companies to come up with preemptive strategies. While covering insurance costs is what companies in this market do, they also try their best to consult their clients into practicing safety to prevent future accidents, Kryshak said.
Church Mutual advises churches to lock most doors (except the main entrance) and invite law enforcement to do an assessment of the building. Ushers can also play a vital role in safety and security in church. “Train the ushers to be the first line in defense,” Kryshak said. “They are the individuals who are welcoming people. They are shaking their hands, they can get a sense of really understanding the people that are coming in; being aware of those behavioral points.”
In addition to offering risk prevention strategies, insurers in this sector also allow places of worship to customize their coverage for special events and charity work. “We have a large Sunday dinner every week in which we serve a lot of unhoused folks in the neighborhood, and they’ve provided an additional insurance rider to cover that event,” the D.C. Presbyterian pastor said. “So, I think they seem to be aware and sensitive to the particular needs and activities of churches.” Felsen also added that with the high costs of security, the Department of Homeland Security holds a grant program for some religious institutions to apply for.
Church attendance generally spikes during spring and Easter, and both churches and their insurers know this. More and more places of worship are planning extra security measures in anticipation for the worst-case scenario, and insurance companies are stepping up their game to assist.
“We believe that in most cases you can’t stop the armed intruder,” Kryshak said. “However if you are preparing ahead of time and recognize some of those behaviors, [you] could stop a person from going forward with a plan or poor decision.”
Almost three in four insurance C-suite executives say they believe insurtechs are disrupting the industry, but only 43% see this same effect in their own businesses. Among the 400 insurtechs surveyed, 44% said they believe their involvement will be cooperative with the industry while just over a third expect to be competitors.
Companies wanting to thrive will have to innovate. That’s the key to unlocking $375 billion in new revenue globally in insurance, according to Accenture. Insurers that continuously innovate and adapt to changing customer needs will be able to capture emerging growth opportunities and outperform competitors, the firm says. Insurers could generate an additional $177 billion in revenue from areas such as emerging risks in cyber and autonomous vehicles. About $198 billion in new revenue represents the potential shift in market share between insurers who embrace transformation at the cost of less-nimble competitors.
Cyber does represent a significant growth opportunity, as many firms—particularly smaller ones—struggle to strengthen their defenses. Nearly three quarters of clients face major shortcomings in their cyber-security readiness, according to a Hiscox survey of more than 4,100 small and large companies in the United States, the United Kingdom, Germany, Spain and the Netherlands. Still, nearly seven out of 10 rank the threat of cyber attack alongside fraud as a top risk. And nearly 60% believe their cyber-security spending budget will increase 5% or more in the coming year. Small businesses lag when it comes to cyber insurance. The survey shows only 21% of U.S. firms with fewer than 250 employees have cyber insurance. Some 58% of companies with more than 250 employees have cyber insurance.
A growing cyber threat for 2018 is potential attacks against critical infrastructure as hackers target industrial control systems, according to a FireEye and Marsh & McLennan report. As more industrial and infrastructure systems come online, they become more vulnerable to digital attacks that can cause physical damage to facilities such as chemical and manufacturing plants, energy platforms, transportation networks and water systems.
While strengthening network defenses is crucial for cyber security, some decidedly low-tech risks can go overlooked, such as old-fashioned paper. A study in The American Journal of Managed Care finds that, while network attacks draw the headlines and affect more people, improper disposal and theft of paper records and patient films are more frequent causes of data breaches—even if much less severe. Lost or stolen laptops remain a major risk, according to the study, led by Meghan Hufstader Gabriel of the University of Central Florida.
Going back, you were working as an insurance attorney, so what led you into insurtech?
I got really tired of seeing the same documents over and over during litigation. One of the first cases I ever worked on, I was told to find the words “Montgomery Point” or variations of those words in probably more than a million emails, which took me about three years to review. I started paying attention to technology and different ways of doing things. I started noticing machine learning—in the litigation context, it’s called technology-assisted review. I realized machines could do what I was doing and they could actually do it much better.
How is technology able to tackle something as seemingly complex as insurance policies?
I would argue the policies are complex because of the convoluted way they are put together. A lot of times, a policy is a compilation of forms and endorsements, which is another way of saying it’s a handful of documents jammed together. We realized we could leverage machine learning technology to break an insurance policy down into its individual clauses and we could break the clauses down into their numerical values or the wordings to help people understand them faster. We could do that because of lot of the time the industry was using the same documents over and over and over. Machines are very, very good at sorting out repetitive documents.
You started with a focus on claims. How did the shift to policy analysis come about?
We started working with one insurance company and then another and collecting claim documents at the source and then uploading them to our software. The pivot point was when an underwriter called us on a very large claim. She said, “I’ve been reviewing the underwriting file in your claim document management software and really like it. Can I use this software for policy review?”
Like any good entrepreneur, I said, “Sure! What’s policy review?” I really didn’t know a whole lot about policy review at that time. Slowly but surely, we realized that this was a much bigger problem than the claim document problem we were solving and that we should go solve this policy review problem.
How are policies similar, and how do you find the differences that make a difference?
There are a couple different ways I look at a policy. There is the language, and then there are the numerical values.
Insurance language could be a clause that excludes any damage by war or terrorism or government. Another clause might say, “We do not accept responsibility for anything damaged if there is an attack, which involves missiles by a government person.” Those two different clauses may essentially mean the same thing.
The first thing we did on machine learning was we trained our machine learning platform—we call it Johannes—to understand that both clauses mean the same thing. Both should be labeled “Exclusion—War.” We’ve done this work on more than a million clauses now and identified about 3,000 categories. As of now, we can take wording from one carrier and wording from another carrier and line up similar clauses, even though these clauses are written differently.
Step two was to go deeper into the policy and not only pull out the policy language but also pull out the numerical values.
Imagine you have a war policy deductible for $10,000 and on another policy you have a deductible for a missile shot by a government person and that deductible is for $100,000. In the end, the broker needs to be able to line those up and tell their clients that both of these are deductibles for war and this one’s for $10,000 and this one’s for $100,000 and advise them which one’s better. In that case, you have to be able to apply a common label across both deductibles and show how the data compare. That’s our Policy Check tool we recently launched. It’s standardizing the language and the numerical values no matter what an insurance policy calls it.
Johannes is named after Johannes Gutenberg, the guy who invented the printing press. The more we have worked with insurance policies and artificial intelligence, the more I have come to appreciate old document systems. And the printing press was the first document system. Johannes is basically our attempt to pull apart existing insurance documents and turn them into usable data.
When did you launch and how has it been going?
We started building in late February 2015. We launched a beta version in February 2016. That was fun in that we brought people in and they broke the software immediately, which is how it should go. We launched a full version in late 2016 and signed two of our large enterprise customers. One of them is a partnership with QBE. They’re bringing 126,000 insurance forms into RiskGenius so that they can review, research and bind those forms a lot faster.
How do you see machine learning changing the industry?
A lot of the work that brokers have to do is highly repetitive, and they struggle to even get it done on time because there is so much of it. I compare it to Uber, which realized the supply of rides was not satisfying consumer demand. They created more supply by finding more drivers and cars.
On the broker side, there is a lot of demand for the best insurance product possible. A lot of time brokers don’t have the time to provide that analysis to their customers, particularly small and medium-sized customers. Brokers can’t put in the time needed to do that type of work because they need to focus on the big accounts. Our goal is to free up the brokers to do more policy analysis faster so they’re doing less of that repetitive work. In the long run, it’s going to create better relationships between brokers and their customers because they’re going to spend more time on risk management and finding what’s in the customer’s policy and what the best coverage is.
Later, visionary brokerages became aggregators, using sophisticated high-tech engines to allow consumers to find the cover they liked best by entering their details only once. Now insurers are bringing similar technological innovation to the commercial market, allowing distant carriers to offer their products directly to local brokers over the internet through quote-and-bind portals.
These proliferating websites enable U.S. brokers to buy cover—sometimes on admitted paper, sometimes from carriers and MGAs in other states, and even from London—without sending a fax, opening an envelope or picking up the phone. The revolution is wholesale.
“It is absolutely the future of distribution,” says David Umbers, CEO of Ascent Underwriting, a managing general agent in London. His company’s portal, Optio, is a hit in the United States. Ascent receives tens of thousands of online inquiries each year from its 90 selected and registered U.S. brokers. So far, the website delivers two main products to U.S. producers: a modular cyber cover for small to midsize enterprises and a medical billings policy.
More products are in development for distribution through the system, which provides country-specific products elsewhere around the world. Next up is a product for allied health professionals that incorporates cyber cover.
Quote-and-bind portals typically allow brokers to enter the fundamental details of a client’s risk into a secure website, select the coverage options they want, then submit the electronic proposal for instantaneous underwriting—or referral if the algorithms kick it back. If the system accepts the risk, the broker first views the price of cover, then may bind with a click before printing all the relevant documentation, sometimes with the broker’s own corporate branding.
A process that has taken days or weeks using traditional channels can now be completed within minutes. Not only do such systems slash costs from the process; they also allow broader choices.
“Cost is the big advantage,” Umbers says, “because the mechanism of distribution is so efficient, but quite often quote-and-bind portals provide a better product, too. They have to be best of breed. That is the key to Optio’s success.”
The Lloyd’s carriers providing the risk capital that backs Ascent’s portal-policies love it, too. Distribution through Optio allows them to get at small and midsize commercial risks that otherwise would not make economic sense to bring to London through the usual long chain of wholesalers and placing brokers.
“It is a great way of selling high volume,” Umbers says. “It gives us huge operational efficiencies and access to a market that is otherwise impossible to reach. It reflects complete concentration of value within the distribution channel.”
Our average policy premium is $500, so with this model it’s important that the machine take as much of the strain as possible. You almost have to have the mindset that, as soon as a human touches a risk, the agent and the underwriter lose money on such tight margins.Tweet
The Range of Options
Not all quote-and-bind portals are quite what they seem. Optio policies always carry the Ascent brand, but many carriers choose to extend their reach through a process known as “white labelling.” Local wholesalers or MGAs apply their own branding to the front end of the website and to the products distributed through it. White labelling is a valuable tool for carriers working with local companies whose home-market reputation and relationships may be stronger than their own, and it has obvious benefits for the distributor.
The systems also have the significant advantage of improving and radically simplifying data capture, dissemination and analysis. By their very nature, quote-and-bind portals capture data at the source, the originating broker. It is then available for analysis and reporting by everyone in the chain, all the way to the ultimate carrier and even to reinsurers, without re-keying.
It all began more than 15 years ago, when insurers first created e-commerce platforms. One first mover was the Lloyd’s operation Beazley, which in 2001 launched a platform called EazyPro to distribute specialist professional liability cover for SMEs directly to U.S. surplus lines brokers. In its first 10 months of operation, it brought in premiums of about $1 million. But things have moved a very long way since then.
EazyPro is now very close to retirement. It has been superseded by a new system called myBeazley. Its ancestor was primarily a quoting system. It priced risks—or referred them to London for underwriters to look over. Either way, risks were bound at Lloyd’s, and the documentation was posted to the broker. Today, myBeazley, like other new-generation portals, has many more bells and whistles and allows online binding of many risks with no human intervention at all. It limits questions to the bare minimum (in the case of professional indemnity policies, just four), then instantly provides pricing. Cover can be bound in less than two minutes, and supporting documentation is printed by the binding brokers.
Like Ascent’s Optio, the system refers more complicated risks to underwriters. Documents and data can be uploaded to them. MyBeazley has a monthly payment option, handles midterm adjustments, allows automatic renewal, delivers broker-branded documentation if desired, and provides management information with a click or two. Its latest new product for U.S.-producing brokers is event cancellation insurance.
“MyBeazley is generally used for SME and mid-market business,” says Paul Willoughby, head of IT strategy and innovation at Beazley. “Brokers can register in three or four minutes and will usually be visited by a Beazley underwriter before they get going for five or 10 minutes of training.” The system offers admitted and surplus lines cover for licensed brokers in the United States. Around the world, more than 400 are using the system to date.
Some systems have even greater reach. StarStone Insurance began developing its Escape portal in 2010 to distribute small umbrella excess casualty cover to wholesalers and MGAs.
“There was a market need for easy access to smaller-scale casualty covers,” says Kardiner Cadet, the insurer’s vice president and head of e-commerce. “Brokers spend the brunt of their time trying to place underlying policies and needed quick responses on the excess or umbrella cover.”
An important change, Cadet says, was StarStone’s move to admitted paper, which gave usage a dramatic boost since it eliminates the extra administration that comes with surplus lines. Admitted policies now account for 86% of those sold through Escape.
API technology means portals will probably be eliminated in the next few years. We have it up and running for our cyber product and could easily do it for myBeazley.Tweet
The online offering was expanded three years ago to include an equipment floater that offers coverage for contractors’ equipment and miscellaneous property. The most recent additions, now being rolled out, include a senior-care follow-form excess liability product for nursing homes as well as the newly launched Escape 123, an E&O product that targets professional service providers with revenues under $500,000.
The system now delivers about 40,000 policies every year from roughly 5,000 brokers who actively use Escape (about 20% log in every day). Most risks generate premiums somewhere between $750 and $5,000.
One reason for its success is the personnel support StarStone has dedicated to the product. Brokers currently initiate up to 150 live chats daily to consult with one of five dedicated underwriters, who respond on average in 18 seconds and typically conduct three or four chats concurrently. They also answer 40 or 50 phone calls and up to 100 emails on an average day. Meanwhile, e-business development representatives ensure brokers understand the products and the system functionality.
Cadet reports some impressive results. “Eighty percent of the accounts quoted go straight through to bind without the broker having to consult with an underwriter, 20% are referred to an underwriter, and half those are declined,” he says. That suggests a remarkable 90% conversion rate for business quoted across the Escape portals.
Even larger is Markel Online. Its various portals deliver an unusually wide range of products to wholesale brokers, allowing them to rate, quote, bind and issue property, general liability, liquor liability, inland marine and excess liability coverages on a non-admitted basis.
Paul Broughton, Markel’s managing director of marketing, says Markel expects to expand the available offering even further. “We are evaluating additional product line opportunities at this time,” he says, noting that for 2017 Markel expects approximately 250,000 quotes to have been created via Markel Online.
Wholesalers are attracted by the system’s efficiency. “By limiting the amount of data needed to produce a quote, with a complete application, our producers are able to bind a straightforward account in a matter of minutes,” he says. “Of course, a multi-line, multi-class, multi-location risk, or one requiring underwriter approval may require a bit more time.” Speed to quote is always critical when designing a portal, Broughton says.
Like many other quote-and-bind portals, Markel Online is available to specific individuals employed by appointed wholesalers. They gain access to certain products based on prior agreement. “Once a producer contact is created in our agency management system, specific rights are assigned to the user, and a password is provided for them to access Markel Online,” Broughton explains. “Our underwriters provide information on our risk appetite and training on underwing guidelines. Producers are then off and running, with little to no formal system training needed.”
Much of Markel Online’s business is handled by MGAs. “It has provided an excellent mechanism for our MGAs to produce quotes, bind coverage, and issue policies, thus allowing them to more effectively write business on Markel’s behalf,” Broughton says.
Hiscox, the Bermuda-headquartered insurer with its origins in Lloyd’s, uses its $250 million portal system internally, as well as with third-party intermediaries, to provide professional liability, general liability and business owners policies to U.S. companies with revenues up to $5 million. It provides same-day coverage for more than 150 professions. Hiscox handles the billing and, like myBeazley, the portal delivers automatic renewals, which allow originating brokers to earn commission for the lifetime of a policy. In some cases, Hiscox reports, the system has helped wholesalers acquire new clients that may otherwise have been channeled by their retail agents directly to insurers.
There was a market need for easy access to smaller-scale casualty covers. Brokers spend the brunt of their time trying to place underlying policies and needed quick responses on the excess or umbrella cover.Tweet
“We have built this system to help our broker-partners and their retail agent audience bind the necessary coverage small businesses need in a matter of minutes,” says Kevin Kerridge, executive vice president for the Direct & Partnerships Division at Hiscox USA. “We also offer the ability to quote and bind over the phone with call center agents.”
More than 200,000 policies bound through the digital platform are in force today, many accepted through co-branded portals, which Hiscox says it can have up and running for a brokerage within a couple of weeks.
“Our average policy premium is $500, so with this model it’s important that the machine take as much of the strain as possible,” Kerridge says. “You almost have to have the mindset that, as soon as a human touches a risk, the agent and the underwriter lose money on such tight margins.” The results are impressive: 85% of applications get an immediate bindable quote. Still, even with its machine-driven approach to this kind of business, the Hiscox call center takes more than 50,000 calls per month.
Portals into the Future
Although portals are used effectively across many product lines today, some wholesalers are already looking to a next-generation approach that would reduce the number of systems they use during the course of their day, improve their internal efficiency, and let them retain the considerable account data they accumulate when entering risk and client information into portals. Many are embarking on their own system projects that rely on carriers’ application programming interface (API) systems to create internal quoting tools for their own use. An API allows a broker to enter the details of a risk once, then receive a quote from all of the multiple interfaced quote-and-bind systems.
“Brokers can integrate with us through API,” says Beazley’s Willoughby. “They don’t have to log on to the system. Instead, they get their prices directly from us on their own platforms.”
Several larger wholesale brokerages, that in essence have built their own internal aggregators, have developed such systems. Smaller firms might have to rely on re-keying into multiple quote-and-bind platforms for a little longer, until third-party vendors make an off-the-shelf aggregation product, although they typically stick to the quote-and-bind portals they prefer.
Meanwhile, as is so often the case with technological revolutions, some believe quote-and-bind portals are almost obsolete already.
“API technology means portals will probably be eliminated in the next few years,” Willoughby predicts, although currently only a handful of systems have built-in API functionality. “We have it up and running for our cyber product and could easily do it for myBeazley.” Such a move would give brokers’ systems access to everything including a document generation tool allowing them to create paperwork that carries their own branding. The next step in the revolution, according to Willoughby, is the incorporation of blockchain technology. “It could be incorporated, but I am not sure the market is quite ready for that yet.”
Hiscox believes a multi-channel customer experience is the future of distribution. “Whether it’s in person, online or over a mobile device, consumer demand is driving the future,” Kerridge says. “Companies across all industries are looking for ways to connect and transact with their clients in a smart and convenient way.”
But that doesn’t signal the end of the agent or broker. “We disagree with the notion that insurance agents are going the way of the dodo,” Kerridge says. “Agents are here to stay, but they will look different and be much more digitally empowered.”
StarStone’s Cadet is also thinking about the next big thing in technology-driven distribution. “I don’t believe company portals are the be-all and end-all,” he admits. “Technology is always evolving, and carriers need to find different and better ways to make their products more accessible to brokers. We must evolve and adapt.”
That, he says, could include mobile apps, integration with brokers’ management systems, even using bots. “We will see failures as insurtech evolves, but we should not be dissuaded,” he insists. “Most insurtech, while important, is simply a variation on an existing theme, not a true innovation. We must continue to keep our eyes open to spot the true innovations when they emerge.”
Leonard heads the Leader’s Edge Foreign Desk.
What is the target of Omada’s program?
Digital therapeutics are aimed at combatting obesity-related chronic diseases like hypertension and high blood fats. When you combine cardiovascular disease with those, you have the number-one health challenge in the world. There are a lot of other diseases we are trying to get our hands around, but obesity-related ones are clearly an issue: there is a 2030 projected spend of over $1.2 trillion annually on them. That makes it worth focusing a lot of attention here.
What is the difference between digital therapeutics and digital health?
The term digital therapeutics is used to differentiate this subcategory of digital health, which treats diseases by modifying patient behavior through digital programs and then tracks it via remote monitoring. The difference is that it’s evidence based. It’s not just a digital product that augments a medical product.
There are a lot of digital health products not based in science or proven to have the outcomes they claim. What an employer wants to pay for is something they know is going to have a good outcome. In medicine, it would be unacceptable not to have proven data.
How was Omada’s program built?
Our founders were relooking at this space and saw bodies of literature out there, some of which were being acted on on a small scale but which had a lot of opportunity for being grown and developed further. One of those was the Diabetes Prevention Program, whose results were published in The New England Journal of Medicine in 2002. People were being enrolled in the DPP but not at scale. So we asked how we could take this proven method and apply it in a scalable fashion, make it personalized and help affect that cost curve overall. Omada was built out of that.
How did Omada take the DPP work and create a digital program?
The initial body of work looked at a subset of people who were prediabetic and, if left untreated, 5% to 10% of that group would likely become diabetic each year. This is a large public health challenge with about 84 million people in this prediabetic category.
The CDC published this work that compared three groups of people with prediabetes. The first received intensive behavioral counseling, the second group received metformin [used to treat high blood sugar in people with Type 2 diabetes], and the third got a placebo along with basic advice and information from a physician. People who received behavioral counseling had a 58% decreased progression rate to diabetes. That was a significant improvement over the groups that took the placebo and metformin.
A lot of the work in the DPP was in-person settings with a health coach and lessons, and that model was very effective. However, when you are talking about working with 86 million people, you can’t scale that to meet that challenge. A digital format allows you to reach a larger number of people and collect data points to customize and personalize the experience for every individual in the program. Everyone going through has a slightly different experience based upon their inputs and how they interact with their health coach.
What does the Omada program look like?
Omada follows a CDC-approved curriculum. We use a virtual health coach and a cohort of like individuals to go through the program together. Tools people use will vary. Each person gets a cellular connected scale, which is an important element because self-reported weights aren’t very reliable. And from a behavioral perspective, there is value to having it auto-transmit into an account so they can see weight loss.
The elements of the program include weekly lessons for one year around changing food habits, increasing activity levels, preparing for challenges and reinforcing healthy choices. Participants are expected to weigh in daily. Most people stay in for up to two years. More than 140,000 people have been enrolled in the program since its inception.
What does the program cost?
We work with either self-insured employers or insurance companies as a covered preventive benefit for clinically eligible individuals. Because we operate as a benefit like this, we are able to charge organizational customers (employers or insurance companies) on an outcomes-based pricing structure. We do charge the employer/insurer when an individual enrolls; this mainly covers our marketing costs, as well as the cost of the welcome kit for the participant. From there, we charge the employer or insurer only if the participant achieves the desired health outcome (weight loss). We would invoice the employer/insurer monthly, based on how much weight the participant has lost and maintained—so not only is our business structure incentivized to create initial weight loss; we’re also incentivized to maintain that healthy outcome for as long as possible, because the better the outcome, the better the revenue. As long as our contract with a participant’s employer or insurer is ongoing, the participant will never pay any out-of-pocket cost for Omada.
What about ROI?
Of course, morbidity and mortality and prevention of disease are the most important elements, but cost savings is also something we are trying to achieve and is really important too. The program has been proven multiple different times to have meaningful cost savings as early as eight months in.
We did a claims analysis on a large cohort in one payer program started in 2014, and as compared to a propensity matched cohort, there was a $1,338 cost differential among people who went through the program in one year. This didn’t include the cost of program, but it is still in the positive if included.
When it was broken down, inpatient and ER visits were decreased. Only pharmaceutical spend increased slightly, but that’s because people were more compliant with their care, which we want to see. But even that was more than offset by other spend. Generally, within one year, Omada participants lower their risk of Type 2 diabetes by 30%, stroke by 16% and heart disease by 13%. After 16 weeks, individuals, on average, lower their body weight by about 4%.
What does demand look like from insurers and employers for wellness programs?
It’s really strong. People are realizing this is the number-one health challenge, and anyone who has risk for a population is interested in stemming these costs. It’s difficult to find an employer who doesn’t think this is a challenge. From a payer’s perspective, once they prove the cost savings, they want to make it broadly available.
Not all wellness programs are effective. Why are some unable to effect change among participants?
A lot of companies are quitting wellness programs because they have tried them and consistently haven’t gotten good outcomes. You have to have clinical evidence and studies that show the effectiveness of the products.
Compare it to something like chemicals pharmaceutical companies study and how few of those make it to market. If they put every chemical that came out on the market, there would be lots of failures. In the digital health space, anyone that has something that seems like a good idea and can get money can bring it to the market. There are going to be a huge number of failures there, too.
When analyzing wellness programs, brokers need to look at whether they are based in science, if pricing is based on outcomes, if there is published, peer-reviewed evidence that shows that that specific company’s program works, and if they are personalizing the experience. If a benefits buyer is evaluating potential partners with that level of rigor, it can sort this out. We just haven’t always applied those standards to wellness programs.
What do you know about long-term results of the program?
We have studied it for up to three years and shown durable, long-lasting outcomes both from a weight-loss perspective and reduction in HbA1c (blood glucose concentration over two to three months). We will continue to study it as people are in the program longer. The cost savings would be expected to extend for a longer duration, because we know people are maintaining metrics that yield outcomes. But to my knowledge, no one has studied total cost of care claims beyond one year. The Diabetes Prevention Program in general has benefits of up to 10 years. As that is around longer, we will continue to study that. Right now, outcomes look fantastic from a durability standpoint.
Have you looked at the impact on conditions other than diabetes?
We have studied other conditions. They include elements like hypertension, high blood fats and broader obesity in general. We have seen significant reduction in hypertension and triglycerides.
Even though prediabetes is the heart of what we are working on, we don’t just deal with that. We enroll people who are overweight or obese with one or more other risk factors like hypertension or high cholesterol. We can use a questionnaire with a risk-based screener to see who is eligible, or employers’ biometric data can be used to prequalify people for the program.
How can organizations like yours help employers encourage people to take part in digital wellness programs?
At Omada, we have a large engagement team. We work with an employer’s or health plan’s marketing team as a partner and learn what they have done in the past to engage people. But since we have done this well over 150 times, we bring out all of the elements that work best for an optimal campaign to get the most individuals in the program up front.
We optimize and co-brand with the purchaser, and we also have it announced by a leader in the organization. We don’t talk a lot about weight loss but, rather, about a new benefit that will help them improve their lives. We couple our knowledge with the best practices within the organization to get good results.
With such a focus on engagement, what kind of uptake do you get?
Within the known risk population, we can expect to get 20% enrolled. For anyone who has done this before—engaging in programs where you are asking people to enroll or participate—this number is world-class.
That seems like a small number of people actually taking part. What is “normal” for these kinds of programs?
From the outside, you can look at it like, if 20% enroll, it means that 80% didn’t come into it. And yes, there is still a long way to go. Part of the reason people don’t enroll is it’s just not the right time for people. In fact, according to a 2016 U.S. Chamber of Commerce report, more than 80% of people are just not ready to take action and make lifestyle changes at any given time. So, we continue to run refresh campaigns to connect with those people at a later time. There’s a lot of different reasons why it isn’t appropriate or people don’t feel like they have the time, so we try to get around those elements to let them know this is something different.
A lot of these folks have fought with this and been in weight loss programs in the past. So we make sure to tailor content so they realize it is something that will have an impact and we let them know they probably will have different outcomes this time.