What is the dark net?

Recent Government Action

Call It What You Want, It’s Not War…Yet

10 Ways to Stay Ahead of Change

Numbers Cruncher

How a Chatbot Works

AIG’s Blockchain Pilot a Success

What’s Up with Watson?

IBM’s famous machine has gotten some bad press recently. What’s gone wrong?

IBM’s Watson is in the news again. But he may need therapy after the latest reports.

Boom Boom! Pyrotechnics Insurance Is Growing!

An industry tidbit in honor of July Fourth.

It’s July Fourth. For many Americans, it’s a day to take time off to enjoy with friends and family, maybe watch a parade and, as the day settles into night, take in some fireworks.

States Debate Single-Payer

Harbinger or Passing Storm?

Last week, Senate Republicans released their Better Care Reconciliation Act, which leaves the employer/employee tax “exclusion” on group health benefits untouched, but perpetuates an ongoing fight around subsidies and Medicaid.

Connected Cars Drive Premiums

A new survey shows consumers are warming to usage-based auto insurance.

The way consumers are viewing auto insurance is changing, says a Willis Towers Watson Survey on usage-based auto insurance, or UBI. The survey examined how the spread of in-car technologies and connected cars is influencing, among other things U.S. consumers’ attitudes toward UBI.

Thinking of Retirement?

The retirement business is complicated, difficult and very lucrative. Opportunities abound, but is it right for your firm?

Thirty-five years ago, American employers began shedding costly pension plans and shifting their workforces to newly minted 401(k) plans. Today, those savings accounts present problems of their own—and opportunities for benefits brokers thinking about entering the retirement planning space.


More than 30 million workers nationwide do not have access to tax-deferred 401(k) accounts.

By some estimates, America’s retirement savings shortfall is as high as $14 trillion.

Delayed retirements affect the bottom line through increased health costs and strains on productivity and innovation.

To Canada with Love

Toronto is commemorating the Canadian Confederation’s 150th birthday with a year-long celebration.

Hartford, Connecticut

Phil Rigueur of Aetna talks art, history and more in New England’s rising star.

Phil Rigueur, VP, Joint Venture Markets, Aetna

Healthcare Price Transparency

It’s Complicated

Price transparency means different things to different players.

Reference-Based Pricing

Mixed results show it should remain part of the conversation.

Medical Exam

Tech-enabled transparency is a major step in regaining control of healthcare costs.

If you want to understand business trends, you’re often told to follow the money. We watched more than a billion dollars pour into insurance technology companies in 2016, and one of the most heavily funded insurtech areas was healthcare. 


Among the most pressing issues facing the healthcare industry: the unsustainable pace of rising costs.

Yet even as consumers pay more, most have no idea what they’re spending.

Insurtech startups are diving in with potential solutions to price transparency, but uptake is low.


Read the Sidebars

Reference-Based Pricing

It’s Complicated

Numbers Cruncher

A Long-Floundering Market Finally Hits the Mark

For years, poorly designed long-term care policies were also poorly marketed to men. Today’s hybrid designs target women.

Traditional long-term care insurance has been plagued by a series of increased premiums, reduced benefits and consumers leaving the market altogether. Yet every day 10,000 baby boomers turn 60, and most will require long-term care during their lifetime.


Women bear the brunt of providing long-term care assistance to family members.

The average woman is also more likely than the average man to require long-term care.

The 65-and-older population is expected to jump to 74.1 million by 2030.

It Takes a Team to Challenge the Norm

Toss the transactional mindset. Adopt a consultancy before some startup makes toast of your firm.

What does it take to get to the top and stay there? With annual premium growth across the market dragging in the low single digits, how can companies grow? 


Top brokerages are redefining their business models to build and bolster a competitive edge.

Many are acting more as consultant than salesman.

This changing model is having an impact on revenue streams.

Two Different Directions

You think your employees are happy? Why are two thirds of them job hunting?

As benefits brokerages search for ways to set themselves apart, a new battleground is emerging: finding and retaining key people. The battle for talent has always been an issue for brokerages, and now it’s also a problem for their clients. 


Too often, human resources departments are mired in the day to day instead of long-term planning.

Companies such as ADP handle day-to-day HR tasks and provide advice on client-specific problems.

These services free HR departments to work more strategically on long-term planning.

10,000 Steps

More companies are promoting fitness wearables to improve the health and safety of their workforce.

Cleaning Up

Q&A with Alex Frommeyer, Co-Founder and CEO, Beam Dental

Jenn Walsh

Senior Vice President & Partner, Woodruff-Sawyer & Co., San Francisco

They’re like, “What? You have what going on?”

Preventing Buyer’s Remorse

Make your clients’ disability insurance coverage work harder for them.

When was the last time you experienced buyer’s remorse—that unsettling feeling you get when a purchase just doesn’t live up to your expectations? 

Inside Job

Consider the range of attacks committed by employees or trusted insiders.

When thinking about cyber risks, most companies envision external bad actors trying to hack into their systems or disrupt their operations. They’re half right.

All Eyes on Health Insurtech

The time is now for brokers to get educated and engaged so they can be proactive.

The pain points for purchasers in group health insurance over the last five years have been aggressively targeted by startups. As always, this is an opportunity and a threat. 

Face Value

Look beyond opinion when vetting deals.

You’re in acquisition mode and engaging with sellers. You’re putting out feelers for prospects and entertaining conversations with interested parties. 

A Tech Moment

The NAIC explores technology and insurtech to educate states and serve as a thought leader.

The day-to-day work of the NAIC, during which regulators talk the nitty-gritty of actual regulation, is done in its countless committees and working groups. And, more and more, interest is growing in how technology issues—insurtech, big data, cyber, etc.—affect insurance markets and consumers.

Run! Run! Run! Bolt! Bolt! Bolt!

Our technology is a game of catching up and bolting on. Instead, use tech to build a business model that makes you indispensable.

No matter where you go these days, you can always find something to read about insurtech. In the insurance-industry specific press, the coverage is starting to reach Trumpian levels of overexposure, which makes it exceedingly difficult to filter out the noise. But there are still useful things to explore. 

What If Private Equity Disappears?

How would that change the M&A landscape?

VIDEO: Tough Minded In A Soft Market

Council members speak their mind on what it takes to succeed in today’s insurance environment.

Council members offer some of the most compelling insights into today’s—and tomorrow’s—insurance market.

Tough-Minded in a Soft Market

These guys don’t care if prices are weakening. They know they’ll do just fine.

The continuing soft property-casualty market doesn’t necessarily mean hard times for brokers. Many don’t even consider market conditions when formulating organic growth strategies. 


For some firms, organic growth can be bolstered using strategic M&A.

The greatest opportunity to maximize organic growth might just be retaining your clients.

Technology plays a role in organic growth by allowing customers to transact business digitally.


Read the Sidebars

What If Private Equity Disappears?

Insurtech Goes Global

New York and London aren’t the only hotspots.

The startup wave that’s transforming insurance is still dominated by the U.S., but insurtech is becoming a truly global phenomenon. Cities such as Berlin and Singapore are among the hotspots outside the traditional big insurance centers of New York and London.

Lincoln, Nebraska

Karen Gustin of Ameritas Life Insurance Corp. shows off the happiest city in the U.S.

Karen Gustin, LLIF, Ameritas Life Insurance Corp., EVP, Group Division

Something Old, Something New

New Orleans melds tradition with modern touches.

Gaining Traction

Q&A with Mark Breading, Partner, Strategy Meets Action

Bret Quigley

Chairman and CEO, Prime Risk Partners, Alpharetta, Georgia

I was the kid who had the lemonade stand.

The Future Isn’t Now (But It Soon Will Be)

Venture capitalist Caribou Honig eyes the establishment’s technologically slumbering slugs and marvels how insurtech startups will transform them.

Caribou Honig co-created Insuretech Connect last year, the largest insurance technology conference of 2016. He has been a venture capitalist for several years and has a keen interest in insurtech. He will be leaving QED Investors, a firm he co-founded, later this year to devote more time to insurance technology and education. We recently sat down with him in his Old Town office in Alexandria, Virginia.—Editor 


About two years ago, we saw insurtech was about to go through what I call its Cambrian explosion—a bunch of experiments, many of which natural selection would eventually prune away.

The product side is actually where I see the greatest opportunity to change the game, to create bigger transformation.

If you are a carrier and you’re worried about your existing agent distribution footprint retiring off, you still need to worry.

Cyber Crime Wave

Cyber insurance premium growth follows the growing wave of cyber crime.

Cyber insurance is one of the fastest growing insurance markets; it is expected to grow from $2 billion today to $20+ billion over the next decade. It has given agents and brokers the boost they have needed as global insurance rates have steadily declined over 15 consecutive quarters.

Lloyd’s Will Open Brussels EU Office

Brokers are watching, waiting, exploring whether to follow.

Brexit? We Get It.

Conquering Britain’s EU Vote

Mike Holley was on a plane to Germany within days of the U.K.’s vote to leave the European Union, and he says authorities in Hamburg “rolled out the red carpet” in welcome.
Holly is chief executive of Equinox Global, a London-based managing general agent specializing in whole-account trade credit insurance. 


Under Brexit, British brokerages and insurers appear certain to lose their passporting privileges.

Some British firms are moving to establish EU subsidiaries.

The doomsday scenarios that were predicted after the vote will likely not materialize.


Read the Sidebars

Lloyd’s Will Open Brussels EU Office

What Can You Offer?

Buyers want to see more than revenue to find out what your agency is really worth.

Besides revenue, what do you have to offer a buyer? What else do you bring to the table that sweetens the pot? Whether your agency is focused on employee benefits, property- casualty or both, in our experience the ultimate differentiator is predictable, profitable, organic growth. 

When Good People Do Nothing

While there seemed to be no shortage of Obamacare critics in our industry, those same voices were quiet about repeal and replace.

Speaker of the House Paul Ryan and the newly minted Trump administration vowed to replace what some called the “Obamination” with a national health strategy that would return insurance plan choice to individuals. 

Are You Ready?

New York’s cyber-security rule is far-reaching and tech heavy.

The latest salvo in the cyber-security regulatory wars is the recently issued New York state Department of Financial Services Cybersecurity Rule. The far-reaching rule technically applies to every individual and entity operating in New York under the banking, insurance or financial services laws.

For Global Good

Insurers can save the world—and improve their reputation at the same time.

Most people who keep up on current events can name at least one celebrity banking executive—for example, Mark Carney, the oft-quoted governor of the Bank of England. But a celebrity insurance exec? Not so much.

Gut-Check Time

How are you executing on your strategy for 2017?

Hey, it’s May. What do you mean, “so what?” The year is almost half over. Remember back in January, when you identified all those things you wanted your organization to achieve, that amazing strategy you put together for 2017 filled with things you wanted to change? How’s that going for you? 

Don’t Miss the (Customer Service) Boat

It’s win or lose with every interaction.

Strategic Pairings

2016-2017 Broker M&A Market

Sellers still rule, but for how long? And if you don’t want to sell? Then you must have a succession strategy. This year’s M&A supplement, provided by MarshBerry, includes a 2016 year in review, a 2017 outlook and other insights for buyers and sellers in the broker M&A market.

Princeton, New Jersey

Anthony Kuczinski of Munich Re, US, offers inside tips on the Garden State gem.

Anthony Kuczinski, President and CEO, Munich Re

A Bull Market

Lower Manhattan is in an upswing.

Workers Comp Remains Controversial

States and Business Press Again to Shift Workers Comp Costs

Workers compensation reform is likely to remain a controversial issue in the coming months as state legislatures across the country debate proposals that range from limiting the drugs doctors can prescribe for injured workers to shrinking employers’ obligations under the system.

Borderline Behavior

Beware your data when crossing the border. Is this the best argument for cloud computing?

In a recent House Homeland Security Committee meeting, Homeland Security Secretary John Kelly testified that under his watch all foreign visitors to the United States will be asked, “What [Internet] sites do you visit? And give us your passwords.” 

A Peeping Tom in Your Living Room

Smart technology is collecting your data.

Startups Reinvent Insurance

Q&A with Sabine VanderLinden, Managing Director, Startupbootcamp InsurTech

An Acquired Taste for Global

While globalization seems uncertain today, strategic acquisitions continue to permeate international markets.

How do commercial insurance brokers conquer the world outside their home borders? They choose carefully. 


No matter how you do it, all paths to cross-border alliances must be approached with caution.

The nature of such alliances varies, as does the scope of commitment.

Recent data show the global deal volume in 2015 was nearly $20 billion.

Alera Group

The Alera Group

One of the largest multi-line commercial brokerages didn’t exist last year. Here’s its story.

It was June 2015 in Philadelphia, and the time had come to fish or cut bait. The conversations, the questions—the possibilities—had been murmured about for years. 


From its start in 2002, the Benefit Advisors Network was designed to share best practices and collaborate for mutual benefit.

Alera Group is composed of 24 entrepreneurial insurance and financial services companies from across the country.

Alera began in January as one of the largest privately held multi-line insurance brokerages in the country.


Numbers Cruncher

Alera Group

Northern Exposure

Buying Canadian brokerage firms is attractive, but questions abound.

Want some click bait? According to John Wright, “If you cross the border with your business and you don’t have somebody who has experience with that country’s insurance regulations, you’re lighting a stick of dynamite.”


Insurers and business owners have gone to jail over their ignorance of local insurance regulations.

The boom in cross-border purchases affects not only Canadian and U.S. brokers and agents, but carriers as well.

If a U.S. brokerage isn’t licensed in Canada, it will work with a Canadian firm to ensure it’s doing business legally.

Bruce Dunbar

Chairman, McGriff, Seibels & Williams, Birmingham

The potato gun has been the featured event at a number of our sales retreats, much to the chagrin of the resorts.

A Real Head Turner

The fourth turning is here.

A financial meltdown. A sluggish recovery. A growing concern over income inequality. An increasing distrust of elites. 

The Canary in the Coal Mine

As the M&A market continues to surge, euphoria remains. But for how long?

Coal miners once brought caged canaries into the mines to warn them of pending trouble. If dangerous gas were present in a mine, the canaries would die first, serving as a warning for miners to get out fast.

Buying Cyber Risk

Cyber due diligence can be a major asset in M&A. Lack of it can affect purchase price, or scuttle a deal altogether.

When Verizon agreed to buy Yahoo for $4.83 billion, it didn’t know about Yahoo’s 2013 and 2014 data breaches. They were disclosed in the midst of the acquisition—driving home the importance of conducting cyber due diligence early in the M&A process. 

Culture Shock!

It’s not just the numbers that have to make sense.

Culture can be a strong and unique differentiator. Like an iceberg, the bulk of it lies below the waterline, things you can’t see, such as implicit norms, values, hidden assumptions and unwritten rules, says Edgar Schein in The Corporate Culture Survival Guide

Employee No. 97642

Don’t forget the employees during a deal.

I walked into my office on that first day and saw the folder on my desk. I picked it up and read it out loud: Employee No. 97642. It hit me—I was now just a cog in the wheel. At that moment, I realized everything was going to be different. 

Carriers Are Investing in Insurtech

If you can’t beat ’em, join ’em.

What Do Startup Insurtech Companies Do?

Here are some categories relevant to your business.

Des Moines, Iowa

Jason Bogart of EMC National Life Company shares his hometown favorites.

Jason Bogart, SVP of branch operations, EMC Insurance Companies; President, EMC National Life Company

INDULGE: Beer Is Back in Birmingham

Roll Tide Roll

Birmingham, Alabama is coming into its own.

The Last Mile

Targeted investment in client outreach versus an incoming freshmen or JV squad is the name of the game.

We’re two months into 2017, and it’s official: insurtech is here in a big way. When examining the evergrowing slate of new entrants to the insurance industry, it’s important to find discernable patterns. 

Startups Startin’ Somethin’

Insurtech incites business revolution. It won't be long before insurtech is driving the bus, but you can navigate if you get up to speed.

A few years ago, insurtech wasn’t even a topic of conversation in the boardroom. Today, it’s the buzziest of buzzwords, fueled by capital investment. 


Total 2016 funding in insurance technology startups was $1.69 billion across 173 deals.

Along with venture capital, the insurance industry is investing in this space.

PwC says nine in 10 insurers fear losing part of their business to the insurtech newcomers.


Read the Sidebars

What Do Startup Insurtech Companies Do?

Carriers Are Investing in Insurtech

PAR Now Offers Brokers Cyber Coverage

Beware the perils of cyber exposures from M&A.

PAR, which is always looking to address changing needs, recently decided to offer cyber risk coverage to members.

Born from the Ashes of Crisis

PAR’s E&O program saved many firms and thrives today, changing constantly to meet new middle-market threats.

It was the mid-1980s, and The Graham Company was going through a scare. The market for errors and omissions coverage had evaporated. 


With Assurex Global and Fireman’s Fund, The Council created a captive insurer to provide missing E&O coverage.

Professional Agencies Reinsurance Ltd.—PAR—has become an E&O market leader.

Last year The Bermuda Captive Conference named PAR to its Captive Hall of Fame.


Read the Sidebars

PAR Now Offers Brokers Cyber Coverage

Callous Capitalism

Clients, millennials and workers are losing faith in the heartless corporate culture. Can the insurance industry actually be the solution?

People are losing faith in institutions. Brexit, Trump, WikiLeaks, the rise of alternative news sites and incessant protesting in the streets are symptoms of a deep and growing cynicism in the U.S. and abroad. 


JUST Capital has assessed and ranked 46 insurance companies (brokerages and carriers). For more on these rankings, visit How JUST Are You?

Cynicism toward institutions and corporate America is rampant.

Insurance has an important role in remediating that problem.

Internal policies that respect employees and external policies that build up society go hand in glove.

Digital Health Growing

A look at investments in digital health companies

Accelerating Innovation

Q&A with John Heveran, SVP, CIO, Commercial Insurance, Liberty Mutual

Pets and Debts

It’s time to reimagine benefits for millennial workers.

Here’s the worst-kept secret in employee benefits: millennials don’t care much about traditional voluntary benefits. Auto, home, supplemental life coverage? No, no, and no thank you. 

Steve Hearn


We respectfully retired Mr. Cooper and Mr. Gay. Then it was, “What do we call ourselves?”

Customer for Life

My own journey through the claims process.

I barely had my feet kicked up when the call came. There had been a fire in our home. My heart sank.

The Good, the Bad and…the Potentially Ugly?

And we’re still trying to figure out exactly what it is.

Every day President Trump seems to sign new executive orders, shifting not just the sands in Washington but entire islands of political norms.

The Vision Test

Don’t be blindsided by your inner, self-inflicted visionary.

Is your blindspot showing?

Give Them Their Due

When you trust the firm on the other side of the table, you can be tempted to just shake on it.

We all have a comfort zone. It’s the colleague you’ve known for a decade, the one you call if you want to compare notes or brainstorm. 

How JUST Are You?

JUST Capital ranks the insurance industry.

As we detail in Callous Capitalism,  many Americans are losing faith in our economic system.

Zombie Webcams

Q&A with Donald Light, Director, North American Property/Casualty Practice , Celent

Beat the Bots

Video cameras and Web fridges form the new zombie army.

Marty Rhodes

President & CEO, Stephens Insurance, Little Rock

I was exposed to diverse cultures at an early age. Learning their customs, traditions and food was a very broadening experience.

Where to Find Help Fighting Ransomware

Fortify the Fort

How can your client head off being held up for ransom?

Preventing cyber extortion is not impossible, but it is difficult. That’s due to the increasing sophistication of phishing attacks and the tendency of people to take their chances on what looks real.

The Payoff

The FBI says don’t, but there are compelling reasons to pay hackers a ransom. What should your clients do?

In May 2016, a hacker seized control of computer systems at Kansas Heart Hospital in Wichita. The hospital could not regain control unless it paid the hacker a ransom—an amount reported to be “small.”


Ransomware is the modern-age equivalent of a well-worn extortion scheme in which a small business pays for the release of its hostage, in this case, data.

No one knows how many businesses have been hit by ransomware attacks because they are typically kept private.

Last year Hollywood Presbyterian Medical Center in Los Angeles paid a $17,000 ransom (about 40 bitcoins) when malware infected its computer systems.


Read the Sidebars

Fortify the Fort

Where to Find Help Fighting Ransomware

The Old and the New

How They Compare

The Dodd-Frank Wall Street Reform and Consumer Protection Act has relatively few provisions that deal directly with insurance, but even those have stirred some controversy. However, the Financial CHOICE Act, which appears likely to be the template for scaling back Dodd-Frank, addresses some of those directly.

Dodd-Frank Banking Changes Could Affect Brokers

If banks are freed from some of the restrictions placed on their lending and business practices by Dodd-Frank, it could be good news for some commercial insurance brokerages that serve them, says Eileen Yuen, a managing director at Arthur J. Gallagher & Co.


Brokers may escape reform of the Dodd-Frank financial services bill.

Promises are made to be broken, right? And campaign promises seem to be broken more frequently than the garden-variety type.


Fortunately for brokers, complete repeal of Dodd-Frank appears extremely unlikely.

Although Republicans retain control of the Senate, they fall far short of the numbers needed to cut off a Democratic filibuster.

Brokers’ biggest concern is one small part of Dodd-Frank—the Nonadmitted and Reinsurance Reform Act.


Read the Sidebars


Dodd-Frank Banking Changes Could Affect Brokers

The Old and the New

Highest Projected Silver Plan 2017 Premium Increases

A Big Congressional Target

How the employer health insurance tax break compares to other tax breaks.


Can access and affordability triumph in repeal and replace?

The unexpected Trump Era has brought renewed energy and expectations to Washington, as well as the realization that we are in an uncertain political environment. It’s a new reality that hasn’t been easy to settle into.


Two key figures will play a major role in whatever happens: President Donald Trump and House Speaker Paul Ryan.

More U.S. workers say they worry about having their benefits reduced than worry about having their wages cut.

Ryan’s more far-reaching plan would cap the income tax exclusion for employer-provided health insurance premiums.


Read the Sidebars

A Big Congressional Target

Highest Projected Silver Plan 2017 Premium Increases

With Strong Roots Comes the Foundation for Change

My motto: It’s about converting strategy into action.

If someone dared you, as a business leader, to maintain a tradition of excellence within your business model while challenging the traditions of how your business was established, how would you respond?

Wait and See

Sellers are scaling back on defensive actions and are hanging tight for now.

There was a palpable sense of urgency in the air prior to the 2016 presidential election. We heard rumblings from firms indicating they would push deals through even before year-end.

The Impostor’s Club

Remind yourself of the badass you are.

Is there an “impostor” holding you or your team back?
We’ve all heard the expression “Fake it till you make it.”

Trump’s Rx

When I listen to Donald Trump, I hear my father.

I grew up during the last great age of Jurassic parenting. We called our Dad “T-Rex” because he was the ultimate alpha predator with a big mouth, sharp teeth, limited peripheral vision and small arms that prevented him from doing any housework. His home was his castle.

In the NCC’s bunker-like room surrounded by giant TV monitors—a mini version of NASA mission control—NCC officials prowl the dark net, the anonymous network used for illegal peer-to-peer file sharing. In these murky corners, the spoils of a data breach are offered for sale.

“The dark web is essentially anything on a computer network that’s not indexed for location by typical Internet search engines like Google, Bing and Yahoo,” explains Ed Rios, CEO of the National Cybersecurity Center. Many sites on the dark web use the Onion Router, often called TOR, a tool designed to keep location and users anonymous.

According to Wired, TOR works by having your traffic bounce through a series of routers until it gets to an end router, which then gets the requested web page and sends it back through the tubes, but none of the individual routers know or remember the IP address of the original requester.

“TOR was originally created for legitimate purposes by the U.S. military. In defense, it’s preferable to keep location and identities secret,” Rios says. “However, TOR is also now used for nefarious criminal activities to include the sale of black market items, services and stolen information. Everything from hacking services to personal information and beyond can be found on the dark net if one has the system and knowledge of how to access it.”

What’s the NCC doing there? “It uses the dark net in support of customers for hack validation and consequence management,” Rios says. “It is also used for cyber defense research, training and general situational awareness.”   

While the federal government currently has no consensus as to what constitutes cyber war, Congress is certainly doing a lot of talking about the cyber threat. As of June 2017, there have been 20 congressional hearings pertaining to cyber security, cyber threats and cyber warfare. Congress has also considered related legislation, most having to do with strengthening local and state cyber capabilities versus defining cyber war.

One of the more recent pieces, an amendment to the Countering Iran’s Destabilizing Activities Act of 2017, was introduced June 12 by Senate Majority Leader Mitch McConnell, R-Ky., on behalf of Sen. Mike Crapo, R-Idaho. The amendment (S.A. 232) escalates and expands the current sanctions against Russia by codifying and modifying six current executive orders, two of which relate to Russia’s malicious cyber activity. The amendment also creates several new sanctions against Russia, including for “malicious cyber actors.” As memorialized in the Congressional Record of June 13, 2017, Crapo said on the Senate Floor, “Our amendment also demonstrates our resolve in responding to cyber attacks against U.S. citizens and entities and against our allies.”

One of the few direct inquiries into cyber war occurred more than a year ago, in June 2016, when Rep. James Himes, D-Conn.—a member of the House Foreign Affairs and Armed Services committees—introduced the Cyber Act of War Act of 2016. This bill directs the president to develop a policy for determining when an action carried out in cyber space constitutes a use of force against the United States and to revise the Department of Defense Law of War Manual accordingly.

In developing this policy, the bill asks the president to consider the ways in which a cyber attack’s effects may be equivalent to a conventional attack’s effects, including physical destruction or casualties, and intangible effects of significant scope or duration.

While it seems like this bill speaks to the issues being wrestled with, it doesn’t seem to have moved since being referred to the House Armed Services Subcommittee on Emerging Threats and Capabilities in June 2016. For its part, the Trump administration has made some efforts to strengthen cyber security. On May 11, the president signed an executive order requiring each government agency to submit a report describing its security measures and significant risks. It also requires all federal agencies to adopt the Framework for Improving Critical Infrastructure Cybersecurity, developed by the National Institute of Standards and Technology, and to upgrade critical infrastructure. Additionally, the Department of Defense has requested $647 million dollars for its U.S. Cyber Command, an increase of 16% from last year’s requested amount. On June 12, the chairman of the Joint Chiefs of Staff, Gen. Joseph Dunford, told lawmakers that the U.S. Cyber Command is “simultaneously conducting cyber operations now against multiple adversaries.”

Since 2012, the DoD has also conducted an annual Cyber Guard, which is a multiweek exercise that includes hundreds of participants from all sectors, including the federal government, state National Guards, power companies, banks, port facilities and allied foreign partners. “This is our seed corn for the future,” Adm. Michael Rogers said in a DoD news article. Rogers commands the U.S. Cyber Command, directs the National Security Agency and serves as chief of the Central Security Service. He noted that those who work at CYBERCOM view themselves as “the warriors of the 21st century.”

Since cyber war has yet to occur, this means all other hacking incidents perpetrated by nation-states and terrorist organizations to date have been something less. Nevertheless, many government officials and respected publications have a tendency to overuse the term. In March, for example, The New York Times wrote in a headline: “Trump Inherits a Secret Cyber War Against North Korean Missiles.” The Atlantic in July 2016 reported,

“The Defense Department launched into a full-on cyberwar against the Islamic State.”

When North Korea allegedly conducted an effective cyber attack against Sony Pictures Entertainment in response to a film that ridiculed its leader, Sen. John McCain, R-Ariz., called it a “manifestation of a new form of warfare.” He added: “When you destroy economies, when you are able to impose censorship on the world and especially the United States of America, it’s more than vandalism.”

Despite his tendency to shoot from the hip when speaking and tweeting, President Donald Trump has yet to call a hacking incident an act of cyber war, including the recent WannaCry ransomware attack allegedly perpetrated by North Korea. But if he did utter the words, would that legally give insurers freedom to activate the war exclusion in their policies and not pay related claims?

In 2001, President George W. Bush clearly perceived the terrorist attacks on Sept. 11, to be the equivalent of war, stating that the “enemies of freedom committed an act of war against our country.” He further commented, “Our war on terror begins with al Qaeda but does not end there.”

Despite this informal declaration of war, the insurance industry did not exclude coverage to the hundreds of businesses affected by the terrorist attacks. Within hours of the attacks, Robert Hartwig, then president of the Insurance Information Institute, was in the difficult position of being asked by The Wall Street Journal whether the property losses would be covered by insurance.

“I instantly said yes,” recalls Hartwig, today a professor of finance at the University of South Carolina. “I felt the attacks did not fit the technical definition of war. Within two days, the industry came to the same conclusion, ultimately paying out more than $30 billion in claims.”

A major challenge for brokers is keeping up with the pace of global change and the rate at which technology is advancing. It can be daunting for carriers and brokers to meaningfully transform their business to compete in the on-demand economy. But change is needed, and it’s already happening. So let’s get started. Here is a 10-point checklist to stay ahead of change:

  1. EVOLVE YOUR APPROACH: Look for ways to restructure your organization and team to focus on data intelligence, automation and the move to the on-demand economy.
  2. ADOPT A CLIENT-CENTRIC POINT OF VIEW: Put the client at the center of everything you do. The tipping point for your brand is what you can do to positively affect your clients’ experience.
  3. AUDIT EXISTING SYSTEMS AND PROCESSES: Identify areas of your business that are vulnerable to disruption.
  4. LEVERAGE REAL-TIME DATA TO IMPROVE THE CUSTOMER EXPERIENCE: Beyond operational data and metrics, look for ways to leverage real-time data to close the experience gap—for example, by immediately addressing any customer dissatisfaction expressed in real time on social media.
  5. COMMIT TO DIGITAL AND MOBILE: There’s no time for second-guessing. If you haven’t gone all-in on digital, mobile and intelligent automation, you’re already behind.
  6.  STREAMLINE THE PATH TO SUCCESS: Remove obstacles and barriers to change. If there are silos in your company that will inevitably slow the process of change, work to more elegantly bridge the gaps between them.
  7.  INSTILL A SENSE OF URGENCY: Leaders set the tone for the rest of the organization. Establish a culture that rewards action and embraces change. It all starts at the top.
  8. PARTNER UP: There’s no need to do everything yourself. Look for strategic partnerships to make up for organizational gaps.
  9.  DON’T DRINK YOUR OWN KOOL-AID: A focus group of one is going to get you nowhere. Take stock of what’s happening in your industry, assess and test your ideas, and make moves accordingly. Let the market decide your strategy. Talk to your clients. But more important: listen to your clients.
  10. ALIGN INTERNALLY: Make it known that your organization is change-focused by spreading the messaging across all levels and departments. Align everyone within the organization toward shared goals to achieve business results.

Those who understand the depth, breadth and radical nature of the change and opportunity that’s ahead will be best able to reset their biases accordingly, shape their new world, rise to the new leadership challenges and thrive.

88 %
Of companies in the 1955 Fortune 500 are no longer in business

84 %
Of executives at insurers agree that traditional organizations must evolve their business before they are disrupted

89 %
Of companies expect to compete mostly on the basis of client experience (versus 36% four years ago)

50 billion
The number of connected devices worldwide by 2020, according to some forecasts

No. 1 challenge of digital and technology transformation
Developing new business models to cope with increased connectivity and engagement
CIO Report

For those not familiar with the term, a chatbot is a computer program that conducts an online conversation with the client. Chatbots are often designed to convincingly simulate how a human would react as a conversational partner (known as natural language processing), thereby making clients think they are actually communicating with a human being instead of a computer program. If the conversation gets to a certain level of detail, the chatbot will pass the conversation to a real human, who then completes the transaction. Chatbots are great for such things as customer service dialogue and for clients seeking information acquisition.

Some that have been successful include “Health Tap,” a bot that helps people take care of their health and well-being, and “Florence,” a healthcare chatbot that reminds you to take your medication, checks your symptoms, sends you daily health tips, finds a doctor for you and helps you make appointments.

Bots are being used to ensure patients follow the correct protocol in advance of procedures and answer questions. They can also be used to anticipate issues based on data, proactively and periodically check in with the patient after the procedure to ensure pain levels are being managed, schedule follow-up appointments, confirm and reorder prescriptions, send and receive photo and video updates, and track progress toward the employee’s return to work. The bots are available 24/7 to serve the patient, they never forget and they get smarter with every interaction. I guess you could say they make house calls.

We asked Carol Barton, president of AIG Multinational, about AIG’s first blockchain smart insurance contract.

At what trigger do you consider this a success?
The pilot achieved its goals. Because of this partnership with our clients, we have a better understanding of this new technology, how it works, and its potential.

What kind of efficiencies and cost savings do you foresee by using blockchain for your contracts?
Any technology, including blockchain, that can increase trust and transparency for an industry whose pillars are built on that should be fully explored.

While it is still preliminary, blockchain’s value could be enormous in terms of building more effective and cost efficient processes. The pilot demonstrated how permissioned individuals across the insurance value chain can check instantly whether cover is in place, if premiums have been paid, and whether claims have been filed or paid, reducing the need for numerous phone calls and emails, which in turn will reduce costs and provide timely certainty and transparency.

This pilot project is an important step forward.

Would using blockchain enable you to sell more coverage in the future?
We specifically chose to execute the pilot within one of the most complex areas of our business to test its limits. The results are promising for business expansion, particularly the demonstrable ability to onboard additional stakeholders, such as banks and brokers, within the ledger.

No broker was involved in this contract. Do you see using more smart contracts to bypass brokers in the future?
Our key driver for this initiative was to explore how we might leverage emerging blockchain technology to increase trust and transparency in the insurance value chain—core values that our industry is founded upon. We are focused on how we can learn from this pilot so that we can deliver operational efficiencies for our clients, our broker partners and AIG.

Do you foresee commercial brokers creating these contracts for insurers?
When looking across the spectrum of clients and the risks that they face, there is no “one size fits all” solution to delivering insurance protection. The answer may be different depending on the specific needs and complexity of each client. At AIG, we are committed to partnering with our clients and brokers to deliver innovative solutions that meet their risk, governance and contract certainty objectives.

As MIT Technology Review reported, “A heavily promoted collaboration with the M.D. Anderson Cancer Center in Houston fell apart this year. As IBM’s revenue has swooned and its stock price has seesawed, analysts have been questioning when Watson will actually deliver much value.”

Watson is a machine-learning system that gained fame in 2011 by beating other contestants on the game show Jeopardy! by consuming hundreds of millions of pages of content, including the full text of Wikipedia. This form of artificial intelligence is designed to recognize patterns in the data it consumes and become increasingly intelligent the more it consumes.

After Watson’s success on Jeopardy, IBM began exploring the ways in which Watson could have an impact in different industries, one of the first being the healthcare industry. For example, according to MIT Technology Review, in its partnership with M.D. Anderson Cancer Center, Watson was supposed to “read data about any patient’s symptoms, gene sequence, and pathology reports, combine it with physician’s notes on the patient and relevant journal articles, and then help doctors come up with diagnoses and treatments.”

While the specific reasons for Watson’s success or failure on any given project vary, MIT Technology Review boils Watson’s current troubles down to one fundamental issue—it needs the correct information programed into it in order to learn further. “Watson is continually rejiggering its internal processing routines in order to produce the highest possible percentage of correct answers on some set of problems,” the article says. If it doesn’t have those correct answers already in it, Watson can’t differentiate between right and wrong, and thus can’t continue to refine and improve its response.

In the healthcare world, this means that for Watson to be able to sift through large amounts of data and decipher what is needed for a specific patient, a human would need to do it first. For example, “To recognize genes linked to disease, Watson needs thousands of records of patients who have specific diseases and whose DNA has been analyzed. But those gene-and-patient-record combinations can be hard to come by. In many cases, the data simply doesn’t exist in the right format—or in any form at all. Or the data may be scattered throughout dozens of different systems, and difficult to work with,” says MIT Technology Review.

So what does this mean for insurance? Well, as Leader’s Edge reported last year, some insurers and brokers are beginning to employ machine learning in their organizations. Chubb is applying it to workers compensation claims with the goal of closing them faster and at less expense, while improving health outcomes and speeding up return to work. Brokerages like Willis Towers Watson and Aon are using it to better understand their clients’ loss drivers and related insurance coverage needs. And Swiss Re in particular had just partnered with Watson to develop cognitive solutions to help underwriters accurately price risk, thus increasing the company’s life and health reinsurance profits through a more informed understanding of potential loss exposures.

“To compete successfully, insurers and reinsurers need to identify emerging risks and loss trends better than they have in past, spotting operational issues and opportunities at a higher frequency than done before with traditional analytics,” said Leader’s Edge. Watson, as well as other AI, can help achieve this.

While Watson may have some flaws, it—as well as other AI—still seems to hold great potential for businesses across industries to make better use of data. In fact, IBM recently announced a beta test for Watson in cyber security. We’ll continue to keep an eye on Watson as it evolves.

Yep, for many of us, the holiday isn’t complete without fireworks. And if you’re in the niche market of fireworks and pyrotechnics insurance, that’s a good thing.

July Fourth is noted as being the busiest firework time of the year (with New Year’s Eve coming second). And the fireworks industry is growing. According to the American Pyrotechnics Association, consumption of fireworks in the United States has risen from 29 million pounds in 1976 to more 268.4 million pounds in 2016. The association notes there are only three states that maintain a total prohibition on all consumer fireworks.

“States have been allowing more and bigger fireworks so that they don't have to worry about their citizens making their Fourth of July purchases elsewhere,” reported the Pew Charitable Trusts a few years ago.

As Pew notes, the increased revenue is expected to come from things such as licensing and safety fees as well as sales tax.

A Niche Industry

While it may require working on the holidays, fireworks and pyrotechnic insurance is a niche that is fairly multi-facted. As MyNewMarkets.com reported, from the manufacturing of fireworks, to the equipment, to the firework companies, wholesalers, retailers and display shows, the insurance needs are numerous.

There are also a considerable number of regulations to be aware of. “It is a very regulated industry with a lot of government entities involved and every single event and every situation is different,” said Tami Town to MyNewMarkets. Town is a specialist in the market for Ryder Rosaker McCue & Huston Insurance Services. As Towne and others note, the industry became considerably more regulated after the terrorist attacks on September 11, 2001, as it falls within regulation of hazardous materials, which became much more restrictive.

As The Council explains (CIAB password protected), “The significant problems in the individual and exchange marketplaces, and corresponding cuts to the federal safety net of Medicaid, will have consequences for years to come on the entirety of the health care ecosystem—as evidenced by the growing political movements on the left in support of single-payer health coverage.”

Echoing that sentiment is a recent Washington Post article, which notes that the continued healthcare debate at the national level has rekindled calls for a single-payer system among some states. Eyes and ears have been trained on two of the nation’s largest states, California and New York, where legislation has been making its way through the system.

In California, legislation known as the Healthy California Act cleared the state Senate by a 23-14 margin and was pending in the state Assembly. However, state Assembly Speaker Anthony Rendon pulled the bill from consideration by the Assembly on Friday, June 23. As the Huffington Post reported, “Rendon, much to the chagrin of the bill’s supporters, opted to pull it last week despite his support for a single-payer system, calling the plan ‘woefully incomplete.’ He urged the state Senate to ‘fill the holes’ and send the Assembly a ‘workable’ bill next year. So while on hold for now, single payer still seems like a possibility in the state.

In New York, the Democratic-led state Assembly has approved the New York Health Act on a 94-46 vote and sent it to the Republican-led state Senate. If the measure can get through the Senate—a slim but real possibility—Gov. Andrew Cuomo is likely to sign it.

Despite this momentum, major barriers lay waiting in the path of these bills including:

  • Opposition from insurers, providers and employers. Not surprisingly, insurance companies oppose the notion of the government (federal or state) taking over their business. And there also is strong opposition from physicians, hospitals and other providers who worry a single-payer system would have far too much leverage over what they are paid. Finally, large employers, especially those that do business in multiple states, also object to the single-payer movement. They worry about giving control over a key benefit for their employees and, very possibly, being stuck with a new tax burden to pay for it.
  • Resistance by the federal government. Both the New York and California single-payer bills assume the state can take control of spending for Medicare, Medicaid and veterans’ care in their states. That would require unprecedented permission from Congress and the White House and in the current political climate the odds of that are slim and none.
  • Taxes, taxes, taxes. Perhaps the biggest trump card held by opponents of single-payer healthcare is the fact states would need to impose significant new taxes on citizens and employers to pay for it. In California, healthcare spending is estimated at $400 billion a year, more than double the state’s spending on all services in 2016. Single-payer proponents argue half of that spending ($200 billion annually) could come from money now spent by the state and the federal government on healthcare, and another $100 billion to $150 billion would be saved by employers who now pay for coverage. Even with this “fuzzy” math, it still leaves a $50-$100 billion hole to be filled by new taxes. New York legislators are looking at math that looks very similar.

All this is not to say it is impossible for a single-payer plan to pass in 2017. But even it were to be enacted, observers often cite the state of Vermont as an example of a locality that enacted single-payer legislation in 2011 only to drop it in 2014 when they could not figure out how to pay for it. Similarly, the state of Colorado appeared moving toward a single-payer model in 2016 through a ballot initiative that seemed certain to pass. However, on Election Day, the plan went down to an overwhelming defeat, primarily due to the specter of new taxes.

This summer is certain to be full of headlines about the debates going on in D.C. and around the country on which direction the nation should take on healthcare. What is likely, at least for now, is continued status quo. Even if the single-payer efforts in California and New York fail in 2017, the debate won’t go away. Democrats in Congress are increasingly backing a single-payer bill. Moreover, Aetna CEO Mark Bertolini told a private investors’ conference, the U.S. should give the notion serious debate. He cited Medicare, a single-payer program covering millions of American seniors, utilizes insurers to process claims and other key responsibilities. So a debate that has been raging, on and off, since Harry Truman was in the White House, continues.

Editor’s Note: This article was updated on June 30, 2017, to reflect changes in the movement of the Health California Act.

Willingness to share data is a prerequisite for UBI, and Willis Towers Watson found that 81% of respondents said they would be willing or open to sharing recent driving data, and 84% would be interested in or open to having a short trial to determine the discount they could get before buying a policy.

Willis Towers Watson notes that consumers also have to buy into the principle that their insurance will be determined by how they drive. The survey found that only 7% of respondents disagreed with the premise that UBI is a better way to calculate premiums than traditional methods.

Katie DeGraaf, global telematics sales and delivery lead for Willis Towers Watson, believes connected cars are paving the way for the UBI insurance market according to a Willis Tower Watson press release.

In talking with Leader’s Edge about the survey, DeGraaf said the results of the survey show that UBI makes sense to the consumer and is more relevant overall.

“In the past, for example, credit score related to a consumer’s auto insurance. While there are correlations between financial information and risk of driver, it doesn’t seem as relevant to the consumer as information based on where the consumer drives, how fast, when or for how long,” said DeGraaf. “With this technology, it just makes more sense to the consumer.”

And while this survey focused on individual consumers, DeGraaf notes that the technology can be applied across the commercial space as well. “Connections to users’ smart phones can be leveraged to bring prices down,” she said, offering the example of managing a commercial fleet through an app.

The changing behavior in the consumer is important to the insurance industry for many reasons, DeGraaf said, noting that insurance companies need to focus on opportunities that are relevant to a world that connects more and more with technology.

For more on the connected future, check out “Driving You Mad,” on self-driving vehicles and “Digital Mind Field,” on the shifting roles of risk in the digital ecosystem.

Americans are now generally better positioned for retirement than they were a few decades ago, thanks to the ability to slowly and effortlessly save money through their workplace 401(k) accounts and similar defined contribution plans. But not everyone has benefited. Many workers—more than 30 million nationwide—do not have access to the tax-deferred accounts. And it’s increasingly clear, as surges of baby boomers enter retirement, many others who do have 401(k)s fail to save as much as they need to in order to retire in comfort and security.

By some estimates, America’s retirement savings shortfall is as high as $14 trillion, a problem that is now boomeranging back to employers, who find themselves uncertain about what to do with a graying workforce that can’t afford to retire. Delayed retirements affect the bottom line through increased health costs and strains on productivity and innovation.

Those challenges—as well as other recent trends in the retirement planning space—are tailor-made for benefits brokers who are already working with employers on health plans, life insurance, workers comp and other programs.

There couldn’t be a better time for firms with broad experience to enter the space, according to Joseph DeSilva Jr., senior vice president and general manager of ADP Retirement Services. “There’s a change right now that’s going on in the marketplace where people expect more value at a lower cost,” he says. “A lot of that’s driven by regulation, but a lot of it has been in motion for years now.”

Among those drivers is a controversial rule from the U.S. Department of Labor that has occupied the industry’s thoughts since 2010. The fiduciary rule, championed by the Obama administration, requires brokers and advisors to more clearly demonstrate they’re putting their clients’ interests first. Critics contend the change, which has faced challenges from the Trump administration, will limit investment choices, impose burdensome compliance requirements and ultimately drive up costs.

The Trump administration recently announced the rule will begin taking effect in June but will not be fully enforced until at least January while its review of the potential effects continues. Further revisions are expected. Regardless of the outcome, it’s already changed the industry. Some advisors unwilling to take on the additional rigor as a fiduciary have departed the space, and others are expected to leave rather than compete with firms that have proceeded with the basic tenets of the rule even if the Trump administration significantly changes it.

“I am seeing more of a trend of retirement-focused advisors emerge,” says Allison Winge, executive vice president of retirement at Plexus Financial Services. But Winge, who has been in the industry for 17 years, cautions that the upcoming changes won’t work for everyone. “Assuming the fiduciary rule does pass,” she says, “I would only recommend it if the advisor is wanting to specialize in the retirement plan space.”

Dave Kulchar, director of retirement plan services for Oswald Financial, offers a similar note of caution. “Plan sponsors are not looking for generalists,” he says, “so to be competitive in this space, you must be a specialist.”

Nevin Adams, chief of communications and marketing for the American Retirement Association, says a new regulatory regime—or remnants of it—could be an advantage for new arrivals.

“If you’re new to it, you don’t get so caught up in the way it used to be and the way we used to do things,” he says. “The things that might be considered strange, alien or complicated to the people who have been doing this business for a while—to you, it’s just the way it’s been.”

Eric Poole, a financial planner with Kentucky Planning Partners in Louisville who began handling 401(k) accounts three years ago, says he expects more accounts will come into play as firms depart. “This may be a time where they’re looking to cash out, sell a book, or get out of the business as a whole,” Poole says. “It’s nothing but a huge, huge opportunity for anyone looking to get in.”

DeSilva, whose firm works with 53,000 plan sponsors nationwide, agrees. “Regardless of what the DOL or the Trump administration requires, there has been a huge change in the marketplace,” he says. “The buying expectations have changed. The expectations are focused on a provider that has a lot of knowledge, a lot of value, for a really low cost.”

Amber Lloyd, manager member and owner of Retirement Management Services, a third-party administrator in Louisville, expects most changes to occur with smaller plans as those advisors decide they can’t take on a larger fiduciary role. “I think that’s definitely a market for advisors that want to get into the space,” she says.

The surge of retiring baby boomers is also affecting the business as advisors and brokers join their clients in retirement. The average age of a financial advisor is 50, and more than a third plan to retire within 14 years, according to a recent survey by Cerulli Associates and the Investment Management Consultants Association. As those advisors retire, the American Retirement Association’s Adams says, the landscape will change. New entries into the space could buy or merge with firms, hire their advisors or take over their books.

Adams says the space is ripe for competition, particularly from people who are focused and dedicated. He says numerous advisors can be easily displaced because they tend to bring in a plan, put it into the hands of individual account managers and move on.

“They’re not doing right by the plan sponsors. That’s a sad thing,” Adams says. “That’s why I think there’s a lot of opportunity for advisors who are really committed to this business.”

Partner Up and Start Simple

Veterans of the space and recent arrivals both stress one bit of advice for brokers considering expansion into retirement planning: don’t go it alone. Carve out an initial role for yourself, and find others to complement you.

“If you present yourself as ‘I, I, I,’ you’re not going to make it in the industry, because it’s very complicated,” says Ruth Rivera, vice president of retirement services at Bukaty Companies.

Plan sponsors are not looking for generalists, so to be competitive in this space, you must be a specialist.

Dave Kulchar, director of retirement plan services, Oswald Financial

“It’s almost impossible for someone to say, ‘Hey, I’m going to be a retirement advisor now and focus on supporting retirement plans,” says Phil Chisholm, vice president for product management at Fidelity Investments. “The complexity from a regulatory, legal and just structural standpoint requires some experience. Where we tend to see the most success is people who partner with others who bring a skill set as well.”

One valuable entry point is education and enrollment meetings. “It’s a great introduction to the business,” Poole says. For example, explains Chisholm, “an advisor might say, ‘I don’t understand the technical ins and outs of a 401(k) plan, but sitting down in a cafeteria and talking to participants, that’s where I’m really strong,’ or ‘Sitting with a plan sponsor or employer and talking about investments, I’m really strong there, too.’” As for the rest? “We’ll help fill in the gaps,” Chisholm says.

There are three avenues of training that new and established players in the industry mention most frequently:

  • The National Association of Plan Advisors (NAPA), an affiliate of the National Retirement Association, offers an introductory online practice-builder course, full training and certification for fiduciaries, and numerous continuing education programs.
  •  The Retirement Advisor University, a program through the UCLA Anderson School of Management Executive Education, has courses taught by professors and retirement industry leaders available on campus and online.
  •  The College for Financial Planning offers numerous professional designation programs, including Certified Financial Planner.

“Those three resources probably cover the bulk of the needs of an advisor trying to get up to speed,” Chisholm says. Other options include the International Foundation for Retirement Education, the Center for Fiduciary Studies and the Society of Certified Financial Advisors.

At the outset, advisors will need a Series 7 securities license. Winge, of Plexus Financial Services, says advisors should also consider a Series 65 license to offer co-investment fiduciary services.

Some advisors later choose to pursue a full fiduciary role, taking responsibility for fund selection and monitoring, Lloyd of Retirement Management Services says, while others stay closer to the education role.

“They’re the advisors out talking to employees, helping to explain what the retirement plan is, what the benefits of participating in the plan are, how to accumulate funds over your lifetime, and what that’s going to mean to you,” she says.

“The key is you don’t have to do everything yourself,” says Tobi Alfier, a consulting practice director for CBIZ ACI. “Find people who will help make you shine.”

Key alliances include recordkeepers, who set up the defined contribution plan’s platform and track its assets, and third-party administrators, or TPAs, who oversee plan design and help employers comply with government regulations.

Alfier says developing a solid team will help protect clients—and you. “If you are going to specialize in large plans (more than 100 employees), meet CPA auditors you can refer,” she says. “For any size plans, find a TPA who can do plan design, prepare illustrations, sit shoulder to shoulder with you in prospect meetings, and who has a great staff committed to accurate and timely administration.”

Rivera, a 20-year veteran of the industry who shifted to advising on 401(k)s three years ago, also recommends bringing experienced people to prospect meetings. Use their numbers for assets under management to project confidence in your offerings, she says. “You’ve got to be able to present a team effect,” she says.

Lloyd says TPA firms like hers can ease the transition for new retirement planners. “We’ll help the advisor meet with clients to make sure that we are designing something that is appropriate and tax-efficient for that particular employer,” she says. “It helps to expand their wheelhouse of knowledge and capabilities.”

Alfier says it’s also important to team with a sales-oriented, but not a product-selling, TPA. “Take them on ride-alongs,” she says. “Learn the questions they ask and why. Knowing the goals of a prospect will help you determine the most appropriate plan of action for them and the best place to put their retirement plan assets.”

Good connections with TPAs also can lead to new clients, according to DeSilva, who says linking with ADP means teaming up with 200 sales representatives already engaged in the space. “Working with some firms requires the advisor to do all the legwork,” he says. “Working with ADP, you partner with those sales representatives to go and capture business.”

Chisholm says it’s important to limit partnerships with recordkeepers, who set up the plan’s platform and track assets, in the early going. “Work with a couple of them,” he says. “It’s hard enough to understand the marketplace. The more that you work with, the more you have to learn everybody’s operating model, their product lines, and the complexity to go along with it. If you can keep it to a manageable size as you’re starting out, the better off you’ll be.”

Poole, of Kentucky Planning Partners, says advisors also will help themselves, as well as plan participants, if they keep those recordkeepers’ platforms simple, with a limited menu of choices for account holders. “The majority of our lineups are going to the household names that have a history of good performance and keep the expenses low,” he says.

Alfier suggests getting to know different wholesalers and learning everything you can about their products. “You are going to be responsible for the great retirements of your clients and their employees,” she says.

“They are going to rely on you to put their money in the smartest place for them, based on their demographics and goals. You need to know who to suggest.”

Chisholm says brokers also should assess what they have available in-house. “If the resources exist within your own firm, leverage them as much as possible.”

Associating with a well-established registered investment advisor, such as Global Retirement Partners, is also a good way to “gain access and have ongoing exposure to tools, resource support and intellectual capital,” Oswald’s Kulchar says.

The complexity from a regulatory, legal and just structural standpoint requires some experience. Where we tend to see the most success is people who partner with others who bring a skill set as well.

Phil Chisholm, VP for product management, Fidelity Investments

Learning the Trade

Training is a necessity, but it’s also an excellent avenue for benefits brokers to explore whether they want to expand into the space. “It’s a good way to look without exposing your bottom line,” Adams says.

Some of the essentials can be gleaned from potential partners. “We do a lot of educational events for advisors,” Lloyd says of her TPA firm. “We do mini boot camps to try to help new advisors in our area to get introduced to this space, terminology and what will be expected of them from companies.”

Poole says it’s important to pursue training and accreditation to help business owners feel confident you will manage their employees’ savings well and select the right TPAs and recordkeepers to ensure compliance.
“Do anything you can do to add an extra little bit of validity to yourself,” he says. “That’s what you’re selling first and foremost.”

Two designations are particularly well recognized in the industry: AIF (Accredited Investment Fiduciary) and CPFA (Certified Public Finance Administrator).

“The AIF designation immediately demonstrates the advisor is working toward the best interests of the clients and is well qualified to do so,” Poole says. “The CPFA reinforces a high level of education and experience.”

Alfier says the AIF will help differentiate newcomers from their competition. “Part of the training will give you clear knowledge of who constitutes a fiduciary and what is required of one,” she says. “It will also give you the knowledge to keep yourself from becoming a fiduciary—some broker-dealers will not allow their brokers to act as fiduciaries. You don’t want to do the wrong thing.”

Chisholm says the education should be ongoing as the practice grows. “Rely on the industry as much as you can and basically absorb as much as you can in the marketplace.”

Whom Do You Know?

Benefits brokers are accustomed to leveraging connections, and the same networking skills will open doors for advisors entering the retirement planning space.

“Cold calling is a very difficult world,” says Chisholm, who says new arrivals will find leads from the usual sources, such as local chambers of commerce, but also from CPAs, auditors, commercial lenders and others with ancillary connections to retirement planning. “These businesses provide other services, so you’re not competing with them; you’re complementing them.”

Poole suggests joining human resources groups to meet the people who are picking 401(k) advisors. “They’re in every city,” he says.

Industry conferences can be expensive, Chisholm says, but they’re an excellent place to build networks with people in and out of your region. NAPA’s annual 401(k) Summit is a popular option for many in the industry, he says. “It’s just a great way for someone who’s in the market to truly start interacting with other folks, leveraging best practices, building contacts and gathering ideas on how they can advance their business.”

Chisholm says he’s also seeing growth in regional, college-style study groups, with advisors and others in the industry gathering periodically to share ideas and knowledge. “Those are usually very helpful for people to get up to speed and learn what other people are doing,” he says.

Networking with NAPA and affiliated groups is also critical to tracking what’s happening in Washington. “With a new administration, obviously the political direction is going to change, maybe dramatically,” he says. “That’s where industry groups will be very helpful for someone who’s less experienced. They’ll help raise awareness of areas that advisors and brokers are going to have to pay special attention to.”

Alfier recommends connecting with college alumni groups and also with ProVisors, a networking group for professionals that is active in California and various regions of the country. “They are very selective about membership in that they don’t allow too many people in the same profession to be in the same group,” she says.

Alfier also suggests getting involved with groups affiliated with plan sponsors. “Determine your niche and learn everything you can about it,” she says. “For example, manufacturing companies have very different personalities and challenges than professional groups, i.e., doctors and lawyers. Just because you specialize doesn’t mean you can’t ever do anything else. You need to grow, but start where you’re comfortable.”

A Ready-Made Niche

Financial wellness programs, designed to help employees take a holistic approach to managing money, are a natural way for benefits brokerages to break into the retirement planning space. Brokers can capitalize on their knowledge of healthcare costs and coverage as they talk to both employers and employees about the best way to meet existing financial obligations and prepare for the future.

Seven out of 10 workers say their financial situation is their greatest cause of stress, according to the American Psychological Association, and studies by the peer-reviewed journal Health Affairs and others have shown that stress drives up medical expenses and drives down productivity.

The number one cost in retirement is healthcare, so bridging that gap is important for us. A benefits broker/financial advisor—someone who can wear both hats—really brings a high level of credibility to the table.

Joseph DeSilva Jr., SVP and general manager, ADP Retirement Services

Financial wellness programs generate a return on investment of $1 to $3 for every dollar spent, according to the Society for Human Resources Management. “The concept of wellness has a great deal of resonance with employers because it’s a cost savings,” Adams says.

Sometimes the assistance can be rudimentary, such as helping individuals learn how to better budget their living expenses so they can save for the future. Other times, the conversation will need to be comprehensive.

“A lot of customers and their employees are really thirsting for knowledge broadly around financial services. It could be their insurance, their disability, college planning or other benefits that they have,” Chisholm says. “People are overwhelmed. People don’t consider themselves experts, and it’s daunting. It’s very difficult to figure out where all the pieces come together.”

For business owners, the conversation can focus on how helping their employees alleviate financial stress helps the company’s bottom line. “That’s another way to show your value, when you’re saying, ‘Hey, this employee is now going to able to retire at 65, which means you don’t have to keep paying this higher salary, these higher health benefits,” Poole says. “You can—over a one-, three-, five-year basis—show the progress that the plan is making. I think business owners place a lot of value in that.”

DeSilva says those education efforts are important for employees, too, because they often fail to anticipate the medical expenses they might face in retirement. “The number one cost in retirement is healthcare, so bridging that gap is important for us,” DeSilva says. “A benefits broker/financial advisor—someone who can wear both hats—really brings a high level of credibility to the table.”

Advice for the Advisor

Not everyone who ventures into the retirement space will succeed, of course. Sometimes it’s because a company’s motives are misplaced. “The business of working with retirement plans is chock-full of brokers—and I’ll use the term pejoratively—who don’t know anything about retirement plans,” Adams says. “They see a pot of money, and, particularly in a commission-based structure, they think it’s pretty easy pickings. They don’t appreciate what’s involved with it.”

But advisors with the right focus also veer off path. Among the most common pitfalls: they overextend themselves. Chisholm says a friend recently departed the space after realizing he’d taken on more than he could handle. “He was trying to offer too many things to his clients because he was trying to build up his business,” he says.

Advisors need to ensure the commitments they make for enrollment meetings and other aspects of a plan are sustainable as their business grows. “Ultimately you have to make sure you’re successful in hitting your profitability targets,” Chisholm says. “You have to be smart about sometimes looking at the business and saying, ‘What kind of services can I provide cost-effectively, profitably, that are going to allow me to be scalable and have a complete book of plans?’”

Again, building strong partnerships with those who do the back-office work and others is critical, as is building a support team within your firm. “Most of the successful groups that we work with tend to have built out teams,” Chisholm says. “You can have 40, 50, 100 plans in your book of business, but that’s going to require you to understand and clearly articulate to your clients what services you do, what you do not do and how you justify the pricing for those services. Obviously, the more things that you do, you’re going to need a team to support you through that process.”

Chisholm says it’s important to benchmark fees carefully. “On one hand, you don’t want to be pricing yourself out of the market,” he says. “On the other hand, you don’t want to be underpricing your own services and selling yourself short.”

Early adjustments may be necessary. “Don’t be afraid to take hits at the beginning, maybe reducing your compensation or whatever, to really position yourself in the industry,” Bukaty Companies’ Rivera says. “Everything works phenomenally when you start getting referrals, to the point where you’re not really working as hard because people know who you are and what you’re doing.”

Brokers should also consider starting with smaller plans. The profits aren’t as good as large plans, but the competition can be less fierce and there are more opportunities among employers who don’t have existing 401(k) plans. “Most retirement advisors are moving up market,” Winge says. “Perhaps focus on plans under $5 million.”

Chisholm says advisors would be wise to ensure they’re tech-ready or team up with people who are. For years, employers eschewed online access, saying most people in their workforce didn’t have access to computers or interest in checking their plans. “I think those days are over,” Chisholm says. “Everybody has a smart phone, everybody knows how to load an app onto their phone.”

As advisors build relationships with clients, they need to remember that humility and honesty go a long way in making inroads, according to recent arrivals in the space as well as industry veterans.

You can have 40, 50, 100 plans in your book of business, but that’s going to require you to understand and clearly articulate to your clients what services you do, what you do not do and how you justify the pricing for those services.

Phil Chisholm, VP for product management, Fidelity Investments

It’s important to acknowledge “when you don’t know what you don’t know,” Chisholm says. “The last thing you want to do is put yourself in a situation where you are saying something inaccurate because you don’t want to look like you don’t have all the answers,” he says. “People are going to recognize we can’t be experts in 100% of everything. If there’s any area of uncertainty, it’s always OK to say, ‘Let me do a little research on that and get back to you.’”

Projecting confidence is important, Rivera says. So is owning up to a mistake. “The more you own it, the more people will trust you, and the more you have an opportunity to really grow in the business,” she says.

Patience is also critical for advisors and brokers breaking into the space. Poole says it can take 18 months from the first phone call about a 401(k) to the time the plan goes live. “Don’t get discouraged,” he says.

“There’s a long sales cycle to acquire any client. Business owners, HR—they’re doing a lot of different things, so be patient. Just stay at it.”

As brokers and advisors establish themselves, they need to distinguish themselves from their competitors. An advisor may become known for being able to simplify complex plans for buyers, for instance.

“Establishing that brand is what is going to start to differentiate you from the plethora that are out there,” DeSilva says.

“Learn how to listen well,” Alfier says. “People—prospects—love to talk about themselves. Find out what is keeping them up at night, then provide a solution. Anyone can talk about money. Learn how to be different.”

Lease is a contributing writer. daryl.lease@gmail.com

This year marks 150 years since the colonies of Canada, Nova Scotia and New Brunswick formed the Canadian Confederation on July 1, 1867. In honor of the sesquicentennial, the country kicked off Canada 150 last New Year’s Eve, launching a year of commemorative events reflecting the history and heritage of each province.
Thirty official city-produced events will take place during Toronto’s 150th birthday party, deemed TO Canada with Love. Many of the events, such as the Multicultural Canada Day Celebration, honor the city’s rich diversity. From festivals to music to art, there is a lot going on, so if you are traveling to Toronto, check with your hotel’s concierge to see what is on the calendar while you are in town.
The big event is Canada Days, which runs from June 30 to July 3 with the main celebration occurring on Canada Day, July 1. The four-day festival will include events at Nathan Phillips Square, where you can take a selfie with the illuminated 3D TORONTO sign in front of City Hall, which is sporting a new red maple leaf by the final “O.” But many events, such as Canada on Screen, a showcase of 150 movingimage works from Canada’s history, are ongoing. You can catch a screening of the features, shorts, documentaries, animation, television, experimental works, music videos, commercials and moving-image installations at the TIFF Bell Lightbox, the hub for the Toronto International Film Festival.
Likewise, the Toronto Symphony Orchestra will perform existing and new Canadian music throughout the year, from indigenous to indie to classical and cutting-edge. The government of Canada chose the orchestra to present Canada Mosaic, a Canada 150 Signature Project. As part of the project, the orchestra has co-commissioned two-minute works, “Sesquies,” from 38 partner orchestras in every Canadian province, which will premiere in Toronto.
While there are no official restaurant events scheduled, homage must be paid to this global foodie city. To quote David Chang, who has five restaurants in Toronto and is widely considered to be among the best chefs in the world, “If people ask me, ‘What do you think could improve in Toronto dining,’ I’d say there’s nothing to improve on.” Nevertheless, Toronto chefs continue to raise the bar. Five of Toronto’s restaurants made the top 10 on the 2017 Canada’s 100 Best (alas, not 150) list: Alo (1), Edulis (5), Buca Yorkville (7), Canoe (8) and Dandylion (9). As the magazine’s editor, Jacob Richler, says, “That is total domination of fine dining.”

Hartford is known as New England’s rising star. It’s a smaller city but has a lot of energy. This is partly due to the number of colleges—UConn-Hartford, the University of Hartford, Trinity College and Wesleyan University— which makes for fun and exciting Friday nights. But we also have a diverse ethnic population that adds richness to our food, entertainment and arts.

Dining scene
We have an extensive choice of cuisines for a city our size. Restaurants range from upscale American to Italian, Portuguese, Caribbean, Asian and Mexican.

Favorite new restaurant
It’s hard to choose, but I’d say Bear’s Smokehouse for southern barbeque, Metro Cafe Hartford for a good breakfast and lunch, and Salute or Firebox, both farm-to-table restaurants, for dinner.

Classic eats
Carbone’s Ristorante. This northern Italian restaurant opened in 1938. It’s old school, with photos of local politicians, celebrities and athletes hanging on the walls. The traditional Italian food is great. I love the salmon, calamari and veal.

Hartford Marriott Downtown by the convention center. It is conveniently located off Interstates 84 and 91 and in walking distance to the Front Street District, a dining and shopping corridor that is home to some great restaurants—The Capital Grille and NIXS Hartford, to name two.

Watering hole
I take clients who are staying at the Marriott to The Capital Grille. They have great drinks and appetizers as well as an outdoor seating area and valet parking. ON20 is a high-end restaurant that also serves good cocktails and has an excellent view of the city.

Real Art Ways in the funky Parkville neighborhood is one of the country’s best contemporary arts spaces. Founded in 1842, the Wadsworth Athenaeum is the oldest continuously operating public art museum in the United States. Within the Athenaeum is the Amistad Center for Art & Culture, which opened in 1987. It houses art, artifacts and popular culture objects that document the experience, expressions and history of people of African American Heritage.

Bushnell Park is the oldest publicly funded park in the United States. It is a great place for a run or bike ride, as is Elizabeth Park, which has a beautiful rose garden in the center. It was the first municipal rose garden in the country and is the nation’s third largest rose garden today.

Of Americans have tried to find out before getting care how much they would have to pay out of pocket—not including co-pays—and/or how much their insurers would pay.

Of insured people with deductibles above $3,000 say they have tried to find price information before getting care.

Of Americans say there is not enough information about how much medical services cost.

Source: Public Agenda, “Still Searching: How People Use Health Care Price Information in the United States”

What makes price transparency so complex is different numbers are important for different stakeholders. In addition to the theory that cost and quality-of-care transparency will drive consumers away from low-value providers, some experts believe that being labeled as low-value on its own could propel providers to improve their quality of care for the sake of their reputation.

So, while consumers may respond more to cost information that is directly related to their out-of-pocket spend or relevant to their particular situation, providers may be more affected by costs that demonstrate a low quality of care. According to a 2012 Health Affairs article, those cost measures should have a clear association with the quality of care. “Examples include re-hospitalizations, costs associated with potentially avoidable complications or ‘never’ events, or use of high-cost high-radiation risk imaging for back pain. All of these might be viewed by providers as potentially avoidable costs that clearly result from poor-quality health care.”

Doctors are seen as trusted sources of price information. In a report about how consumers use healthcare price information, Public Agenda found 77 % of Americans trust their doctors a great deal or some when it comes to finding out about the price of medical care. It also found 70% of Americans think it is a good idea for doctors and their staffs to discuss prices with patients before ordering tests or procedures or giving referrals.

Yet only 28% say a doctor or their staff has brought up price in conversation with them.

The fact is, physicians can use cost and quality information to have a more informed dialogue with their patients. As noted in a 2014 West Health Policy Center analysis, “Some argue physicians can, in principle, use price information to guide patients toward higher-value treatment options and providers. To do so, physicians need to embrace frugality as a value, and they need data on the cost to the healthcare system of the treatments they are ordering and the cost differences between treatment options. They also would, ideally, know patients’ out-of-pocket obligations.”

Employers, health plans and policymakers can use this information to see patterns of patient care, levels of competition, etc. According to the West Health Policy Center analysis, the price transparency discussion usually focuses on providing patients with information on out-of-pocket costs. “That focus is far too narrow. Shopping for healthcare is a multistep process involving five key audiences—patients, physicians, employers, health plans and policymakers—each with distinct needs and uses for price information.”

Some employers and insurers have adopted reference-based pricing as an alternative way to manage healthcare costs. In this approach, insurers offer a maximum price they will pay for specific procedures (which would potentially be based on some percentage of Medicare pricing), especially those that have a wide price variation. Providers who agree to the reference price are “in network” and those who don’t are not. If a plan member chooses an “out-of-network” provider charging more than the reference price, that person is responsible for the price difference. Reference-based pricing operates on the premise that members will shop for providers and providers will lower their prices to be considered “in network” or at least come close.

“The advocates of reference-based pricing would like to be able to bring an even playing field to the table and say, ‘OK, I get that you’re going to charge more than Medicare. But can we have some consistency here?’” Cruickshank says. “Then we’ve got no variation. There’s no more games being played. We’ve got transparency.”

A 2016 investigative report in the Journal of the American Medical Association suggested reference-based pricing could help create a larger incentive to search for lower-cost providers. “Because patients are responsible for the ‘last dollar,’ they may be more cost conscious, even for higher-priced services such as surgery,” the Journal reported. “Bonus programs in which patients receive incentives if they receive care from less expensive clinicians or facilities may also increase patient interest in price data.”

Some recent examples have shown success. The California Public Employees Retirement System (CalPERS) enacted reference-based pricing and found price reductions for certain procedures. According to a Health Affairs blog co-authored by Ann Boynton of CalPERS, the use of reference pricing for inpatient orthopedic surgery “led to significant price reductions from some of the hospitals whose initial prices were above the CalPERS payment limit. These price reductions have increased; the number of California hospitals charging prices below the CalPERS reference limit ($30,000) rose from 46 in 2011 to 72 in 2015.”

The report noted that reference-based pricing helped not merely to slow the rate of price growth but to reduce actual prices. At CalPERS, the first two years of reference-based pricing provided savings of $2.8 million for joint replacement surgery, $1.3 million for cataract surgery, $7 million for colonoscopies, and $2.3 million for arthroscopies.

Some critics question whether those savings have led to a diminished quality of healthcare. In fact, another Health Affairs blog noted, “The CalPERS experiment’s quality metrics were crude, limited to aggregate prospective and retrospective factors such as readmission rates, complications and infections. CalPERS did not apply the most important quality measure of all: Were patients able to walk after surgery? The experiment lacked outcome measures and any individualized assessment of quality.”

The CalPERS response acknowledges the general lack of robust quality-of-care measures in our healthcare system and notes the “reference pricing initiative took into consideration all the quality measures that were available to it. None of our critics’ preferred cost-reduction strategies…have better measures of quality; many of them forgo quality measurement altogether.” What the strategy did do, CalPERS says, was to “encourage patients to use high-volume hospitals and surgeons who benefit from experience to obtain good outcomes as well as lower costs.”

Quality-of-care concerns aren’t the only issue raised by critics of reference-based pricing. Another is the administrative burden placed on both consumers and HR staff. A Lockton white paper details a midsize employer’s successful transition to reference-based pricing, with level premiums, decreasing deductibles and even billing errors uncovered by employees.

Yet Lockton also details the struggles with the move. “A very small staff was responsible for following up on balance bills and working with partners to ensure employees were not left with additional costs.” Employees were also threatened with collections, and preventive care cases had to be negotiated on a case-by-case basis.

With mixed results, reference-based pricing will likely remain part of this conversation, though Cruickshank believes it will take the support of an administration to really take hold. “To force everybody into a consistent compensation system around what percentage of Medicare you’re being paid,” he says, “it’s going to require legislation probably to unmask it.”

If you’re following the money, what does that mean to you?

According to startup research firm Venture Scanner, startups that are designed to help people search for healthcare solutions (including providers and plans) have raised $2.5 billion to date, startups that provide employee benefits platforms have raised nearly $1.4 billion, and startups that focus on health management have raised $2 billion.

These companies perform a variety of services. After all, our healthcare system is complicated, with a lot of pain points that need fixing. One of the most pressing issues is the unsustainable cost trend. According to a PwC Medical Cost Trend report released earlier this year: “In the early 2000s, price and utilization were both major contributors to healthcare trend growth. Since then, the utilization trend has declined while the price trend grew…. Health benefit costs will be unsustainable in the long run.”

Yet while costs rise, most consumers have no idea what they’re spending. “While the escalation of the high costs of large claimants is a major economic problem in the system, still there is too much waste and variability in what things cost,” says Brad Plummer, senior vice president of the employee benefits practice at Cottingham & Butler. “When you connect the consumer to the provider with transparent costs and remove the opaque PPO/carrier system, you get efficient markets.”

How does insurtech propose to help? Price transparency is just a start.

Nothing “Consumer” About It

In response to the healthcare cost trend, employers have begun to shift more of the burden to employees. According to PwC, “63% of employers offer a high-deductible plan with a health savings account, and 25% offer a high-deductible plan as the only health insurance option to their employees.” But as consumers bear more of the upfront, out-of-pocket costs of their healthcare, cries for a more realistic, consumer-like experience are growing.

“With the rise of consumer-driven health plans, the need for price transparency has become even more critical,” says Seth Cohen, vice president of sales and alliances at healthcare tech company Castlight Health. “It’s debatable how important that information is when every member has a $20 co-pay, but when a member has a $3,000 deductible, then that information becomes really critical. And so, a lot of people say there’s nothing ‘consumer’ about a consumer-driven health plan without consumer-like information.”

Consumers certainly have a right to ask. Many research studies, for example, have shown wide variations in prices for the same procedure. And Castlight Health’s own price map shows that a lower back MRI in Miami costs from $714 to $3,164, while prices for a mammogram in Miami range from $96 to $510.

Cohen says it goes beyond medical, with pharmacy pricing playing a critical role.

“Price transparency in pharmacy is really important,” Cohen says. “A lot of people don’t know that the price of a pharmaceutical actually varies pretty significantly depending on whether you’re at Costco or Walgreens or Walmart or CVS.” The amount consumers spent at their pharmacy—while still a relatively small portion of employer health benefits—had the steepest rise in the share of employer health costs (a 21% increase since 2007) in PwC’s Medical Cost Trend report.

Yet according to public policy advocacy group Public Agenda, 51% of those who have not pursued price information before getting care indicate they are not sure how to do so.

Sometimes, even providers are not so sure. When we talk about the healthcare delivery system, says Rod Cruickshank, president and CEO of The Partners Group, “none of the actors know what the price is, nor are they interested. If we are trying to create transparency in healthcare purchases, we have to understand the problem from the delivery side’s perspective.”

The Rise of Value-Based Payments

There is an expectation that, if costs are made readily available to consumers, they will use that information to choose a lower-cost provider. Higher-cost providers will then begin to lose market share and lower their prices.

A lot of people say there’s nothing ‘consumer’ about a consumer-driven health plan without consumer-like information.

Seth Cohen, VP of sales and alliances, Castlight Health

This notion has a considerable amount of buy-in. “About eight years ago…there were very limited efforts by health insurance companies but nothing meaningful,” Cohen says. “We encountered a lot of resistance initially to it. But I think now price transparency has kind of been accepted almost universally as a must-have. I have yet to encounter any employer, any broker, any consultant who would say price transparency is not important.”

Wade Olson, national practice leader of employee benefits for BB&T Insurance Services, agrees. “There’s always been Medicare data that’s given us some basic elements of price and quality transparency but never really on the commercial side,” he says. “Over the last four to five years, there’s been a lot more focused effort from technology companies and technology platforms to align cost and quality outcomes.”

Underlying factors help drive this change. The healthcare community has recognized for a number of years now that our system doesn’t work. Throughout the 1990s, healthcare leaders, policymakers and even the public began to acknowledge the system is costly, inefficient, even potentially unsafe. A 1999 Institute of Medicine report found perhaps as many as 98,000 people die in hospitals each year as a result of preventable medical errors. It called for leadership, measured improvement, and mandatory quality reporting. The report helped catalyze the already burgeoning quality movement, and patient safety and quality care rose to the forefront of industry conversations. 

It would have been impossible to truly change healthcare delivery without changing the fee-for-service system, which exacerbates quality-of-care issues by rewarding providers for volume and intensity of services.

Thus began the movement toward a value-based payment system.

At first, the Centers for Medicare & Medicaid Services (CMS) and state governments used demonstration projects, such as voluntary public reporting of quality data, to work toward this goal. But in 2010, the Affordable Care Act put many of those reforms into law, including the Hospital Value-Based Purchasing Program and the Hospital Readmissions Reduction Program.

Those ACA mandates, both of which incentivize quality care through Medicare payments, have been an important part of fostering change in pricing transparency because they help change the focus of payment to value and outcomes instead of the number of patients seen.

“Before the ACA…the discussion among physicians and hospitals and payers to collaborate on quality and risk were really, really rare,” Cruickshank says. “But everybody now is at the table talking, so that’s movement.”

That collaboration among players is critical for change. “The ACA places a focus on wellness and outcome-based results versus discounted fee-for-service activities,” Olson says. “The carriers are adopting fee-for-value payment programs, and the health systems are recognizing the need to have outcome-based incentives as a key part of their revenue generation model.

“So, if I’m paying a provider less on a discounted fee-for-service activity and more on an incentive to deliver value to that membership, it has to be supported by the insurance carriers as well as the health community,” Olson says. “You have companies like Mobile Health Consumer, Castlight, and many others that focus on transparency of cost and quality. That is being integrated into the insurance carrier’s model to incentivize the members to leverage that data and control their own consumption based upon the cost and quality information they see.”

Not Price But Value

While the industry has made improvements in getting pricing information more publicly available, the same can’t necessarily be said for information on quality—and one without the other is useless. In fact, some argue that price transparency itself is not a good thing, because price information alone could do more harm than good.

According to Health Affairs, a leading journal of health policy issues, evidence suggests consumers associate high cost with value in healthcare, believing that more care is better and that higher-cost providers provide higher-quality care. “The potential hazard of only publicly reporting cost data is that consumers will use the cost information to select higher-cost providers,” Health Affairs reported. “Overcoming the ‘more is better’ belief and communicating that lower cost is not compromising on quality are key challenges in publicly reporting cost data.”

“No one wants the cheapest doctor,” Cohen says. “I think this is where insurance companies still have the biggest challenge—they’re really hard-pressed to show meaningful, quality information. “If you are an insurance company responsible for contracting with a network, with a provider, how can you turn around and tell your members that provider you just contracted with is below average? They’re in a really difficult spot to objectively distinguish lesser and better performers.”

The promise of these tech-driven healthcare companies, such as Castlight, is to be that objective third party that can provide that extremely important information on quality of care. “We don’t have a conflict of interest with the provider community,” Cohen explains. “We are able to tell you this provider is really bad and you should stay away from them.” Castlight works with numerous partners to provide more objective information on quality of care, including The Centers for Medicare & Medicaid Services, The Leapfrog Group, the NCQA and other regional groups.

The promise of these tech-driven healthcare companies…is to be that objective third party that can provide that extremely important information on quality of care.

By adding quality-of-care information alongside pricing information, you can then have a conversation about value. “You don’t know if a lower cost is a good thing or a bad thing unless you know how that ties to the outcomes from a health perspective,” Olson says. “A higher-cost setting with high quality of care, improved outcomes and lower infection rates all factor into the value proposition of that provider. Ultimately, that higher cost setting can deliver much greater value for the member and plan sponsor than a lower-cost, lower-quality facility.”

Government Leads the Way

The Affordable Care Act represented a significant legislative push toward a value-based payment system. How that will continue is uncertain, but as Olson says, “Long term, this change to value in payment is definitely going to be a key component in the revenue model for carriers and healthcare providers. I think the health systems and the doctors offices will have a transition period…but I think as they start understanding fee for value and the outcome-based rewards they receive, they will start shifting more and more of their operating model to those outcomes. This operating focus on value from the providers is ultimately best for the consumers as well as for the financial integrity of the healthcare system overall.”

The government has continued to play a role in increasing price transparency at both the federal and state level. For example, a 2014 West Health Policy Center analysis notes that in April of that year, the Centers for Medicare & Medicaid Services “made a massive Medicare physician claims dataset freely available online.” This was in response to a Freedom of Information Act request by Consumers’ Checkbook, a nonprofit consumer organization. The goal of releasing such a large volume of claims data with physician identifiers is to help stakeholders gain an understanding of “the efficiency and treatment patterns of individual physicians and physician groups.”

For a number of reasons, it’s important that CMS continues to push in this direction. “What has historically happened is that nobody adopts anything unless CMS adopts it first,” Cruickshank says. “As a provider, you know that if something gets installed through Medicare, it’s eventually going to play out in the other lines of business at some point.” 

It helps to understand how healthcare is delivered. “Most of the money that runs through the delivery system is coming from the over-age-65 group, and that’s Medicare,” Cruickshank says. “That’s why we’ve got to remember when we’re talking to payers, if we’re only talking about employer-sponsored healthcare, we are not being heard. We are not their number one revenue source. The minute I start talking about Medicare, Medicaid and commercial…now I’ve got their attention, and we can conduct change.”

State governments have also made movement toward price transparency. According to the 2016 Report Card on State Price Transparency Laws, compiled by two independent health policy organizations, “Most states have approached the subject of price transparency at the legislative level, as only seven states have no statutes addressing it. But in 37 other states, the lack of transparency comes from weakness in the design and implementation of their laws.”

The report card, produced by the Health Care Incentives Improvement Institute and Catalyst for Payment Reform, notes a trend in proposed state legislation that directs providers or insurers to give consumers price information prior to care. The report card acknowledges that, while this is a step in the right direction, this type of legislation alone is not robust enough. Pitfalls to this approach include the fact that providers and insurers do not use a consistent approach to calculating and presenting pricing information, “making it very difficult to comparison shop.” Instead, the report card rewards states with a mandated all-payer claims database (APCD) and states that publish those data on a well-designed, state-mandated website. All-payer claims databases collect data on paid amounts for services from a range of sources, from private insurers to Medicaid to self-insured employer plans.

While this information is intended to improve price transparency, consumers aren’t the only stakeholders who could benefit. The West Health Policy Center notes, “Patients may occasionally consult APCD-based hospital price reports, but they are not the primary audience. The more significant audiences for these price reports are employers, health plans and policymakers. Employers can use the price data to identify high-price providers and, with health plans, develop strategies to steer patients away from these providers. Policymakers can use the price reports to assess the level of competition, or lack thereof, in the market for hospital care.”

Another key takeaway from the report card is the importance it places on the presentation of the information—not just the collection of it. As report card contributor Judith Hibbard of the University of Oregon writes, “The benefits of transparency are only realized, however, if consumers attend to and use the information in making choices. We know from years of experience and decades of research with health care quality transparency efforts, that the way in which information is displayed and presented can make a difference in whether it is understood and used.”

This is a critical point—and a key focus of some healthcare tech companies. As many are learning, just because you put the information out there doesn’t mean consumers will use it.

According to a 2016 study in the Journal of the American Medical Association, “Low utilization is the most commonly reported challenge to price transparency initiatives by insurers who offer tools.”

Why? Many find the information difficult to understand or irrelevant to their situation. Or they just aren’t used to shopping around for healthcare providers and services.

If You Build It, Will They Come?

Cohen says Castlight worked hard in its early years to obtain and publicize information about healthcare costs, a process he calls “a really big challenge.” He said the company figured as long as it made that information freely available on a consumer-friendly site, consumers would flock to it. “If you’re responsible for the first $3,000 out of pocket, well, of course you’re going to want to know how to spend that money wisely,” he says. Yet that “hypothesis,” Cohen says, had a “mixed result.”

We have to rethink how we procure and then make the most of this innovation, because I think if we just look at the health plans of health insurance companies, we’re missing it.

Seth Cohen, VP of sales and alliances, Castlight Health

“It’s not just a given people will use this information,” he says. “In fact, it’s really, really hard. Healthcare is a very emotional purchasing decision…. And unwinding those habits…it’s a really hard behavior change.”
Cruickshank agrees. We could create all of the transparency in the world, but ultimately, he says, “Nobody cares about transparency until they are going to be a user in the system. What’s the number one response to a $5,000 deductible I don’t want to spend? I don’t go to the doctor until I have to. We’re delaying care.”

Noting the rapid rise of high-deductible health plans, Cruickshank asks, “Is it good?” He’s not sold on the value of these benefit designs for employers or members, and he questions whether the experiment is working, whether the system itself can yet handle the trust necessary for consumerism to work. And yet, he provides a clear picture of how, once a movement gains momentum—once people trust it—we can, indeed, change.

“Remember when no one bought anything on the Internet?” he says. “And there were the early adopters who said, ‘No, I trust the Internet, and I’ll make purchases.’ But for a while there, it was a big unknown. Will anyone use it? Will they give up their credit card number to this system? And we watched adoption move slowly, slowly, slowly until we jumped over this cliff to where now everybody buys everything on the Internet. As soon as convenience is given without risk, people will do it.”

Incentives and Accountability

One group that has a significant amount of control—and may not be leveraging it—is employers. According to a 2016 report by the Kaiser Family Foundation, employer-sponsored insurance covers about 150 million people in the United States, more than half of the non-elderly population. And, as Olson explains, “the employer has a pretty strong influence over how members consume medical goods and services.”

“Medicare and Medicaid aren’t sensitive to consumerism,” Cruickshank says. “So when it comes to what are we going to do as a country to have more affordability, it probably is going to be that we’ve got to do something that lowers the cost of the employer-sponsored plan. That’s the one that seems to be visible and seems to be absolutely out of control.”

One of the ways employers can influence consumer behavior is with plan design, and this means more than just offering a high-deductible healthcare plan. “I think the future success of employer-sponsored health plans should really focus more on how the employer can position the program to influence the membership as the key stakeholder in driving positive change,” Olson says. He likens it to the auto and home insurance industries, where riskier insureds—e.g., 19-year-old male drivers—pay more. “If you’re a smoker and you become a nonsmoker, you should get a discount on your premiums. If you improve your BMI to a targeted level, you should be rewarded for that behavior and lifestyle change that improved your health and reduced your future risk of incurring claims.”

Obviously, this requires data about employees’ health. And for companies that don’t have the resources to collect, mine and communicate about the data themselves, “It’s really the broker/consultant who should be partnering—either internally or externally—with an effective data analytics company and linking individual member data with an effective outreach program to drive lifestyle and behavior modification at the member level,” Olson says. “[Using] claims data from the insurance carriers in such a way…is the key leverage point for an integrated data system.”

Yet the matter of engagement persists. You can’t tell people that they will be penalized or incentivized for XYZ and then just walk away. At the same time, how do you incentivize healthy people—those who won’t benefit from lifestyle incentives—to engage at all? One possible answer is to meet them where they are.

Building a Community

When Castlight Health realized people weren’t just going to start using their hard-earned pricing information automatically, the company shifted its approach. “What we have to do is really provide a more comprehensive platform to help people engage in their healthcare needs and benefits holistically,” Cohen says. So the company became a healthcare information destination, answering questions ranging from “What is a deductible?” to “How do I lose weight?” The company believes the more comprehensive approach is critical to engaging more consumers.

Cohen says timing also poses one of healthcare insurtech’s biggest challenges. Instead of targeting the generic open enrollment period, he says, “let’s stop communicating a bunch of stuff to people when they don’t need it.” Instead, use the data they have to send timely, targeted messages. That could mean using pregnancy claims data to determine when people may be looking for other labor and delivery information or sending checkup reminders based on doctor visit history.

Olson believes another key part of fostering engagement is helping people become comfortable with communicating via the technology, which could require some incentives.

“With Mobile Health Consumer, we can put a health assessment on the mobile tool and require employees to download the app and take their health assessment to be eligible for incentives for healthy consumer activities,” he says. Once people have taken that step, he explains, you can use data analytics to understand their health needs and communicate personalized information to them on their phone. As they begin to see value in that messaging, they become part of that community, and you can drive lifestyle behavior modification. “This activity will ultimately help members reduce their claims because they’re more engaged in managing their health. Those engaged members know they have a resource they can rely on because it’s been a credible tool in the past.”

One of the arguments against consumerism in healthcare is that only certain procedures are “shoppable.” According to a Health Care Cost Institute study, “At most, 43% of the $524.2 billion spent on healthcare by individuals with [employer-sponsored insurance] in 2011 was spent on shoppable services.” These are services such as colonoscopies, lab tests and imaging tests—procedures you can plan for. And it’s true in a sense—if you have an emergency and are rushed to the hospital, you’ll go where the ambulance driver takes you.

What’s the number one response to a $5,000 deductible I don’t want to spend? I don’t go to the doctor until I have to. We’re delaying care.

Rod Cruickshank, president and CEO, The Partners Group

But, as Cohen explains, it’s a long-term process of engaging in your care. Whether it’s gaps in medication adherence or receiving care in a poor-quality setting or just not at all, “catastrophic claims emerge often because people are not managing their preventative care. And that’s a huge priority area for self-insured employers and totally insured companies alike.”

Know Your Clients

For a broker, there’s a lot to know. First, there’s knowing your clients. Olson says good brokers and consultants help clients understand how an employee benefit program design can support their core business strategies. “It’s not so much about short-term cost savings as it is about long-term risk mitigation and risk management,” Olson says. “The marketplace is not placing much value on a broker or consultant who is just placing product annually then going away. Technology can drive efficiencies but not necessarily effectiveness of solutions.

“We spend 95% of our time at a prospect meeting understanding their business issues and their business strategies. We want to understand how they compete in the market, what challenges they are facing, and how their total rewards system is helping them attract and retain talent. Your business focus and technical expertise has to be much broader in the areas in which you provide advice and guidance for your customers than it was five years ago.”

Then, there’s knowing the options and where to find them. “Part of the job of the consultant or broker is to help clients take advantage of innovation, right?” Cohen says. “And to help them adopt new strategies and tools to address persistent problems in the healthcare space. Given that, I would say the focus of innovation is rapidly moving away from the places we used to see it.”

Long term, this change to value in payment is definitely going to be a key component in the revenue model for carriers and healthcare providers.

Wade Olson, national practice leader of employee benefits, BB&T Insurance Services

Healthcare innovation used to lie in carrier headquarters, such as Indianapolis or Hartford, Cohen says. Brokers would see what the carriers were offering and bring it to their clients. Today, Cohen says, many employers are moving to what he calls “best of breed” models. “Instead of relying on single health plans for all of the capabilities you need, let’s take advantage of the proliferation of innovation that is taking place in Silicon Valley or in Austin, Texas, or in Boston.”

The point he makes is this: all that funding flowing to health insurance tech companies is not going to carrier headquarters; it’s likely going to Silicon Valley—or, as Cohen says, “to 700 app vendors.” That shift also changes the roles of brokers and consultants, he notes, because procuring a pilot with an app vendor is different from procuring health insurance. Communicating these options is also different. “If you have 17 different programs available to your employees, you need a very different communications plan and platform,” he says. “We have to rethink how we procure and then make the most of this innovation, because I think if we just look at the health plans of health insurance companies, we’re missing it.”

But how do you choose? “You don’t want to just have something to have it,” Olson says. “There’s so many different tools and so many different applications of those tools that I think what you really need to do is step back and analyze what is the core problem we’re trying to solve. Then you need to confirm the key objectives and ask what stakeholders in the delivery model this solution or technology brings value to. Key healthcare stakeholders include the insurance carriers, the health systems, employers, employees and their family members, the government and the consultant/broker. How can we have an integrated approach that’s going to bring value to all stakeholders? Once the goals are defined, you start building that integrated model. If you’re building it with that in mind, you will make better decisions, and you go from where you are to where you want to be in a more effective and efficient way.”

Finally, brokers should know the healthcare landscape. Cruickshank says brokers need to learn more about how public entities such as Medicare, Medicaid and CMS operate. As he says, “Be more fluent in the public domain.”

The mandates imposed by the Affordable Care Act, Olson says, helped align different healthcare stakeholders around better outcomes. As a result, he says, insurtech becomes a key to future success. “The more that insurtech can focus on aligning and integrating the various stakeholders in a way that brings value to each of those in their own way and then collectively produces better outcomes for the member, it is absolutely key,” he says. “It needs to be well understood by the insurance community.

Laycox is associate managing editor. Sandy.Laycox@ciab.com

The problem is a double-edged sword for women, who traditionally have become unpaid caregivers when a family member or loved one suffers a long-term care event. Compounding the problem, statistics show, women outlive men, make less money than men and are more likely to need long-term care than men.

Consider the impact of long-term care events on women:

  • More than 75% of caregiving support in the United States is provided by family members, particularly women
  • 66% of all unpaid caregivers are women
  • Unpaid caregivers average 20 hours of support every week
  • 75% of all patients in nursing homes are women.

To top it off, some complain insurance brokers and other financial advisors don’t even know how to discuss the topic with women. Pat Foley, OneAmerica’s president of individual insurance and retirement insurance, says financial services professionals have yet to learn how to approach this giant potential market.

“Women tend to be the caretakers in the family, but many times, the financial services community isn’t talking to the women about the insurance solutions that are available,” Foley says. “They tend to talk to the men about the financial situations the family needs…more than they talk directly to women.”

This is important because, according to Wendy Boglioli, a certified long-term care agent and healthy-aging advocate, women are the most likely to need care themselves. “Women take care of everybody else because we are the primary caregivers in this country,” Boglioli says. “We are also the primary recipients who are going to need healthcare in this country. We are going to live, on average, 19 years without our spouse, either through death or divorce. Women have to pay attention.”

Boglioli can’t understand why more professionals don’t recognize the financial opportunity women represent. “The women’s market is not a niche market,” she says. “We are the market. “Women over 50 years old control more than $19 trillion. They own more than three quarters of the nation’s wealth. This is a huge segment that has more spending clout than anyone else, and those are baby boomer women.”

It’s Not Just a Woman Thing

But the shortage of coverage extends far beyond just women. The U.S. Department of Health and Human Services estimates 70% of Americans older than 65 will require at least some type of long-term care. In 2015, there were 47.8 million people age 65 and older, accounting for 14.9% of the U.S. population, according to the U.S. Census Bureau. The 65-and-older population is expected to jump to 74.1 million by 2030 and 88 million by 2050. Yet only 4.8 million people were covered by long-term care insurance in 2014, according to the Life Insurance and Market Research Association.

The traditional long-term care market was primarily based on a policyholder’s health and several pricing assumptions that have turned out to be wrong. As a result, many of the original policies have experienced hefty premium increases and decreased coverage. Many insurance carriers have also left the market.

The women’s market is not a niche market. We are the market. Women over 50 years old control more than $19 trillion.

Wendy Boglioli, certified long-term care agent

Into the vacuum a new type of product has emerged. So-called asset-based policies (also called hybrid policies) are offered on a typical life insurance or annuity chassis with riders attached to allow the policyholder to access the death benefit early for use on long-term care.

“It’s a little bit different than stand-alone because there is a death benefit,” says Dennis Martin, OneAmerica senior vice president for product and business development. “It’s not a use it or lose it. It’s more of a value-driven sale than it is a price-driven sale. People don’t want to pay money for something they think they might not need.”

That “use it or lose it” philosophy contributes to the downfall of the traditional long-term care policy. Dean Harder, an agent focused on retirement at the OYRI Group, likens the growth in asset-based long-term care sales to more consumers becoming educated to alternative approaches to long-term care. “If we go back 15 years ago, long-term care insurance was a very hot topic,” Harder says. “But what happened is that solution was filled with all kinds of fail points, and those fail points have come to fruition.

“Until it was proven that the world was round, it fell on deaf ears. Once it became clear the Earth is not flat, it took nothing for everybody to get on that side. What’s happening is the only story people really know is the health-based or traditional-based long-term care insurance. People don’t know the round world, which is the asset-based. It’s becoming more and more popular.”

The emerging popularity of hybrid policies comes at a good time, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance, but it may not be enough to head off a coming crisis.

“Baby boomers are still aging,” Slome says. “The population needs care. The population doesn’t have a plan for long-term care. Government isn’t going to be a plan for long-term care. While linked benefit products are growing, they are not expanding the market. They are just the new flavor. You’re seeing those sales go up. The more global question is: how will the nation deal with long-term care?

Michelle Prather, OneAmerica national accounts vice president for the bank and credit union channels, says a product known as Care Solutions—a variety of long-term care offerings that can be life insurance- or annuity-based—appeals to men and women. “The asset-based options we offer, where you get something whether you live on it or die and you leave it to someone, make a lot of sense to both males and females,” Prather says. “Males are, ‘Hey, I’m a built guy. I’m not going to need this.’ Well, that’s great. You have lived your life, and you pass on a contract to someone else so you haven’t wasted that investment. But ladies also have the peace of mind knowing that they have something there to take care of them when or if their spouse dies. They know they are not going to be a burden on anybody else and have all the power to make decisions about how they want to be cared for. We provide a lifetime source of income to pay for that care so that they have choices and dignity in how they are being taken care of.”

A recent white paper from Wade Pfau, a professor of retirement income at the American College of Financial Services, and Michael Finke, the dean and chief academic offer at the college, shows the advantages an asset-based policy has over traditional policies as well as self-funding a long-term care event.

The two compared asset-based policies with traditional policies and self-funding to see how a hypothetical long-term care event would affect each approach. What they found was that both comparable health-based and asset-based long-term care policies reduce the net costs of long-term care when a qualifying event has taken place. But the death benefit and the fundamentally high-deductible nature of the asset-based policy allow similar protection at a noticeably lower cost in the event that no qualifying long-term care event takes place. In both cases, knowing there is insurance available to cover major costs may free more assets to be truly liquid rather than serving as unnecessary contingency funds.

“Of course, both end up reducing costs dramatically for an expensive event versus funding for that on your own,” Pfau says. “I guess in some sense I was surprised at how much more effective the hybrid policy can be, especially on the two extremes. With no qualifying long-term care event, you get a death benefit that helps offset some of the cost. But then, with an expensive event, the hybrid policy also helps to reduce costs relative to a traditional policy.

Women tend to be the caretakers in the family, but many times the financial services community isn’t talking to the women about the insurance solutions that are available.

Pat Foley, president of individual insurance and retirement insurance, OneAmerica

“It’s going to be this new approach of developing hybrid policies that can really move the needle. With more and more Americans reaching the age of needing long-term care and fewer working-age people to provide that care, anyone who can afford to might feel better off if they can pay for private care versus going into an increasingly strained Medicaid facility.”

Finke says the hybrid policies, particularly the OneAmerica unlimited benefits option, provide financial protection in the event of a long-term care event that lasts for years.

“Compared to traditional long-term care that doesn’t incorporate any life insurance element, it is a comparatively efficient way to fund long-term care expenses,” Finke says. “Particularly if you choose the option to have unlimited coverage; it covers a significant amount of expenses for those who experience a prolonged care event.

“It’ll cover a good chunk of your overall long-term care exposure, and you can often cover the rest with Social Security and other forms of guaranteed income, and it prevents you from having to deplete your nest egg.

For a relatively modest amount of money, it’s a good way to hedge against that risk of a severe long-term care event while still providing a death benefit if the insurance is not needed.”

Woman to Woman

Some suggest the male-dominated financial services community doesn’t understand how to market long-term care to women. Foley says the professional women’s marketplace is underserved by the financial services community.

“Approaching women directly about financial topics is not something that has historically been done,” Foley says. “I think that’s changing as we get more women in financial services roles, but I think we’re leaving a lot of the marketplace untapped because of the demographics of the financial services community.”

Chris Coudret, OneAmerica vice president and chief distribution officer for Care Solutions, agrees. “Some of the professionals have a stereotype of long-term care,” Coudret says. “They view it as nursing home insurance and that the other people who sell that type of insurance aren’t as sophisticated. But today, it is a financial product that is for those who are middle- to upper-income, who have income.”

Boglioli says there is a need for more female financial professionals. “It’s a great opening for financial professionals and for women coming into that career because it is so needed,” Boglioli says. “Women listen differently. They prepare for their client meeting differently. It goes back to education. A lot of advisors too often look at it as a sale and the sale didn’t work out. Women don’t make up their minds like that. We take our time.”

The asset-based options we offer, where you get something whether you live on it or die and you leave it to someone, make a lot of sense to both males and females.

Michelle Prather, national accounts VP, OneAmerica

Tracey Edgar, vice president of national accounts and head of the brokerage channel, says women may be better than men at selling long-term care.

“I think the long-term-care product itself, because it is a heart product and not so much a logic product, is going to be better sold by women in the long run,” she says. “I think women have a unique way of talking about long-term care. I would say that many men are going into the discussion talking about the financial implications, where I think a woman is going to talk more about the impact to a family member. There’s a big need for this message to have more women in financial services.”

Patten is a contributing writer. mike.patten87@gmail.com

In a world where brokers face new kinds of competition and risks are emerging, expanding and evolving, what are the characteristics of a leader?

Brokers are now thinking in new ways about the services they provide and who within the firm can best deliver them. Wholesale change is not required, but top brokerages are redefining their business models to build and bolster a competitive edge. To gain leverage from their advantages, leading firms are slowly adapting the way they do business.

“With our clients facing more complex risks, we must be even more creative with our innovative solutions,” says Rob Cohen, chairman and CEO of the IMA Financial Group. For IMA, Cohen says, teamwork and an integrated approach are part of the answer. “Our subject-matter experts work closely with each other, our producers and our service teams to ensure we’re thinking of all the different aspects of our clients’ needs,” he says. “We have to watch everything, from natural disaster trends to our global political landscape, to just keep up with factors constantly affecting the way we work and live.”

Michael Victorson, president and CEO of M3 Insurance, says clients expect brokers to take a team approach when managing their complex risks. He cites Dr. Atul Gawande’s work on healthcare delivery, which stresses primary care physicians are no longer able to be and do everything for their patients by themselves.

“This same concept holds true with our producers and the work they do with their clients,” Victorson says. “In today’s market, the client requires and expects a coordinated team.”

A critical driver is the level of specialization and sophistication required to assist clients in transferring and managing risk effectively and efficiently. “No one person can be an expert in all areas, from cyber to claims, reinsurance, loss control, workers compensation, et cetera,” he says.

This shift to a multiskilled team approach has been responsive. “We have had consulting services in our company for many years, but not as our core approach,” says Dan Keough, chairman and CEO of Holmes Murphy. “This changed about five years ago when our clients needed us to better understand their challenges and search to find or build solutions for them. All we have to offer our customers is our cumulative knowledge to solve their problems and help them manage their cost. Our culture is key to our ability to work together as a team to serve our clients.”

The emphasis on culture is reflected in Holmes Murphy’s approach to helping its clients. The company explores clients’ corporate cultures to gauge how they affect their financial decisions. “We are also looking at ways to simplify complex issues like healthcare, to demonstrate the impact we can have on their business,” Keough says.

Taking the Long Road

Before we had a grasp on our analytics, measuring success meant intuitive assumptions that may or may not be relevant to the results. Now, we use analytics to fine-tune strategies that drive value for our clients.

Rob Cohen, chairman and CEO, IMA Financial Group

Wortham chairman Richard Blades says his company operates in a similar way, acting as more of a consultant to clients than simply as a salesman or a transactional brokerage. “It is important to execute the transaction exceptionally well,” Blades says. “However, you need to take the long-term approach with clients and offer them consulting on the appropriate program structure and to manuscript the coverage to fit their particular needs.”

In Blades’ view, a long-term perspective is critical when designing a risk-management program, since clients buy insurance over many years, not just once. He says brokers should approach the market and negotiate the best program structure, while ensuring that doors are left open for clients in case they want or need to make changes to their program or carriers.

Part of this can entail the development of mutually beneficial relationships between brokerages and carriers that ultimately provide a lower total cost of risk over an extended period of time, Blades says, since this comprehensive, future-oriented approach leads to high levels of client retention.

Victorson says his firm is now behaving like a consultant, even before his people get through the door. “If M3 approaches clients in a transactional way or with a transactional mindset, then that’s exactly how we will be viewed and treated,” he says. “We have made significant progress, collectively, in our consulting mindset and business plan execution orientation.” The types of questions and issues clients bring, he says, act as a litmus test to gauge M3’s progress in this area. “When our clients look to us for advice on critical business matters that may have little to do with insurance but have a significant impact on their business, we feel like we have achieved the level of advisor.”

This change in the nature of leading broking houses is having an impact on revenue streams. M3 has seen a significant growth in fee-based (over commission-based) remuneration. “Over the last five years, our fee-based revenue as a percentage of our total producer revenue has more than doubled,” Victorson says. He expects the trend to continue, both for M3 and across the brokerage industry. “Looking forward, we also believe there will be an upswing in at-risk compensation models which put a percentage of fees at risk based on our performance.”

Diverse Talent Fuels Growth

The move from purely transactional broking to consulting means broking firms must become more complex. One clear reflection of this evolution is the expanding nature of the specialist position, from the front line to an enlarged C-suite. To deliver and manage consulting services requires new skills, which means hiring different types of people who have the appropriate expertise.

TrueNorth was formed in 2001 through the merger of three companies and targeted staged growth. Duane Smith, CEO and president, and his partners have built the company to $70 million from a revenue base of $9 million over the last 15 years.

“Early on, the six original founders realized we were good salespeople but not great at running the operations of our business,” Smith says. “One of the first decisions we made was to add a chief financial officer and a chief operating officer to focus on running the business so we could continue to focus on growing it.”

TrueNorth set six revenue-based thresholds as benchmarks for its growth and development. “What we didn’t realize is that, at each of the additional revenue levels, we would reach another ceiling of complexity that we would need to break through to continue to evolve and grow,” Smith says. “As we reached new levels of complexity, we were forced to step back and reorganize to continue our journey.”

Looking forward, we also believe that there will be an upswing in at-risk compensation models which put a percentage of fees at risk based on our performance.

Michael Victorson, president and CEO, M3 Insurance

They added talent at each level: legal, loss control, HR, IT, training and development, financial analysis, software developers, project managers. “The list goes on,” Smith says. “Without these investments, we could tread water and manage expenses, but the ability to grow would taper off.”

Holmes Murphy also added talent as it evolved. “Diversifying our skill sets has fueled our company’s growth over the past several years. Hiring actuaries and attorneys has become our norm,” Keough says. Most recently, the company employed doctors to help clients understand how to get to the root cause of their healthcare issues and to drive down and manage their costs. “This has become our fastest-growing division,” he reports. “We’ve also brought on an individual who was successful in consumer engagement at a major airline, and we are bringing risk managers on board to better understand our clients’ needs.”

Cohen says IMA tries to stand out through its ability to attack problems and drive client results at “a much higher level.” People are at the core of that ability. IMA was one of the first insurance brokerages to hire a risk manager to help make clients’ working environment safer, he notes. “That tradition continues today by looking outside the traditional scope of insurance,” Cohen says. “We continue to hire people with advanced knowledge in their industries.”

The head of IMA’s energy practice is a former oil and gas company president. IMA has also looked outside insurance to make similar hires in areas including law, consulting, technology and construction. Hiring experts builds the company’s tradition of thinking beyond the customary definition of insurance, Cohen says. “They solve our clients’ complex problems, which also reduces risks that weigh on the performance of their companies.”

Data Are Only (an Important) Part of the Equation

The change has reached the very top, into IMA’s C-suite. The company recently created the entirely new position of chief data officer. “Data will have a huge impact on our industry and the way we do business,” Cohen says. “We’ve invested heavily in the ability to make internal, data-driven decisions. Under the leadership of our new chief data officer, we can run analytics reports in seconds that would previously take a week.” Cohen says the level of insight this analytical function delivers is unmatched by IMA’s peers.

Analytics are also an important tool at Wortham, where data specialists assess exposures and design the most appropriate insurance program for each client, based on the client’s unique risk profile. But Blades is wary of relying entirely on big data analysis. Traditional broking skills remain paramount. “The analytics are only a part of the equation in designing the program,” Blades says. “For instance, Wortham spends a considerable amount of time trending and developing assured’s losses and exposures to quantify the projected loss pick. This enables us to negotiate the appropriate collateral with a carrier and determine the optimal retention.”

Wortham reviews modeling results for catastrophe exposures while also consulting traditional engineering reports for estimated maximum and probable maximum loss figures.

“We use this analysis to assist in determining the assureds’ appropriate property and business interruption limits,” Blades says, “as well as any particular sub-limits for catastrophe coverage.”

Cohen says the ability to tame data has become essential. “Analytics are becoming required for businesses to succeed,” he says. “Customers expect the right product at the right time and at the best price. Before we had a grasp on our analytics, measuring success meant intuitive assumptions that may or may not be relevant to the results. Now, we use analytics to fine-tune strategies that drive value for our clients.” He believes the industry is facing a pivotal time and must “challenge the norm while remaining true to our tradition of excellence.”

As we reached new levels of complexity, we were forced to step back and reorganize to continue our journey.

Duane Smith, CEO and president, TrueNorth

Clients are expecting solutions that fall outside the traditional definition of insurance, he says. That demands brokers find solutions to their customers’ biggest pain points. “If not,” he says, “a dot-com, a search engine or a startup will. We have astute customers that expect us to be the beacons of innovation.”

Victorson believes the current wave of new approaches is more than a fad. “Innovation will continue to be a part of our industry, regardless of services that brokers provide or the delivery model and technology they use,” he says. To that end, M3 is closely following the evolving role of insurtech companies and evaluating how emerging technology might allow his brokerage to create a better client experience while making the firm more effective and indispensable to customers. But it will not be a bit of technical wizardry or a special approach alone that will deliver continued success. Another fundamental must underlie all that, as Victorson knows: “As always, the focal point of our evaluation will be our clients and acting in their best interest.”

Blades expects the evolution of the brokerage model to continue, especially in personal lines and for small commercial accounts. To survive, brokers must ensure they add value to their clients’ risk-management practices and insurance-purchasing processes.

“If we are not adding value, clients will start going more directly to carriers and/or buying coverage from an online platform,” Blades says, noting that they may very well return to a broker once they have experienced a claim that has not gone the way they would like.

“Our business model will continue to provide clients with value-added services and a consulting approach to achieving the optimal insurance program while reducing the overall total cost of risk,” he says.

Diversifying our skill sets has fueled our company’s growth over the past several years.

Dan Keough, chairman and CEO, Holmes Murphy

Amid the changes taking place in the ways brokerages do business, the best firms continue to focus on the traditional traits that make and sustain a leader: they are client-focused, striving to understand each client’s specific risk challenges and opportunities, and remain intent on adding value to their clients’ businesses.

That, they agree, will always be a winning formula.

Leonard is chief of the Foreign Desk.

But it’s a battle many companies are losing because they don’t have the time to figure out what makes their employees tick and how to keep good talent on board.

“The war on talent has never been stronger and more in the forefront,” says Bruce Whittredge, vice president of sales for major accounts at ADP. “This is actually the first time we’ve had a shortage of qualified talent in some of the white-collar industries.”

The challenges of finding and keeping talent provide human resources departments an opportunity to lead. But at many businesses, HR is mired in a day-to-day tactical mode, administering payroll, taxes and benefits instead of engaging in the strategic planning it takes to position their companies for success.

That’s why human capital management, or HCM, is evolving into the next big thing. Companies such as ADP and others can take over the administration of day-to-day HR tasks or provide advice on problems specific to individual companies, which can free HR to work strategically.

Anne Burkett, national practice leader for HR technology at USI Insurance Services, says many clients her company encounters are still struggling with manual entry of data into multiple systems—recruiting, payroll, benefits administration—and the transferring of data that entails is time consuming and prone to errors. The introduction of automated systems such as ADP offers consolidates data and makes it ease through the system.

“What I’m typically getting from a recruiting standpoint is they are either manually handling that or they have all these little workarounds in Excel or whatever they are using that is tied to their payroll,” Burkett says.

“Typically what we see is all of these manual keystrokes. It starts with recruiting, and then you’ve got to get background information and on and on. And then you take a client from a typical picture to here’s what it should look like with all of those being automated, and then there’s very little requirement on the HR staff. It’s certainly fun to watch their eyes light up.

“One of the most important things I hear continuously from HR is ‘I’ve got to be more efficient,’” Burkett says. “I have to automate in every place that I can, in a manner that is cost effective. You can’t be strategic if you are too busy entering data. We hear that from probably every client we talk to.”

Among the top strategic issues needing attention? Figuring out how to find and keep key talent. It turns out there’s a big difference between what employers believe workers think about their job and what those employees actually do think.

The war on talent has never been stronger and more in the forefront. This is actually the first time we’ve had a shortage of qualified talent in some of the white-collar industries.

Bruce Whittredge, VP of sales for major accounts, ADP

A recent ADP Research Institute study, Fixing the Talent Management Disconnect: Employer Perception versus Employee Reality, found several such disconnects in midsize U.S. companies. Among the more crucial: most employers don’t have an accurate handle on how many of their key people are thinking about leaving.

Consider this: 24% of employees said they were actively looking for new jobs, and another 42% said they were passively looking for new jobs. This means two of every three of an employer’s workers are open to leaving. Yet employers overestimate how many of their employees are actively searching (38%), and they underestimate how many are passively looking (21%). For brokerages, helping employers see these risks more clearly could be their new differentiator.

That emphasis on human capital management is new for brokerages that for years have tried to position themselves as a client’s resource for the right technology to remain in compliance with the rules and regulations associated with the Affordable Care Act and other government regulations. Whittredge suggests that, while technology and compliance are still important considerations, today’s clients are more worried about managing their people.

“We are trying to help brokers understand that they are almost a step behind because they are still trying to push technology as the win,” Whittredge says. “We need to get to a place where brokers see how valuable they can be in helping their clients solve for a major gap—finding great talent and putting that talent into roles where they will stay for a long time. Then, the broker’s benefits play becomes even more valuable when coupled with technology, compliance and the rest of the things that we’ve done historically.”

As baby boomers complete their journey through the working years—10,000 boomers retire each day—the number of experienced executives in the workforce dwindles. At the same time, the rise of social media makes it easier for workers to browse for open positions elsewhere, which increases the number of employees actively looking for other jobs.

According to the ADP Research Institute’s Workforce Vitality Report, job hopping/switching is at an all-time high. About half a million American workers left one job for another in the fourth quarter of 2016, up from 406,000 in the fourth quarter of 2015. Key findings from the report indicate employers need a better plan for attracting, engaging and retaining top talent.

The report suggests that employers at midsize companies in the United States don’t realize how important factors such as the work itself, work hours, the cost of the benefits package and flexibility are to employees.

The differences between what employers think is important to employees versus what employees actually value are stark. These data contain vital information that brokerages could leverage to gain business and retain existing customers.

Some of the key findings include:

  • Expectations play a key role in employee satisfaction. Of employees who were satisfied with their job, 85% agreed that their expectations were met through their job experience. Of the employees who indicated they were not satisfied, only 49% felt their expectations were met, and 60% said they have walked away from a job that did not meet their expectations.
  • Employees also said they are more likely to stay with a company if their experience aligns with the expectations agreed to when they were hired—and if they understand how their role helps to achieve company business goals. The things that attract employees are the same things that retain them.
  • Employee satisfaction is also related to a sense of purpose. Some 83% of employees who were satisfied at work indicated they feel purposeful. Of the employees who indicated they were not satisfied, only 36% felt purposeful.
  • While employers generally understand the top factors in attracting employees, focusing more on the day-to-day duties of the job and providing work/life balance and a path for meaningful career development will help better capture talent.

The ADP study found that employers almost universally underestimate the importance of the work itself, hours, time off and relationships with direct managers. It suggests employers focus on meeting a broader set of needs targeted at employees’ personal growth. Currently, just one third of U.S. employees give their companies high marks on career performance, compensation or learning management, onboarding, succession planning and recruitment strategies.

Typically what we see is all of these manual keystrokes. And then you take a client from a typical picture to here’s what it should look like with all of those being automated, and then there’s very little requirement on the HR staff. It’s certainly fun to watch their eyes light up.

Anne Burkett, national practice leader for HR technology, USI Insurance Services

Both employers and employees believe workers must leave their current job to make more money or receive a promotion. Company executives need to consider what this means for talent management when even the people in charge say workers need to leave to advance.

Whittredge says these kinds of insights can help brokers redefine their sales tactics. He says changing the way they communicate with prospects and clients about current HR trends and issues helps them become better advisors.

“One of the questions I try to have brokers ask their clients or prospects is, ‘What are their HCM strategies and goals for next quarter or 2017,’” Whittredge says. “Often the brokers were afraid to ask because they didn’t have the answers. But because we have all those tools and resources to support them, now they can ask better questions. They can be more contemporary, and they can be more strategic in the way they go about their sales process, because when the answers start going down the path of talent or the path of recruiting or associate engagement, we have those tools and resources.”

Patten is a contributing writer. mike.patten87@gmail.com

The ancient Chinese philosopher Lao Tzu observed that a journey of a thousand miles starts with a single step. But 10,000 steps daily is now the new fitness goal for millions of people.

Fitbit set that goal, equal to about five miles, to remind its users that moving around more can help them get healthier. While walkers seek to trim their waistlines, corporate America has noticed the devices can add to their bottom lines. Healthier employees mean lower healthcare costs.

To that end, more health plans and more companies are seeking to motivate their workers to take more steps to get healthier. About 30% of U.S. companies will offer subsidies or discounts in 2017 for employees to purchase fitness wearables, according to a corporate health and well-being survey from Fidelity Investments and the National Business Group on Health.

Among health insurers, UnitedHealthcare’s Motion program offers financial rewards of up to $1,500 a year to be used toward out-of-pocket medical expenses for enrollees who meet fitness targets measured by a Fitbit or other device.

Aetna announced last year it would subsidize purchases of Apple’s smart watch for some customers and offer monthly payroll deductions to make it easier to cover the remaining cost. The insurer is also providing the smart watches to its own employees. The watches can be used in conjunction with apps to manage care, wellness, medications and bill paying. John Hancock has added a subsidized Apple Watch to its Vitality program that seeks to encourage life insurance policyholders to become healthier.

Sales of the wearable devices reflect the impact of such initiatives. Wearable sales reached a record 33.9 million units for the final quarter of 2016, up nearly 16.9% year over year and up 25% for the full year, International Data Corporation reports. The research firm says the emphasis is shifting from more basic devices to so-called “smart” wearables—that is, devices that can run apps.

Fitbit’s strategy seems to be mirroring that shift. Recognizing the challenge from Apple and other smart watches, Fitbit recently bought smart-watch makers Pebble and Vector Watch. Fitbit says it is emphasizing efforts to build its corporate business by working with insurers, employers and health systems.

As wearables get more powerful, they are going to be making a bigger impact than just getting people walking. More companies, in a variety of industrial settings, are looking to use wearable sensors to improve safety and reduce workers comp claims. Connected sensors are being embedded into safety clothing and attached to workers’ belts to show when they might be in danger of slipping or lifting too much weight. Smart clothing can tell when noise levels get too high or when workers need additional protection, such as for knee impact.

And getting back to steps, be on the lookout for smart shoes—not the kind that TV spy Maxwell Smart used back in the 1960s—but, rather, sensor-equipped and Bluetooth-connected shoes that help runners measure cadence, impact and balance, and even shoes intended to help golfers improve their game.

Tell us about Beam Dental.
Beam Dental is a new dental benefits company founded in 2012. Today, we operate in eight states, but we’re expanding rapidly. We want to provide the world’s highest-quality dental insurance and do it in a way that’s very innovative and technology forward. Our DNA as a company is more technology than it is insurance.

What sets Beam Dental apart from your competition?
There are two things we do that no one else does in dental. We make available to our members a program called Beam Perks that is essentially a dental wellness program at no extra charge. It comprises a connected, sonic-powered toothbrush that comes in three different colors, replacement heads, toothpaste and floss. It comes as a quarterly subscription service.

The second thing is that there’s a Bluetooth chip that connects the brush to our app. It monitors when and how long you use the brush, similar to a Fitbit that measures your steps. At a group level, we provide a premium discount based on participation. Folks who are taking really good care of their teeth should get value for that. Our company is focused on preventive care. We don’t want our members to have to go to the dentist for a root canal.

Where did you get the idea?
I have two co-founders, and we’re actually on our second company together. Our first company was in R&D services in the medical device industry. We had gotten some exposure to the dental industry, and we started thinking about what the future of the dental industry is and how we could get more people access to dental service. There is far more demand for dental service than there is access.

How do you build an insurance company?
We’re taking a sophisticated approach to the technology and underwriting portions of this plan. Most dentists are interested in participating in dental networks, and they participate broadly in them. What other insurers don’t do well is technology in helping to manage enrollments, eligibility, contracting, administration—all of the kinds of nuts and bolts that brokerages have to deal with.

And how does Beam Dental work with its brokerage partners?
We realized that making life easy for our broker partners would create this meaningful support and service differentiator between us and other carriers. We spent a lot of time learning from our broker partners and asking, “What do you need to make your life easier when you’re selling a company on Beam Dental? Or when you’re contracting, enrolling and implementing them? Or post effective date, trying to manage that group over time? That’s how we have added features and continue to evolve the product today.

What data do you collect?
We collect behavioral data. We time stamp when the brushes are being used and how long you’re brushing your teeth. Ideally, you’re brushing two minutes per day. That’s what helps inform what your engagement level is. From our data, we are seeing fewer claims from the people who are brushing the best for things like fillings and crowns and root canals. It’s working.

How do you address privacy concerns?
We are fully HIPAA compliant—even beyond what we need to be legally. We are also careful to show people that we are delivering value to them individually. We emphasize that the premium discounting program is rolled up at the group level. The HR manager is only going to see how the company performs, not how an individual performs, and the discount applies to the group evenly.

What’s the biggest challenge running a startup?
The biggest challenge in doing a startup is that you always have more ideas than time and money. It’s psychologically kind of tough when you have to deliver the simplest and fastest versions of your big idea and then very quickly improve upon it because you’re up against other startups and established competitors. You have to deliver value from day one versus those competitors.

What do you like to do when you’re not working?
My latest obsession is fostering puppies for the humane society. It has been the most ridiculously fun thing we’ve ever done. Chihuahuas and pit bulls are typically the dogs that get abandoned. I’ve kind of become the crazy puppy lady.

Tell me about your family.
My husband, John, and I have been married for 19 years. We met in line buying margaritas at the Union Street Fair in San Francisco. We have a son and daughter. Christopher is 14 and a baseball player. Meghan is 18 and a rower. She’ll be going to Columbia next year. Everything in New York City she loved. She walks taller there. For her it’s like being plugged in.

What’s the best career advice you ever received?
Years ago when I was considering a new position at the firm, my husband asked me if I was still going to get “the buzz.” His question reminded me to consider what really makes me tick. Is it going to be creative? Interesting enough? It’s rarely about the money or the title. Well, sometimes it’s about the money—especially now with Columbia tuition.

Who was your most influential business mentor?
Stan Loar [the former CEO and current chairman of Woodruff-Sawyer] introduced me to the idea of “You get what you give.” This influences how I invest my time, balancing industry activities with my day-to-day responsibilities at the firm.

What would your co-workers be surprised to learn about you?
I think the puppy thing had them scratching their heads a little bit. They’re like, “What? You have what going on?”

If you could have lunch with three people, living or dead, who would they be?
We’ll have to be creative and rotate them in for various courses. They would be my best friends in my Council study group: Chris Nadeau, Kerry Drake, Shawn Pynes, Liz Smith, John Kirke, Lisa Hawker and Tim Byrne. Dave Oberkircher has to be there, too, since I’m sure he would have some thoughts about how our lives have zigged and zagged the last 18 months since we lost him to cancer. Most importantly, inspired by Shawn, it would be a “proper” lunch—lengthy and with a lot of great wine. If I could squeeze him in, then I’d also have Rob Lowe there.

This month you become chair of the Council of Employee Benefits Executives. How do you envision your year in charge?
In such a dynamic time, it’s hard to imagine what new challenges might emerge. I do know that our best shot at success is leveraging the collective talents within our member firms. I’d like to encourage everyone to continue to contribute their time, energy and ideas. Our clients need us to solve big problems, and that will require a high level of engagement.

Do you feel an obligation to mentor other aspiring women executives? I haven’t paid that much attention to it, as about half of our leadership positions and shareholders at Woodruff-Sawyer are women. I will say I experience and witness gender bias routinely in business. I do what I can to create awareness on the issue. You can’t change everything overnight. We need to just keep moving forward.

If you could change one thing about the insurance industry, what would it be? I would want all stakeholders leveraging technology so they are making decisions based on data as opposed to their “spidey” senses based on legacy operations.

What gives you your leader’s edge? I think it’s my curiosity and high energy level. I love meeting new people. I like testing new ideas. That’s led to a really fantastic network of peers with whom I can continually brainstorm and challenge my points of view.

Favorite Author
Brené Brown (“She’s got a great TED talk on the power of vulnerabilities. Rising Strong is a really great book.”)

Favorite Movie
The Blind Side (“It just hit everything for me, and it’s entertaining.”)

Favorite Destination
Mexico (“New Year’s Eve usually finds us in Cabo San Lucas.”)

Last Broadway Play
Hedwig and the Angry Inch (“An alum of my daughter’s high school was in it. He was fantastic. At the Tony Awards, he did a shout-out to one of his teachers.”)

2012 red Lexus 450h SUV

I’ve found the unease that results from buyer’s remorse is often proportional to a product’s significance or price: the more important the purchase, the worse the feeling. That’s because, with big-ticket items such as a new car, you’ve likely spent hours researching brand and model options, asking questions of the dealer’s sales team and taking numerous test drives. A lot of time and effort went into making a decision you are now stuck with for at least a few years.

Buyer’s remorse isn’t just limited to personal purchases. Clients that make the choice to switch insurance carriers sometimes have feelings of regret and unease after implementing a new program. However, the consequences here are twofold: not only is your client left dealing with empty promises from its new benefits partner, but the wrong choice also could leave your relationship hanging in the balance.

New Approach to Disability Management

As an advisor, your most important role is to help ensure your clients select the right carrier for their employee benefits program. This is particularly important when analyzing disability insurance carriers.

While switching disability carriers might seem like a low-risk change, selecting the right disability carrier can make all the difference to your client. That’s because disability carriers do more than just provide employees with important income replacement if they need to take a disability leave. Today’s disability insurance plans provide return-to-work and stay-at-work support to an employee experiencing a medical condition in the workplace. These programs can help reduce employee healthcare costs and increase productivity, employee engagement and morale.

During the RFP process, many insurers make promises about their programs, including their impact on employee disability durations and how they will aid an employee’s return-to-work or stay-at-work accommodations. From my experience, these assertions can end up being empty promises that leave clients scratching their heads when the reality doesn’t live up to expectations.

Go Beyond Number Crunching

While you need to consider many data points when advising a client on the best disability insurance carrier, it’s especially important to analyze different return-to-work or stay-at-work services and how each could benefit a client’s bottom line.

But doing your due diligence goes beyond just looking at the numbers. You’ll also need to ask the right questions of a carrier to help ensure your clients get the type of comprehensive disability management support they need. These three questions will help your clients avoid surprises down the road:

Are all employees eligible to receive return-to-work and stay-at-work services?

When an employee experiences a disabling illness or injury, the last thing your client will want to do is determine if the employee is eligible for accommodations assistance. It’s easy for a carrier to say it will provide assistance to all employees, but there can often be unexpected red tape for an employer if, for example, the employee is enrolled in a short-term (instead of long-term) disability program. Determining which employees are eligible—and any additional costs associated with coverage for those who aren’t—is important to understand before an employee experiences a medical issue.

Who will be working directly with the employee to develop the appropriate return-to-work or stay-at-work plan?

The most important aspect of a disability carrier’s stay-at-work and return-to-work services is having available an on-site expert skilled in disability management. Consultants from a disability carrier analyze the employee’s workspace, job function and any restrictions imposed by the employee’s medical team, and they work with the employer and employee to find the best solution.

It’s not unusual for national carriers to use contractors from across the country to provide this timely and localized accommodations assistance. What you and your client will want to learn, though, is who manages these contractors, what type of training they have and how the individuals report back to the carrier about what an employee may need or progress being made. Identifying who will provide this assistance will help ensure your client’s employees are getting the right kind of support.

How does the carrier showcase return on investment?

Employee benefits are often highly scrutinized by executive management, which makes a benefits offering’s return on investment an important proof point for your client contacts to report on. Yet success is measured differently for each employer.

Will the board of directors or senior executives want to know their employees’ average disability duration versus the industry average? Or how many temporary or permanent workers weren’t needed as the result of comprehensive disability management? Can they show how they’ve used benefits from other carriers to make the most of an employer’s full benefits offering? While all carriers will report that employees were able to return to work, not all carriers can translate successes in a way that showcases how they impacted a company’s bottom line.

Speaking up during the process and helping your client determine answers to what are often nitty-gritty disability management questions can help prevent surprises down the road. Not only does this translate into success for the client and prevent buyer’s remorse, it helps position you as a consultant who understands your client’s needs.

Jeffery Smith is workplace possibilities program practice consultant at Standard Insurance Company. jeff.smith@standard.com

Carnegie Mellon University’s Computer Emergency Response Team found nearly half (47%) of the respondents to its 2016 Annual State of Cybercrime survey reported an insider breach, and insiders were responsible for 50% of the breaches of private or sensitive information.

Brokers and agents need to be aware of the types of crimes committed by insiders and understand the differences in coverage. “It is important to determine when cyber is not cyber,” says Chris Giovino, Aon’s managing director of forensic analysis and crime claims. “Not all cyber acts are covered by cyber insurance. For example, collusion by an insider with an external cyber criminal would most likely be covered under a crime or fidelity policy, not wholly under cyber insurance.”

The Sony hack, which resulted in the theft of movies, emails and sensitive internal communications and zeroed out large amounts of data on Sony’s servers, was initially blamed on North Korea. Subsequent reports by security experts claimed the attack was perpetrated with insider assistance. 

Employers, agents and brokers should consider the range of attacks that might be committed by employees or trusted insiders, such as contractors or business partners with system access. For example, the theft of confidential information, such as pricing and sales data, can lead to the loss of market share if the information should fall into the hands of a competitor who leverages it in the marketplace or if the disclosure results in damage to a company’s reputation. This information often is used by a highly mobile workforce and stored on laptops, where it is easily accessible to sales and account personnel. The theft of this sort of data might result from a lost or stolen laptop, or an insider might sell data to a willing buyer. 

The theft of highly valuable proprietary data by an insider is usually easier to detect, since these assets are commonly stored in designated repositories with restricted access and user logs. Nevertheless, insiders often commit serious economic espionage. Google’s spinoff company Waymo, which specializes in self-driving vehicles, has been in the headlines recently over public allegations that one of its top engineers downloaded 14,000 proprietary files and trade secrets and took them with him to his new position at Uber. Waymo has sued Uber for violations of the federal Defense of Trade Secrets Act and the California Uniform

Trade Secrets Act and infringement of patent rights.

One is reminded in this context of Edward Snowden, the federal contractor who downloaded millions of files from the National Security Agency without being detected. Without good log analysis, monitoring and strict access controls, employees can do the same within any company. 

Other highly valued types of data that are susceptible to insider theft, misuse or unauthorized disclosure include employee information, health and benefits data, transactional information, strategic plans and customer data. These data have a strong market value and are easily traded in underground markets. Compared to external cyber attacks, breaches involving insiders can have a higher financial impact. In fact, 30% of the Carnegie Mellon survey respondents said cyber breaches caused by insiders were more costly than external attacks.

Customer data held in company systems also can put a company in the bull’s eye for attack.  Manufacturing companies that offer products and services to critical infrastructure industries may have plans of customer facilities, custom specifications, and critical data related to the operation of industrial control systems stored in their computer systems. Often, these data are not encrypted, and the company may not be aware of how much or what types of data it has on its servers or employee laptops. Rather than target multiple critical infrastructure organizations, terrorists and nation-states desiring this information may seek out a vulnerable employee who is willing to obtain it for them.

Not all insider cyber events are nefariously motivated. Insiders also make mistakes or unintentionally cause a cyber incident. For example, companies commonly allow employees to use their own devices, such as laptops, iPads, smart phones and USB thumb drives for business purposes. The use of these devices, however, increases the risk that the device will infect the corporate system with malware. Certain types of applications installed on personal devices, such as peer-to-peer software, could enable unauthorized access to company data. Employees might fall prey to social engineering or fraud tactics and be tricked into emailing personally identifiable information, such as employee W-2 files, to criminals. Again, what many might perceive as a cyber crime may actually be deemed computer fraud by insurance carriers.

An employee’s loss of a laptop, CD, thumb drive or smart phone containing personally identifiable information may require a forensic investigation and trigger breach notification laws. This type of loss is covered by most cyber policies. If the employee intentionally provided the data to a third party, however, that could fall under a crime or fidelity policy. 

Aon’s Giovino offers a tip from experience: “One of the most important steps any company can take when dealing with a cyber event is to have an internal triage of potential events,” Giovino says, “and then work with the broker to place all insurance carriers on notice: cyber, fidelity, crime, property and business interruption.”

Cyber events, particularly those involving insiders, often unfold in unexpected ways. For example, it is not uncommon for companies to be so disabled from a cyber intrusion that it requires the shutdown of operations to enable a full forensic investigation and system cleanup to be performed. This might trigger cyber and business interruption coverage, as well as property claims.

Brokers and agents face a continuing challenge to stay abreast of the current threat environment and understand the types of insider threats their clients might face. This requires understanding clients’ operations and learning about their cyber security program, including policies and procedures, security controls, use of encryption, restrictions on the use of removable media and personal devices, and logging and monitoring. Companies that think through the insider threat and mitigate these risks through a strong security posture and well-considered coverage will have the best cyber risk management strategies.

Jody Westby is CEO of Global Cyber Risk. westby@globalcyberrisk.com

Brokerages are all working on technology and data-driven initiatives in different areas, but the challenge is simultaneously focusing on the customer experience while evolving and automating internal workflows and processes.

Direct-to-consumer models are the most obvious to point out, despite mixed results. The carrier direct models certainly can be seen as a warning to brokers, but like everything, the devil is in the (claims management and servicing) details. Any new market entrant that focuses on a service or technology with a direct benefit to the insured is putting serious resources into the customer experience, and that is the main takeaway for brokers.

Companies want to place their offerings as close to the customer as possible. In the last 90 days, there have been 29 insurtech funding events to the tune of $400 million. Total 2016 funding in insurance technology startups was estimated at $1.69 billion. And that figure doesn’t include what is dubbed “healthtech” funding, which grew for the seventh straight year in 2016, hitting a high of $6.1 billion.

These days, lines are very blurry, and it’s difficult to see a border between insurtech and healthtech. But the moral of these numbers is that a ton of capital is being thrown out to show insurance purchasers there’s a better way.

I believe the winning business models in group health insurance will be those that link to the regulatory levers—carrots and sticks for individuals and providers—and move them. They’ll also need to prove they can deliver better outcomes at lower cost, have a viable basis for underwriting and risk management, and demonstrate potential to scale.

Success will be a function of slick software, data usage, and tactical knowledge of regulations and how to motivate behavioral change. It will also be based on what brokers do best: provide advice and counsel when clients need it most.

Reportedly one in seven employees does not understand the benefits (and therefore the value) being offered by employers, and health insurance is by far the biggest piece. Faced with a complex set of choices and dense information in a cost-shifting environment, it’s no surprise many go for the easy option: saving money now. Insurtech is focused on the pain points that can streamline the enrollment process and free up resources to give individual service and advice to the client base, whenever they need it, wherever they are.

“There is no line between digital and broker. In fact, they are one and the same, and clients expect and need trusted advisors,” says Decisely CEO Kevin Dunn in “Q1 2017 InsurTech Briefing,” produced by Willis Re, Willis Towers Watson and CB Insights. Decisely, which provides health benefits, insurance and a technology platform for HR administration to small U.S. businesses, uses a 100% digital model. And Dunn says it doesn’t stop there.

“Others in the space have built technology to solve the problems of small businesses, yet they have only created a self-service front end. This front-end focus is solely a digital distributor…We provide self-service on the front-end, but our back end also understands the uniqueness in the brokerage industry when it comes to pricing, carriers and compliance—all things necessary to run and keep a small business afloat.”

There won’t be a radical power shift in healthcare anytime soon. Change and new don’t necessarily go together well in this climate. But innovators and even more mature companies are demonstrating the capacity to go after the possibilities that data, technology and creative solutions offer to mitigate the pain.

This activity is a bright spot in healthcare reform, and brokers need to study and understand the deeper forces of what’s happening in order to be proactive in determining whether their firm can deliver the proficiencies required by the marketplace. If they can’t deliver those, they need to find a way to use partnerships, joint ventures or acquisitions to shore up absent capabilities.

We’ve seen only the beginning of the amount of talent and money that will pour into this industry. Brokerages with scale and technical capabilities are well positioned to take advantage of the huge potential to do more business and at the same time create a much more customer-friendly industry. It’s only the tip of the iceberg, but the time is now for brokers to get educated and engaged so they can be proactive.

You are in the midst of filtering a wide pool of candidates so you can select the right fit for your firm.

Then, you meet an old colleague for dinner, and he warns you about a certain prospect. “Don’t go there,” he says. “We had a terrible experience when they bought our firm years back. I promise you, the deal will be a nightmare.”

You leave dinner with a bad taste in your mouth about that prospect. Since there are other sellers vying for your attention, you might as well drop that firm from the list. You trust this industry friend—he’s honest and fair. If he said the deal was rotten, you’re sure it must have been. You’re relieved that he waved a red flag now so you didn’t end up finding out the hard way. 

Does this scenario sound familiar? You’re seeking out opinions and information about the sellers you’re courting because information is power, right? The more you know, the better prepared you’ll be. It’s called doing your homework. Right?

Maybe not. Press the pause button for just a minute. Before you take those outside opinions seriously, back up and take a holistic view of your situation.

  • Is there value you could be overlooking because of a tainted perspective?
  •  Has someone’s opinion pulled you far away from the facts? (What are the facts?)
  • What are the numbers telling you about the deal? Is this a wise business decision?
  • Why were you attracted to the buyer/seller in the first place? What is your business gut telling you?
  • Do you have a trusted outside advisor who can provide a balanced perspective?

We see many buyers and sellers rely on word-of-mouth intelligence to form their opinions about a firm’s potential, and we believe this is a dangerous road to travel. Beware of allowing your own perspective to be jaded by someone else’s bad experience.

When another’s experience creates a filter through which we perceive a prospective buyer or seller, that muddy lens can actually block the view of a firm’s positive qualities. We can overlook a strong management team, a progressive mentorship program, a track record for producing new business and more. Our vision becomes myopic and focused only on that negative feedback we heard.

Think of it this way: would you let someone else steer the helm of your business? Would you allow an old colleague, former employer or acquaintance to single-handedly choose the next firm you will acquire or sell to? We didn’t think so. So why do we have a tendency to allow others’ opinions to close doors on business opportunities?

Whether you’re in the position to buy, sell or stay as you are, take the time to carefully vet a deal and use a fact-based approach. Consult with an advisor who can tease out opinion from fact, someone who can challenge you with the tough questions rather than interjecting opinions into the matter. If you do receive negative feedback about a firm you’re considering buying or selling, we believe you should log that information in the opinion file. Do not allow that perspective to become the entire case. 

In today’s dynamic market, we could all use a reminder to stop, analyze the facts and then weigh information fairly before moving forward. It’s both an exhilarating and nerve-wracking time when you’re in the position to grow your firm through acquisition or to transition by selling. It’s also emotional. But beware of allowing others’ hot air to carry away a potentially great deal for your firm.

Market Update

Deal announcements in April were down from March, at 19 versus 40 last month. April is also down almost 30% from the 28 deals announced in April 2016, although there are often revisions to each monthly count throughout the year. Year to date through April, buyers have announced a total of 140 acquisitions, which compares to 152 through April last year (down 8.5%).

Acrisure has been the most active buyer year to date, with 12 announcements, followed closely by BroadStreet Partners and Arthur J. Gallagher & Co. at 11 and 10 announcements, respectively. California agencies make up 19 of the 140 deals reported so far, or nearly 14%, followed by Massachusetts and Florida, with 10 targets announced in each state.

On April 19, AmWINS Group and Partners Specialty Group announced they had agreed “in principle” to acquisition terms. The combined entity would further separate AmWINS as the largest U.S. wholesale distributor, with PSG currently the ninth largest nationwide. PSG has 14 regional offices throughout the U.S. and placed about $500 million in gross written premium in 2016 across various specialties ranging from transportation to cyber liability. The transaction is expected to take 45-60 days to close.

Trem is SVP at MarshBerry. Phil.Trem@MarshBerry.com

Securities offered through MarshBerry Capital, member FINRA and SIPC. Deal counts are inclusive of completed deals with U.S. targets only. Please send M&A announcements to M&A@MarshBerry.com. Sources: SNL Financial, MarshBerry

The NAIC has had standing working groups on big data and cyber issues for several years now. Under NAIC president and Wisconsin commissioner Ted Nickel, these groups were reorganized this year into the Innovation and Technology Task Force. The new task force’s mission is to provide a forum for discussing innovation and technology in the insurance sector, to monitor technology developments affecting the state insurance regulatory framework and to develop regulatory guidance to assist states in addressing the new paradigms and assist stakeholders in compliance.

Working groups on big data, cyber, speed to market (which deals with electronic filings) and the sharing economy were all active at the NAIC’s recent meeting in Denver. This can be good and bad, of course.

With respect to the Cyber Working Group, for instance, the regulators are on the third draft of a cyber-security and data breach notification model act. While The Council likes the idea of a national, uniform approach to cyber-security and data breach notification, the issues are difficult, and the current draft of the model raises many concerns and potential problems. Likewise, the Big Data Working Group has raised issues that make many carriers uncomfortable. So, with the potential good come potential problems. But the discussion is important, necessary and well under way. 

NAIC as Technology Company

The NAIC views itself—in some ways—as a technology company. The association has the hardware, software, personnel, budget and data to make it the largest repository of insurance financial regulatory information in the world and to serve as a major source of assistance to the states in their regulatory missions. The NAIC collects financial data for the states from every insurer authorized in the U.S. It also provides back-office technology and support to state insurance departments through its “State Based Systems” initiative and maintains electronic platforms for policy filings, rate and form review, and producer licensing. 

Insurtech Thought Leader?

The NAIC and its members recognize they are not necessarily prepared to regulate the ever-evolving ways in which insurers and producers do business and engage consumers. This is especially true with technology and insurtech.

The association’s Center for Insurance Policy Research (CIPR) publishes studies and organizes events designed to educate state, federal and international policymakers, consumers and industry stakeholders to enhance “intergovernmental cooperation and awareness, improving consumer protection and promoting legitimate marketplace competition.” 

In the last year, CIPR has held several tech-centric events:

  • A “Technology and Insurance” program focused on the problems and opportunities presented by bitcoin and blockchain technology in the insurance industry
  • A “Sharing Economy” webinar on the disruptive innovation caused by the evolving sharing economy and the resulting regulatory issues that are part of the new market approaches
  •  A “Meeting the Challenges of Innovation” program on insurtech trends and the role of regulation in insurtech. Interestingly, but perhaps not surprisingly, industry thought leaders who participated agreed the regulator’s role should be as an objective evaluator of innovation, and regulators were urged to use reasoned, clear processes to evaluate the impact of insurtech innovations on companies and consumers without prejudging or unnecessarily tying the hands of industry innovators. 

In Denver in April, CIPR held a forum on flood insurance and the National Flood Insurance Program, which is up for reauthorization this fall. Although flood insurance is not typically thought of as an insurtech issue, regulators and industry panelists alike emphasized the importance of technology to gauge flood risk and to determine fair and accurate pricing in discussing expansion of the private market for flood insurance. 

Next up for CIPR is a weeklong “Innovation Program” that will bring together insurtech company representatives, regulators and others to explore “innovative thinking, disruptive technologies, insurance workforce, and the market implications of these trends and how regulation fits into the innovation chain.” 

The NAIC titled its latest annual report “Inspiring Innovation.” It was not clear whether the association is aiming to inspire innovation in the regulatory approaches taken by the states or in the insurance markets the states oversee. It’s critical regulators use their power for good—to encourage innovation and change, to look for ways to say yes instead of no, and to allow the marketplace to develop and grow while still protecting consumers, which is their core regulatory priority.

We think it’s doable, and the NAIC and its members should get some credit for trying to get there.

Sinder, The Council’s chief legal officer, is a partner at Steptoe & Johnson. ssinder@steptoe.com
Fielding, the CIAB’s general counsel, represents The Council on the NAIC’s National Insurance Producer Registry. john.fielding@ciab.com

What’s really different when you think and operate like an insurtech company? What would it take to turn your agency into an insurtech firm?

At its core, an insurtech company is a technology company attempting to apply software, process or technique to an aspect of the insurance industry and, in doing so, fundamentally changes the way that segment of the industry works. It’s a logical idea that’s been around since the idea of business. It’s simply made sexier with a dash of bravado and the sizzle of technology. In fact, disruptive change is often fueled more by the personality of the cast of characters than by seemingly magical new technology or secret-sauce inventions.

When targeting an industry that’s perceived as stale, you don’t have to burn a lot of research and development investment inventing truly innovative technologies. Technology in our industry is mostly a game of catching up and bolting on.

  • We can’t provide clients with access to their basic insurance documentation without manual effort? Run, run, run! Bolt on!
  • Clients can’t directly upload exposure information on 1,200 commercial buildings? Run, run, run! Bolt on!
  • Wait, a different client needs to upload the same type of information but for municipal buildings instead of commercial buildings? That other bolt-on doesn’t work! Run, run, run! Bolt, bolt, bolt!

What we ultimately end up with is a pretty gnarly looking Frankenstein of disjointed processes, systems and software. In most cases, only one or two people know how to deal with any given section of the monster. It’s likely not even a single person in the agency could trace the flow of all business through the beast.

Insurtech firms know this. They understand that, even though the industry is complex and even though we know how to navigate it better than they do, we are absolutely buried in a rat’s nest of individual and small-team processes. An insurtech approach isn’t just about adding sauce and sizzle. It’s about creating a holistic approach that can handle whatever processes, regulatory requirements, and strange trading partner rituals that are thrown at it. When the system is designed with complexity in mind, the manual processing requirements disappear. The margins go up, and the service gets better. That’s where they’ll win and we’ll go home looking confused. It’s not their software, their fancy logo or the rounded corners of the buttons on their website.

In fact, drop the entire idea of technology and software out of the equation, and the problem still exists. Has your agency defined the metrics and operational parameters for landing and servicing business across all divisions in a way that adds value to the insured and defines the experience of working with your firm in a way that makes it impossible to leave you?

Insurtech firms have. In fact, they start there. Then, they build the systems and software required to execute on the model. Sure, they may start in some obscure corner of the industry, but trust me when I say this: tech firms are built to scale up, and when they do, it happens overnight. Build, execute, iterate, scale. This wash-rinse-repeat approach has been proven over time and will never be successfully countered by run-run-run-bolt-bolt-bolt!

It’s a lot to think about, but we have to start somewhere and this is the core of the issue. The impending battle will be fought here. So think about it, captains of industry.

Gagnon is The Council’s CIO and president of Tiebeam Partners. christopher.gagnon@ciab.com

A steady flow of private equity money into the brokerage sector has fueled a spate of mergers and acquisitions in recent years. Amalgamations of smaller agencies and brokerages into large national operations have changed the brokerage landscape in ways that would have been unimaginable only a few years ago.

But imagine the unimaginable: what would happen if the financial spigot suddenly dried up?

If private equity dried up, I think you’d see valuations for M&A activity fall significantly, says Paul Newsome, managing director at Sandler O’Neill + Partners in Chicago.

“Theoretically…valuations and multiples would come down, and there would be less acquisition activity,” says John Ward, principal at Cincinnatus Partners in Loveland, Ohio. “And the segment would resort to the age-old strategy of internal perpetuation within the agency.”

The impact would depend in large part on the reason the private equity and investment money became scarce, explains Quentin McMillan, a director at Keefe Bruyette & Woods in New York.

“If it was due to interest deductibility going away, which would affect private equity to a greater extent than the public brokers, you could see a decline in M&A, causing the multiple paid-for businesses to decline,” McMillan says. “Private equity can afford to pay more.

“The public broker reaction would depend on the private equity firms’ plans with the businesses they operate—whether to keep ownership and focus on paying down debt, looking for a buyer, or taking them public. There are between five and 10 large brokers owned by private equity that at some point will likely sell.”

Kai Pan, an analyst with Morgan Stanley, says, “M&A remains competitive, and valuation multiples are elevated. If rising interest rates would increase funding cost for private equity investors, the acquisition environment could be more favorable to strategic buyers. That said, most brokers do not expect significant change in the M&A environment. They are instead focusing on acquisitions, which add strategic value and financial accretion.”

The possibility of a drought doesn’t concern Jim Kapnick, CEO of Kapnick Insurance in Adrian, Michigan. “We are a family-owned business looking to be around for many, many years. If the private equity money dried up, we would continue doing exactly what we are doing today.”

As a complement to our written feature, Tough-Minded in a soft market, we asked several members to comment on issues including the economy, technology and client expectations. Here are some thoughts from Dan Klaras, President of Assurance Agency; Brian Hetherington, CEO & Co-Chairman of ABD Insurance and Financial Services; and Jon Loftin, President & COO of MJ Insurance.

When rates are low, growth has to be higher.

The booming Northern California economy is good for business.

As small agencies are acquired, they gain new competitive advantages.

Using insurtech wisely can provide great opportunity.

Jon Loftin, Dan Klaras, and Brian Hetherington discuss the on-demand world, data analytics and self-service.

The unique risks in the sharing economy market pose new opportunities.

Instead, they approach growth from a variety of directions, ranging from hiring and training practices to strategic M&A.

“We’re estimating that organic growth in 2016 was 4.0% on average, 4.6% in ’15 and 7.7% in ’14,” says Phil Trem, senior vice president with MarshBerry. “The economy has been relatively stable in that time frame, but since 2014 the rate environment has been decreasing. Most high-performing organizations aren’t saying, ‘The rate environment is changing. Let’s do something about that.’ First and foremost, it’s about people—training and mentoring.

“Firms that grow organically can complement organic growth with M&A, but it can become problematic if they substitute M&A for organic growth,” Trem says. “Organic growth typically has a higher return on investment than an acquisition does.”

Some firms have shown, however, that organic growth can be bolstered using strategic M&A. Although these deals don’t initially appear as organic growth, they have the potential to foster it over time.

“It varies quite a bit” among brokerages, says Paul Newsome, managing director at Sandler O’Neill + Partners in Chicago. Companies like Arthur J. Gallagher, he says, are primarily trying to expand organic growth through better execution, while others are trying to expand organic growth by changing the types of business they are in. “Aon would be the most notable example of this, where they are divesting [themselves of] businesses that they think have lower organic growth capabilities,” he says.

For example, Aon signed a definitive agreement in February to sell its benefits administration and HR business processing platform to Blackstone for more than $4 billion.

“The sale…creates incremental capital to strengthen growth in core operations,” says president and CEO Greg Case, “and accelerates the pursuit of inorganic growth opportunities that address emerging client needs, similar to recent acquisitions in cyber risk advisory and health brokerage solutions.”

Firms that grow organically can complement organic growth with M&A, but it can become problematic if they substitute M&A for organic growth.

Phil Trem, SVP, MarshBerry

Quentin McMillan, a director at Keefe Bruyette & Woods in New York, says Aon is using the proceeds from this sale for share repurchases and M&A. “Also,” McMillan says, “the company is already spending $300 million to $400 million annually investing in their data and analytics, which is driving strong organic growth in new areas.”

Newsome says there’s a lot of strategic M&A going on among the publicly traded brokerages. Marsh and Aon, he says, both are growing middle-market efforts. Marsh’s Marsh & McLennan Agency operation most recently announced five acquisitions between December and March, including both employee benefits and traditional p-c firms. “We invest to grow…both organically and through acquisitions, said Dan Glaser, president and CEO of Marsh & McLennan Companies, during last year’s fourth-quarter earnings call. “We have been improving the mix of business over several years by focusing our investment in growth areas while divesting or deemphasizing other parts of the business.

“We invest to enhance the growth rate of the overall firm across three target areas—geography, segments and capabilities,” Glaser said, pointing to examples such as Marsh’s buildout of Marsh & McLennan Agency, the emergence of cyber, flood and mortgage practices, and investments in Oliver Wyman’s digital technology and analytics platform. “We expect these faster-growing businesses will become a larger proportion of MMC over time, enhancing our long-term revenue growth.”

McMillan also notes that brokerages are using strategic M&A to bolster their competency in emerging lines of business. Aon recently purchased Stroz Friedberg, a cyber risk management firm, for about $300 million.

“As CEO Greg Case discussed on the call, the p-c insurance industry has placed $2 billion in cyber premiums while clients have reported $400 billion in losses,” McMillan says. “The magnitude of this gap clearly shows the runway for growth, and our view is that Aon’s investment in cyber and certain other high-growth areas should benefit longer-term organic growth trends.”

Spreading the Expertise

Most of the brokers have centers of excellence for various specialties, McMillan says, and these can help drive specialty expertise farther through the organization. Gallagher, McMillan notes, has talked about this concept in the past. “The small broker they purchase is friends with the CFO of a big business in their town,” McMillan says. “The business is growing, and more specialty insurance needs to be purchased, above the scope of the regional broker. The broker can call AJG’s center of excellence, work with someone who specializes in that type of risk and write business the broker would never have been able to due to the specialty nature of the risk.”

The center of excellence approach to organic growth extends beyond the large national brokerages. “We have more than 25 centers of excellence that are risk focused, and we have dedicated leadership and teams that are charged with keeping abreast of the current trends, deep technical knowledge and understanding how to successfully articulate the value to clients,” says Jim Kapnick, CEO of Kapnick Insurance Group in Adrian, Michigan. “Because we have spread out the responsibility, we can gain greater expertise and dramatically improve speed to market on innovative risk solutions.”

We have institutionalized the ‘one firm’ mentality and bringing best-of-class solutions to business, human capital and individual risks. All new employees are encouraged to become cross-licensed, and we are training people to assess risk on a holistic basis and bring in the appropriate expertise as needed.

Jim Kapnick, CEO, Kapnick Insurance Group

In addition, Kapnick says, “We have institutionalized the ‘one firm’ mentality and bringing best-of-class solutions to business, human capital and individual risks. All new employees are encouraged to become cross-licensed, and we are training people to assess risk on a holistic basis and bring in the appropriate expertise as needed. We have broken down the traditional silos and are truly bringing a better solution for the client.”

Moving away from traditional sales roles is an emerging theme in agency growth, and this can apply to hiring practices as well as training. In explaining what drives business development at Parker, Smith & Feek in Bellevue, Washington, president and CEO Greg Collins highlights recruiting—in particular, recruiting both experienced account executives and account executives who have no experience in insurance but have worked in client relationship/business development roles in other industries, such as banking.

“Every time you do this,” Collins says, “you expand your sphere of influence, especially when you put them in product groups where their centers of influence can be leveraged.”

Client Retention Strategies Can Feed New Business

Is there room for growth in client retention? It depends on how you look at it. “Client retention is high,” says Kai Pan, an equity research analyst at Morgan Stanley in New York, “so the key to enhance organic growth is increase business with existing clients and attain new customers.”

But Collins thinks that perhaps the greatest opportunity to maximize organic growth lies in the simple math of client retention. “Most good brokers, I hear, hover in the 90% to 92% annual retention area,” he says. But that means a broker with 90% retention and $20 million client revenues is losing $2 million of client business annually. “To grow 8% organically, they need to replace that $2 million and then add another $1.6 million, assuming all their renewals stay at the same level. That’s $3.6 million new business,” Collins says.

That translates into “sales velocity” of 18%, which is “very hard to do,” he says. “Our retention the past two years is 98%. At 98% you would need to add $2 million to grow at the same 8%— a sales velocity of 10%, much easier than 18% in sales velocity. In short, I believe brokers should first focus on outstanding client service and retention and then use those same skills to attract other, similar clients who want the same outstanding service. If you focus on client retention—every day working to increase your value to your current clients—you will develop skills, resources and expertise that you can use to differentiate yourself in business development.”

Another important strategy for Parker, Smith & Feek is to focus on the clients they can serve best. There are seven major practice areas that comprise 73% of the agency’s business: construction, real estate, healthcare, food processing, manufacturing, high tech and professional services. “All have characteristics of businesses we like working with,” Collins says. “They tend to be larger and well managed. They have sophisticated risk-management needs, pay a lot of money for insurance and have a high expectation for broker services. In short, they have difficult risk-management problems to solve.”

I believe brokers should first focus on outstanding client service and retention and then use those same skills to attract other, similar clients who want the same outstanding service.

Greg Collins, President and CEO, Parker, Smith & Feek

Technology Drives Opportunity and Service

Technology also plays a key role in enhancing organic growth, but technology alone is no panacea. “They don’t have to have a huge system. It just depends on how you use it,” Trem says. “The tools are important, but if you’re not using it right, it’s not doing you that much good.”

For Insureon’s Insurance Noodle in Chicago, technology means zeroing in on data analytics, says President Ralph Blust. The use of data and industry analytics is an important and emerging area to facilitate organic growth,” Blust says. “Data identifying buying practices to then predict speed of growth of companies in specific verticals is an example of how data can help agents target companies within verticals. Our industry has relied too heavily on actuarial sciences historically, and now, with increasing optics to other relevant and factual data points, an agent can identify industry opportunities.”

In Chicago, for example, the availability and placement of bike-sharing stations provides data on commuting patterns of urban dwellers. “Evaluating that data with business startups and closures can help an agent identify target marketing spends,” Blust says. “This same data can help a firm that is expanding identify areas for new offices and where to recruit new talent.”

Blust’s company is also analyzing the percentage of sales that appetizers and desserts make up of a restaurant’s revenues. They can then establish a probability for the restaurant staying in business, regardless of how long it has been established. “From this modeling, we are working with carriers to establish a pricing scheme directly related to the probable success of the restaurant,” he says.

Technology can also play a role in enhancing organic growth, allowing customers to transact business through digital means. Greater use of digital technology does not mean a broker must downplay its role as an advisory firm, Kapnick explains.

“There is a belief in our industry that to survive you either need to be an advisory firm or have an exceptional client digital experience,” he says. “I disagree and believe that those who survive will be both. We already are a best-in-class advisory firm and are focused on delivering a best-in-class digital experience. This includes providing tools and resources to our clients to help cut the administrative burden and create greater transparency in working together.”

No matter what strategy a brokerage follows, Collins says, it must recognize the customer should always come first. “We should always be fighting for the best treatment possible for our clients—that means the lowest reasonable premiums we can achieve. Most of our larger clients are on a fee structure with us. That means we get paid for services and outcomes—not based on how much the client pays in premium. To be overly concerned about client premiums because it affects your revenue is a conflict of interest. In fact, we should be working every day to take cost out of our clients’ risk exposure. So I am not concerned at all about the soft market. I assume the carriers know what they’re doing in pricing, and I’m delighted to see rates go down. It’s very helpful to our clients.”

Hofmann is a freelance writer. markahofmann1952@gmail.com

Berlin boasts a thriving scene, including insurance startups such as robo-advisor Clark; Simplesurance, which offers cross-selling software for product insurance; and peer-to-peer insurer Friendsurance. Munich is home to the Allianz X incubator and the W1 Forward insurtech accelerator whose alumni include firms working with machine learning, underwriting and mobile claims solutions.

Singapore has become an Asian hub for insurtech. MetLife launched its Singapore-based Lumen Lab in 2015 to develop new business models in wellness, wealth and retirement and to better tap the Asian market, which is expected to account for about half of the insurance industry’s growth in the next decade. Lumen Lab chose eight finalists for its inaugural “Collab” accelerator program in February. The winner will receive a $100,000 contract.

Australia’s IAG is launching an insurtech innovation hub in Singapore supported by the insurer’s $75 million venture fund. Paris-based global insurer Axa has established a Data Innovation Lab in Singapore and Axa Lab Asia in Shanghai, which is modeled on its Silicon Valley digital innovation effort, Axa Lab.

In the Mideast, insurance technology in Israel is making strides, with startups such as predictive analytics software company Atidot. Earlier this year, Axa Strategic Ventures, along with Jerusalem Venture Partners, held the first Israeli insurtech competition, leading to investments in startups focusing on fraud prevention and identity verification.

But Will the Chatbot Friend You?

Online small business insurer Next Insurance says it has launched the first full insurance signup via Facebook Messenger using a chatbot. To sign up for insurance, customers just need to message the automated assistant and answer a series of questions. So far, the 2016 startup is focusing on personal trainers, photographers and contractors.

Regulators Eye Insurtech

The National Association of Insurance Commissioners is setting up a task force to help keep regulators up to date on the rapid development of new products and services arising out of insurtech. The Innovation and

Technology Task Force will oversee existing working groups on big data, cyber security and speed to market. NAIC president and Wisconsin insurance commissioner Ted Nickel says, “Insurance regulators have a critical role to play in supporting innovation.”

We Lincolnites pride ourselves in having one of the friendliest cities in the United States. In fact, we were recently named the happiest city in the United States by Gallup. Unsuspecting college sports rivals experience this when they come to our city for Husker games. We love people, working hard and life. That’s what it’s all about.

Lincoln is affordable and fun, making it an incredible place for existing and new businesses. Our incubator and accelerator environment is alive and growing. It’s a great place to be!

The University of Nebraska always has something going on—sports, live concerts, food festivals, off-Broadway shows, marathons, art exhibits. We also have 131 miles of hard surface and rocked trails for biking, running and walking, so pack accordingly.

It’s not always cold here! It can be 100+ degrees in the middle of summer and I will still have someone ask me, “Is it still cold there?”

Restaurant scene
No one believes me, but Lincoln has some of the most eclectic culinary opportunities I’ve seen in a city of our size. We have a large worldwide relocator population, which is reflected in our markets and restaurants. From authentic Mexican and Chinese to Persian, Thai, Indian, Japanese, African and Russian, I could go on and on.

Best new restaurant
My favorite new restaurant, The Normandy, is straight from western France. From fancy to comfort food, everything is spectacular. The pastries are to die for, and the wine, well, that goes without saying.

Favorite restaurant
Blue Orchid Thai Restaurant. My friends know that they must like Thai or lunching with me will be a problem. The drunken noodles spicy are the best!

Watering hole
I’ve been traveling for more than 30 years, so when clients come to Lincoln, I want them to have an experience they can’t get in another city. The Other Room is a mysterious speakeasy, complete with a back alley secret address. Once you find the location, you must knock, and if the light outside is green, you are let in. Only 25 people at a time get to enjoy the award-winning mixologist’s creations.

I recommend people stay at the Marriott Courtyard in downtown. It’s within walking distance to the historic Haymarket district, and there’s always something to do—restaurants, sporting events, bars, coffee houses, farmers markets, music, art.

A painting of a dour woman in early 20th century dress greets you as you exit the elevator on the 12th floor of the Pontchartrain Hotel in New Orleans, which was recently restored to its former glory. A cigarette dangles from her mouth, an Old Fashioned from her hand, and the words “Hot Tin” are painted in cursive across the canvas, all obviously recent additions. It is a hilarious harbinger of the rollicking good time to be had at the hotel’s new rooftop bar, Hot Tin, a reference to Cat on a Hot Tin Roof, written by former guest Tennessee Williams. It could also be a metaphor for New Orleans, which has hit its stride when it comes to melding the old with the new.
Along with the reopening of the historic Pontchartrain Hotel in the Garden District, last year the Ace Hotel New Orleans was opened in the Central Business District. The former is a trip down memory lane. The latter is an oh-so-hip addition to the city. Both have become magnets for locals as well as visitors, who are drawn to their clubby bars and restaurants.
New Orleanian Cooper Manning, the eldest son of quarterback Archie Manning, is one of the investors in the Pontchartrain Hotel, so it’s no surprise that the $10 million makeover included the return of the Bayou Bar, where the New Orleans Saints football franchise was christened in 1969. Patrons sip whiskey in the dark-wood tavern that features murals of the bayou. Mile-high pie is once again served in the Caribbean Room, where jackets are required. Blueberry muffins are back on the menu at The Silver Whistle Café (now made by the Willa Jean bakery, part of the Besh Restaurant Group, which manages the restaurants). Still, the hotel feels of the moment. There is a modern elegance to the rooms in the circa-1927 building, and with a 270-degree view of the Mississippi River and downtown, the party at Hot Tin never seems to stop.
At the Ace Hotel, an $80 million overhaul of the 1928 art deco building, a former furniture store, preserved architectural elements like the oversize, multi-paned windows and Corinthian pillars, which dot the lobby and the hotel’s popular restaurant, Josephine Estelle. The New York design studio of Roman and Williams worked its magic on the interiors, maintaining a sense of place while giving the hotel its signature retro cool. Palmetto murals in the restaurant were salvaged from the New Orleans Opera House. Guest rooms have armoires painted with bayou landscapes. Some even have Martin guitars and turntables. Not to be outdone by the Pontchartrain Hotel, the Ace also has a rooftop scene that revolves around the small pool and a bar, Alto, that cranks out frozen drinks and craft beers.

When it comes to insurtech startups, how do insurers find the ones that will work best?
There are two main dimensions to look at. The first dimension is how far along they are in terms of funding. Where are they with angel investors, Seed A, Seed B financing rounds? How mature are they organizationally?

Who is their management?

The other question is market maturity—how far along is their solution? Are they at the back-of-the-napkin idea stage, or have they built some proof of concepts? Have they done pilots with insurers. Have they implemented it? Are they live with an insurer? Everybody has to go through a process to narrow down the 800 insurtechs out there to the ones that match their business strategy.

Agents and brokers should be aware of and evaluating insurtechs as well. Many of the insurtech companies will either be their competitors or have some tech solutions that could give a broker a valuable edge.

What are the potential landmines?
The landmines are similar to the days of the Internet bubble. We say 80% to 90% of the insurtechs out there now are going to fail. They will outright collapse, or they’ll never get any market penetration. The 10% to 20% are going to have some sustainable solution, and they’re going to have a big impact on the industry.

The challenge for insurers is that you almost have to take a portfolio approach to it. You have to work with a number of them and know that some are going to fail and some are going to be successful. You are looking for a home run or two, but you know that some are going to fail.

Another landmine is not taking the proper approach and thinking about how you manage these organizationally. Like all startups, these guys tend to pivot and realize that their original idea—as cool as it was—no one was buying it. With their capabilities, they can flip to something different because an insurer asked if they could do that. That may be a direction that doesn’t make sense for another insurer. You have to watch the pivots, and you have to pick the right approach.

A lot of the activity seems to be in personal lines. What do you see going on in commercial lines?
There is a lot going on in commercial lines too. The two main spaces in commercial lines are in distribution and risk mitigation—especially in small commercial. There are a number of insurtechs in the distribution space that are looking to disrupt that in one way or another, either as a digital agent and broker or some kind of platform for reaching small businesses.

There is great potential for loss control engineering. It’s a discipline that’s going to change significantly. We are moving into this real-time world where we can monitor and react to every single thing that’s being tracked, monitored or recorded—not just for the factories and utilities but also for the small businesses.

With all this real-time data, there is a great opportunity to rethink the whole relationship between the insurer and their policyholders and manage the risk in some different ways. There are lots of implications there for the product and the premium and the way the whole relationship evolves. There are huge implications in commercial lines.

In workers comp, there is a fascinating potential for improving the safety of work sites and workers in various professions, managing and monitoring them, and helping with improved treatment plans and getting them back to work.

Specialty lines offer all kinds of unique opportunities. There is absolutely great potential. Commercial lines will change just as much as personal lines over the next five to 10 years.

Did you grow up in Georgia?
I was born in Florida. My father was a Navy officer, so we moved frequently. I lived up and down the East Coast, in Europe and California. Most of my life was in the D.C. area. That’s what I think of as my hometown. My three siblings still live there.

How often did you move?
Through third grade, we moved seven times. And then we stayed in northern Virginia.

Moving so often must have been difficult.
You have to make new friends quickly. In many ways that’s a good and useful skill.

What did you want to be when you were growing up?
I’m not sure I knew, but my mother always told me I would go into sales. I was the kid who had the lemonade stand. I sold newspapers starting at the age of eight. I sold donuts door-to-door at one point. That was tough—it’s a perishable item. I was always selling. What’s funny is I actually thought I was going to be the next great American writer. I was an English major at the University of Virginia, but then I took some business courses, loved them and switched to a business major.

What do you do when you’re not working?
Most of my time revolves around family and church. Most of my charitable giving is around the church or mission work. I like to read and run. And I like to golf. I would like to say I’m a good golfer, but it’s not true. I’m more enthusiastic than skilled.

This year Rachel and I will be celebrating our 30th anniversary. We have two sons and two daughters, ages 11 to 26, and one granddaughter.

Any shown an interest in insurance?
Despite my best efforts, no. That’s not to say it’s too late. I’ve always encouraged them, just as my parents did, to find something you like and you’ll probably be pretty good at it.

You own a farm in northeast Georgia. We have 50 acres. We rent the pasture out to a gentleman who keeps cattle on it. There is no Internet, no cable, no TV. It forces us to unplug and hang out as a family. It’s on the middle fork of the Broad River, so we go kayaking and tubing on the river. We ride ponies and our ATV. We play board games at night. It’s a forced way of unplugging.

Was that part of the idea?
Oh, absolutely—to get back to reality.

What’s your favorite city?
Probably Chicago. Part of it is my wife’s family is still there. I have grad school friends there. And I like to get deep-dish pizza.

You founded Prime Risk Partners in 2014. Tell me about your business.
We’re approaching $90 million in revenues and have more than 400 employees. Our focus is on growing organically, but we will continue to grow through acquisitions as well. Besides Georgia, we’re in New York, New Jersey, Indiana, Kentucky and Illinois. We have 14 offices total.

What surprised you most about being the boss? First, I don’t really think of myself as “the boss.” Yes, the buck stops with me, but I view myself as one of the partners. What is most gratifying, but not really surprising, is how my partners are really stepping up to the plate and driving our organic growth. Our partners, our producers, our leaders, they have bought into organic growth whole hog.

What would your co-workers be surprised to learn about you?
That I actually do know how to relax.

What gives you your leader’s edge?
Partnering with really talented people and letting them do their thing.

The Quigley File

Favorite Movies
Shawshank Redemption

Favorite Actor
Clint Eastwood

Favorite Musical Group
The Beatles

Favorite Beatle
Paul McCartney

Favorite Writer
Tom Clancy

Favorite Book
The Bible

Let’s get the first thing out of the way. Your name. Why Caribou?
Many years ago, my folks were driving up to Quebec, and they stopped overnight in the town of Caribou in northern Maine, where I’m told they grow a lot of potatoes and there is a weather station and that’s about it.

And this being a road trip, I was named after the town in which I was conceived. The standard joke is that I’m lucky not to be named Buick.

That’s pretty good.
Well, you know, I grew up outside of the Albany area. So I consider myself lucky not to be named Schenectady.

When did this era we call insurtech begin?
In the first decade of the 2000s, the aggregators were, to varying degrees, successful at taking some friction out of the system for the consumer. Certainly, creating some transparency. I think what you’re seeing now is going toward a reduction in friction and increasing transparency as people try to move to applying the smartphone for distribution.

I think you’ve got some bits and pieces of that being applied to underwriting. I’ve seen only a little bit on the product side. So as I think about the insurance value chain, I’ve got my distribution, my marketing, I’ve got my product, I’ve got my underwriting. The product side is actually where I see the greatest opportunity to change the game, to create bigger transformation. And when you change product, then marketing, distribution and underwriting have to change with it. We’re only now starting to see a handful of companies going after the product side.

How did you get into insurtech?
We started in 2008 with a combination of adtech and the fintech banking side of things—payments, money remit, lending. The adtech piece does become very data-driven, particularly in digital channels, of course.

And there’s a lot of analogies between that and the lending side.

We’ve leaned into the fintech side of things, and not surprisingly over the course of years we’ve seen and made a few investments related to insurtech. In the same way, back in 2009, 2010, when we were doing fintech before fintech was cool, we were doing a few insurtech deals before insurtech was a thing.

Our first was in 2011. We were a part of the seed funding round for Drive Factor, an automotive telematics provider. I feel in hindsight we were probably a little early. We not only made an investment but actually had a successful exit.

The mindset of a VC is very simple. It is this constant balance between fear and greed. You’ve got the fear devil on one side and the greed angel on the other shoulder, and we’re always balancing that.

Drive Factor was ultimately bought by CCC in April 2015. CCC is in the claim service side for auto. And what I really like about that is the notion that telematics provides you with information about what the driver is doing, what the car is doing, and then CCC has information on what happens when it comes to claims and incidents. You put those two things together and I think it’s a much more powerful offering for a carrier than either one of them. That’s real synergy.

Other investments were TransUnion, Valen Analytics and a company called L2C.

A company called Pitzi in Brazil, which has a cell phone insurance company, is similar to Asurion. A company in Germany called KNIP is kind of a digital mobile broker. We also recently invested in a company in Mexico in the aggregator space called ComparaGuru.

What do you look for in an investment?
We’ve invested across every stage. We’ve done a couple of seed deals. We’ve done a couple of private-equity stage deals, like TransUnion.

Series A, where a company has a little bit of traction in the market but isn’t necessarily scaled up, tends to be our sweet spot. I tell entrepreneurs, “I need to see 500 customers for six months if it’s a B2C business.”

And then I have enough to go on. Less than that, earlier than that, is really hard for me to get conviction about what’s going to happen. We write modest-sized checks—$1 million to $5 million over the life of an investment.

What drives a decision?
The mindset of a VC is very simple. It is this constant balance between fear and greed. You’ve got the fear devil on one side and the greed angel on the other shoulder, and we’re always balancing that. An investment always starts with a great entrepreneur, great management.

You know, you can look at everyone’s darling today, Uber. There’s a lot of elegance to what they are doing. Yes, they are eating the lunch of an incumbent—the taxi industry. But they are creating lots of value—clear preference among many consumers. They’re also creating lots of value for a bunch of drivers and enough value left over for Uber shareholders to get handsomely rewarded. So that sort of elegant value creation is transformative and a disruptive business model.

Uber started by solving a problem for black cars, and then once they started to get real traction, they realized this gives us a foothold into not just the black car market but into the general taxi market. Oh, that just happens to be 100 times bigger. It’s OK if the initial market you’re tackling is somewhat niche as long as that can lead somewhere.

And I’ll say, insurance is fascinating in that regard. There are, of course, the giant categories led by auto, homeowners, health, life. But then the deeper I dig, the more fascinated I am finding niches of insurance.

These things are perhaps a bit of an echo chamber, where people start talking about the opportunities in insurance and that draws in some high-quality entrepreneurs, which then draws in more VCs. So you get these sorts of virtual cycles building.

Did you stumble upon insurtech?
I prefer the word “serendipity” over “stumble.” If you build a reputation for being very focused on data-driven companies and for actually knowing a thing or two about financial services, people start to think, oh, maybe you’ll fit this insurance-related data thing. It turns out, they were right, that we were sort of interested.

My job is to look around corners to see what’s coming. About two years ago, we saw insurtech was about to go through what I call its Cambrian explosion—a bunch of experiments, many of which natural selection would eventually prune away. It looked to us like the insurance industry is about five to 10 years behind the banking industry in adopting technology.

Why is that?
The web was a strong enough force to push banks into adopting technology because of their fundamental business, business processes and consumer-facing approach. Technology overcame the inertia of the banking industry, which has a fair bit of it.

But the Internet and the web were not actually sufficient—as far as I can tell—to overcome the immovable object of the insurance industry. I think in part because the insurance industry was actually doing pretty well. Insurance is pretty healthy and serving a lot of needs well.

The interactions people have with the industry are infrequent in comparison to banking, which has much higher frequency. It’s the difference between toothpaste and a dentist. Banking is much more your toothpaste.

So there’s more appetite for things that will reduce the friction.
In insurance, even if the user interface to finding out about my policy is pretty inconvenient and circa 1997, I only have to go there a couple of times a year, so it’s just not that costly. People’s expectations around interactivity—around their ability to engage on demand—is convenience. And that is sort of taken to a new level with the smartphone.

How so?
There’s a whole cascade of technologies that are riding on the smartphone’s coattails that open up new possibilities for the industry. Drones are one of my favorite examples. Drones would not exist in their form without the advances that cascade from building a billion smartphones a year. You get this mass investment in small battery technology, in lightweight processing power, in cameras—all of which cascade down into drones.

The lower cost curve and the greater functional ability to operate them makes them a more viable solution for claims and maybe underwriting. That takes costs out of the system. So you’ve got both a demand side and supply side driving this new change.

We’ve heard a lot about behavioral economics recently. How does that fit in?
You can incorporate behavioral economics into your user interface and then into some aspects of your business model, all with the existing technology.

I’m impressed that Lemonade is embracing behavioral economics. I think that it is a robust field with many applications in insurance. There’s empirical data, for instance, around different ways you can reduce fraud or quasi-fraud. You see it manifested throughout the experience that Lemonade puts in front of the consumer, like the “Honesty Pledge.”

With the exception of a handful of sophisticated insurers, particularly auto insurers, there wasn’t a lot of use of sophisticated statistical models. The truth is people stopped using the term “big data” in part because there aren’t actually many cases of really big data.

Those things, again, don’t necessarily require a sophisticated next-gen-tech stack, right? Although, they do work a lot better if it’s through a direct channel rather than through an agent. It’s really hard to apply behavioral economics through middlemen, because you don't control the interaction precisely enough.

A lot of good marketing there.
A lot of good marketing. I think for a while people talked about the peer-to-peer piece of it. I think that’s not quite a smoke screen, but it’s a piece of behavioral economics. I think the Lemonade team put it out there and then the tech press bit. They previously saw all the peer-to-peer stuff happening in lending, like Lending Club and Prosper. They got excited and said peer-to-peer is going to reinvent insurance just like peer-to-peer is reinventing lending. But I don’t think the Lemonade team drank their own Kool-Aid. I suspect they would say, “Well, look, if that’s what’s going to get us our great seed round funding, then terrific. We’ll take it.”

But of course it’s not inconsistent with their strategy of applying behavioral economics to insurance. It’s part of that. But it’s not “the thing” that defines Lemonade.

A lot of insurtech looks to reduce inefficiencies. What do you see out there?
I want to start with a framework—my view of what a technology-driven innovation will look like. The hallmarks of technology-driven change are three things: a reduction in friction, an increase in transparency and lower costs.

When you have technology coming to bear in the value chain, it’s creating quantification and metrics around that part of the value chain. I can take cost out of the system by seeing where my costs are. That’s the transparency. I can then apply technology to pull out friction and therefore pull out cost.

How does artificial intelligence fit in?
I think there are still a lot of carriers who aren’t even using regression models. So I think for some carriers, 2003 is still calling. With the exception of a handful of sophisticated insurers, particularly auto insurers, there wasn’t a lot of use of sophisticated statistical models. The truth is people stopped using the term “big data” in part because there aren’t actually many cases of really big data

That said, some insurance use cases are legit big data use cases. Telematics—that’s real big data—large quantities, and it’s unstructured. That’s a really good place to look at machine learning.

I think drone data, image data, lends itself to real machine learning. Think about using SnapSheet to grab a picture of your recent auto accident and avoid having an adjuster come out to see your car. I think that’s an area where technology can give you the twin benefits of a better end customer experience and cost savings for the carrier.

On the commercial side, how would you change the product in an ideal world?
My sense is that there is a product for everyone. Every edge case, every sort of unusual commercial need, can find a policy ultimately. But it’s a vast collection of edge cases, which means you end up having a giant thorny matching problem, which gets solved by a fleet of human brokers doing that matching. But that ends up being more expensive, costlier to the system. It’s higher friction, slower, more frustrating than a technology-oriented matching system.

So I will say it is less about the product side than it is around finding ways to make the matching more efficient.

The hallmarks of technology-driven change are three things: a reduction in friction, an increase in transparency and lower costs.

We’re talking about brokers’ livelihoods.
One of the grand debates around this is, if you’re an entrepreneur trying to solve this matching problem, do you orient your business to enable brokers to more efficiently do the matching so that a team of 10 brokers, instead of being able to do N matches on behalf of clients—connecting them with carriers in a day, can do 2N or 3N?

So you quickly learn you don’t need 10 brokers anymore. You can get by with four, and their productivity can increase. This is ultimately good for them, good for the carriers and good for the clients, because the cost of four brokers is less than the cost of 10.

A smaller number of brokers would love to have all of that income that the 10 were divvying up.
And there’s a question around how you divide up the spoils of greater efficiency. How much goes to the customer? How much to the carrier? How much to the broker? And don’t forget there’s a fourth party in this mix.

That technology provider also wants to get paid and capture some of the value they’re creating.

In the short term, the answer is going to be, the brokers who are first to adopt technology that makes them more productive will reap the gains, because the pricing and the commissions and everything facing the customer won’t change immediately.

Until they have competition.

Are there other things brokers can adopt to make themselves super relevant and not out of the chain?
On the commercial side, I think the analog is what are they doing to ensure they are findable in an online environment; in a mobile environment. Are they doing everything to ensure they are providing value-add services? In the long run, there may not be enough value in just matchmaking between someone who needs a policy and the carrier who provides it. There might be enough value for a person to do that and we just have a lot fewer people doing it—say from 10 to four.

What about the future of reinsurance brokers?
I’m really intrigued. It feels a little bit like the New York Stock Exchange floor, right? Having a bunch of humans doing that matchmaking between buyers and sellers. I don’t understand why reinsurance brokering needs to and should be done by a fleet of humans. And you’ve got big commercial counterparties, right?

It’s not a distribution problem. It’s really almost a matchmaking problem in its purest form. So why do reinsurance brokers exist? Why is that not a tech-enabled digital marketplace? I think I’m starting to come across a few companies that are new startups that are tackling that. I’m too ignorant, still, to defend the incumbent case. If it’s ripe for the digital marketplace, then it’ll happen.

The industry has a difficult time recruiting enough qualified people. The public doesn’t know this profession exists. Do new efficiencies solve that problem?
We’re still in the early days. Creative destruction is socially painful. Think about tens of thousands of people losing their jobs because technology is being brought to bear in their value chain and reducing the value of what they do. Think bank tellers. You don’t need as many bank tellers when you have ATMs. It’s cheaper. It’s more convenient. But socially, it’s always painful when that happens.

In the short term, the answer is going to be, the brokers who are first to adopt technology that makes them more productive will reap the gains, because the pricing and the commissions and everything facing the customer won’t change immediately.

If you are a carrier and you’re worried about your existing agent distribution footprint retiring off, you still need to worry. You need to have your remaining producers pick up the slack. So if you’re a carrier and you’ve got 1,000 physical points of presence through your broker network and each one has two people in it and one of those people retires and the other person is still there, great—no problem as long as you have productivity taking up the slack. But if each one has one person and half of them are retiring, then you’ve gone from 1,000 points of presence to 500. That’s a bit more of an issue.

You could argue carriers need to play more of a role in nurturing and incubating the remaining agents and brokers in terms of driving them to recommended technology solutions for productivity and efficiency.

Is most insurtech aimed at carriers or focused on brokers?
If I’m a carrier, do I ask myself, “Do I try to enable the existing brokers, or do I try to disintermediate the broker by becoming one myself?” I feel like I’ve seen almost a 50/50 split.

One of my long-standing favorites out there is a company called Bold Penguin, out of Ohio. They are saying the existing small business commercial broker is going to persist. Many of them may retire, but as a structure they’re going to persist. It’s how people are still going to get most of their policies, and we want to equip them to do better. And we want to connect them with a bunch of carriers on our network.

There are also really good companies in this space that are trying to connect directly to the end client. Some of these are hybrid, where they may cooperate with a brokerage or they may serve some brokerage, as well. Bunker is a really good company. Embroker is another really good company.

How big is insurtech? How many companies are just starting?
We’re talking a few hundred being funded per year. And that’s probably up 100 from the year before. There is this wave of really early-stage companies that are now beginning to mature to where they are attracting Series A venture capital. You get a little bit of traction, a little bit of proof points.

You’re talking in the zip code of $1 billion to $2 billion of venture capital going into these companies. That’s enough to at least create some experimentation among the entrepreneurs. The dollars invested will grow more quickly as some of those early stage companies start to succeed. Then they’ll be able to attract bigger checks.

What is considered a normal period from getting traction to going public?
If you’re going from an entrepreneur PowerPoint deck to ringing the opening of the New York Stock Exchange in 10 years, that’s pretty quick. There aren’t very many overnight success stories. Even the ones that feel like they are were working at getting to some sort of scale before you ever knew about them five years ago.

Credit Karma is one of our investments. We led their Series A back in 2009. They talk publicly of having 60+ million users, now. And they started in 2007. So they’re nine years old.

People are talking about them as candidates for an IPO. I won’t comment on that. They’re certainly at an interesting scale. If you’re getting to IPO after 10 years, that’s a really good pace. If you’re faster than that, that’s blazing fast. There are plenty of great companies built over two decades.

What about startups that have major hiccups, like Zenefits?
The lesson from Zenefits is, follow the law. They weren’t trying to do something that couldn’t be done and still follow the law. Instead, they were cutting corners. I don’t think I’m saying anything controversial by saying that. Maybe they were trying to get to their IPO in six years instead of 10 and made some bad choices along the way.

You could argue carriers need to play more of a role in nurturing and incubating the remaining agents and brokers in terms of driving them to recommended technology solutions for productivity and efficiency.

How is our industry investing in insurtech?
You have folks like Axa and American Family and Liberty and so on that are not only trying to do some commercial partnerships but also trying to write investment checks. And they’ve lit up some in-house corporate venture capital, which I think is a perfectly reasonable way to invest. I’ve been, on the whole, quite impressed with their approach to venture capital.

One of the classic failings of in-house corporate venture capital is they try to serve two masters at once. They give lip service to the financial returns, but then they also very much link their investments to strategic goals. And serving two masters in that space is really hard. I think it’s a recipe for failure. I think carriers have been, on the whole, more disciplined about saying, “If we’re going to light up a VC capital arm in-house, we’re going to run it like a VC arm.”

How are insurtech startups faring?
The investment appetite for these kinds of companies has increased rapidly. It’s a relatively favorable environment. If insurtechs are getting meaningful traction, folks will be interested. Contrast that with two years ago when, if you were an insurtech with moderate traction, it was very possible no investor would be particularly interested in talking with you.

What turned it around?
I don’t think there was any single event. There were several factors at once. A lot of the fintech VCs had sort of played out the banking side. Lending, payments and wealth management were looking for the next sub-sector of fintech, broadly defined as financial services. And lo and behold, here is this utterly massive one which has had—compared to those other areas—a lot less investment and entrepreneurship.

A very high-quality crop of entrepreneurs jumped into the space. These things are perhaps a bit of an echo chamber, where people start talking about the opportunities in insurance, and that draws in some high-quality entrepreneurs, which then draws in more VCs. So you get these sorts of virtual cycles building.

The last thing that incubated the ecosystem was carriers and reinsurers. They have become—particularly in the last 19 months—really interested and willing to partner with high-quality startups. That’s a crucial piece for the success of these entrepreneurs.

Has there been increased interest in insurtech since your conference, Insuretech Connect?
The last time I checked Google Trends for insurtech, it was almost approaching an exponential increase. Our conference is not driving that. Our conference exploited that, in a sense. It was a glimmer in our eye actually in August of 2015. We partnered with Jay Weintraub in January 2016. Our first paid registration was April 7. We had 1,500 people attend. I think we’ll hit 3,000 this year. That’s a good proxy for the energy in the system.

Where is insurtech right now?
We’re in the second inning. By comparison, I would say in fintech we’re in fourth and fifth innings. And in payments—PayPal—we’re in the sixth inning. I think we will see another wave of experimentation, of entrepreneurs being drawn and of capital becoming available. I think it is still on the upswing.

I think you’ll start to see some of the first wave of seed-stage insurtech companies start to get their next wave of funding, which will allow them to accelerate what they’re doing. What the next round of capital wants to see is traction after that first round. Once an entrepreneur shows they can deliver what they said they were going to deliver, and there’s some product market fit, then the VCs want them to just accelerate, accelerate, accelerate. They’ll give them some capital to do that.

So what’s around the corner?
I hope we’ll start to see some APIs [application programing interfaces, i.e., customer interfaces] across the value chain. I just saw the other day Liberty Mutual at least declaring they’re going to have open APIs available. I thought that was really interesting. That is actually very forward thinking. I think we’ll see more of that.

One of the classic failings of in-house corporate venture capital is they try to serve two masters at once. They give lip service to the financial returns, but then they also very much link their investments to strategic goals. And serving two masters in that space is really hard. I think it’s a recipe for failure.

I also think drones have some real application in insurance. And you’ll start to see some sort of outsourced networks of drone operators. So I don’t need to own the drone. I just need access to a network—almost an Uber of drone operators.

I’m also keen on parametric insurance. So if traditional insurance is indemnity, if I have a loss I’m going to get covered for the amount of loss I actually incurred. Parametric is defined as if there’s a preset claim event, which is triggered by some objective third-party parameter. The classic is an earthquake of magnitude X within a latitude and longitude radius of where I am. Then there is a predetermined amount that will be paid out for that. Crop loss is another one. If the Department of Agriculture includes this acreage in its drought report, then there is a crop insurance payout.

And what I like about parametric compared to indemnity is it takes cost out of the system, because I don’t need underwriting in the same way. I don’t need to send someone on premises and do a bunch of measurements and gauging. There’s still some underwriting to understand the risk, but it’s not quite the same. The claims cost—adjudicating claims—should go to near zero, because I’m just getting some third-party data feed, as long as it’s a valid data feed.

And by the way, the Internet of things starts to open up more data feeds every day as the quantified earth happens. I love that it takes cost out of the system, because that’s fundamentally making the ecosystem better.

I think it can be a much better experience for the insured. If I’ve got some sort of loss event, the last thing I want is to wrangle with my carrier to get paid. I don’t want to be spending time documenting what just happened, setting up times to meet with the adjuster and so on and so forth.

What do you see in insurtech companies in the future?
I like companies that are using the native capabilities of the smartphone to make the transaction, lower friction, more self-serve. Whether it’s using the camera to take a picture of what I want to insure or using the camera to take a picture of the property after a claim or using GPS to help with fraud detection.

Honig can be reached at caribou.honig@gmail.com.

Honig’s second Insuretech Connect conference will be Oct. 3-4 at Caesars Palace in Las Vegas. For information, visit www.insuretechconnect.com.

In its Global Insurance Market Index Q4 2016 report, Marsh attributed the decline to “a global market with substantial capacity and an absence of significant catastrophe losses.”

Cyber insurance rates, on the other hand, have had positive growth for 10 consecutive quarters, although Marsh data show premiums are now increasing at a slower pace than in 2015, when they rose between 16.9% and 20% throughout the year. In 2016, rates rose by 12% in the first quarter and only 1.4% in the fourth.

This does not necessarily mean the cyber insurance market is stabilizing. It just means the next big attack hasn’t happened yet. Just as property-casualty rates are linked to natural disasters and large-scale accidents or events, cyber insurance rates are linked to cyber crime. The nature of the crime—the industry sector hit, the number of people affected, and the amount of press given to a cyber event—can significantly affect rates. 

Reuters reported the 2013 Target Stores and 2014 Home Depot breaches cost the companies $264 million and $232 million, respectively. But the breaches also cost other retailers. Marsh data show a 32% increase in cyber insurance premiums for the retail sector in the first half of 2015. Beazley reported some health insurers who suffered attacks faced a three-fold premium increase.

The insurance market’s cyber underwriting process has continued to evolve and mature as lessons are learned from attacks and losses. Insurers are building repositories of claims data to bolster their analysis in the underwriting process. They are also beginning to understand the importance of cyber-security programs that align with best practices. These programs link IT operations, compliance requirements, policies and procedures, technologies deployed, response plans and governance to create a stronger security posture that is better able to withstand cyber attacks.

In the end, however, the insurance market and buyers are still reacting to criminal behavior and the harm caused through cyber crimes, particularly those events that may aggregate exposures. The sophistication of today’s attacks is unparalleled, and they are being conducted by a range of actors—teenagers seeking a thrill, lone hackers, insiders, organized crime, terrorists and nation states—each with different motives and end-game strategies. Therefore, it is wise to factor in the unpredictable—the “unknown unknowns”—when determining capacity and pricing parameters. Breaches of personal, health and financial data will continue, but the trend is toward complex, multipronged attacks that may perform several actions (steal data, erase or corrupt data, disclose confidential information, etc.) and attacks with an easy monetary reward.

The increase of ransomware, which is malware that very quickly encrypts all data on a system—as well as online backup files—is alarming. Most companies are not prepared to deal with these attacks (hint: get a bitcoin account now). A 2016 IBM study found that ransomware increased 6,000% in 2016 and is headed toward becoming a $1 billion business.

The Internet of things is all about connecting smart devices, sensors, surveillance cameras, thermostats, etc. to a network and the Internet. It is poised to become a favored means of conducting cyber attacks, which can cause massive network disruptions and business interruption losses.

A recent AT&T report says IoT attacks increased 400% in 2016. No one is prepared to deal with them; not governments, companies, educational institutions, hospitals, underwriters, brokers or agents. I predict by 2018, IoT attacks will become the most serious cyber threat on the planet.

Quite simply, cyber crime will continue to drive purchases of cyber coverage, and it will force changes in insurance products. Large attacks, such as those that hit Target, Sony, Home Depot and Anthem, raised awareness at the board and executive levels and resulted in increased cyber coverage purchases.

A 2016 Zurich-Advisen survey reported 85% of senior executives consider cyber a significant risk, and the Financial Roundtable’s 2015 survey (full disclosure: I wrote the report) on board and executive governance of cyber security revealed 63% of boards are actively addressing and governing computer and information security.

That level of awareness drives sales. Marsh had a 25% increase in cyber insurance sales from 2015 to 2016, and Lloyd’s of London’s CEO, Inga Beale, reported a 50% rise in 2016. The Council’s October 2016 Cyber Insurance Market Watch Survey found retail, healthcare and financial services clients were most likely to purchase cyber insurance.

Marsh noted the healthcare, communications, media and technology sectors led the way.

Cyber insurance sales to small and midsize businesses are also likely to rise. These companies generally have not focused on cyber threats, but they are now increasingly targeted. A 2016 Advisen report says these businesses are often vulnerable and the impact on their operations can be substantial.

All of this means:

  •  The criminals will keep attacking in more ingenious ways.
  •  The cyber insurance market is a long way from stabilizing, and insurance companies will struggle for some time to figure out rates and underwriting.
  • Clients will remain confused about what cyber insurance they need and how much to buy and will have to engage in risk assessments to help them identify their vulnerabilities and the types of attacks that could have a material impact on their operations or bottom line.
  • Brokers and agents will have to do a better job of explaining policies and the types of events that are covered. They will need to understand the threat environment and how attacks can affect clients. 
  •  Legislators will respond to attacks by continuing to pass laws and regulations, such as the EU’s General Data Protection Regulation. It goes into effect in May 2018 and requires security measures and imposes stiff penalties for non-compliance. It also forces companies to examine insurance options as a means of transferring risk.

“Regardless of sector, the role of the insurance industry goes far beyond simply providing a cyber policy,” says Beale. “It spans the full life cycle—from initial risk assessments to helping build more resilient systems and infrastructure and ultimately to providing the support if and when things go wrong.”

Westby is CEO of Global Cyber Risk. westby@globalcyberrisk.com

Trade with the EU currently accounts for about 11% of Lloyd’s gross written premium and is conducted under the existing passporting regime. “In theory, anything that restricts our access to the EU could have an impact on that business,” says Stewart Todd, a spokesman for Lloyd’s, “but I wouldn’t say we forecast a fall in revenues, because we have been working on contingency plans since the referendum was announced.”

That work stepped up considerably after the vote, Todd says. “The aim for us in terms of dealing with a post-Brexit landscape was always to ensure that our customers could continue to access the EU market seamlessly,” he says, “and that European clients could access Lloyd’s so as not to affect their ability to conduct business.”

Lloyd’s has been assessing its options since June 2016, including the establishment of multiple branches in several EU countries or an EU-supervised subsidiary. Late in the year the market announced its intention to open a licensed EU entity. “That’s the best way to ensure we can continue to trade with the EU, and therefore that was the plan we decided to focus on,” Todd says.

“The branches model would be expensive and would essentially restrict our access to the traditionally stronger European markets of France, Germany, Spain, Italy and the Nordics. To run that model would require branches in those specific territories and the associated costs, resources and regulatory framework to work through. Given that, we are focusing our efforts on the subsidiary model.”

Widespread reports in April suggested the shortlist for the Lloyd’s jurisdiction had been pared to Frankfurt and Luxembourg. Todd told Leader’s Edge Lloyd’s was holding discussions with the countries it was considering and was exploring details of how the new model would work from the perspectives of staffing, resources, regulation and tax just days before it announced that the subsidiary will be located in Brussels, Belgium, the effective political capital of the European Union. Chief Executive Inga Beale told reporters that the number of employees located in the subsidiary would be “tens, not hundreds.” The decision appears to have been motivated by attractive proximity to the regulators and legislators who lay down the European Union’s insurance rules.

Belgium will also allow Lloyd’s to cede the lion’s share of its premium—perhaps 100%—back to London. Lloyd’s is still examining how best to channel business into the subsidiary from the Lloyd’s-based underwriting companies that operate Lloyd’s syndicates.

Many brokerages had been waiting to see how Lloyd’s would handle Brexit before making any major plans. “Those who conduct business with the EU have said they are looking to see what solution we put in place, and I think that also goes for coverholders in the EU,” Todd says. “They are waiting to see what we do to enable them to continue conducting business with us. Will there be costs? Almost certainly, but still, the question for us is: can we make this work in a way that means it is still an attractive proposition? We have been talking to the market as this process has developed, so we believe that they are in step with us and can see the benefit of this approach for them.”

Soon, his company will have a fully licensed and authorized German firm to serve his EU clients. It will allow Equinox to keep issuing policies anywhere in the 27 countries of the post-Brexit EU, no matter what happens to trade in financial services between Britain and the others.

Equinox, and all London market insurers and brokerages, currently enjoy a privilege known as “passporting.” It lets them report only to the U.K. regulator for all their European operations. It’s the equivalent of the California insurance commissioner deciding New York regulation is good enough to allow New York carriers and brokers to issue policies in his state without reporting to him in an onerous way.

For British brokerages and insurers, including Lloyd’s, the passporting privilege is almost certain to disappear with the U.K.’s decision last June to go it alone, outside the barrier-free single European market of about 445 million people. That will probably happen two years after British Prime Minister Theresa May’s formal notification of Britain’s intention to leave the Union, which she issued in March. When Britain goes, U.K. insurers and brokerages that want to keep selling insurance in Europe will have to find another way.

Given all the pre-vote panic and the post-vote posturing, it’s easy to get the impression Britain’s referendum choice could deliver a fatal blow to London’s international insurance market. However, such predictions were clearly overblown. Many companies are executing contingency plans, but for most, business as usual will soon resume.

A consensus has settled over the market: Brexit is not a massive problem. But it is certainly inconvenient.

Greg Collins, chief executive of London wholesale specialist Miller Insurance Services, says he and his firm feel “no sense of panic or concern at all about Brexit.” The brokerage has adopted a watch-and-wait stance rather than rushing to open a subsidiary in the EU. Miller realizes about 15% of its business is from EU countries outside the U.K., including facultative insurance placements for continental carriers, and the proportion is growing.

To export that business to U.K. reinsurance markets including Lloyd’s, it may require an EU-supervised company. “We may follow Lloyd’s wherever they go, since they have done the groundwork,” Collins says.

We may follow Lloyd’s wherever they go, since they have done the groundwork. Lloyd’s is right to be ready. We may have transitional arrangements—it is so uncertain at the moment—but it is not worth the effort of doing something that may be unnecessary.

Greg Collins, CEO, Miller Insurance Services

“Lloyd’s is right to be ready. We may have transitional arrangements—it is so uncertain at the moment—but it is not worth the effort of doing something that may be unnecessary.” He believes establishing an EU subsidiary will be very straightforward. Many international carriers already have EU-licensed entities outside the U.K. “I don’t think it is an existential threat to the London market,” Collins adds. “There’s little doubt that all the main underwriting decisions will still take place here in London.”

Where Will They Go?

Dave Matcham is chief executive of the International Underwriting Association, the trade body that represents London’s wholesale insurers and reinsurers that operate outside Lloyd’s. “The impact of Brexit on individual IUA members will vary across companies according to the many differences in existing corporate structures and international operations,” Matcham says. “Without a retention of the market access provided by passporting, however, some companies may be forced either to set up branches in each EU member state or establish a new subsidiary in one member state and utilize passporting from there.”

AIG Europe, an IUA member, has opted for the latter course. It has revealed plans to open an insurance company in Luxembourg, a small EU country with an outsized financial services sector, to “ensure continued smooth operation of its business across the European Economic Area and Switzerland once the U.K. leaves the EU,” the global giant said in a statement. It will retain a U.K. company for British and London-market business.

AIG Europe chief executive Anthony Baldwin is certainly not writing off post-Brexit Britain’s importance. “AIG sees opportunity in the ongoing resilience of the U.K. insurance market,” he says. The company has about 2,200 employees in London and 2,700 elsewhere in Europe.

Another of the handful of companies to announce plans so far is Hiscox, the speciality London insurer that branched out to build an international retail operation. “Our European business is currently written by our U.K. insurance company and on Lloyd’s paper, so we need to form a new insurance company in the EU,” chief executive Bronek Masojada says. “We’re currently looking at Luxembourg and Malta. The main considerations for us are somewhere with a long-term commitment to the EU, with a stable regulatory environment, where the regulator is welcoming and where we can speak to the regulator in English.” Masojada says the new office will support the dozen European offices Hiscox already operates, which wrote £175 million ($217.23 million) of premium in 2016 and employs 300 people.

“Any additional headcount will be incremental,” he says. “We expect to continue to grow the European business around 8% to 10% every year. While there will be a short-term capital inefficiency for us, it will not be material, and we will simply move capital from the U.K. carrier into the new EU entity as we write more European business. For Hiscox, this is a structural issue, not a strategic issue. I don’t want to underestimate it, but it’s a largely mechanical process with lawyers and accountants at work.”

For Hiscox this is a structural issue, not a strategic issue. I don’t want to underestimate it, but it’s a largely mechanical process with lawyers and accountants at work.

Bronek Masojada, CEO, Hiscox

Officials in various EU countries have been actively wooing British firms. Dublin, which has a relatively large international insurance sector built on London’s back and oiled, from about two decades ago, by light regulation and an attractive tax rate, was an early and obvious option for many U.K. operations seeking an EU subsidiary. Five insurers have reportedly applied for Irish Central Bank insurance authorization in the city, and another five intend to, but since regulators require substantial operations be established, rather than simple fronting companies, others have pulled back.

“A key requirement for authorization is substance in Ireland,” Sylvia Cronin, Ireland’s chief insurance supervisor, recently told a KPMG audience. “The applicant must demonstrate to us that the business will be run from Ireland and that decision-making happens here.”

Lloyd’s dispatched a delegation to Dublin after Chief Executive Inga Beale met at Davos with Enda Kenny, at press time the Irish taoiseach, or prime minister, but the market later ruled out locating its EU subsidiary in the city.

Apparently, the scale of the operation Lloyd’s wishes to establish would be insufficient. “We don’t want to set up a lot of infrastructure in a country,” Beale told a London insurance Breakfast Club meeting in January.

Tiny Luxembourg—officially a “Grand Duchy”—also had been in the frame for Lloyd’s since it is less inclined to demand that refugee insurers and brokerages migrate scores or hundreds of employees, but in the end Lloyd’s chose Brussels. [See sidebar: Lloyd’s and Brexit.]

Holley is watching Lloyd’s moves. Equinox Global’s business is placed entirely in the Lloyd’s market, and its operation must be compatible with Lloyd’s choices. But within the EU, location doesn’t matter. So far, at least, Equinox Global is the first London company known to have chosen a German location for its EU-licensed passporting company. But for Equinox the move will have other benefits. “We get something back,” Holley says. “The German regulatory environment for an MGA will be more favorable than the U.K., which I expect will be a gain. Commercially, there’s a gain. Our German customers appreciate our setting roots in their country. Until now, the business was structured in a way most convenient for us. Brexit forces us to adopt a structure most convenient for our customers.”

Equinox moved incredibly quickly, but some in the market worry that EU subsidiaries may take too long to set up or could run into roadblocks. One brokerage is proposing a work-around solution. Marsh UK told The Insurance Insider it has put together a “bridge solution” involving fronting arrangements with a group of EU-licensed insurers. The brokerage’s U.K. and Ireland CEO, Mark Weil, told the newsletter that the arrangement would mean clients “don’t need to wait for regulators to approve lots of licenses or for the passporting debate to be settled.” Such arrangements will have an inevitable expense impact, but Weil said the scheme would not be “materially additive” to costs.

Until now, the business was structured in a way most convenient for us. Brexit forces us to adopt a structure most convenient for our customers.

Mike Holley, CEO, Equinox Global

Escape from Solvency II Not Likely

The IUA and other market bodies are cheerleaders for the negotiated retention of passporting, but the prospect of retention looks increasingly unlikely. An alternative is “equivalence,” an option under which free trade in equivalent services is permitted when EU bureaucrats deem local regulation to be equivalent to EU requirements. The London Market Group, a cooperative body that brings together the IUA, Lloyd’s, and the

London & International Insurance Brokers’ Association, has published recommendations to the U.K. government to guide its Brexit negotiations. It highlights the need for a guarantee that the London market will be considered to have regulatory equivalence with the EU and calls for a new trade deal giving U.K. and EU insurers, reinsurers and brokers continued rights to undertake cross-border activity. In contrast, the worst-case outcome would make that illegal. That is, Britain trades with Europe without a deal and falls back on World Trade Organization rules.

LMG chairman Nicolas Aubert, whose day job is chief executive of Willis Towers Watson Great Britain, says: “Over £8 billion of EU business comes to London, so we are continuing to work closely with the government to see where there are existing precedents in current international agreements which could be used for the Brexit negotiations to support our industry.” LMG also believes Brexit offers an opportunity to review the current regulatory environment. The goal would be to ensure U.K. rules remain proportionate and do not put London at a disadvantage. Obviously, the U.K. currently meets EU regulatory requirements, but one hope of some U.K. insurers and brokerages is that Brexit could lead to a lighter regulatory touch than that of the new EU regime, called Solvency II, which many find overly burdensome.

Their hopes seem unlikely to be realized. Sam Woods, CEO of the Prudential Regulation Authority, the U.K. commercial insurance supervisor, spoke to a U.K. Treasury committee on EU insurance regulation in late February. He hinted little will change after Brexit.

We don’t have a crystal ball, but we think it is likely that the U.K. will look to retain Solvency II equivalence.

Bronek Masojada, CEO, Hiscox

“My view of it is that the fundamental regime is pretty sensible,” Woods told members of Parliament. “It is very largely built on the regime that we had here in the U.K. before, which has basically been exported to the rest of Europe.” He said it seems very unlikely that the U.K.’s regulatory regime will be made significantly less onerous as a result of Brexit.

Masojada of Hiscox agrees. “We don’t have a crystal ball,” Masojada says, “but we think it is likely that the U.K. will look to retain Solvency II equivalence.”

There are a number of different drivers of organic growth. And because we can’t be the best in all things, it’s important to choose a focus. What are you really good at? Where does your agency shine?

The typical generalist agency is being bought all the time. And those sellers get an acceptable price for their business. But what buyers really want and are willing to pay for is a firm that’s doing something different.

What kind of different are we talking about? Certainly, buyers are looking for growth, but they also have to satisfy other needs to enhance their portfolios and help drive that growth. Beyond supporting growth through acquisitions, they’re looking to replace retiring baby boomers and to fill operational, sales and executive leadership positions with talented individuals. We all know there is a talent deficit in each of these roles, so strong leadership is an important factor buyers consider.

A strong production force is also essential. Producers drive organic growth, so buyers want to see a business that has an engine to continue achieving sales goals and writing new business as a percentage of prior-year commissions and fees at or greater than 20%.

Ultimately, buyers are not just looking to aggregate revenue; they want to buy a business that can produce and continue driving growth. That’s completely different from meeting a revenue hurdle at the time of transaction. It’s about potential, what’s inside the firm propelling its success.

How important is revenue diversity among business lines? It’s less important than showing an ability to successfully grow in a line of business. If you can grow all lines of business, then all the better. But without a concentrated effort in one area, many agencies end up diluting growth across the board.

So, how do you determine what your differentiator is? We believe now is a great time to take a step back and reevaluate your firm’s strengths. That requires attaining a level of self-awareness as a business.

Put yourself in the buyer’s shoes. If you were going to acquire an agency tomorrow, what would you look for other than just revenue. What talent would you want to see working in the business, and what behaviors would indicate to you that the firm is valuable beyond its peers?

Now, consider your business today and how you’d respond if a buyer were to simply ask, “What do you have to offer besides revenue?” When we take a moment to zero in on our differentiators, we can then focus on enhancing those areas of the business. We elevate our value proposition. And we can hopefully push a deal from average to remarkable.

The Latest Deals

Deal announcements in March 2017 were relatively the same as February levels—30 in March versus 29 in February. Deals are down nearly 20% from this time last year, with 50 announced deals in March 2016. Year to date through March 2017, there have been a total of 102 announced acquisitions, compared to 124 through March last year.

BroadStreet Partners has been the most active acquirer this year, with 11 announcements through March. Arthur J. Gallagher and Hub International are not far behind with nine and seven announcements year to date, respectively. Targets have been largely p-c agencies (over 50% of year-to-date deals), with the remainder weighted to multi-line/full-service agencies as opposed to benefits-only brokerages. 

In mid-March, private equity firm Onex Corporation announced its intention to sell USI Insurance Services to private equity firms KKR and Caisse de dépôt et placement du Québec for a reported $4.3 billion. Onex purchased USI in December 2012 for $2.3 billion, after GS Capital Partners (an affiliate of Goldman Sachs) had taken USI private in 2007. USI currently generates more than $1 billion of annual revenue across 140 offices. USI has been an active acquirer in the insurance distribution marketplace, announcing more than 35 deals since Onex took the majority stake in 2012. The deal is expected to close in the second quarter of 2017.

Trem is SVP at MarshBerry. Phil.Trem@MarshBerry.com

Securities offered through MarshBerry Capital, member FINRA and SIPC. Deal counts are inclusive of completed deals with U.S. targets only. Please send M&A announcements to M&A@MarshBerry.com. Sources: SNL Financial, MarshBerry.

Libertarians rejoiced. Single men celebrated not having to purchase maternity benefits. The cavalry appeared to be on the way to repeal the Affordable Care Act and change the trajectory of a new entitlement that would add $1 trillion to the public debt over the next decade.

Many in the brokerage community seemed excited at the prospect. But they failed to read the Republican bills closely. Key elements of the GOP legislation were fixated on taxing employer-sponsored benefits as a means to finance new reform. The hastily assembled legislation proposed tax credits indexed to the Consumer Price Index and eliminating both the individual mandate and most taxes currently funding the ACA. The proposed law would return America to a time when healthcare was still a privilege, not a right—and certainly not a social obligation.

When Good People Do Nothing

Under Trump’s plan, the aforementioned tax credits would replace ACA subsidies indexed to premiums. Very quickly, premium assistance to purchase health insurance would prove inadequate for most of those who received aid, forcing them to drop insurance altogether. The bill emphasized access over affordability. This was a bit like declaring everyone has the right to live in a 10-bedroom mansion and drive a Maserati—as long as they can afford them.

Who are we fooling? The Congressional Budget Office estimated at least 24 million people would lose their insurance within a decade. Proposed block grants to states would do little to increase coverage for Medicaid.

The GOP replacement plan was essentially a Trojan Horse to strip $330 billion from entitlement spending and presumably use it to build a border wall, increase defense spending, finance infrastructure and enact a sizable tax cut. This would all be done by eliminating all the taxes that funded Obamacare, presumably without taxing employer-sponsored benefits or shifting more taxes to the wealthy or to business.

Yeah, right.

I was bemused by how many in our industry—America’s Health Insurance Plans, brokers and other stakeholders—chose not to speak out in support of the ACA and said nothing in opposition to the reckless replacement bill.

Many of us believe it would have led to a more rapid erosion of employer-sponsored insurance and to a road to Medicare for all. The healthcare community shuddered—on the heels of years spent reorganizing around reimbursement reform, health information technology mandates and the formation of integrated care delivery systems.

The promise that the American Health Care Act would somehow result in higher wages and a spike in GDP due to bigger paychecks seemed delusional. Instead, it would result in more cost shifting in the form of higher deductibles and a declining menu of benefits.

Do the Right Thing

The first time I was interviewed by The New York Times after leaving a major health insurer as its regional CEO, I gave a balanced opinion of how health reform might affect insurers and what industry practices should be changed. The backlash was immediate. It was clear if I were to be effective in my dealings with stakeholders who controlled markets, I must choose my words more carefully.

Turmoil creates a false sense of lifetime employment. Aside from a moral obligation to be the best fiduciary possible, brokers did not feel emboldened to speak up and criticize the institutions driving rising costs—including HR and benefits decision makers who sometimes make decisions based on what will be least disruptive instead of what will derive the most value for their firm.

While there seemed to be no shortage of Obamacare critics in our industry, those same voices were quiet about repeal and replace. Understandably, when your role as an intermediary is at risk, you will always vote with your pocketbook. While benefits brokers exist in every country that has nationalized healthcare, there is an uninformed belief that disintermediation is tantamount to unemployment. Good consultants know there is always a role to play in advising clients’ concerns. Serving as an intermediary is like being a physician. There is an implied Hippocratic oath to do no harm. Sadly, the lack of transparency, the transactional natures of unscrupulous agents and brokers, and misaligned incentives can cause intermediaries to violate the trust of generalist employer purchasers who depend on them.

Many in our industry have benefited by the rising costs. Many brokers still receive commissions instead of fees, resulting in generous cost-of-living increases each year that do not track with their transactional contributions.

The good news is there are thousands of advisors who do an outstanding job and care deeply about our reputation as a leading voice on behalf of our clients—the employers. As competition becomes more transparent, a growing number of advisors are having the courage to employ transparent practices that can restore them as the air traffic controller for all stakeholders. In the words of one competitor whom I respect, “I’d rather be respected than liked.”


It’s often said the best disinfectant is a little sunshine. Pols will fight out of self-interest instead of moving toward what they know is right. It’s time for our industry to step up. Express your opinion on how to fix our system. I’d like to think we are planting trees under which we may never rest.

It’s time to surgically remove opacity, self-dealing, incompetent and rapacious intermediaries. It’s time to lay a foundation that won’t bankrupt our children and will take care of the least among us. Let’s be the model for transparency. Let’s be vocal in our desire to fix Obamacare.

We start by rebranding it to what we hope it will become instead of fixating on trashing the Obama legacy. No more spreading alternative facts. It’s our time to show a little leadership and find a responsible set of solutions. Whether healthcare is a right, a privilege, a moral obligation or a consumer choice, we need change, and we want our best and brightest at the table to help our legislators.

Let’s get on with the cure instead of continuing to benefit from healthcare’s prolonged illness. In the words of Don Berwick, former administrator of the Centers for Medicare and Medicaid Services: “The best hospital bed is empty, not full. The best CT scan is the one we don’t need to take. The best doctor visit is the one we don’t need to have.”

Turpin is author of 53 Is The New 38: Tales of Indignity and Middle Age. He also happens to be EVP of USI. Michael.Turpin@usi.com

According to regulators, the rule is intended to catalyze a fundamental change in how the financial services sector considers and approaches cyber security. The regulation took effect March 1, although you need not be in compliance until August 28. And requisite compliance with many of the more technical requirements is delayed until 2018 or beyond.

The initial proposed rule was widely criticized both because it purported to apply to individuals and firms outside of New York and because it was overly prescriptive and at odds with federal and other widely accepted protocols. Although the final rule remains highly prescriptive for those subject to the full thrust of its requirements, the list of regulatory exemptions was expanded, so the regulatory burden for many is drastically minimized.

Most significantly for us, a “small business” exemption was modified to cover any firm whose New York-specific business is more limited. Any firm (including its affiliates) that has at least one of the following characteristics is considered a small New York business:

  • Fewer than 10 employees (including independent contractors) in New York
  • Less than $5 million in gross annual revenue in each of the last three fiscal years from New York business operations
  • Less than $10 million in year-end total assets.

Firms that fall within this category qualify for an exemption from many of the rule’s requirements, provided the firm files a prescribed Notice of Exemption with NYDFS within 30 days of determining it is eligible.

Licensed agents and brokers with firms that either are in compliance with the rule or qualify for a firm-level exemption are separately exempt from having any individual compliance obligations. The Notice of Exemption filing requirement, however, appears to apply to individual licensees. We have asked the department to clarify if this is not the case, as it would result in the submission of tens of thousands of notices from individual licensees. We have received no response to that request.

By August 28, all agencies and brokerages licensed in New York—including those that qualify for the small-business exemptions—will be required to:

  • Develop a cyber-security program based on a risk assessment that is designed to ensure the confidentiality and integrity of information systems, detect cyber events—any attempts (successful or unsuccessful) to gain unauthorized access or disrupt a system—and respond to, mitigate and recover from those events
  • Develop a written cyber-security policy approved by a senior officer or board of directors that sets forth the firm’s policies and procedures to protect information
  • Conduct periodic risk assessments to identify points of weakness in their information systems and inform the design of a cyber-security program by March 1, 2018
  • Implement by March 1, 2019, policies and procedures applicable to third-party vendors that have access to the firm’s secure network and non-public information
  • Provide proper notices to regulators within 72 hours of a cyber-security event that has a reasonable likelihood of materially affecting the firm’s normal operations and provide a written certificate certifying that the company is in compliance with the rule by February 15 of each year.

Firms that do not qualify for the New York small business (or another) exemption must do the following:

  • Appoint a chief information security officer to implement the cyber-security program and oversee qualified cyber-security personnel
  • Test the program’s penetration and vulnerability capacity by March 1, 2018
  • Maintain an audit trail for all cyber-security activity by Sept. 1, 2018
  • Implement risk-based controls to monitor user access by Sept. 1, 2018
  • Implement multifactor authentication procedures for user access by March 1, 2018
  • Encrypt non-public information by Sept. 1, 2018
  • Create a written incident response plan for any material cyber-security event
  • Ensure by March 1, 2018, employees engage in regular cyber-security awareness training
  • Establish procedures by Sept. 1, 2018, for ensuring in-house developed application security.

This list is heavy with technical requirements designed to maximize a firm’s cyber security. With regard to app security, for example, companies not only have to ensure they employ secure development practices for their own applications but must also have procedures for evaluating and accessing the security of externally developed applications.

And to prevent unauthorized access to non-public information or information systems, firms must utilize specific multifactor techniques or reasonably equivalent alternatives.

There is a lot to be done. Now the question is, will your firm be ready?

Sinder is The Council’s chief legal officer. ssinder@steptoe.com
Fielding is CIAB general counsel. john.fielding@ciab.com
Rigamonti is a Steptoe associate. erigamonti@steptoe.com

This is consistent with my experience of being shunned at non-insurance cocktail parties when I dare reveal my passion for the business. But there’s hope, says Rowan Douglas of Willis Towers Watson.

Douglas is one of the founding visionaries of a global initiative called the Insurance Development Forum. The IDF is a public/private partnership launched last year by the United Nations, the World Bank and more than a dozen global insurers and brokerages intent on bringing insurance to the world’s most underinsured, catastrophe-prone regions.

The IDF’s goal, led by XL Catlin’s Stephen Catlin, is to facilitate the transformation of places like Haiti—where insurance-funded recovery from disaster is nonexistent—into places like New Zealand, where extensive insurance has successfully funded rapid reconstruction after devastating earthquakes.

The scope of the global underinsurance problem—and the opportunity for the insurance industry to address it—is staggering. Globally, 70% of economic losses from natural hazards remain uninsured. In middle- and low-income countries, the uninsured proportion of economic losses often exceeds 90%.

Lack of insurance isn’t a problem only in emerging economies. Look at the impact of an earthquake in central Italy in August 2016 that killed 267 people. Fewer than 3% of homes in Italy have private earthquake coverage, which resulted in this Reuters headline: “Lack of Italy Earthquake Coverage Limits Insurers’ Losses.”

Good news for the insurance industry? Not necessarily. Headlines like this feed the popular notion that insurers make money by collecting premiums and not paying much in claims. The headline should have read, “Italy Earthquake Underscores Need for Insurance.”

If the IDF succeeds, the insurance industry will have helped spread sophisticated transparent risk modeling, insurance-enabling regulation and ample underwriting capacity to underinsured places around the world.

People in the insurance industry get that underinsurance is a bad thing, for the underinsured and for the industry itself. In a market where demand should be strong because the risks are high and rising due to climate change, insurers have failed to cultivate business. But it’s not from lack of trying.

A few private/public stakeholders have tried over the years to address the challenge in various places from time to time. Some have succeeded in mostly small ways. But the scale, scope and complexity of the resilience and protection gap require a much broader and coordinated approach. That’s why the IDF was formed.

The underlying premise of the IDF is that, for the insurance industry to succeed in solving the problem of underinsurance, the organization needs to weave together distinct initiatives. Key IDF initiatives include:

  • Developing a catalogue of regulatory and policy issues that affect the use of risk management tools in vulnerable nations and engaging with supervisors to create a regulatory framework that local governments can use to further develop their legal and regulatory platforms
  • Creating a sustainable and accessible risk modeling and mapping framework that promotes the understanding and quantification of risk to increase demand for, and efficient supply of, disaster risk financing and to inform risk-aware development and mitigation.

The core mission is to methodically increase access to “the safety net for economic growth,” which is what Albert Benchimol, Axis Capital CEO and an IDF member, called the insurance industry’s social purpose—which it aims to sustainably serve in both developed and non-developed economies. Though this is the central purpose of insurance, the industry’s efforts to deliver this message are often drowned out by consumer advocates reinforcing the popular notion that insurers make money by avoiding risk and not paying claims.

It wasn’t always the case that the critical role insurers play in economic stability and resilience was so unappreciated. Rowan Douglas recently reminded me that through the 1860s, the scourge of urban conflagration was rampant. Insurance industry visionaries became social heroes by working together to tackle the job of not only insuring this risk but mitigating it, largely by pushing for stronger building codes, such that by the 1920s, urban fire was largely history.

Today, with the support of agencies like the UN and World Bank, the IDF has a chance to once again bring the industry together and embrace its central purpose as an economic safety net.

If the IDF’s vision is realized—and it will take time and insurance industry commitment—the insurance topic might once again actually be more fashionable at non-insurance cocktail parties than banking. It may be a sign of progress that Mark Carney is an IDF committee member.

Winans is EVP, U.S. Financial Services Communications, at Hill+Knowlton Strategies.

Nearly halfway toward achieving them? Not really? Well, the good news is you are not alone. The bad news is 70% of major change efforts in organizations fail, says John Kotter in the Harvard Business Review article “Leading Change: Why Transformation Efforts Fail.” That’s a pretty dismal percentage. But there is something we can do to change that, and you still have more than half the year left.

In their book The 4 Disciplines of Execution, Chris McChesney and Sean Covey offer some ideas on why most strategies fail. Strategies that require people to change, which is what most ambitious strategies do, are difficult to execute—often due to people’s resistance to change.

A second reason is employees can’t execute on what they don’t understand. Employees often do not understand their organization’s goals. Surveys show most people cannot reiterate the top three goals of their organization.

One of the biggest obstacles to change is what McChesney and Covey call the “whirlwind.” This is “the massive amount of energy that’s necessary just to keep your operation going on a day-to-day basis.” Most people spend their energy keeping up with the daily demands of the job, leaving no time to implement a new strategy.

As the leader, it’s your role to not only set the strategy but also to create an environment that allows your team to execute on that strategy. You can set the best strategy in the world, but if your team isn’t able to execute on it, nothing happens. In the book The Work of Leaders, execution is defined as “making your vision a reality.” Execution is taking the good ideas that you defined in your strategy and turning them into results.

So how can you ensure your team has what they need to execute your strategy? McChesney and Covey identify four disciplines of execution. The first is “Focus on the Wildly Important.” It’s critical to set the right goals. Stay with me now. This is not as easy as it sounds. The most difficult part is selecting the one or two exceptionally crucial goals that will truly make a difference. They answer the question, “If every other area of our operation remained at its current level of performance, what is the one area where change would have the greatest impact?” These goals are called WIGs, Wildly Important Goals. McChesney and Covey say this is where your company’s time and energy must be focused, even at the expense of other good ideas. You can’t let the whirlwind blow them off course.

The second discipline is “Act on the Lead Measures.” This is where you identify the actions needed to achieve your WIGs. By delineating specific activities that are based on clearly defined and measurable targets, you increase the likelihood you will achieve the goal. McChesney and Covey give us two ways to measure goals. Most of us are familiar with “lag” measures. They tell us what we have accomplished after the fact.

Surveys, satisfaction reports and revenue calculations are good examples. But there are also measures that can predict and influence lag measures. These are called “lead” measures. Examples of lead measures are presenting X number of proposals, making X number of calls and writing X number of follow-up letters.

Some things to consider when selecting a lead measure:

  • Is it predictive, and can it be influenced?
  • Is it an ongoing process?
  • Is it something your team can do?
  • Is it measureable and worth measuring?

Discipline three is “Keep a Compelling Scoreboard.” We all know what gets measured gets done, right? McChesney and Covey advocate for a scoreboard employees create that ensures they will be invested. It should “drive action, promote problem solving and boost energy and engagement.” Keep it simple and visible. It should show the lead and the lag measures and tell you immediately if you are winning or losing.

Update it weekly. 

The fourth and final discipline is “Create a Cadence of Accountability.” Accountability is what will keep your WIGs from blowing away in the whirlwind. When you create a sense of personal accountability through a weekly WIG meeting, it keeps things front and center for the team and ensures they maintain focus. The 30-minute meeting has a simple agenda. Each person gives a status report on their commitments. Everyone reviews the scoreboard and discusses what’s working and what should be adjusted. The meeting concludes by defining what needs to be accomplished by the next meeting. 

There are seven months left in 2017. What are you going to do with them? Let the four disciplines of execution help you. If you would like to learn more about them, we will be focusing on them at Targeting Team Leadership, an experiential workshop The Council’s Leadership Academy is offering in September. We’d love to see you there.

McDaid is The Council’s SVP of Leadership & Management Resources. elizabeth.mcdaid@ciab.com

Here’s a little break from your day. Take out a scrap of paper and rank the following in order of importance to your firm:

  1.  Investing in tools to be more proficient
  2. More easily determining the risk appetite of your carrier partners
  3. Writing more business
  4. Adding more services to your current offerings
  5. Finding more talent
  6.  Putting a premium on customer service.

If number six topped your list, pat yourself on the back. If it didn’t, you’re not alone (but you should read on).

Today’s business model is squarely focused on the internal processes—gathering information, determining risk appetite, adding more business, talent and services. All of these are important components of your bottom line. But I think our industry is missing a big opportunity by not putting enough time and effort into the one thing that we should all really be focused on: customer service.

Strip everything else away and there are two basic parts to the business: (A) protecting your clients’ assets and finding the right company or capital provider to do that and (B) assisting the client when there is a claim.

We don’t talk about the customer service segment of the industry as much as we should. Service is what we do. We help make people and businesses whole again. For years, it’s been assumed people make decisions based on price alone, but that’s not always the case. With all the talk of disintermediation and disruption, the personal relationship between the broker and the client is the one thing that can’t be replaced.

It’s your key differentiator.

Studies show people will pay more for a positive customer experience. In fact, they are driven to you by service. We have the experience, the know-how and the data to service the client during a loss. Isn’t that the ideal position to be in?

Too often, we associate ease of use with great service (effortless interaction and technology that quickly provides access to information and resources without spending time on hold waiting for an agent) until something goes wrong. Then, you need that human interaction and personal connection to guide and provide assurance and expertise.

At last year’s Legislative & Working Groups Summit here in Washington, D.C., we brought in a speaker to talk about creating great customer experiences. A few things stood out to me. First, it’s rare to come across a company that is effortless to work with (sad but true). The takeaway here is that every ounce of effort you take off your customers’ shoulders, the more loyal they will be. And loyalty matters, because people who have positive experiences with your business will tell their friends and colleagues about it, potentially setting you up for more new business. Technology may help streamline processes, but it can’t replace the human advocate that offers guidance at an unsettling time.

Second, customer service can increase revenue and reduce (or at least control) operating expenses. Happy customers don’t focus so much on cost if they like the experience. It’s easier to retain clients than to find and onboard new ones.

In any business, the stakes are high for customer service. And for our industry, we either win or lose with every interaction. A bad experience can lead to a damaged relationship and loss of business. Knowing when to connect (which interactions need personal connections versus knowing when clients would rather take advantage of a more automated process) is critical.

At the end of the day, the half of our business where we play the role of advocate in making the client whole is something unique to us. We may not have control over disruptors or generational shifts or changes in technology, but we do have full control over how we make our clients feel. That’s the customer service boat. Make sure you’re on board.

Download the full Publication here.

Midway between New York City and Philadelphia, Princeton is more laid back, but still offers rich history, cultural attractions, shopping and restaurants. Princeton University, founded in 1746, plays a central role. 

Restaurant scene
Farm-to-table restaurants are a tasty trend, but we also have a lot of iconic eateries—PJ’s Pancake House for breakfast, Hoagie Haven for subs, Conte’s for pizza, and Thomas Sweet for ice cream—which were favorite stops for my family when the girls were growing up.

Favorite restaurant
Witherspoon Grill.  It is considered a steakhouse, but Nassau Street Seafood & Produce Co. supplies it with incredibly fresh fish. It’s usually hopping with music inside, and has outdoor seating. It’s perfect for kicking back and people watching, but also a comfortable environment for business dinners or cocktails.

Nassau Inn. Located on Palmer Square, the inn’s original building, built in 1756, hosted prominent figures of the time, including many founding fathers. It moved to its current location in the early 20th century and has since undergone renovations.

I like to take clients to the Yankee Doodle Tap Room at the Nassau Inn. There’s a large mural by Norman Rockwell behind the bar, and the names of students and others associated with the university such as “Dr. Einstein” are carved into the old wooden tabletops.

Each spring the Communiversity ArtsFest features artists, crafters and nonprofits, with nonstop music playing on six stages. If you love art, visit the Princeton University Art Museum, whose collection ranges from Greek and Roman antiquities to modern and contemporary pieces, including works by Monet, de Kooning and Warhol.

Princeton is known for rowing—whether watching some of the best U.S. athletes compete or joining a crew team. Delaware and Raritan Canal State Park has miles of hiking and biking paths and canoes and kayaks available for rent. My favorite golf course is TPC Jasna Polana, the former estate of John Seward Johnson. Designed by Gary Player, the course is recognized among the top private golf courses in New Jersey.

Nobel Prize winner John Forbes Nash Jr., subject of the biography and film, A Beautiful Mind, served as senior research mathematician at Princeton University. Nash was once a special guest at a Munich Re client event at the Nassau Inn.

Tom Wolfe coined the term “Masters of the Universe” to describe the ambitious young Wall Streeters of the 1980s that he chronicled in his best-selling novel, The Bonfire of the Vanities. Like the stock market, the Financial District has had its ups and downs since. But there is no doubt that Lower Manhattan is in the throes of a bull market. In addition to finance, the current Masters of the Universe, navigating the narrow, winding streets of New York City’s oldest neighborhood, are coming from creative industries such as advertising, tech, fashion and media—publishing giants Condé Nast and Time Inc. have both moved here.
They are also living and playing where they work. According to the Alliance for Downtown New York’s 2016 Year in Review, there are now 658 stores, 512 eateries, 323 residential and mixed-use buildings and 30 hotels in Lower Manhattan.
The latest addition to the neighborhood’s skyscrapers and historic sights, such as Trinity Church, Federal Hall and Wall Street, is the Oculus, which serves as the World Trade Center transportation hub—a striking structure designed by Spanish architect Santiago Calatrava. Built by the shopping center developer Westfield Corporation and known officially as the Westfield World Trade Center, the mezzanine is a mecca for upscale shops, including a two-floor Apple store, FordHub, Ford’s experiential retail space, and the latest Eataly. While this Eataly lacks the cavernous feel of the Flatiron location, it is still teeming with market stations offering Italian fare—pizza, pasta, freshly baked breads and wheels of cheese. You can grab a panini or espresso to go or sit down at one of four restaurants, including the Osteria della Pace, which serves Southern Italian cuisine with Downtown views.
Towering above it all is the new One World Observatory, on the 100th floor of One World Trade Center. Far below, in the heart of it all, are two new hotels, the Four Seasons Hotel New York Downtown, an oasis of refinement, and the Beekman, a modern take on the Gilded Age.
The city’s hottest new restaurants, which are also some of its most beautiful, are not only located in Lower Manhattan but also affiliated with hotels, a tad unusual. At the Beekman, New Yorkers from the Upper West and East Sides are actually venturing down, appearing as tourists in their own city to sip cocktails in The Bar Room, a stunning space in the atrium of this former library, and to dine at chef Keith McNally’s Augustine or chef Tom Colicchio’s Fowler & Wells. Le Coucou, a lovely French eatery by chef Daniel Rose, is in 11 Howard, a new boutique hotel in Chinatown. It topped the list of best new restaurants in 2016 for many critics, including Pete Wells of The New York Times, and is one of the most sought-after reservations in town.

Meanwhile, lawmakers in some states will consider expanding the number of workers eligible for coverage. And although a movement to allow employers to “opt out” of providing coverage suffered numerous setbacks in 2016, proponents says they will refile similar opt out bills in at least two states in 2017.

The most common cost-cutting attempt in 2017 likely will be more widespread adoption of drug formularies for use in treating injured workers. These formularies detail which medications doctors can prescribe and are an attempt to reduce the nation’s growing opioid addiction.

Proponents argue there is no evidence prescribing opioid analgesics for pain results in injured workers returning to work faster. States expected to consider drug formularies in 2017 include Arkansas, California, Georgia, Louisiana, New York, North Carolina, Montana and Pennsylvania.

Meanwhile, proponents of legislation to allow employers to opt out of their state-run workers compensation system say they are not dissuaded by setbacks they incurred in 2016.

A one sentence bill filed in the Arkansas Legislature would establish an “optional alternative system to finance and administer employee benefits compensation regarding health, disability, and death benefits.”

Texas currently is the only state that allows employers to opt out of the state-run workers compensation system. Oklahoma lawmakers adopted a similar program in 2013. But that state’s Supreme Court in late 2016 ruled unconstitutional the “Oklahoma Employee Injury Benefit Act,” or “Opt Out Act,” declaring the law creates impermissible, unequal disparate treatment of a select group of injured workers.

Bills filed in Tennessee and South Carolina last year that would have created opt-out systems failed, although supporters say they will keep trying.

Lawmakers in Florida and Illinois will consider placing limits on how much an employer must pay an injured worker.

Although most of the 2017 legislation is expected to address how to stop or slow escalating costs, Washington state lawmakers will consider adding workers in the gig economy to the workers compensation system. The gig economy consists of a growing number of workers who exist on short-term contracts or freelance instead of permanent jobs. The Government Accountability Office says about 40% of U.S. workers fall into this category.

The Washington bill would require businesses who employ contract workers under the 1099 tax system to contribute to a fund that would be used to provide workers compensation and other benefits to contract employees.

“If they don’t want to give us that information, then they don’t come,” he said.

The practice already has apparently begun in earnest. And the inquiries have not necessarily been limited to foreign visitors. In January the U.S. Court of Appeals for the Second Circuit held that customs officers could, without a warrant or probable cause, examine and copy documents belonging to a traveler who was under investigation for a crime completely unrelated to customs or border issues.

The defendant in United States v. David Levy was returning home to the U.S. from a business trip to Panama. Levy was the subject of an ongoing investigation into alleged stock manipulation. He was detained at the airport passport entry point by Customs and Border Protection officers who had been asked for “assistance” by the federal agency investigating Levy. Customs and Border Protection inspected his luggage, including a notebook of handwritten jottings, which they photocopied. Less than three days later, Levy was indicted for a variety of crimes. The notebook was a key piece of evidence used to convict.

So what does this mean for you and your clients who travel outside the U.S.? A few things:

  • Can you be stopped and questioned at the U.S. border? Yes, this is called “secondary inspection.” Expect to miss your connecting flight. If you disrespect the officers during the secondary inspection questioning, expect to miss the next flight after that too.
  • If you are subjected to a secondary inspection, do you have the right to have your lawyer present? If you are a U.S. citizen, yes. If not, technically you have that right only if you are being questioned about matters other than your immigration status, but what is relevant to your immigration status is very broadly construed. If you try to exercise your rights, expect the CBP officers to push back and assert you are making yourself look guilty.
  • Can your electronics be taken from you at the border? Unfortunately, yes. And if your devices are taken, do not expect to get them back for months. 
  • What should you do if your electronics are taken? You must be provided with a receipt for your device(s). You should always write down the names and badge numbers of the officers with whom you meet. If there are privileged, trade-secret or other sensitive materials on the device, you should advise the seizing officer. And you should immediately engage legal counsel to ensure steps are taken to preserve and protect sensitive materials.
  • Can you be compelled at the border to disclose account passwords? No. But the assertion of this right may extend your detention during the secondary inspection and foreign visitors may be denied entry. You also can expect CBP officers to inform you that the assertion of this right makes you look guilty.
  • Are electronic and hard-copy materials that are protected by the attorney-client privilege exempt from disclosure? Not necessarily, but if you notify the inspecting or seizing officer of this fact, then review of those materials is subject to special procedures. These procedures include requiring the CBP officer to seek advice from CBP Counsel before conducting a search of them.

There are good e-hygiene practices you can deploy when traveling internationally with electronic devices that will minimize the damage from such intrusions, both in the U.S. and abroad. You can and should, for example, close all laptop programs and cell phone/tablet apps before entering a border zone. 

The most important thing you can do to protect yourself, though, is to store all sensitive materials in a secure cloud-based environment and not on your devices. If such materials are on your devices, they may not just be yours by the time you cross a border.

At the end of the day, the power of border officials derives from YOUR desire to cross the border. If you are a U.S. citizen or a legal resident, you will be allowed entry at the end of the day (unless you are arrested, but that is beyond the scope of today’s discussion).

For U.S. visitors without legal status, your “admissibility” is within the discretion of CBP officials. That said, you can always decide that entry is not worth the effort. My great hope is our friends and colleagues from abroad do not feel compelled to reach that conclusion.

Sinder is The Council’s chief legal officer. ssinder@steptoe.com

Herrington is a partner in Steptoe’s White Collar Criminal Defense and Financial Services Practice Groups. mherring@steptoe.com

And who will watch the watchers? Nearly two millennia after the poet Juvenal asked that question, it remains just as relevant, although in ways the Roman satirist surely never imagined. Vizio, a maker of “smart” televisions, agreed earlier this year to pay $2.2 million to settle charges that it installed software that could collect viewing data from 11 million televisions without seeking the consent of the people doing the watching.

The televisions were capable of capturing second-by-second data on what viewers were watching, whether it was via cable, broadcast, set-top box, DVD or streaming devices, according to a complaint by the Federal Trade Commission and the New Jersey attorney general.

Devices aren’t just tracking what we watch, they’re also listening. That’s why Arkansas police sought a warrant for the audio data collected by an Amazon Echo device at a home where the police were conducting a murder investigation. Amazon turned down the request for the data, but it highlights that when such devices are on, they’re always listening, if only for their “wake” word—or even during Super Bowl ads. After a commercial for the Google Home voice assistant aired during the big game, fans took to the Internet to report that the ad—specifically the words “Okay Google”—had turned on the devices in their home.

Don’t Talk to Strangers

Smartphone voice assistants may be another source of danger. A study by computer scientists at Georgetown and Cal-Berkeley showed smartphones could be vulnerable to hacking by hidden voice commands from web videos, for instance, and prompted to open web sites with malware.  

Speaking of unimagined outcomes, the inventor of sticky tape might not have dreamed that it would fill a computer security need—taping over webcams—for people who just want to be sure the devices they’re looking at haven’t suddenly decided to look back. That very low-tech defense has reportedly been taken up by Facebook founder Mark Zuckerberg and FBI Director James Comey.

The Industry Strikes Back

After a massive cyber attack last fall that was mounted via a veritable zombie host of Internet-connected devices, some of the biggest names in technology and cybersecurity have banded together to boost security on the Internet of Things. AT&T, IBM, Nokia and security firms Palo Alto Networks, Symantec and Trustonic said they were forming the IoT Cybersecurity Alliance Trustonic to combat cyber attacks from connected devices.

AT&T says it has seen a 3,198% increase (that’s not a typo) in attackers scanning for vulnerabilities in web-connected devices. 

“Be it a connected car, pacemaker or coffee maker, every connected device is a potential new entry point for cyberattacks,” says Bill O’Hern, AT&T chief security officer. “Yet each device requires very different security considerations.”

When Your Data Talk

The warning about data collection and pacemakers might have come in handy for an Ohio man who was charged with arson and insurance fraud after he told police he had carried a variety of items from his burning home in a short period of time, the local Journal-News reported. A cardiologist said data from the man’s pacemaker told a different story.

Tell us about Startupbootcamp InsurTech
Startupbootcamp InsurTech is an accelerator. That means taking different types and shapes of startups and enabling them to succeed. Within a three-month period, we give them access to a lot of resources, including best-practice techniques, to help the startups design sustainable business models.

I am working very closely with insurance partners. Our partners include 16 major insurance brands that work directly with the startups to speed traction. We also have a network of investors and mentors. We leverage all of those people, all of those resources, to actually accelerate the startups.

One part of what we do is educational, the other part is about interacting with the right people, to work on the right insurance projects and then win investment as well.

Why is insurance such fertile ground for innovation now?
When you look at what happened in 2014, you had a number of investors realizing the industry was ripe for innovation. They realized a change was taking place in insurance because of digital technology, which was coming to market and becoming more ubiquitous. We also have changes affecting customer behaviors. Uber, Airbnb, Amazon, Google—all of those have changed our customer expectations. A lot of customers want these experiences in their daily lives whether they are dealing with a bank or an insurer.

Are there specific processes that are particularly ripe for change?
We have seen a lot of startups coming in to reinvent the way claims are being handled. Today, 60% to 80% of costs for many insurers are still claims costs. However, claims can be processed differently today. One of our startups from last year’s cohort, RightIndem, is trying to make the claims process far more customer-centric and at the same time far more digitized. Insurers realize they must deliver better experiences for customers and are looking for solutions. Other startups are looking at combining artificial intelligence and visualization to improve the way information is being captured across the claims process.

In the underwriting area, insurers are gradually looking at ways to augment their scoring abilities, not only using internal data but leveraging external data sources. This includes personal and social data to better understand the profile of their customers so they can design more interesting products for them.

In servicing functions, digital assistants operated by artificial intelligence are automating processes. Such assistants will remove people from departments and make repetitive processes a little bit more interesting.

Now AI, like Alexa, allows you to believe you are talking to a human. Insurers are investigating this to improve their customer servicing too.

What makes a great startup?
It’s probably the founding team—people who can see there is a consumer need or an insurance business problem in the market that needs solving. They have scanned the industry and see they can leverage their skills to solve those problems effectively, and they are good listeners when engaging in conversations with insurers. Another characteristic of great startups is execution. At the end of the day, a great idea needs to be supported by a sustainable business model.

What is your experience so far in insurtech?
We continuously meet amazing people coming through the Bootcamp. This includes amazing founders, people who are passionate about what they are doing. It makes you quite humble. There is so much happening in the sector. Things are moving so fast. We are nonetheless fortunate to be working with amazing insurers who want to innovate, transform their business and drive internal resilience. One way they see that happening is by working with us, working with the startups and learning to behave as startups.

Some build global alliances. Others go the M&A route. And still others look to expand into new markets. No matter how you do it, all paths must be approached with caution.

Building out global alliances of like-minded peers that complement existing operations and help growth is one border-crossing method. The nature of such alliances varies, as does the scope of commitment. Over the past few years, some variations have emerged, such as Renomia’s company-centered networks, in which its members operate independently but support each other in cross-border risk placements. Or Brokerslink’s network of independent brokers, whose members are vested partners and equal shareholders.

For more aggressive “individualists” with the means to scale and vast global ambitions, there are mergers and acquisitions. Recent data from global insurance investment management company Conning show the global deal volume in 2015 was nearly $20 billion. This comprised mostly bolt-on transactions that helped brokers develop broader product offerings. Transformational, large-ticket mergers, such as Willis Tower Watson’s, or BB&T’s acquisition of U.K.-based Swett and Crawford, are still infrequent.

But as more brokers confront complex international business decisions requiring a strategic approach to M&A, both types of deals are expected to increase. Insurance intermediation has always been about clients, so when clients look increasingly beyond familiar markets, brokers need to improve their global competencies to retain their accounts.

It isn’t a simple process, and many brokers continue to approach cross-border deals with extreme caution and due diligence. They make sure operations are compatible and complementary, compliance costs are reasonable and options for legal recourse are clear. Translating values and business models to a new, foreign market is an even tougher challenge, as is understanding how your current acquisitions align with your company’s and clients’ long-term strategy. 

“The fundamental question is how you create something truly global,” says Arik Rashkes, managing director for the Financial Institution Group at Houlihan Lokey, the leading investment bank for global M&A. “The notion is to get something that is very efficient and works on the same platform. But you can also find yourself running a hundred different companies, and that’s what people are hesitant about.”

Private Equity a Key Player

As with domestic M&A, private equity is driving a lot of brokerage M&A activity, both in North America and globally. “The insurance brokerage space has been extremely attractive for private equity,” Rashkes says.

“They have been very deep on insurance brokers for over the last five years, and you can see it all across the board.” What private equity firms naturally love here is a steady cash flow, “something you can predict is a huge thing after they got burned with unstable businesses.”  

The notion is to get something that is very efficient and works on the same platform. But you can also find yourself running a hundred different companies, and that’s what people are hesitant about.

Arik Rashkes, managing director for the Financial Institution Group, Houlihan Lokey

Of course, there are obvious advantages to these arrangements for brokers, as they get access to a big capital machine with clear benchmarks for growth and favorable conditions for a leveraged buyout. All this has been good for companies’ price-earnings ratio. But as the interest rate is rising and brokerage price-earnings in North America plateau, the leveraged buyout loses its appeal. The prospect of higher rates this year may push North American buyers to invest more in smaller retailers domestically and globally, and there is no shortage of quality options. As the dollar remains strong against other currencies, solid overseas companies may look like a steal.

Brexit and Trump Shake Up Stable Markets

Another factor that affects global M&A is the increased geopolitical uncertainty. “Cross-border transactions will hurt in the next couple of years due to much commotion and change,” Rashkes says.” Persistent crises in the Middle East and economic troubles in major emerging markets have been a constant backdrop, steering investors toward more stable markets in the United States and Europe. Yet these fairly reliable markets were made much less certain last year by Brexit and the unclear prospects of the European Union framework moving forward, as well as anticipated changes in America’s international and domestic agenda.

President Trump’s dramatic arrival to the White House signaled a new era for both the finance industry and foreign affairs. As we have observed, the current president takes his election promises literally and very seriously. And while we have yet to find out which sectoral and international priorities will top the administration’s agenda this year, it is clear the traditional trade policy, based on a free flow of goods, capital and labor, is being fundamentally dismantled—to the dismay of U.S. commerce and investment partners in Europe, North America and Asia Pacific. If the tide of globalization begins to ebb, so will any residual confidence in global mechanisms protecting foreign investment.

The industry is also closely following how the Brexit process evolves, as it affects Lloyd’s role as a global insurance hub and the U.K.’s access to European markets through the simplified passporting procedure.

Passporting has been a very handy instrument for foreign and U.K. investors to anchor a regional office in the heart of global finance in London, while being recognized by EU states’ licensing authorities as a local entity. As the debate about Brexit’s effect on passporting and the extent of a future U.K.-EU partnership unfolds, companies are confronted with new costs and staggering realities of investing in the EU and Britain.

For Britain-based companies and Lloyd’s, it is essential to preserve the most favorable access to the EU market, which depends on the results of withdrawal negotiations. Under the worst-case scenario, companies’ acquisitions in the U.K. will not enjoy the same benefits as before, which will understandably decrease London’s appeal. In anticipation of that, some global carriers with operations in the City have rushed to exit.

Lloyd’s is not sitting idly either, and is currently working on a contingency plan to absorb associated exit shocks, such as restricted financial market access and more limited access to a potential pool of talent. Lloyd’s accounts for 20% of the City’s GDP and more than £60 billion in written premiums, so there is much riding on the company’s ability to remain in the global insurance marketplace.

Ironically, some industry experts see a silver lining even in the worst-case scenario of Britain’s divorce. They contend London’s independence in financial regulation is worth the cost. Brexit will free regulators and the local industry as a whole from implementing burdensome, Brussels-imposed common market directives, which hurt British sovereignty, not to mention national pride. Euro-skeptics in Britain remember the times outside of the EU when London was a thriving offshore center on steroids for dollar-denominated transactions and a hub for alternative investment and emerging market finance. Nobody dictated when or how authorities would regulate the industry, as is the case with Solvency II and other rules. In return for conceding policy-making power, Brits are troubled by mandatory transfers to support Europe’s poorer regions, which already send labor migrants to the U.K. If done right, they argue, Brexit presents a valuable opportunity to go back to London’s past financial glory and make it more globally competitive and more attractive for potential foreign investment by opening to more capital and less regulation.

John Eltham, the head of North American Broker Business at Miller Insurance Services, in London, says the Brexit referendum has made a major impact on the rate of exchange movements relative to the British pound. “As we earn much of our income in foreign currency but pay ourselves in sterling, this has had a positive effect on profit margins,” says Eltham, who is also the chair of the Council’s International Working Group. “It has simultaneously made the relative cost of acquisition in USD terms lower and therefore more attractive. It is not by chance that Aon chose to re-domicile in London and that foreign capital continues to flow in to the City with investments in both broking houses and major insurance carriers.

It is not by chance that Aon chose to re-domicile in London and that foreign capital continues to flow in to the City with investments in both broking houses and major insurance carriers.

John Eltham, head of North American Broker Business, Miller Insurance Services

“The London insurance market has built a unique infrastructure and concentration of knowledge. This is supported by the entrepreneurial spirit that has seen London establish itself as the leading global financial center, fueled in part by the cosmopolitan nature of its inhabitants. This spirit will not alter post-Brexit.”

Better Buyers than Sellers

While the regulatory uncertainty in London and the U.S. is new, local regulations and compliance rules in other countries such as China have and continue to pose challenges for foreign investors. “Foreign-owned brokers have to go through a set of costly requirements in China, including restrictions on the form of establishment and capitalization levels which are attainable only for the top 10 to 15 global players,” says Alex Yip, Lockton’s CEO for Greater China.

We have also seen insurance companies reducing their exposure in the Chinese market or exiting it altogether. One reason is a growing uncertainty over how national regulators respond to general market volatilities and capital outflows, which underlie the fundamental state of China’s evolving financial system and the government’s goal to keep tight controls over the renminbi. Restrictions on transfers abroad, implemented last year, were disruptive to companies’ operations, affecting their ability to repay loans to overseas investors or pay dividends to foreign stakeholders. Provincial authorities add another layer of bureaucratic riddles, so the cost of compliance adds up, as foreign investors burn money on higher capitalization, local staff training and new technology. 

On the other hand, China and Japan have been on a global shopping spree. Although an Asian investor has yet to acquire a sizeable Western brokerage, the conditions are ripe for local capital to move offshore. Last year the Chinese completed the most international M&A by volume after the U.S., acquiring 777 companies at a combined value of $225 billion. And several insurance companies were targets for Chinese and Japanese investors. Asia has become an increasingly expensive market, as assets have increased in price partly due to foreign investment. Economic growth has slowed or stagnated in some cases, and both countries have amassed a large stash of dollars they can’t spend domestically because of the lower return on investment.
In China’s case, the government is specifically pushing state-owned companies to invest abroad to gain knowledge and a foothold in key markets through the “Go Global” or “One Belt, One Road” initiatives. Both initiatives encourage corporations to diversify investments and seek strategic partners among foreign companies to strengthen their global competitive advantage.  

… And the Pursuit of Technology

Access to technology is an ever-important part of a brokerage’s strategic planning. For some, acquisitions can help gain advanced technologies that transform distribution channels, improve the client interface or provide better telemetrics and predictive analytics capabilities.

According to CB Insights, which tracks insurtech activity, the United States claims the largest share of investment in insurance technology startups at 59% of global deals in the sector. At the same time, smaller markets in Europe, and especially the Nordic region, have moved faster toward e-commerce and operational digitization and showed significant progress in automation and machine learning.

As companies’ profits suffer due to claims unpredictability and low interest rates, cutting operational cost through technology is top of mind for senior management. McKinsey estimates that over the next decade the insurance sector in Europe will shed around 250,000 jobs due to modernization, and most of those losses will happen in repeatable and support functions related to reporting and analysis. As a result, most of the client interface—from risk insurance purchase to claims processing—would happen exclusively online. 

Asia is on the other end of the spectrum. Its growing population and challenges associated with traditional insurance distribution make it an interesting target for overseas insurance technology investors. Difficulties in raising capital and an insufficient number of skilled entrepreneurs in the sector, coupled with the inherent cultural aversion to startup failures, result in a weaker early-stage startup ecosystem in most Asian economies. The lack of quality filters present in the United States and Europe will be unlikely to produce highly competitive Asian versions of Zenefits and Lemonade, conceding the market to foreigners with advanced business acumens, deeper insurance expertise and available cash for a more aggressive expansion.

Foreign-owned brokers have to go through a set of costly requirements in China, including restrictions on the form of establishment and capitalization levels which are attainable only for the top 10 to 15 global players.

Alex Yip, CEO for Greater China, Lockton

In 2015, U.S. and local private equity firms invested $1 billion in Chinese online-based Zhong An Insurance, the largest transaction in p-c insurtech that year. The transaction gave U.S. investors a shot at capitalizing on the fast-growing insurance segment and a stake in the first licensed online insurer that “aims to extend its disruptive approach to the traditional insurance industry.” Accenture estimates that China’s online insurance premiums will grow to more than $60 billion by 2018, increasing the segment’s local market share to 12%. Even though China, India and Japan account collectively for 11% of insurtech deals, Forbes forecast that in coming years we will see more experienced investors from the United States and Europe in this market.

It might feel at times as if the investment world we know is folding. Overall political uncertainty, the lingering economic slump, low interest rates and the lack of confidence in globalization put major cross-border investments on hold. Experts predict that in coming years we will still see activities on the fringe, with smaller deals likely to dominate. Eventually, we are heading toward a busy long-term scenario for global M&A, but only after Europe is in a better place politically, the United States is clearer about its healthcare reform and international affairs, and leaders of emerging markets get their management and operational house in order.

Gololobov is The Council’s international director. Vladimir.gololobov@ciab.com

  • 20,000 clients
  • 750 employees
  • 24 firms, 40 locations across 15 states
  • $158 million in revenue
  • Goal: Exceeding $500 million in revenue
  • Ownership: 40% member firms; 60% Genstar Capital
  • Initial makeup: 75% employee benefits firms; 15% p-c firms; 7% wealth management/financial services firms; 3% other.
  • Five-year goal: 45% employee benefits; 45% p-c and risk management; 10% wealth management/financial services.

Even as the Benefit Advisors Network had grown, every time the group gathered, someone else had sold. Consolidators had continued to approach. Challenges for individual firms had ramped up.

From the very start in 2002, the point of BAN had been to share best practices and collaborate for mutual benefit. But that day, a whole new level of collaboration was on the table. The 20-odd people in the room were committing to merge their firms, even while maintaining a sizeable ownership stake, and to collectively take on a private equity partner to grow their companies.

The invitation had been open to all, but those gathered had committed to step up—and step together. One by one, they stood to say why.

“The men and women there spoke to the interest of improving their firms, of working at a much deeper level with the peers they had held in such high regard and admiration and collaborated with already,” says John O’Connell, president of C.M. Smith Agency. “I think it was Alan Levitz who said, ‘Holy smokes, no one said they’re here for the money.’… It was an incredibly inspiring moment, because it set our true north.”

The compass had landed on what would become Alera Group, a brand-new employee benefits, property-casualty, risk management and wealth management firm with investment from Genstar Capital. Composed of 24 entrepreneurial insurance and financial services companies from across the country, Alera came out of the gate in January as the 14th largest privately held multi-line insurance brokerage and seventh largest privately held employee benefits firm in the country. Levitz, who was CEO of GCG Financial, has taken the helm as Alera Group president and CEO.

“To draw the distinction, this was the absolute opposite of an exit strategy or sellout,” O’Connell says. “It was critical to our decision-making process as a group that we needed to be focused on really building a great new company, and not just having some sort of monetization event and fading into the mist.”

The landmark partnership addresses many issues agency owners face, from perpetuation concerns to risk. And in the bigger picture, O’Connell says, “as the market gets more sharp and pointed in its demands, just as in any other industry, having scale and scope and a DNA of innovation is critically important.”

An Open-Book Process

It’s essential to note that BAN continues on. Earlier this year, in fact, some 300 BAN members gathered in San Antonio, and Alera owners took part. It’s not a replacement in any way, but rather, as Levitz puts it, “a logical evolution.” BAN began as a study group and became a shared services platform. Next, there was some sharing of financial compensation. The Alera deal, however, includes accountability around using the services that are on the platform and continuing to build together.

The process, says O’Connell, who serves as BAN’s vice president, “was very open-book. It was not selective in any way. What I mean by that is, we didn’t handpick firms that might have been a little better performing or higher growth. It was open, and anyone who chose, they could learn all the way through.” And Alera still promotes partnership opportunities.   

BAN includes roughly 70 firms. Those that chose not to become part of Alera had their reasons. Some firms have multiple owners or strong internal perpetuation strategies; others weren’t interested in looking at an alternative capital structure. Some had an employee stock ownership plan. And still others thought it might be a daunting project, requiring much time and energy. (And that last subset in particular was right.)

“But overall, of the 24 firms that are part of Alera Group, 20 of them were initially part of Benefit Advisors Network, and they had a history of working together through their owners, through their salespeople, through their account executives, very closely over the last 12-plus years,” says Rob Lieblein, Alera’s chief development officer. “Not only was there trust involved, but they thought about the world and business and strategy the same way. So when the opportunity came about to consider coming together as one, there really was a strong foundation in place.”

As for the other four firms, they were all firms Lieblein had been in relationship with while working with consulting and investment banking firm MarshBerry.

Throughout BAN, however, “I think there was a curiosity,” Levitz says. “A skepticism, certainly. Concern. And on the other side, an optimism and a wow factor to the whole set of discussions. To pretend that all of us weren’t someplace on that spectrum at some point during the conversation would be a mischaracterization. We all went through the process of trying to understand it, what it meant to us as people, what it meant to us as firms, what it meant to our people, and what it might mean within the industry.”

To draw the distinction, this was the absolute opposite of an exit strategy or sellout. It was critical to our decision-making process as a group that we needed to be focused on really building a great new company, and not just having some sort of monetization event and fading into the mist.

John O’Connell, president, C.M. Smith Agency

And they all went through the process of wondering just how long it would take.

Time and Intensity

Back in 2014 the board of the Benefit Advisors Network, as a member-driven organization, first approached Lieblein about coming up with an alternative business model for firms to join. He had strategies ready to present at the start of 2015. It took about six months, Lieblein says, for the individual firms to grasp what Alera would be, how the private equity firm would be involved, how debt could be used and what ownership would mean. Next up was the process of building vision, strategy and objectives, followed by six months’ worth of due diligence, legal agreements and conversations with lenders.

Because the move was unprecedented, because so many firms were involved, and because none of those firms had been through any venture of this scale, wheels turned slowly. Most initially believed the process would take months rather than years.

“It was a challenge keeping everybody enthused,” Lieblein admits. “It was a major time commitment for every single person in each firm to stay together for two years and give 100% effort to this, as well as 100% to their businesses. To their credit—and I think this is an important point—the 24 firms, between 2015 and 2016, grew 8%, which is almost double the industry average. It was a herculean effort by everybody involved.”

Those who made that effort speak of intensity, of complexity, of trenches, and calls and talks and work groups and meetings. But they also speak of community, like-mindedness and a culture of collaboration that pulled them through.

“What was a pleasant surprise for me … was the ability of all of the owners, who are great entrepreneurs, to check their egos at the door to get a deal done,” says Peter Marathas, Alera’s chief legal counsel. “I don’t think I’m overstating it to say we never had any type of issue where we had to reign anyone in. Everybody had a singular view and worked together to get there, to a great result.”

Alera aims to create a national platform, administered regionally, deployed locally. As such, each firm retains its local brand equity, but can use the Alera name to bring national presence and heft. Collaborative opportunities among peers have increased. “We have evidence of a ton of sales activity just since we all came together,” Levitz says. “What’s been really great is the number of collaborative sales—I can’t say have been made, but are being talked about—within the firms, where one firm might have a prospect that’s in another firm’s sweet spot. And we’re already working much more closely than even as a BAN firm we would have done, just because of the accountability.”

Yet, so far, not much has changed on a day-to-day basis for many of the employees of the individual firms. “Other than the fact that now we’re allowed to dream a little bigger,” says Bill Brown, a partner at Ardent Solutions and one of eight Alera steering committee members. “Whenever we would have a great idea before, it would fall on someone locally to either develop that expertise or find that funding. Now we have a greater opportunity, just because of the experience and the resources financially, to build it.” The way of the past might have been to temper creativity with too much reality, he says, but the way of the present is to talk about building something bigger than the individual firm, and bigger than Texas. “Let’s tackle the biggest questions, and not necessarily just our community or local issues.”

The involvement of Genstar, naturally, helps make that a possibility. Brown—who, like the others, never doubted for a moment that Alera would come to fruition—says that of all the equity partners the group met with, Genstar was the one that caught the vision and the enthusiasm.

“Whenever we started talking with Genstar, everyone was on the front of their seats,” Brown says. Other potential partners still viewed the individual firms as “24 separate companies,” he says, “and they just could not understand that we had already built a culture and were now building a company.”

When others brought up the challenges of integration, Brown says, “we kept saying that it wasn’t a big issue, and here’s what we’ve done, and here’s who we are, and here’s how we think…. Genstar believed us.”

It wasn’t that the company would come first and the culture second. The culture—one of collaboration, openness, and the desire to positively impact clients and communities—was already well in place.

Ryan Clark, president and managing director of Genstar, says by the time his firm came on the scene, the culture and shared vision was evident.

“At our first meeting, we had a dinner with principals from maybe half of the companies, and you could tell the common sense of spirit, the camaraderie, the mutual respect they had for one another, the engagement that comes only from working with each other through BAN over a number of years,” Clark says. “It was clear to us that this was something special, and if any group of companies could pull this off, there was that spirit in the room that first night, at that first dinner. And in the meeting the next day, it was palpable that this group of people could do it.”

The Shared Vision

Part of the shared vision was a belief in the distributive equity model. Many who were not owners in the individual 24 firms became owners in Alera Group. There are people in almost all of the firms that now have equity interest, Levitz says, and will share in the upside of any appreciation. “The bottom line is that the current owners of the new firm in total own 40%,” he says. “While certainly there was a financial transaction where Genstar was buying 60%, we are heavily invested in the new company, and we think the vast majority of our compensation from doing this deal will come from whatever we can do over the next five years, rather than what we did in the past.”

Because the large majority of the firms had already worked together through BAN, there was no need to immediately integrate computer platforms or other technology. The partnership with Genstar, however, means firms that might not have been able to invest in building their business in the past will likely have greater opportunities in the future. Alera’s level of accountability and trust means if the group collectively decides to implement a shared platform, for example, once the discussions end and the decision is made, there will be 100 percent buy-in, Levitz explains.

Levitz and GCG got involved in 2015, adding weight and validation to the effort. (As Levitz became CEO of Alera, his brother, Rick Levitz, who has been GCG’s president of wealth management, became the firm’s managing partner.) It didn’t take long for the group to recognize Alan Levitz was the natural choice to lead Alera. Besides his ability to “wrangle” the entrepreneurs and make every meeting productive, as Brown puts it, Levitz had a different perspective with experience in benefits, p-c and wealth management.

“I think, even to this day, many of the benefits firms are still a little myopic around benefits,” Levitz says. “They’re having to remind themselves we’re going to be much more than just a benefits company…. I was involved in running a business as opposed to running a practice.”

We have evidence of a ton of sales activity just since we all came together. And we’re already working much more closely than even as a BAN firm we would have done, just because of the accountability.

Allan Levitz, president and CEO, Alera Group

Alera certainly could have been just a benefits company. “But I don’t think we ever really considered it, to be quite honest,” Levitz says. “We already have $25 million, in round numbers, of p-c revenue.”

Adds Lieblein: “I think the market is still coming to grips with 24 firms coming together as a single entity versus just being loosely tied together in some way…. Some of the smartest people in the industry have tried to do this for so many years and never have. So why would this small group of people—many of them they may not even have known—be able to pull this off? A lot of times I find myself, particularly in talking with industry consultants, explaining what happened, and it’s like, ‘OK. Now I get it. It’s not what I thought was taking place.’”

One other thing that didn’t take place: 24 individual deals. “That probably would have created a lot more of the challenges we were afraid of all along,” says outside legal counsel Mike Harrington of Harrington & McCarthy. He represented Alera Group firms with Genstar’s legal team of Ropes & Grey.

“These were individual deals packaged together as a single deal, and we were lead transaction counsel,” Harrington says. “We also had the assistance of a bunch of the firms’ trusted advisors as well, to deal with the individual situations on a case-by-case basis. The deal terms were largely the same, but that was the way we settled upon it, as far as the challenges and numbers. That was really the way to do it. All the facts and the history that goes along with each of the individual firms were different, obviously, but we settled upon a process where we could look at these in very similar—if not the same—light in terms of a legal acquisition and sale document.”

Leaving a Legacy

Looking back now, O’Connell says the process has afforded an opportunity to see things from a different macro perspective—including that of an investment thesis. Learning the pros and cons of the industry overall, he says, “was very, very eye-opening.”

“In that context, there’s plenty of room across the continuum of the business for big players, medium players and small players,” he says. “But I think we’re seeing a sharpening of competition and focus within the advisory space.”

The practice of simply providing a renewal and a spreadsheet to clients once or twice a year has long been dead, he says. Small boutique firms that hope to succeed must have very deep and narrow areas of focus. But multi-line firms must be bigger and stronger, with a “very broad array of tools and outcomes to deliver to a client. If you don’t, then the market is very punishing.” Alera, then, is right on trend, and those involved say they wouldn’t be surprised if others see how it works and decide to follow suit.

As for Levitz, he speaks of the biggest surprises so far: the level of support for each other, for the overall effort and for him—as well as Alera Group’s ability to pull Lieblein to “the other side.” Until March of last year, Lieblein was executive vice president at MarshBerry. (Billy Corrigan, the former chief financial officer for the international division at Marsh, rounds out the Alera leadership team as chief financial officer.)

“All of us have an aspirational goal, and mine was to leave a legacy,” Lieblein says. “I left a great career to join the other side, and it’s really, really exciting.”

There was no “other side” for chief counsel Peter Marathas, the managing partner at Marathas, Barrow & Weatherhead. His new role is similar to what it has been for many years. “Just more concentrated,” he says, “and a hell of a lot more fun. The first Benefit Advisors Network meeting I ever attended, there were seven members jammed into a small conference room down in Florida. The invitation to me was, ‘Come hang out with us, make some friends, talk about what’s going on in the industry, but don’t expect to be paid because we can’t pay you.’ But I met with those folks … and it became a wonderful relationship for me.”

As an employee benefits attorney, Marathas’s role has long been to provide compliance support. But his counsel has gone far beyond insurance issues to include guidance on a wide variety of business issues. “So when serious discussions began about a group of BAN members forming together to become one, I was part of those discussions from the very beginning,” he says.

Brown, meanwhile, at age 38, talks of the tremendous mentoring relationship that Levitz has offered, and the benefits of working so closely with others he admires. As the entrepreneur—and the son of an entrepreneur—he’s always had multiple mentors and a love of business in general. “But I don’t know that I appreciate yet what it means to not be the owner,” he admits. “That’s probably going to be learned…. There will be some tough times ahead and there will be some lessons learned, but for the time being it feels like all 24 of us got exactly what we hoped for. Sometimes that’s bad, and sometimes that’s amazing. Be we just couldn’t be more excited to share our story.”

So far, those involved say that, when sharing that story, they’ve received support and encouragement from firm members and clients alike. Granted, there will always be those who will “wait and see” how it all shakes out but Levitz points to two already-present positive signs: organic and inquisitive growth. Both, he says, have been “phenomenal.”

In terms of acquisitive growth, Levitz says the sheer number of conversations Alera is having with other firms is “tremendous.”

What was a pleasant surprise for me … was the ability of all of the owners, who are great entrepreneurs, to check their egos at the door to get a deal done … Everybody had a singular view and worked together to get there, to a great result.

Peter Marathas, chief legal counsel, Alera Group

“There are people who are interested in what we’re doing,” Levitz says, “and there are people who are interested in making it successful internally.” As for the clients, he says, “They’ve just heard nothing but great things. They like this national platform that we can all draw from, yet still get the same local service that they’ve all been used to.”

And at Alera’s core, that’s what it’s really all about: “I knew I was in the right place, and doing the right thing, when ultimately, at the end of the day, this was about better serving clients and transforming the client experience,” Levitz says. “When there’s clarity in vision, success is not far behind. I think that’s the place that we see opportunity. We don’t have to work at deciding what we’re going to be or what we’re going to look like. We know what that is. Now, the market will move things, but in general, we know what we’re going to look like. Now we just have to go about the business of making it happen.”

Soltes is a contributing writer. fionasoltes@aol.com

Wright, the CEO of insurance brokerage Johnson, Kendall & Johnson, isn’t trying to be an alarmist. He has seen insurers and business owners go to jail out of ignorance of local insurance regulations. Be especially careful in Brazil and Argentina, he says. India? That’s where litigation regarding insurance issues went on for five years after Union Carbide’s 1984 Bhopal disaster. The Canadians probably won’t arrest you. But, he says, “You could get fined like you wouldn’t believe.”

Concerns with cross-border mergers and acquisitions—particularly with our closest trading partner to the north—don’t end with the dangers of negotiating complex regulations. How will Donald Trump’s position on NAFTA affect cross-border acquisitions and regulations in both Canada and the United States? Can smaller companies survive as larger multi-nationals continue to gobble up properties outside their borders? Is there still a place in the modern North American insurance landscape for the medium-sized, privately held company?

Such concerns come amid a boom in cross-border purchases, particularly by U.S. corporations seeking deals with smaller Canadian companies. The boom affects not only the Canadian and U.S. brokers and agents who specialize in cross-border insurance issues, but carriers as well. As Canadian insurers assist companies amid the M&A spike, many of those same insurance companies are being gobbled up in cross-border acquisitions.

“Canadian firms have been very attractive to U.S. companies over the last few years,” says Jeffrey Charles, managing director of international business for Jones Brown, privately held (and “proudly Canadian”) insurance brokerage and strategic consultancy based in Toronto.

Referring to American firms, Charles says, “You’re buying here for 25 cents on the dollar cheaper. Sales are up, prices are up, but I wouldn’t call it a bubble. I think there’s genuine value and there will continue to be.”

Big Appetites

To fully understand the increase in merger and acquisition deals in the Canadian insurance industry, several experts in cross-border M&A say, you need to start with a short history lesson. As in the United States, the insurance broker and agent landscape in Canada used to be dominated by what Charles termed “the man-about-town brokerage.” If you grew up in a small town, you knew him. He was your neighbor who very well might have sponsored your Little League team.

Then came two pressures that led to those small companies being consumed by, usually, larger regional players looking to grow by buying up smaller brokers in their region. The companies wanted to grow, of course, but they also needed to grow to compete with the increasingly massive public companies with “large pools of equity and a burning desire to invest,” Charles says.

And, in recent decades, that man-or-woman-about-town has increasingly been retiring. More and more, Charles and others say, their children aren’t interested in carrying on the family business. They find themselves interested in selling in a seller’s market.

You’re seeing the California company that doesn’t see room to grow there, but sees there are opportunities in British Columbia. They see the chance to grow, they see the exchange rate. The market is more complex than just big always eating small.

Jeffrey Charles, managing director of international business, Jones Brown

Now, the regional players are the hot commodity, both for larger Canadian companies and for larger multi-nationals and even mid-sized regional companies in the western and northern United States.

“You’re seeing the California company that doesn’t see room to grow there, but sees there are opportunities in British Columbia,” Charles says. “They see the chance to grow, they see the exchange rate. The market is more complex than just big always eating small.”

Cross-Border Collaboration

As the landscape of insurers and brokers has changed, the duties of the agents and brokers in facilitating effective insurance coverage for their clients have remained much the same. It’s complicated, but, at least in some ways on the Canadian side, it has become less riddled with potential regulatory landmines.
In 2011, Brenda Rose, vice president and partner with Firstbrook Cassie & Anderson, based in Toronto, headed the Insurance Brokers Association of Canada excise-tax committee, which worked with the Canada Revenue Agency (Canada’s IRS) to simplify tax statutes for companies doing cross-border business. The reform was badly needed because businesses coming into Canada were getting lost—and often fined—amid labyrinthine, sometimes cryptic tax laws that often confused even government officials.
“People doing cross-border business were even getting different interpretations of what taxes were due on what things depending on who gave them instructions,” Rose says. “It was a very difficult environment in which to operate. I think we’ve done a good job of keeping strong safety nets in place while also making it a more business-friendly environment.”
Rose’s company, like those of Wright and Charles, provides consulting services for companies looking to expand into Canada from the United States and other countries. Canadian Insurance 101: “There are two things you legally need in Canada,” Rose says. “A Canadian-licensed insurer and a Canadian-licensed broker.”
If a U.S. brokerage isn’t licensed in Canada, or vice versa, it will work with a firm across the border to assist clients in doing business legally in both countries.
“The overriding message here: If you cross the border, compliance is an important topic besides risk,” Wright says. “The rules are obscure. For one: We see so many people go over assuming that because they have coverage in the U.S., the coverage carries over to their Canadian subsidiary. If you don’t have somebody local on the other side who knows what they’re doing, there can be very costly mistakes made very easily.”
So, Americans like Wright work with Canadians like Rose, and Rose looks to experts like Wright to figure out the U.S. laws, which can also be confusing.
“Considering state regulations, a company coming in can be looking at 50 different rules to do business in the United States,” Wright says. “In Germany they say, ‘Here are your rules. You comply with these rules, you’re good anywhere here no matter.’ You try to explain the rules here to a German and their head will blow off.”

Independent Streak

While the increase in cross-border mergers and acquisitions provides more business to agents and brokers who specialize in the various regulations, it also poses both existential threats and significant opportunities to their companies. As multi-nationals consume small and midsize companies, the pressure increases on those small and midsize companies that want to stay independent.

For small brokers and agents in Canada, the race by larger companies to acquire has created buy-out offers that are often hard to refuse, especially, as Wright points out, “if there is less desire from the next generation to continue the business, especially in a tougher environment.” Midsize private companies in Canada, too, are under pressure to sell to larger companies inside and outside the country.

But there are opportunities for them to thrive, Wright and Rose contend, if those companies can offer the advantages of a massive public company while still providing a level of personal service—the kind that tends to be lost as companies become massive multi-nationals.

You have to have somebody who knows what they’re doing and can spend time figuring out exactly what needs to be done in the complex environment of working across borders.

John Wright, CEO, Johnson, Kendall & Johnson

For example, Rose and the 80 employees at Firstbrook Cassie & Anderson have made a commitment to staying privately held. In fact, she says, the firm uses its smaller size as an advantage.

“Clients can get lost with the massive companies as they move to call centers and handling clients in more of a cookie-cutter fashion,” Rose says. “There are hungry, larger national and international players to buy up brokerages like ours. But we’re dedicated to preserving our place as independent professionals.”

Which creates some unique challenges in the world of ever-expanding international companies charging into the Canadian market.

“We have to be big and powerful enough to actually accomplish what we need to accomplish in this new landscape,” she says. “I need to offer you the choices you need, to have all the choices available, while also following through with our commitment to be the best at working for you at a level that huge companies can’t. There’s a Goldilocks zone you have to stay in to stay independent in this new environment.”

Here’s where the increase in cross-border activity plays to the advantage of companies like Firstbrook Cassie & Anderson, Johnson, Kendall & Johnson and Jones Brown. All three have thrived because they have successfully found that Goldilocks zone in which they can provide all the services and market reach of the big boys, but with a smaller independent company’s ability to focus on building ongoing relationships and meticulously tailored plans critical for companies to successfully navigate cross-border acquisitions, mergers or expansions.

“There’s a lot of people who say, ‘We can do that with anybody or we can Google it,’” Wright says. “You have to have somebody who knows what they’re doing and can spend time figuring out exactly what needs to be done in the complex environment of working across borders.”

Most cross-border M&A experts, including Rose, Wright and Charles, don’t see the current rise in prices being offered by international insurers for their Canadian counterparts to wane any time soon. “I don’t think it’s a bubble,” Rose says. “It’s not the U.S. housing situation. There’s genuine value there.”

And, unlike some in the broader Canadian business community, insurers don’t seem concerned about Donald Trump’s campaign rhetoric regarding NAFTA and the need for tariffs. After all, Canada is the United States’ biggest trading partner with more than $2 billion crossing the border each day. Canada is the single largest destination for U.S. exports. It could be argued that Canada and the United States are the two countries on the planet most closely linked economically. It would be very bad business for both countries to put stress on that longtime economic marriage.

And even in a scenario in which the United States builds economic walls—and Canada surely retaliates—there still will be business.

I need to offer you the choices you need, to have all the choices available, while also following through with our commitment to be the best at working for you at a level that huge companies can’t. There’s a Goldilocks zone you have to stay in to stay independent in this new environment.

Brenda Rose, vice president and partner, Firstbrook Cassie & Anderson

“If I’m insuring a manufacturer in Michigan and they have a plant in Canada, they might not build another one, but they can still buy one,” Rose says. “And they’d do that because the prices are right now.”

Most are optimistic that the U.S.-Canadian partnership won’t devolve that far. Trump is a businessman, after all. If the economy improves under his leadership, more American companies and investors will have more equity to invest in Canada.

“I’m not expecting things to change,” Wright says. “The market is strong, the desire to expand is there. The dollar is strong. All the pieces are still in place.”

Nelson is a contributing writer. omagbob@gmail.com

Did you grow up in Birmingham?
I was born in New Orleans, but moved to Birmingham when I was three years old. My parents—my father was from St. Louis; my mother was from Hope, Arkansas—met at Columbia University in New York. My father was offered a career move to Birmingham with a food broker. He eventually started his own brokerage here.

Were you expecting to work in your father’s company?
Not really. After college he told me, “It would be best for you to find your own way in the world. You’ll always be welcome here at a future time.” My younger brother became the president of my father’s business.

What did you want to be when you were growing up?
I wanted to be a success.

Who was your childhood hero?
“Bear” Bryant. He came to the University of Alabama in 1957, when I first started watching football. “Bear” was a larger-than-life personality whose mere presence would silence a room when he entered.

What does your perfect weekend look like?
I’m an outdoorsman. I like to hunt and fish. I have a farm down in Selma, Alabama, where I hunt deer and turkeys.

If you could go hunting with three other people, living or dead, who would they be?
My three sons.

Tell me about Birmingham.
It is the financial and legal center of the state. Healthcare is the largest industry, although the steel industry and pipe manufacturing are still significant. Automobile manufacturing has also grown significantly.

Why did you choose the University of the South?
I wanted to have a liberal arts education. I wanted to meet people from different parts of the country and get exposed to different thoughts, ideas and people.

You’re now in your 46th year at McGriff, Seibels & Williams, including 27 years as CEO. How’d you get started there?
I started as a producer trainee in 1971. I had a relationship with Lee McGriff. We went to the same school and were president of the same fraternity—40 years apart.

What did the company look like in 1971?
We were a local agency at the time, with 25 to 30 employees. Lee McGriff and Dick Womack recruited a team of young people that learned the business really from scratch. Today we have 850 employees in 10 offices around the country. In 2015 we had $3.4 billion in premium sales and $250 million in net revenues.

You sold the company to BB&T in 2004. Why?
BB&T provided the best alternative to allow McGriff to continue to be McGriff. They invested in our strategic plans, provided capital for perpetuation and growth, and most importantly enabled us to maintain our corporate culture.

What’s the most interesting thing in your office?
A potato gun.

You’ve got to explain that.
Bobby Reagan, president of Reagan & Associates, did our agency appraisal for many years, assisted us in strategic planning, and ultimately helped facilitate our transaction with BB&T. He invited us to his lake house in north Georgia one year, where we had a great time, among other things, playing with a potato gun he had built—he’s got an engineering degree. Anyway, we participated in his annual “best practices” survey, so he sent us a plaque. I sent it back saying that I would rather have a potato gun. So he sent us a gun with the plaque attached. The gun has been the featured event at a number of our sales retreats, much to the chagrin of the resorts.

How would your employees describe your management style?
Team-oriented. Sales-oriented. There’s not a lot of bureaucracy at McGriff. We tell people it’s alright to suck up to the boss, but there’s no money in it.

What gives you your leader’s edge?
Without question, our culture. Our sales culture is pretty unique—the flexibility, the teamwork, the esprit de corps, quality people, the hard work and the success.



The Dunbar File

Favorite Birmingham Restaurants:
Botega’s (Pretty famous for their fish.)
Dreamland (ribs)
The Highland Bar and Grill

Favorite Hunting Spots: South Alabama, South Texas

Favorite Fishing Spot: Gulf of Mexico

Favorite Vacation Spot: See above

Many people left unsettled and divided. Fertility rates are down. Mobility rates hit rock bottom. New policies restrict immigration to new lows. Populations around the world embrace leaders with a distinct bent toward nationalism.

That was the 1930s. We have been here before.

In 1997, two amateur historians, William Strauss and Neil Howe, wrote The Fourth Turning. The authors documented repeating historical patterns in Anglo-American history dating to the 15th century. The book is undergoing a resurgence of sales, thanks to Chief White House Strategist Steve Bannon, who some characterize as the second most powerful man in the United States. He is using the book’s theories as a playbook to shape a new order in America, and people are taking notice.

The book’s premise is that history repeats itself every 80 to 90 years in predictable, four-phase cycles. Each cycle, or “turning,” is about 20 years long. In February Time magazine quoted historian David Kaiser: “Successive generations have fallen into crisis, embraced institutions, rebelled against those institutions, and forgotten the lessons of the past—which invites the next crisis.”

For about four centuries the fourth turning has been characterized as a crisis period in U.S. history. A quick look back at the last three centuries shows fourth turnings climaxing with major wars—the Revolutionary War, Civil War and World War II. They are all about 80 years apart. In each case, an economic collapse, a disintegration of social order, and a declining institutional effectiveness preceded the wars, while a new civic order and institutional effectiveness, along with economic growth, followed them.

According to the authors, 2017 puts us smack in the middle of a fourth turning.

The Turnings

Each of the four turnings has an underlying theme. The first turning is a “high”—society is confident and institutions are strong. The most recent first turning (1945–1964) was the post-World War II era, which is defined in The Fourth Turning as the New American High. The GI generation built many of the institutions that shaped the new world order—NATO, The World Bank, Bretton Woods and The United Nations.

Eisenhower commissioned the Interstate Highway System, wages surged and income gaps closed, favoring a strong middle class. Life was good.

The second turning is an “awakening”—social structure begins to splinter, families weaken, the value of institutions is questioned and ideals are discovered. In second turnings, individual values overshadow institutions. The most recent awakening (1964–1984) was called the Consciousness Revolution. Students rioted, cities crumbled, and the counterculture movement was born. This second turning produced the Civil Rights Act, Woodstock, feminism and Watergate.

The third turning is an “unraveling”—eroding interest in the value of institutions, a cynical culture and a darkening vision of the future. In third turnings, people fear the national consensus is splitting into competing values camps. In the most recent third turning (1984–2008), called Culture Wars, we saw the beginning of the red state-blue state divide. Culture Wars started with Reagan’s new “Morning in America” and ended with a recession.

The fourth turning is called a “crisis”—society’s greatest need is to fix the outside world. There is an urgent need to simplify. Change, risk and uncertainly reach their peak in a fourth turning. The last three fourth turnings climaxed in game-changing wars and laid the groundwork for a rebirth of civic spirit, institution building and economic prosperity—ushering in the high of the first turning.

According to the theory, fourth turnings typically experience four distinct phases in the 20-year period. The first is a catalyst—the last one being the Great Depression in 1929. The second phase is a regeneracy, characterized by the possibility of a reenergized civic life. The third is climax, the crucial moments that confirm the death of the old order and the birth of the new. Last century, this would have been World War II. Finally, the fourth turning culminates in a resolution—a conclusion that establishes a new order.

Where Are We Now?

Neil Howe believes the catalyst for this fourth turning was the Great Recession, begun in 2008, which puts the end of the fourth turning sometime in the mid-2020s. The election of Donald Trump seemed to be propelling America toward a climax, and if the 80-year cycle holds true, the climax would occur sometime between 2019 and 2021.

The authors do not predict exact timing of events of the fourth turning but stated more than 20 years ago that the beginning of a fourth turning could come sometime between 2000 and 2010, spurred by anything ranging from a financial crash to a national election. The scenarios they offer are strikingly familiar, including terrorists blowing up an aircraft and the ensuing retaliation, an impasse over the federal budget that triggers a government shutdown and Wall Street panic over looming debt default.

What’s Next?

The last three fourth turnings climaxed in major wars, and Bannon does not shy away from the possibility. There’s tough talk on the Middle East and China, and increasing tension with Iran. Of course, there’s Russia, and an increasingly belligerent North Korea. “It all looks as if the world is preparing for war,” Mikhail Gorbachev said recently in Time.

He added: “[P]oliticians and military leaders sound increasingly belligerent and defense doctrines more dangerous. Commentators and TV personalities are joining the bellicose chorus.”

Climaxes occur just as the generation who came of age during the last climax have mostly died and gone. The youngest of the GI generation is 93, and most Baby Boomers—the current dominant generation—have little recollection of World War II.

The future ramifications for the insurance industry are astronomical—both in claims and in broker business development. Turnings influence the overall social mood of society. There is a sense among people today that we are living in uncertain times with plenty of risk, and many are looking for ways to protect themselves.

One way to do this could be more scenario planning for catastrophes. Given that the new warfare is more likely to be cyber than nuclear, what are the implications of a complete systems grid shutdown in the U.S., even just for a day? Strategic Air Command and other agencies in the government have been stepping up their planning for such a strike. And in addition to advising their clients, brokerage principals should be looking seriously into their own firm’s scenario planning.

This is real stuff that should not be ignored. These theories are based on undisputed historical evidence that has been true to form for centuries. The question is: Can a fourth turning be avoided or will history repeat itself? As the late philosopher George Santayana said, “Those who cannot remember the past are condemned to repeat it.”

Wright, president of CoachingMillennials, is a frequent collaborator with Neil Howe. warren@coachingmillennials.com

I thought about those canaries when I recently sat on a regional business economics association panel along with another investment banker and partners from two private equity firms. In discussing the global M&A outlook, the group agreed we are looking at an unprecedented marketplace in which valuations in all industries are incredibly aggressive.

One panelist noted that in the short term we could expect only blue skies ahead. There are many reasons to believe this. Since 2013, the number of private equity funds created to focus on the lower middle market (defined as firms between $100 million and $500 million in revenues) has increased significantly. More funds mean more available capital. Even in a market with high-priced assets, private equity groups are in the business of deploying capital. They need to continue to invest. Capital deployment in today’s market comes with a smaller margin of error, partially because of the high valuations required to get a deal done.

A recent report by GF Data says middle market valuations achieved a peak in 2016, so fund creation and valuations are at a high watermark. These market characteristics help make this a good time to be a seller. Buyers are often forced to be aggressive on good investment opportunities because they need to put their capital to work. It does not appear there are fewer sellers as in past cycles, but there are definitely more buyers. This strong demand is partially responsible for the valuation increase.

While one panelist’s “blue skies ahead” optimism for the short term M&A market feels good, we certainly need to watch and see what happens to the canaries. Government regulation is a big question mark. New regulations concerning tariffs and trade could have a lasting effect on the economy. Tax reform may affect corporations and individuals, but to what end? We expect interest rates will continue to slowly rise, but the general consensus is the slight uptick will not affect lending capacity. Obviously, the threat of global instability—or U.S. conflicts with Russia, Korea or in the Middle East—would have a negative impact.

No one could pinpoint anything specific. It was more a sense that the euphoric times we are seeing today are unprecedented. The days ahead seem bright, but all good things come to an end.

M&A has a cyclical nature. At this point, no one seems able to figure out when the canary will draw its last breath.

The Latest Deals

There were just 21 deals reported in February, down from 40 in January. There were 74 deals completed in the first two months of 2016—61 fewer deals than in the same period a year ago.

Private-equity backed independent agencies have been the most active buyers this year. They account for 24 of the 61 deals—nearly 40%. P-C agencies have been acquired most often. They make up nearly 50% of all the announced deals in January and February (30 of 61). 

Arthur J. Gallagher & Co. has been the most active buyer with seven acquisitions through February. Notably this year, Baldwin Risk Partners and its affiliated company, Baldwin Krystyn Sherman Partners, have announced several transactions. They have been the second-most active buyer this year, behind Gallagher. Baldwin has announced three p-c agency acquisitions in the Florida market, where the parent company is based.

Trem is SVP at MarshBerry. Phil.Trem@MarshBerry.com.

Securities offered through MarshBerry Capital, member FINRA and SIPC. Deal counts are inclusive of completed deals with U.S. targets only. Please send M&A announcements to M&A@MarshBerry.com.
Sources: SNL Financial, MarshBerry.

The Wall Street Journal reported that, although Yahoo disclosed the 2014 breach involving the personal information of 500,000 users in September 2016, the company had “linked the incident to state-sponsored hackers two years earlier.” Yahoo reportedly discovered the 2013 breach, which involved private information on more than one billion users, in December 2016. Combined, they represent the largest known breach of personally identifiable information (PII). To add to the company’s problems, the Securities and Exchange Commission opened an investigation into whether Yahoo violated its guidance to disclose cyber events that could have a material impact on investors.

Upon learning of the 2014 breach, Verizon signaled that it might seek to renegotiate the deal under the “material adverse change” clause of its purchase agreement. Indeed, the companies recently agreed on a $350 million reduction in price and a division of potential future liabilities arising from the breaches.

Cyber Due Diligence and Risk Management

Buying a company—or even certain assets of a company—means buying its past, present and future cyber risks, including its privacy and regulatory issues, infrastructure weaknesses, and software and hardware vulnerabilities. Brokers should be aware of this, whether buying or selling a brokerage practice or advising clients seeking to acquire or divest assets or entire businesses. 

For example, without conducting cyber due diligence, the buyer risks purchasing a company with active malware within its system. Or a company’s security controls could be so weak that interconnecting the buyer’s and seller’s systems could quickly compromise all operations. Or the seller’s intellectual property could have been stolen or serious breaches of PII could have occurred, exposing future market share.

A company’s data are some of its most valuable assets. It is important to know if the data being purchased have been stolen, disclosed or compromised. The Wall Street Journal reported in 2012 that Chinese hackers had unfettered access to Nortel’s systems for nearly a decade, using seven passwords stolen from executives. They stole technical papers, R&D reports, business plans and anything else they wanted. The paper noted that, “Mr. Shields [the internal investigator] and several former colleagues said the company didn’t fix the hacking problem before starting to sell its assets, and didn’t disclose the hacking to prospective buyers. Nortel assets have been purchased by Avaya Inc., Ciena Corp., Telefon AB L.M. Ericsson and Genband.”

This type of activity continues today. Electronic espionage, theft by insiders and intelligence gathering by nation states are commonplace. Cyber defense company FireEye noted in a 2016 report that it had “observed several likely China-based threat groups targeting companies engaged in M&A-related activity.” 

Brokers should realize that no matter the size of the deal or perceived sophistication of the parties, the security of digital assets cannot be taken for granted. “To assume a company has adequate protections against theft of confidential information or intellectual property is to take an enormous and unnecessary risk that could change the value of the underlying deal,” note Tom Smedinghoff and Roland Trope, co-editors of A Guide to Cybersecurity Due Diligence in M&A Transactions, which will be published in early summer 2017 by the American Bar Association.

The Impact of Cyber Due Diligence on a Deal

Cyber due diligence is critically important to buyers and sellers. Evidence of a strong cybersecurity posture can be marketed as an asset and result in a higher valuation of target companies. Weak cyber-security practices, however, can cause a reduction in purchase price to offset necessary expenditures to correct security issues or resolve potential liabilities—or it can scuttle the deal altogether. 

In 2016, the New York Stock Exchange and Veracode conducted a survey of 276 public company directors and officers to better understand cyber risk-management practices in the M&A environment. Of the respondents, 85% indicated the discovery of major vulnerabilities in a target company’s software assets would likely or very likely affect their final decision on the acquisition. Although 52% of the respondents said they would buy the company at a significantly lower valuation, 22% of them said a high-profile data breach would cause them to decline the acquisition.

A similar study, performed a couple of years earlier by the UK law firm Freshfields Bruckhaus Deringer, surveyed deal-makers instead of directors, but it had comparable findings. Of the survey respondents, 90% said previous cyber breaches could reduce the value of the target company, and 83% said a deal could be scuttled if previous breaches were revealed. 

Significantly, the report noted that the opinions of the respondents did not necessarily indicate that cyber due diligence was occurring. “It is odd that most respondents to the survey said they were concerned about cyber security risks but that most respondents aren’t actually doing anything about them during the M&A process,” the report noted

The Yahoo—Verizon acquisition has likely changed that.

What to Do

Brokers can help clients by advocating for a robust cyber-risk assessment early in the M&A process. This can range from a review of documents to a comprehensive analysis of the IT infrastructure and cyber-security program, including vulnerability scanning or penetration testing. The scope of the assessment will depend on the size of the company, sensitivity of data, compliance requirements and complexity of business operations.

If a company manufactures (or even uses) products with embedded software or uses wireless devices, it is important to check for security vulnerabilities, as the engineers that develop this software or select the devices usually work outside of IT and may not consider security risks during the innovation process. Medical devices, automobile computers and hotel door-locking systems are recent examples of products that have been hacked.

Cyber-security programs should be assessed against the best practices and standards applicable to the company. For example, a global manufacturing company that contracts with the U.S. Government, accepts credit cards at its outlet stores and administers its own health plan may have to meet the ISO 27001 standard for information security, the National Institute of Standards and Technology cyber-security requirements, the Payment Card Industry Data Security Standard, and the HIPAA Security Rule.

Cyber due diligence also must check whether privacy and security compliance requirements are integrated into the cyber-security program. The European Union imposes strict data protection obligations with respect to PII, and its new General Data Protection Regulation, which goes into effect in May 2018, strengthens them and includes breach notification provisions. Fines under the General Data Protection Regulation can be onerous, reaching up to 20 million Euros or 4% of total worldwide annual turnover of the preceding financial year, whichever is higher. European Workers’ Councils and national data protection authorities may impose additional requirements.

A cyber due diligence report should provide detailed findings and enough specificity that potential business interruption or other relevant loss exposures can be identified and quantified. John Dempsey, managing director and global practice leader at Aon, recently noted that, “Accurate exposure quantification can be a game changer. When a company correlates its cyber risks to financial exposures, decisions about whether the price should be adjusted or a deal aborted can be made with greater clarity.”

Quantifying cyber risks also helps the buyer evaluate whether the target’s existing insurance coverage is adequate to transfer the identified risks. Brokers also can help clients manage cyber risks through transactional liability insurance, which includes representations and warranties coverage and may cover the discovery of a cyber event.

Jody Westby is CEO of Global Cyber Risk. westby@globalcyberrisk.com


He believes culture is a vital, powerful and often “unconscious set of forces that control individual and collective behavior, including strategies and goals.”

Dale Stafford and Laura Miles in the Bain brief, “Integrating Cultures After a Merger,” say three key elements define culture—behavioral norms that are exhibited at every level within the organization, critical capabilities that define the corporate strategy, and the company’s operating model, including structure and accountabilities.

Companies often face culture challenges as they grow. No time is this more obvious than during a merger or acquisition. When companies join, two cultures meet. One of three things can happen. They can coexist, one can dominate or they blend.

In 2013, Bain did a survey of executives who managed through mergers. They found that the number one reason for a deal’s failure to achieve the promised value was a clash in cultures. Dr. Nancy Rothbard, professor of management at Wharton, says recent studies show a 75% failure rate in acquisitions, and much of the research points to an inability to merge the cultures.

You may be wondering why this would happen. Several reasons have been identified. In a merger/acquisition, it’s much more difficult to assess the qualitative aspects of an organization.  It’s not easy to determine where the cultural incompatibilities may be because they are considered “soft” and not easy, if not impossible, to quantify. “One mistake people make …is assuming they need to completely throw out the pre-existing cultures after the merger,” says Tim Donnelly in the Inc. Magazine article, “How to Merge Corporate Cultures.” Another error is making the assumption that the acquired company will readily accept the acquirer’s culture.  Often, the companies’ fundamental ways of working are so disparate they lead to misinterpretation, which leads to frustration, demoralization and reduced productivity.

The bottom line is culture counts. If decisions are made without considering culture they can lead to unanticipated and undesirable consequences. So what can be done to ensure a successful integration of cultures? Stafford and Miles recommend the following:

  1. Set a cultural integration agenda. This is a job best done by the CEO. There are some difficult choices that must be made. The CEO needs to explain the “what” and “how” of the new company, including the value creation this merger will bring. Executives should avoid vague or inflated statements.  They need to clearly define the culture they want to emerge.
  2. Diagnose the differences that matter. There are a number of tools that can be used to identify and measure the differences among people.
    a.  Management interviews can be used to reveal managerial styles and priorities.
    b. Video and audio recordings of people in their jobs allow side by side comparisons of different ways to work.
    c. Process flow maps indicate how the work is being done.
    d. Customer interviews identify the differences in customer perceptions of each organization. It is critical to pay attention to this important group of stakeholders and not be too inwardly focused.
    e.  Employee surveys identify accepted behaviors, attitudes and priorities.
  3. Define the culture you are trying to build. The senior team must determine any critical gaps that need to be closed. They must also create a detailed picture of the future culture. This should go beyond vision and value statements. Merged companies should adopt a performance contract that states how the new entity should treat customers, manage process and make decisions. Agreeing on performance criteria early in the process can mitigate differences.
  4. Develop a sustainable culture change plan and measure progress. It’s very difficult to co- create a new culture. Intent Workshops can be a valuable tool to help with this. An Intent Workshop brings people together to plan how they will behave collectively and what they will achieve. An important part of the discussion is how the new behaviors will generate value.

Another way to ensure cultural integration is a process called A Six Source Diagnosis, which is defined by David Maxwell in “How to Effectively Merge Company Culture” in Crucial Skills. It identifies the influences that are keeping problem behaviors in place. The six areas to be examined include personal motivation, personal ability, social motivation, social ability, structural motivation and structural ability.

Leaders who have been through a merger know that mergers are challenging and never perfect. It’s important to recognize that culture is deeper, broader and more entrenched than you might think. But if you treat the existing cultures of both firms as a source of strength, it can enhance the chances of success.

McDaid is The Council’s SVP of Leadership & Management Resources. elizabeth.mcdaid@ciab.com

Have a leadership issue you’d like to explore? Email Elizabeth now. Say No to Not Yet!

This story, describing the impersonal aftermath of a merger, was recently shared among a group of industry leaders who were discussing how emotional intelligence affects workplace performance and morale. It highlights a rarely discussed but extremely important element in the deal-making process: culture.

I talk a lot about culture because I believe in it. Those who don’t are missing the boat.

This year’s M&A issue features cybersecurity during M&A, the complexities of cross-border and international M&A, and the intricacies of translating values and business models to foreign markets. As you read along, whether you’re looking to buy or sell at home or abroad, keep in mind the importance of culture when you’re sitting across the table from your potential partner. 

Culture is all about the hard and soft values your organization expresses in its behavior. It is the key to wins and losses. It is your brand. It is your employees. It is your physical office space and the fine print in your employee handbook. Culture is not something you can fake. Culture 101 is about being authentic.

There’s a Deloitte white paper on my desk that warns not to act solely on products or numbers when considering a merger. The paper’s premise is fitting for this issue: “Organizations today undergo mergers, acquisitions and joint ventures for many reasons: among them, to acquire technologies, products and market access; to create economies of scale; and to establish global presence. However, culture has emerged as one of the dominant factors that prevent effective integrations.” Case in point, Employee No. 97642.

Culture has to be baked in to everything from decision-making and leadership style to adaptability and appetite for risk, to how people work together and build relationships. Then, and only then, can it create better value for your clients and ultimately help you realize success.

Let’s face it, culture alone may not stop an attractive transaction (a fact Deloitte also acknowledges). So it is the keen responsibility of the people managing the deal to ensure its success by embracing, instead of ignoring, it. If you’ve recently bought or sold, don’t throw your hands up in defeat. Even after the deal is done, steps can be taken to ensure a smooth integration or, perhaps even better, the birth of a new culture. The point is, your employees are your number one asset and they should not be cast aside.

The 2017 Edelman Trust Barometer found that the credibility of CEOs fell by 12 points this year to 37 % globally. According to Edelman, the primary axis of communications is now peer-to-peer, underscoring the role employees play as your brand ambassadors, whether you realize it or not.

Culture gives meaning to your company. Culture is your internal brand and your external insights. It is your values and beliefs, and it is linked to measurable business results. Done right, making culture a major component of your next merger or acquisition might actually turn a cold file folder stamped with an employee number into a real person eager to go to work every day.

We reached out to the leaders of three insurer-backed venture capital funds— Axa Strategic Ventures, American Family Ventures, and XL Innovate—to solicit information on their recent investments and what drove their interest in the insurtech startups. All three funds grew substantially in 2016 in terms of the number and value of their investments.

XL Innovate is a case in point. “We’ve made nine investments to date,” says Tom Hutton, managing director of the VC fund, launched by XL Catlin in April 2015. “We’re focused on early-stage startups, particularly those with innovative approaches to underwriting and client-facing distribution. Change is needed, and we believe the insurtech movement over time produces these changes.”

XL Innovate has a three-pronged investment focus—startups that present the opportunity to grow a new business, provide data analytics solutions, or have developed what Hutton calls “a transformational operating model.”

Axa Strategic Ventures, which is backed by French insurer Axa, has made investments in the “pure insurance space” and in data analytics, says Manish Agarwal, the VC fund’s general partner. While the fund has an open mind when it comes to insurtech opportunities, it’s very selective. “On average, I get about five solicitations a week to invest in an insurtech startup,” says Agarwal. “With so many different parts of the insurance value chain ripe for disruption, there’s a lot out there to choose from.”

He is especially open to the development and emergence of new direct insurance carriers. “There’s a movement among reinsurers to provide capital to companies that build the front-end consumer-facing product, which they can then back with their own balance sheets,” he explains.

Like the other two VC funds, American Family Ventures, funded by American Family Insurance, is focused on early-stage startups from the seed capital phase through the Series B round, where investors take bigger stakes right before the company starts to scale. The fund is focused on insurance innovators in the distribution space; startups involved in Internet of things ventures, such as developers of home automation and autonomous vehicle systems; and predictive data analytics.

“We started with a $50 million allocation from our parent [in 2014], which grew substantially in 2016,” says Dan Reed, the fund’s managing director, who declined to reveal the size of this capital infusion. “I will say that our team has grown from four people to six people, and we’re doing on the order of 10 deals a year, with investments in more than 40 insurtech startups to date,” he adds.

“There’s been a real sea change in the industry with regard to insurtech startups,” says Matthew Wong, senior research analyst at CB Insights. “Insurers and reinsurers see opportunities to achieve a return on their investments in non-insurance-specific startups while getting their noses under the tent.”

Employee Benefits  Platforms

  • Help businesses offer healthcare and other insurance products to their employees.
  • 49 startups and $1.1 billion in total funding


Consumer Insurance Management Platforms

  • Help consumers manage their insurance and claims (including mobile apps to file on the spot).
  • 57 startups and $370 million in total funding


Enterprise/Commercial Insurance

  • 92 startups and $840 million in total funding


Insurance Comparison/Marketplace Startups

  • Allow consumers to compare different providers and give providers a forum to offer their products.
  • 280 startups and $1.1 billion in total funding


Insurance Data/Intelligence

  • Companies that collect, process and analyze data analytics and business intelligence.
  • 100 startups and $2.6 billion in total funding


Insurance User Acquisition Companies

  • Help insurers identify new client leads and then manage their acquisition.
  • 75 startups and $325 million in total funding


P2P Insurance

  • 30 startups and $85 million in total funding


Reinsurance Startups

  • 28 entrants and $795 million in total funding

Vibe >> Des Moines is definitely upbeat. There is a lot of development happening in our downtown area, including a new four-story building that EMC is adding to our current campus. Forbes ranks Des Moines as No. 6 for businesses and careers; Kiplinger ranks us as No. 2 for families.


Dining scene >> We have a very diverse restaurant scene. There are many terrific locally owned restaurants, particularly in downtown. If you leave Des Moines hungry, it’s your own fault.


Favorite new restaurant >> My favorite new restaurant is Sam and Gabe’s at The Lyon. It is located just east of downtown and has a beautiful view of the river and skyline. The menu is a blend of old-town steakhouse with a contemporary flair. They also have great seafood.


Classic eats >> My favorite place to eat is the Des Moines Embassy Club. It is a private dining club with reciprocal agreements. The downtown club is elegant, quiet and has a beautiful view of the city. The service is exceptional, and the food is amazing.


Watering holes >> RōCA on Court Avenue provides a wide variety of creative cocktails. My favorite is the “Smoking Gun,” a blend of Bulleit Bourbon, maple syrup, Angostura bitters and wood chip smoke. If a client is a beer lover, I recommend El Bait Shop, which has 222 beers on tap.


Stay >> When we have important customers visiting, we like to have them stay at the Des Lux, a boutique hotel in downtown Des Moines. They have very nice rooms, an excellent fitness center and a terrific breakfast. It’s close to our offices and the downtown nightlife.


Things to do >> I find that most out-of-state visitors enjoy attending the Iowa State Fair in August. They should also visit the Downtown Farmers’ Market during the summer months. Fitness enthusiasts can participate in the Des Moines Marathon and RAGBRAI (Register’s Annual Great Bicycle Ride Across Iowa).


Active >> Des Moines is a very bike-friendly city. There are miles of paved trails for walking, running and biking. A favorite is our Gray’s Lake Trail, a two-mile loop next to downtown. Public golf courses of note are The Harvester Golf Club (one of Golf Digest’s top 100 public courses) and the Tournament Club of Iowa.

German immigrant Philipp Schillinger opened Birmingham’s first brewery in 1884. It was a festive time. As Carla Jean Whitley noted in her book Birmingham Beer: A Heady History of Brewing in the Magic City, Schillinger rode the lead float in the city’s first Mardi Gras parade, drinking to the crowd’s health.

The party stopped with Prohibition, and even though this miserable period in spirits history came to an end, it wasn’t until the repeal of Alabama’s restrictive beer laws in 2009 that local beer production resumed. There are now five craft beer breweries in Birmingham, with another, Birmingham District Brewing Co., scheduled to open later this year.

Laissez les bon temps rouler!

Avondale Brewing Co. The year-round and seasonal beers are named after the folklore of Avondale. The Long Branch Scottish Ale is a nod to the saloon that once occupied the historic building where the brewery is housed. Avondale recently opened a separate tasting room dedicated to funky beers, like barrel-aged saisons, sour beers and Brett beers.

Cahaba Brewing Company This brewery moved to a bigger location last year. It serves a variety of beers—core, seasonal, single hop, specialty, historical—in its taproom and on its covered patio. Skee-Ball draws a rowdy crowd.

Ghost Train Brewing Company Named after Birmingham's former terminal train station, Ghost Train pours five beers, including the Ghost Train Craft Lager, a golden ale, Belgian-style strong ale, brown ale and India pale lager.

Good People Brewing Company Across from Regions Field, the taproom is inside the actual brewery, so you can watch folks brewing while you sip suds. Good People serves five year-round brews—a flagship pale ale and four seasonals—and an occasional one-off.

Trim Tab Brewing Co. Local art hangs on the walls of the laid-back tasting room, where you can see the brewery through windows. Flagship beers are Pillar to Post Rye Brown and the TrimTab IPA, and the brewery also serves seasonal brews.

Birmingham, Alabama, has been on a roll the last several years. In 2010, the release of 1,300 butterflies marked the opening of Railroad Park in downtown—19 acres of green space dotted with trees and wildflowers, a pond, a natural amphitheater, and running and walking trails. In 2013, the minor-league Birmingham Barons played their first game in their new ballpark, Regions Field, also in the heart of the city. Just last year, the Lyric Theatre, the century-old jewel of Birmingham’s historic buildings, reopened after a 20-year, $11 million restoration. Ornate moldings, gold-leaf cherubs on the opera boxes, and Allegory of the Muses, a mural by Birmingham artist Harry Hawkins, are a handful of the opulent architectural details in the former vaudeville theater, where the Alabama Symphony Orchestra, as well as national acts like Ben Folds, now perform.

Last year, Birmingham came in 14th on Zagat’s list of the “26 Hottest Food Cities of 2016,” beating out New York City. One could argue that James Beard Award-winning chef Frank Stitt planted the seed for the city’s Southern farm-to-table culinary scene when he opened Highlands Bar and Grill in 1982. His restaurant in Five Points South, a neighborhood teeming with great eateries, has been a finalist for Beard’s “Outstanding Restaurant” award seven times, most recently in 2015. The Alabama native has schooled many of Birmingham’s top chefs, including Chris Hastings and Brian Somershield, at Highlands Bar and Grill and at his other lauded restaurants Bottega and Chez Fonfon. Hastings won the James Beard “Best Chef: South” award in 2012. He owns the ever-popular Hot & Hot Fish Club and just opened OvenBird, which is getting all the raves for his live-fire cooking. Somershield’s modern Mexican El Barrio Restaurante y Bar is a regular on the annual “Best of Birmingham” list compiled by The Birmingham News.

While it has yet to catch up to Portland, Birmingham is officially a craft beer city. Good People Brewing Company led the way in 2008 with its brown and pale ales and was followed by Avondale Brewing Co., which anchored the revitalization of the now trendy Avondale neighborhood. With Cahaba Brewing Company moving to a bigger location and recent openings of Trim Tab Brewing Co. and Ghost Train Brewing Company, you can add a brewery tour to your itinerary on your next visit.

Home base for exploring the cool new Birmingham? The boutique Redmont Hotel. On the north side of downtown, The Redmont is within walking distance of Good People Brewing, the Lyric Theatre and Birmingham’s burgeoning nightlife.

While the list of insurtech startups skew heavily toward alternative distribution models, a multitude of specialized approaches, tools and techniques are represented—in fact, it’s hard to separate the wheat from the chaff. The emerging models that directly impact brokers (directto-consumer, carrier-broker hybrids, etc.) garner quite a bit of our attention. It’s important, however, to find points of convergence among all of these startups. Think of a Venn diagram. Identifying the common points of overlap can help us identify where the industry is headed and figure out how to join that flow. Today, we’ll look at a factor that exists in every insurtech venture: The Last Mile.

The Last Mile should be familiar to anyone in sales, although I never understood why it isn’t called “The First Mile.” Nomenclature aside, the basic concept says that the person who is closest to a transaction controls that business. As agents and brokers, we take this simple fact for granted. Through various methods, we identify clients and bind business, the very definition of The Last Mile. For nearly every commercial broker, the primary revenue-generating activity is the binding of insurance. As a major distribution source for carriers, we are incentivized on our ability to land and retain clients. The more we land and hold, the more we grow and prosper. To maintain this prosperity, we add services and capabilities, wrapping our clients in a blanket of relationships, trust and the feeling that we are irreplaceable. When you think about the concept in this way, it becomes apparent just how critical The Last Mile is to every one of our agencies. Without it, we truly would become a simple middleman ripe for disintermediation.

So, what are the new market entrants focusing on? While there are a number of insurtech categories with varied approaches to the industry, every one of them is focused on placing their offering as close to the customer as possible.Direct-to-consumer models are the most obvious of the bunch and are clearly designed to remove the broker from the equation. These companies are, however, not the only threat. Any new market entrant that focuses on a service or technology with a direct benefit to the insured is putting serious resources into The Last Mile. Startups often flare up and quickly annihilate themselves, so it’s important not to focus too heavily on who they are but rather on what they are creating. Every new attempt moves the bar. And traditional brokers will have to compete with them. In the last 90 days, there have been 29 insurtech funding events to the tune of $400 million. Current estimates peg total insurtech funding in the range of $17 billion. That’s an amount of capital focused on creating new business models that no traditional brokerage can spend. 

It’s time to ask yourself a hard question: if The Last Mile is a critical factor to agency survival, how much time and resources have you spent building strategies and tactics to keep it in place? We spend a lot of time thinking about how to hire production talent, but this often focuses on a narrow goal of pure new-business generation. When you look at your top producers, they are generally pretty far along in their careers. Their new business is mostly generated through their existing networks rather than through cold calling or traditional prospecting. In short, these producers have over time identified their approach to The Last Mile and successfully applied it to their relationship networks. New producers generally don’t have the experience or networks in place to operate in this way. For these producers, a strategic approach is critical because these are the producers the insurtech firms are targeting. And the odds aren’t looking very good for us. But, we do have the home-field advantage. Instead of having to guess how to capture The Last Mile, we already hold it. We have an inherent understanding of our industry and what motivates buyers of insurance. While an outsider might think The Last Mile is about generating sales, we know that it also encompasses account servicing. You can’t just make it easier to buy insurance. You have to reduce the risk, streamline the placement and most importantly help resolve the claims.

The competitive environment of the past four decades hasn’t required us to change much, but that’s over. Seventeen billion dollars’ worth of rapid progress will convince insurance buyers there’s a better way. It’s time for us to take notice and keep pace. This will require investment and creativity, but most importantly, attention. Where are your agency’s inefficiencies? Where are you making it hard for your clients? How can you strategically use data and technology? You shouldn’t try to compete directly with that mega investment, but you do have to play the game. As my friend Joel Wood likes to say, “If you’re not at the table, you’re on the menu.”

Total 2016 funding in insurance technology startups was estimated at $1.69 billion, spread across 173 deals, according to CB Insights, which tracks insurtech activity. Insurtech  funding for the first quarter of 2017 was estimated at $406 million across 29 deals, according to Venture Scanner, an analyst- and technology-powered startup research firm. It’s a very fluid market that’s hard to define exactly, so the numbers vary by source. For example, CB Insights pegs the number of insurtech startups at 325. Venture Scanner is tracking more than 1,000.

These figures are definitely significant, and they demonstrate investor confidence in the companies’ products and services, which promise improvements to wide-ranging processes and systems across the insurance value chain. Each startup offers a new technology solution that purports to do what insurers and brokerages do, only better. Some say this could spell disintermediation for brokers.

Nine in 10 insurers fear losing part of their business to the insurtech newcomers, according to management consultancy PwC. Three quarters of them believe at least some part of their business will be disrupted.

But that’s a pretty typical response to change that’s beyond the industry’s immediate horizon. For those willing to look to the periphery, insurtech can be a means to thrive. By using it effectively, you can underwrite more closely to risk, process claims more efficiently and cost-effectively, and reach more customers in more interesting ways. But more than that, the potential is there to improve your clients’ ability to do business as well as the lives of their staffs. If you want to evolve your business—and many will say there’s no longer much of a choice if you want to sustain it—insurtech offers endless opportunity. 


The lion’s share of startup money is coming from traditional venture capital firms, many in Silicon Valley. CB Insights tallies 141 traditional and corporate VC firms that invested in an insurtech startup in 2016, compared to 55 in 2011. Among VC firms in the sector are Andreesen Horowitz, Canaan Partners, Horizon Ventures, Lightbank and too many others to list. Insurers and reinsurers have also begun to throw their dollars into the ring, establishing venture capital funds to sniff out interesting startups and make a deal. Five years ago, it was hard to find mention of investments in private technology companies by an insurer or reinsurer. Last year, more than 100 deals were completed.

Thousands of investors, technology developers, startup leaders, and insurance and reinsurance executives have packed conferences in Las Vegas, London, Luxembourg, Singapore and Israel. Similar to conventions like the Consumer Electronics Show, insurtech gatherings have the latest insurance technology innovations on display.

“In the past, innovative insurance business models were generated inside the walls of insurance companies,” says Jamie Yoder, leader of the insurance advisory practice at PwC. “Now, much of the innovation is happening outside company walls, changing insurers’ focus from how to build these new capabilities to how to incorporate them.”

Second to the traditional VC players in placing their bets are global reinsurers, with 79 deals (investments) to their credit in 2016. Munich Re is the primary property-casualty reinsurer investor

in the sector, followed by Swiss Re. The company recently launched a unique startup-reinsurer partnering program, Digital Partners, providing both capital and reinsurance capacity to early-stage companies. In the second half of 2016, partnerships were inked with seven insurance technology startups.

The deals are a win-win for the reinsurer. “The partnership concept aligns Munich Re’s investment with its risk-bearing capital so the startup can sell property-casualty insurance provided by Munich Re,” says Matthew Wong, senior research analyst at CB Insights. “Hannover Re has introduced a similar partnering program on the life side.”

Much of the capital that has been invested in the sector is so-called “seed capital”—the initial funds provided by an entrepreneur’s friends and family for product research and development in advance of launching business operations. “Two thirds of the insurtech startups that raised money last year were early-stage companies with seed capital,” says Wong. “Now that they’ve attracted the first round of early-stage venture capital, we expect to see additional funding rounds occurring this year.”

Geographically, six in 10 insurtech deals last year involved domestic startups, with the remainder of activity spread unevenly across the world. No other country saw nearly the volume of activity or the deal values that have been tabulated in the U.S., with India a distant second at 11%.


 Among the investors betting their capital in the mushrooming sector are