Council members offer some of the most compelling insights into today’s—and tomorrow’s—insurance market.
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.
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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.
Karen Gustin, LLIF, Ameritas Life Insurance Corp., EVP, Group Division
I was the kid who had the lemonade stand.
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 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.
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.
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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.
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.
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.
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.
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?
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.
Anthony Kuczinski, President and CEO, Munich Re
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.
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.”
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.
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.
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.
The potato gun has been the featured event at a number of our sales retreats, much to the chagrin of the resorts.
A financial meltdown. A sluggish recovery. A growing concern over income inequality. An increasing distrust of elites.
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.
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 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.
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.
Jason Bogart, SVP of branch operations, EMC Insurance Companies; President, EMC National Life Company
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.
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.
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PAR, which is always looking to address changing needs, recently decided to offer cyber risk coverage to members.
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.
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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.
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.
We respectfully retired Mr. Cooper and Mr. Gay. Then it was, “What do we call ourselves?”
I barely had my feet kicked up when the call came. There had been a fire in our home. My heart sank.
Every day President Trump seems to sign new executive orders, shifting not just the sands in Washington but entire islands of political norms.
Is your blindspot showing?
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.
As we detail in Callous Capitalism, many Americans are losing faith in our economic system.
I was exposed to diverse cultures at an early age. Learning their customs, traditions and food was a very broadening experience.
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.
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.
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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.
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.
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.
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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.
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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?
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.
Is there an “impostor” holding you or your team back?
We’ve all heard the expression “Fake it till you make it.”
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.
A few months back I took a look at the retail industry to see how data analytics are providing specific value to businesses. Let’s continue to refine this thought experiment by envisioning our own industry, just farther down the maturity curve.
Washington is finally back to work after an epic election battle and a major victory for Republicans. There are big—YUGE!—deals that President Donald Trump, House Speaker Paul Ryan, R-Wis., and Senate Majority Leader Mitch McConnell, R-Ky., are poised to deliver.
The seemingly universal problem of attracting and retaining skilled workers is a headache that can reduce efficiency, hurt morale and eat into the bottom-line. But when it comes to having enough IT and cybersecurity, where the talent gap is much higher than in the workforce at large, the consequences can be far more dire.
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
Each year The Council identifies those who have made extraordinary contributions to the insurance industry and especially to commercial brokerage. We call them Game Changers.—Editor
As companies increasingly seek ways to control costs and remain competitive, one concept that is getting considerable attention is total cost of risk (TCOR), which recognizes a claim has more impact on a customer’s bottom line than just the insurance premium and the cost of the claim.
A single image explains Chris Catrambone’s obsession. It’s a photo of a toddler lying on his stomach as if napping in a crib.
Chris Catrambone and his rescue team have pulled more than 27,000 refugees from the Mediterranean, Aegean and Andaman seas.
Catrambone has gone from a little-known insurance provider from Louisiana to one of Europe’s most celebrated humanitarians.
His crusade began as a pleasure cruise on the Mediterranean in 2012.
Investors are pouring millions into startups to avoid being caught off guard.
“When life gives you lemons, make lemonade.” The proverbial phrase encouraging optimism in the face of adversity is the underlying principle of insurtech startup Lemonade, the nation’s first peer-to-peer (P2P) insurance company but undoubtedly not its last.
In the fast-growing insurtech space, Lemonade is one of hundreds of startup insurance businesses that together have attracted billions in capital.
Most P2P startups are engaged in just one or two lines of insurance.
Lemonade has state-of-the-art technology—fully mobile, digital, frictionless and embedded in an app.
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The precipitous fall in oil prices over the past two years has left the energy landscape littered with bankruptcies, liquidations, restructuring and layoffs as energy companies struggle to stay alive until prices show some sign of sustained recovery.
This is the season when many of us pause to reflect on the accomplishments of the past 12 months as we plan for the coming year. We evaluate our health, our finances, our education and our family and make resolutions that aim to create better lives for our loved ones and for ourselves.
I’m wide open, maybe sometimes to a fault.
I am doing something today that I never would have envisioned two years ago. I am on a plane flying to my friend and mentor’s funeral
Since the dawn of man, body language has been used to understand the intentions of others. It has evolved into a science unto itself, studied intensively and applied to everything from candidate assessment to criminal interrogation.
There was no outward burst of excitement, only silent reflection. The year-long dirty and divisive campaign, a dark period in our nation’s history, was finally over.
Fidel Castro, the notorious former president of Cuba, died on Friday at the age of 90. While for some, Castro’s death represents the symbolic end of the Cuban revolution and the tyranny that followed, others aren’t so sure that anything will change.
Your firm completes an acquisition, one of several in the past five years. The process of integrating the organization ensues, and eventually business continues “as usual.”
Since The Council’s Game Changers were introduced during the association’s 100-year anniversary, I have been obsessed with them—to see who and what events made the list and to read about those whom I know or knew (or know or knew of), as well as those who came before me.
As a conventional-wisdom lobbyist, I—like almost everyone else in our D.C. clan of thousands—had a very specific action plan for the historic first 100 days of President ... Hillary Clinton.
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.”
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.
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.Tweet
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.Tweet
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.Tweet
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. firstname.lastname@example.org
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?”
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.
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!
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 Musical Group
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.Tweet
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.Tweet
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.
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.Tweet
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.Tweet
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.Tweet
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.Tweet
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.Tweet
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 email@example.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. firstname.lastname@example.org
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 Miller Insurance Services, the London wholesale specialist broking firm linked to Willis Towers Watson, 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.Tweet
“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.Tweet
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.Tweet
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.Tweet
“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.
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. email@example.com
Fielding is CIAB general counsel. firstname.lastname@example.org
Rigamonti is a Steptoe associate. email@example.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. firstname.lastname@example.org
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:
- Investing in tools to be more proficient
- More easily determining the risk appetite of your carrier partners
- Writing more business
- Adding more services to your current offerings
- Finding more talent
- 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.
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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.
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.
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. email@example.com
Herrington is a partner in Steptoe’s White Collar Criminal Defense and Financial Services Practice Groups. firstname.lastname@example.org
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.Tweet
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.Tweet
“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.Tweet
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.email@example.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.Tweet
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.Tweet
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.Tweet
“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. firstname.lastname@example.org
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.”
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.Tweet
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.”
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.”
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.Tweet
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.Tweet
“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. email@example.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.)
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.
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.
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. firstname.lastname@example.org
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. email@example.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:
- 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.
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.
- 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.
- 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. firstname.lastname@example.org
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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
- 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
- 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
- 30 startups and $85 million in total funding
- 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%.
THE ESTABLISHMENT IS ENGAGED
Among the investors betting their capital in the mushrooming sector are many of the world’s largest and most recognizable primary insurance companies. A growing number of insurers have formed venture capital funds as a separate business to essentially do what traditional VC firms do—seek out innovative startups offering a decent return on the investment.
Unlike the traditional firms, insurers have two other reasons to make such investments—as a hedge against a new business model that may be in development and as an intelligence-gathering mission to scope out the next generation of insurance products and distribution mechanisms.
Three years ago, you could count on one hand the number of insurer-backed venture capital funds. Today, CB Insights tallies more than two dozen funds financed by a who’s who of insurance, including AIG, John Hancock, Liberty Mutual, Sun Life, USAA, Northwestern Mutual, Mass Mutual, Transamerica, Chubb, Axa Strategic Ventures, American Family Ventures and XL Innovate. Reinsurers with venture capital funds include Swiss Re, Hannover Re, and Munich Re, among others. “The corporate venture capital market in the insurtech space is now one of the most active segments,” says Wong. (For a deeper dive on carrier investment, see the sidebar “Carriers Are Investing in Insurtech.”)
Every investor in a startup is hoping for the next unicorn, a company that reaches a $1 billion market value in the shortest time possible. Most would settle with a growing company with a defensible niche. In the insurance industry, niches are aplenty. “There’s this sudden realization that every link in the insurance value chain is susceptible to disruption,” says Steven Kauderer, a partner in Bain & Company’s financial services practice. “VC firms want to invest ahead of the curve.”
Other industry experts agree. “The VC players and industry-backed VC funds are spreading their money across every segment and corner of the industry,” says Robert Hartwig, an associate professor of finance at the University of South Carolina’s Darla Moore School of Business. “The investments are driven primarily by what could end up being a very lucrative deal with a high return on capital.”
The categories covered by insurtech startups are numerous. And each new platform tries to speak to a perceived pain point or gap in the industry. Take the sharing economy, for example. The rise of on-demand business has created a new type of client who is looking to insure certain assets for regular, short-term periods. This is a need that insurtech wants to fill.
“Most of the attention in the space is going to startups that have developed new ways to distribute insurance under the theme of alternative distribution,” says Wong. “Less attention is going to underwriting, claims and other parts of the insurance value chain…. The startups with the most interesting ways to engage and interface with customers have received the most capital,” Wong says.
WHAT DOES IT MEAN FOR BROKERS?
While some are quick to say all of this spells the end of brokerage, many inside the industry don’t see it, especially those who are already engaging with these technologies.
“There are huge dollars flowing in to try and disrupt the space, but I don’t know if disrupt is the right word,” says Brian Hetherington, CEO and co-chairman of ABD Insurance and Financial Services. “I’d say enhance the space. It’s going to make it easier for people to access and use insurance to better their lives.”
Located in Silicon Valley, ABD both serves and embraces the tech world. One of the company’s five core tenets is Use Technology for Good. And Hetherington talks about that very thing in describing how he would like to see insurance technology become a part of the brokerage world.
“How do you prolong a happy and healthy life? Technology is going to play a huge part in that,” he says. He also notes that technology has the ability to make insurance approachable for people, which is key to using it effectively.
In talking about the employee benefits side of the business, Hetherington comments that Zenefits did a great job of simplifying the front end for the client. “But what they didn’t do was take care of things on the back end. So I think where insurtech is going is really trying to figure out how to use technology to take better care of our clients and risks.”
On the front end, that essentially means simplicity—making enrollment, claims management, HR services, etc. more user-friendly.
“The broker plays an important role in program design on the front end, delivering services before a loss: prevention, disaster recovery plans, contract review,” says Hetherington.
“After a loss, there’s claims management, insurance recovery. And the broker has to be constantly vigilant, paying attention to changing laws and circumstances that impact the client risk profile and/or service requirements,” he adds.
On the back end, things are a little more experimental. “If you could make it simple to have a front end so that [clients] don’t have to worry about what’s behind it, then you can swap out the [back-end] technologies as they happen,” he says. “So we’re trying to build a modular portal like that. You figure out how to swap out the pieces that are going to help you do workers comp claims or loss control or open enrollment or claims handling, deductible management, healthcare management for chronic illnesses, prescription management. All of these things are more back end. There are companies trying to do those pieces, but I don’t know who the clear leader is in any of them yet.”
He notes that from a distribution standpoint, there is also a bit of wait and see, as carriers make investments in technology, yet there’s no consistency among the investments being made. “I don’t think there’s been anybody who’s changing the dynamics of how people purchase insurance in the middle and upper market yet,” he says. “…so sitting back and waiting to see what becomes a prevailing trend does make sense.”
The lack of consistency also means brokers have to remain the trusted advisor guiding their clients’ risk to the right insurer. And even when there is more consistency among technology use, Hetherington believes, brokers will still play an integral advisory role. “I think there is an expectation of having some self-services there, but at the end of the day you need someone to verify and validate that this is the right thing for the company,” Hetherington says. “There’s still an emotional component, and you have to have it vetted through and somebody to talk to as a counselor or advisor, and that’s where brokers add value in the chain. A good broker will dig deep, connect dots and ultimately deliver the right combination of insurance protection and services.”
He also believes there are three areas that are seeing great change yet would still be difficult to completely automate. “A lot of stuff is changing in risk prevention and risk management and coverage selection. I think we need to break things down to those three areas. We talk about the philosophy of risk here…. There’s no wrong answer in insurance. What should my deductible be? They’re all right as long as you know what the ramifications could be…. The coverage selection is an important part of the consultation. I think it’s a harder piece [to disrupt] because it gets to the philosophy of somebody.”
For the larger risks, he notes, the human element of understanding the philosophy and the complexities of decision making are crucial, which is why he sees the greatest technology gains coming in small business. There is more consistency in the risk, which makes it seem more adaptable to a consistent technology.
Technology’s potential to take on more and more complex risk is certainly up for debate. As Manish Agarwal, general partner in Axa Strategic Ventures, says, “Technology always has a way of surprising us.”
In risk management and prevention, brokers on the employee benefits side have already begun to put technology into action, for example, with devices that help manage wellness programs by tracking employee behaviors. “The more information, the better choices we will make,” Hetherington says. “I think that brokers’ roles over time are getting more into the consultative piece to try and figure out how to go extend happy healthy lives, and the psychology component will be a bigger part of all of that.”
The same philosophy can be applied to the p-c side. Hetherington gives the example of weather insurance and using technology to understand weather trends that can help farmers determine when to plant crops, how best to grow things, etc. “Those kinds of informed choices that [enable you to be] more effective with the dollars you have and the time you have will also continue to accelerate,” he says.
“And the end of the day,” he adds, “for a lot of our clients, it’s still relationships, and they still want us to tell them what we think is valuable and how to go approach it. They trust us to say this solution will work for now, and if it doesn’t work, they expect us to try and find whatever the next best thing is to try and make it work. So I think people need to be nimble and adaptive and ready for the changes that are coming, but I don’t see it being a huge disruption.”
Others agree. “Brokers can empower themselves with the same technologies to provide new coverage options to clients,” Hartwig explains. “You will then have a value proposition worth paying for.”
Yoder shares this perspective. “Brokers and agents can’t sit idly by; they have to tap into what’s available, technologically, to do the same things,” he says.
“There are a lot of great ideas percolating in this space involving cost-reduction, market differentiation, customer retention, and revenue growth concepts—all of them with clear applicability to brokers and agencies,” says Yoder. “These new capabilities can be incorporated into what you’re doing today. But you can’t take advantage of them if you’re not aware of them. They’re only a threat if they are ignored."
“It’s such a necessary coverage going forward,” says Stan Loar of Woodruff-Sawyer & Co. “We do a lot of public companies, and every boardroom is talking about cyber. It’s really spreading quickly. Agencies haven’t really focused that much on it, but they are starting to. It’s still pretty much a U.S. phenomenon, but it is spreading globally as well. I think you’re going to see the whole world needs cyber. E&O has caught on in the last 40 or 50 years, and I think cyber is going to be the same.”
Cyber threats have the potential to create catastrophic losses for businesses and firms of all sizes, including middle-market insurance agencies and brokerages. PAR is known for its quality management program and low loss numbers. As such, cyber will be a considerable undertaking if the organization wants to maintain its standards. PAR has developed the following recommendations for brokerages and agencies when assessing preparedness for potential cyber exposures:
- Carry cyber liability insurance to protect themselves and their clients.
- Conduct a security audit of an agency’s systems at least once every three to five years.
- Designate someone within the business to lead compliance efforts regarding applicable privacy and security mandates. Firms writing business in multiple states should recognize that each state (and the federal government) has its own requirements, and the firms should take appropriate measures to remain in compliance.
- Retain or have ready access to specialist resources to help stay in compliance with all appropriate regulations and to conduct regular data security and privacy compliance audits.
- Conduct an annual review of internal policies and procedures for agency management system access and use.
- Ensure electronic communications with clients are securely encrypted.
- Establish policies for retaining paper and electronic documents and establish internal procedures to make sure they are followed.
- Conduct annual staff training on security and privacy compliance.
- Create an internal crisis management team and conduct frequent training of team members to prepare for a potential incident.
- To protect the client’s reputation in case of an embarrassing breach, retain or access a public relations firm with crisis management experience.
Agencies and brokerages involved in mergers and acquisitions should take additional steps to protect themselves against potential cyber exposures that may be exacerbated by these transactions. PAR suggests the following actions be taken to address potential cyber exposures during M&A:
- Review the acquired firm’s insurance policies to assess its cyber coverage and any gaps in exposure.
- Educate employees on policies and procedures. Prepare an integration plan to transition employees of the acquired firm to adopt policies and procedures of the acquirer.
- Establish a plan to transition the acquired firm to the agency management system used by the acquirer.
- Notify insurance carriers and wholesalers of the acquisition and if and when a name change will take place.
- Notify clients of the acquired brokerage of the change.
Carriers offered only minimal coverage—if any—to all but the larger, national houses, leaving middle-market brokers to hope for the best.
“We were in a very hard insurance market, and there was absolutely no one that would write errors and omissions coverage for an insurance agent or broker,” says Bill Graham, CEO of The Graham Company. “It was virtually impossible to get a return phone call, let alone get a quote.
“We were fortunate. We only had a few months where we didn’t have coverage, but it scares the heck out of you and you realize that if you didn’t get coverage it could put you out of business overnight. Thank goodness we have never had a serious claim that could have put us out of business, but that’s more a matter of luck than anything else. Many firms had to merge into larger brokerages to protect themselves.”
In 1986, The Council of Insurance Agents & Brokers, Assurex Global and Fireman’s Fund (now Allianz Global Corporate & Specialty) decided to create a captive insurer that could provide missing E&O coverage for independently owned middle-market agencies and brokerages.
That captive, Professional Agencies Reinsurance Ltd., or PAR as it’s known, has become an E&O market leader. Last year The Bermuda Captive Conference named PAR to its Captive Hall of Fame.
Skip Counselman, chairman and CEO of RCM&D, who is active in Assurex, was one of the early leaders in the effort to find a solution.
“We changed the market because we felt that our loss experience was very favorable,” Counselman says. “We were not having the kinds of losses the national brokers were experiencing. We felt pretty confident in starting our own reinsurance program and assuming risk and owning the company if we maintained the standards we had in place. In the first five years, we were almost claim free. So we were collecting a lot of premium and were not having to pay many losses.”
Council president and CEO Ken Crerar remembers that time well. It started with a discussion in the bar at the Greenbrier Resort at The Council’s annual fall Insurance Leadership Forum. Several members were lamenting having trouble securing E&O insurance.
“The genesis was at our meeting,” Crerar says. “Skip’s dad was in the bar and talked about pulling it together. Captives were something new at the time. It eventually became an Assurex-Council program. We helped reach out to the carriers, Assurex managed it and Fireman’s Fund stepped up to the plate to insure it.”
Brokers got together and set a standard of how they were going to do their business. They shared the risk together. It’s a good example of a program that has really worked well for its insureds.Tweet
The initial discussions at the Greenbrier took place about two years before the captive went live, Crerar says. But a little more than a year later, when they decided to move forward, they acted quickly. “That’s one of the beauties of this meeting,” Crerar says. “They talked, and everything came together.”
It worked, he says, because “brokers got together and set a standard of how they were going to do their business. They shared the risk together. It’s a good example of a program that has really worked well for its insureds.”
Today, PAR serves as an ownership and investment vehicle for policyholders of E&O Plus, its errors and omissions product. It recently added an E&O coverage extension for cyber risk.
“You really can’t put it on auto-pilot, because you do have to keep refreshing,” says Stan Loar, PAR director and board chairman of Woodruff-Sawyer & Co. “Going forward, we’ve got to continue to up our game in quality management and bring in cutting-edge systems, procedures and concepts.”
E&O Plus is available to independent middle-market agents and brokers who are willing to invest in an ownership position in PAR Ltd. and meet stringent quality management standards intended to keep claims down. Thanks to such measures, the captive has returned a dividend to its investors almost every year since its inception.
We felt pretty confident in starting our own reinsurance program and assuming risk and owning the company if we maintained the standards we had in place.Tweet
E&O cover today is now more widely available than it was in the 1980s and 1990s, but many of the early PAR investors recall life before the captive as a scary time.
Tim Wiechers, senior vice president of finance and operations at Assurex Global, which administers PAR, says the lack of coverage threatened to put a lot of agents and brokers out of business.
“I think you can equate it to the early ’80s,” Wiechers says, “when we had the same issue in the medical malpractice area and you had physicians and hospitals that couldn’t buy the coverage and, therefore, there was a threat to even being able to do their surgeries or their services. The same thing was happening on the agency side. That just puts an onus on your own financial well-being, let alone how you can service your clients if you can’t buy it.”
“I think it came in the nick of time,” says Jim Hackbarth, CEO at Assurex Global. “It was unheard of that you could put together a captive in that short a period of time. I think that was driven out of necessity and urgency, which is not always the case in setting up a captive. Typically, it would take a couple of years to get all the insurers lined up and to get all of the capital lined up. To do a captive within six months is a reflection of the urgency that something had to be done.”
The backbone of E&O Plus is a stringent quality management program. Key elements include:
- Strict Eligibility. Potential investors must undergo a thorough underwriting vetting.
- Quality Management Implementation. All insured firms must designate a quality-management manager and implement the PAR quality-management program on an agreed-to schedule.
- Annual Quality Management Conference. Each insured firm’s quality-management manager must attend and participate in PAR’s annual quality-management conference.
- Annual On-Site Audit. PAR conducts an annual, in-person, on-site review of all offices and operations of each participating firm to ensure compliance.
“We think our loss data is better than the industry’s because of this program,” Counselman says. “We think that’s really the most important part of this program. We’re all about quality client service and not making mistakes. If there’s a mistake, we want to find it and fix it.
“We can’t let just anybody into this program, and once they are in, we have to watch them and make sure they continue to enhance their standards.”
So what’s most likely to create an E&O problem? Loar says today’s active M&A marketplace raises concerns.
“We’re really concerned when an agency is all about just M&A,” Loar says. “That doesn’t mean we wouldn’t want it, but we want to make sure they have those systems, because we see claims coming out of those. They buy this agency that I’ll call a rogue agency—maybe the agency wasn’t well organized when the claim occurred. People buy agencies, and they don’t always know what they are getting. They don’t necessarily do the right kind of due diligence. We’re really trying to help them protect risk by helping them understand they are getting an agency that has issues. Or they may be getting an employee who has issues and we need to help them.”
Wiechers says policy checking is another problem area.
I think it came in the nick of time. It was unheard of that you could put together a captive in that short a period of time.Tweet
“Policy checking is an important task, but it typically gets pushed back and sits on somebody’s desk for a long time because it’s a menial task,” Wiechers says. “You can imagine; it’s tedious because you’re comparing one policy from one year to another policy from another year.
You are comparing to make sure the policy coverages and the terms and conditions are the same as to what you just ordered at renewal.”
Richard Blades, Wortham CEO and a PAR board member, says Wortham’s experience with PAR has been beneficial.
“PAR has been extremely valuable to Wortham over the years because it’s been the cornerstone of our insurance program,” Blades says. “We’ve got a tremendous value out of that from the quality management program assisting us in avoiding errors in claims. I’m very proud of the fact that our firm hasn’t had an E&O claim exceeding our deductible in more than 10 years. It’s an accomplishment by having an attention to detail implementing the right procedures.
“Having a strong quality management program is going to make you more efficient and actually help you retain clients as well as produce new opportunities. Having PAR as the cornerstone of our E&O program adds more value than just the risk transfer of the E&O insurance coverage. It’s also the ability to receive that fairly consistent dividend.”
Each PAR participant receives a 145-page quality management guide with recommendations and suggested procedures. And while Counselman won’t reveal details, Crerar says the basics are simple. “The firm audit walks you through what kind of processes you should have in place to protect your client so the client knows what they are getting and what the coverage is,” he says. This culture, he explains, then “spreads through the whole organization. That’s what quality management is all about.”
In other words, PAR excellence.
Institutions that formerly provided a moral compass, respectable work and consistent, strategic clarity have largely felt their foundations rocked as scandals have been discovered, reported and sensationalized. Can the insurance industry actually be a remedial force?
Corporate social responsibility—not a new thing at all, really—falls squarely inside the wheelhouse of both brokerages and insurers, and several firms and companies are making CSR a centerpiece of their business strategies.
“I think there is an increased expectation that a company not only has a corporate social responsibility strategy but delivers on it,” says Paul Jardine, chief experience officer at insurer XL Catlin. “CSR is now business as usual across industries. We can see this evidenced in the way phrases such as ‘the triple bottom line’ have entered general business vernacular.”
Coined by business author John Elkington, “triple bottom line,” aka TBL or 3BL, is a tripartite accounting formula for business that comprises social, environmental and financial performance. The message is that business value goes beyond profit and loss statements.
As capital investment manager Martin Whittaker, now CEO of nonprofit JUST Capital, says, social responsibility has become “a central element to a company’s standing.”
Just or Unjust
According to financier Paul Tudor Jones II, who co-founded JUST Capital with Whittaker, income disparity plays a big role in the eroding confidence in institutions. The income gap between rich and poor, he says, leads directly to mistrust in the economic system.
“Economic inequality makes it difficult, if not impossible, to create equality of opportunity,” writes Peter Singer, a college professor, animal rights activist and author of philosophical treatises. “The holdings of the rich are not legitimate if they are acquired through competition from which others are excluded and made possible by laws that are shaped by the rich for the benefit of the rich,” he has written.
If the system is perceived as being unfair, corporate profits are seen as ill-gotten. It follows that corporate social responsibility rings hollow with no foundation on which to build.
Whittaker agrees. “Through our polling in 2015 and especially in 2016, it became clear that many people in this country, regardless of political affiliation, income level, age, region, etc., feel financially insecure and unhappy with the status quo and in particular their prospects for future prosperity. They feel as though the markets don’t really work for them, that somehow the unwritten social contract, the American Dream, has eroded to the point where they no longer feel respected or valued. For most people struggling to feed their families or save for the future, capitalism has left them behind. The election was a reaction to that,” he says.
JUST Capital is a new entrant into the field of organizations dedicated to advancing corporate responsibility, but its spin is a little different and it purports to have an answer for those who believe the marketplace is not addressing the needs of the greater public.
“We address this through the power of information,” Whittaker says. “By giving people reliable, unbiased information on how companies truly perform on the things that matter most to them, we empower people to vote with their wallets, their energy, their time, their talents. We have mapped all the issues that Americans care about when it comes to business performance, and now we are building the definitive platform for tracking companies on these issues. Right now, it’s very hard if not impossible for ordinary people to know how companies are really doing on the issues they really care about. Does Wal-Mart really pay its workers fairly? How does Apple do on anti-discrimination or work/life balance for employees? Which banks are the best at supporting local communities? Which companies are the best at promoting gender equality?
Everyone behaves differently when they know someone is watching them, and big corporations are no different. We want to identify and celebrate just companies and create a race to the top so that billions of dollars start to flow in a more just direction.”
The company goes first to the American public and asks them what makes a company truly just. It then ranks major corporations across industries using those public-driven values and releases the rankings to the public. The company believes by making this information easily accessible to everyone, it will help people incorporate it into their decision making when purchasing products, job hunting and generally choosing which companies to support. In this way, more capital will flow to the more just companies. And in doing so, capitalism in America will begin to take into account and better reflect the true values of the general public, Whittaker believes.
The biggest problem we have relative to corporate integrity is when arrogance becomes a virtue and humility becomes a vice.Tweet
Perhaps they’re on to something. More than 80% of those surveyed by JUST Capital say they are somewhat or very likely to use information on just behavior in choosing where to work, how to invest and what to buy.
Taking the Temperature
Since 2015, JUST Capital has surveyed more than 50,000 Americans to capture their opinions on what is fair. Through focus groups and interviews, it discovered 188 discrete behaviors the public considers just corporate performance. More than 20,000 people were then asked to prioritize the behaviors, resulting in a list of the 36 most important components of justness, which were grouped into related topics to create 10 different “drivers.” Finally, the company surveyed 5,000 people online to prioritize the components according to which ones they found most important. In a very structured way, you get “a hierarchy of behaviors which have been weighted as to preference for America as a whole,” says Whittaker.
Armed with these components, the firm collected data on 897 companies across 32 sectors, ranking them based on the public’s definition of what is fair corporate behavior.
“You don’t have to convince people there’s a problem, but you do have to figure out where we’re going and where the future is for capitalism. The story of business in the Western world is entrepreneurial success,” says Whittaker. “Somehow, we’ve lost a grip on this.”
But, he says, through attention to these rankings, “consumers can participate as part of the virtuous loop that capitalism provides.”
What JUST Capital found was the top two drivers of fairness at a company were worker pay and benefits (weighted 25.5%) and worker treatment (weighted at 24%), followed by leadership and ethics (17.2%). Community well-being, though it made the list of 10 drivers, was at the bottom (1.7%).
Interestingly, the Deloitte Millennial Survey 2016 showed similar results when rating the values that support long-term business success. Environmental impact and corporate responsibility did make the list; some 8% of millennials said those values support long-term business success. But topping the list at 26% was employee satisfaction, loyalty and fair treatment. Behind that at 25% was ethics, trust, integrity and honesty.
What these numbers seem to say is that people care most about being valued. And Whittaker, who claims he was not surprised by the results, agrees.
“The context for our work is defining what makes a company just, and I think most people experience this first and foremost through the lens of the employee/employer relationship,” he says. “We all need to eat, and so the source of our livelihoods, and in many cases our sense of identity and self-worth, tend to be the most important set of issues. Plus, we know most people are struggling economically, which tends to focus the mind on workplace issues. So it’s not surprising to me that worker, or ‘internal’ company issues, are prioritized. Interestingly, ‘fair pay’ was by far the most important component of corporate justness, closely followed by ‘no discrimination,’ which tells me that as a starting point people really just want to be treated fairly and with respect. Our work shows people still believe community issues, environmental performance, supply chain standards and such are very important; they simply fall behind the things that are fundamental to human nature.”
“I love the [JUST Capital] concept,” says Tom Tropp, corporate vice president for ethics and sustainability at Arthur J. Gallagher & Co. “The more publicity on this type of thing, the more we talk about it, the more we discuss ethics, the better,” he says. Interestingly, Tropp’s ideas of responsibility are well aligned with what JUST Capital found. To him, it is about how employees behave and treat each other, which coincides with the second- and third-highest ranked drivers: worker treatment, and leadership and ethics, respectively.
“There is no question in my mind that the way we treat our internal stakeholders is as important, if not more important, than how we interact with the external community,” Tropp says. “Our most important asset is our employees—25,000 of them around the world. The benefits that we provide and the opportunities we offer to these colleagues have a profound impact on how we are perceived in the world. Integrity begins at the top, is executed from the middle, and is communicated by the employee who faces the external stakeholders every day.”
XL Catlin’s Jardine takes a slightly different stance. His company ranked number one in the insurance industry according to JUST Capital’s methodology. It also ranked particularly high in the area of worker treatment. But that’s not where Jardine feels the most attention should be focused.
“I’m pleased to see we have scored highly on worker treatment and pay and benefits, which are all key elements in creating a successful company through the attraction and retention of the best talent,” he says. “But this talent wants to work for a company that is doing good, and so-called traditional notions of what this looks like still hold true in my view.”
Jardine is referring to the idea of community well-being, being a steward of your environment—the external factors typically thought of as corporate social responsibility today.
“Our role is to set a strategy and deliverables that look beyond what has been done before and harness the talent pool we have here to collectively and collaboratively make a difference. We will do this not only through the innovative insurance solutions we create, which enable the development of future technologies, but also through how we make insurance available in the developing world and manage our own impact on the communities we operate in.”
Both Tropp and Jardine believe participating in the evaluation process is worthwhile. In 2016, Arthur J. Gallagher was listed by Ethisphere—an organization that seeks to define and advance the standards of ethical business practices—as one of the world’s most ethical companies for the fifth year in a row. And every year, Tropp says, the survey gets more complicated, which pushes him forward. “If Ethisphere asks questions about ‘do you do this, this and this’ and we don’t, I wonder why we don’t. And then I back up and ask, ‘Should we?’
“Our employees know the process for inclusion is serious and time consuming,” he says. “It involves a lengthy survey, audits of our documents, and background researches by Ethisphere on our history and current issues. The most important aspect of this award, in my view, is that we use the application process as a learning experience. Each year we discover new ways to improve how we are handling our ethics and compliance programs; the bar is raised each year.”
Jardine has a similar response. “Understanding the public’s view of companies’ roles in society helps us better our business practices. Ratings such as the JUST Capital model help us take stock of where we are performing well and where we can develop further to maintain our position as an industry leader in this space.”
The Industry’s Role
For brokerages, there could be opportunity in all of this. Whittaker believes the insurance industry is in a unique position right now to greatly contribute to these efforts to change the conversation between consumers and corporations.
“It’s easy to get data on environmental issues, and those are important, but it’s not as important as people-driven data,” he says. “This is an area where the insurance industry can really help—their whole business model is data-driven.”
The insurance industry can help companies grapple with how to measure—in reportable ways—worker pay, benefits and treatment, says Whittaker. In this way, brokers could help their clients evaluate these characteristics within their organization to see where they fall in meeting these public-driven values. Employee benefits brokerages, in particular, are in a position to directly help address some of these values with their clients.
“A tactical thing every smart broker should do,” says Whittaker, is to review all the just components and consider them in light of the issues you know are relevant to clients. Providing health insurance and helping workers prepare for retirement, for example, both rate as very important (96% and 79%, respectively) to those surveyed.
I think there is an increased expectation that a company not only has a corporate social responsibility strategy but delivers on it.Tweet
And there’s a role to play in serving at-risk populations and businesses. “We believe the insurance industry is uniquely positioned to do a tremendous amount of good by providing risk transfer solutions that protect some of the world’s most vulnerable people,” Jardine says.
“A good example of this is the Lloyd’s Disaster Risk Fund. The fund is designed to help developing economies improve resilience against natural catastrophes. Emerging economies contribute 40% to global GDP yet represent only 16% of global insurance premiums. Another example is the Blue Marble Microinsurance Consortium, a group of brokers and insurers committed to providing insurance to developing regions of the world using innovative, technology-enabled platforms. Our aim is to achieve sustainability through adequate levels of profitability and advance the role of insurance in society.”
Living, Breathing CSR
Effective corporate social responsibility is a fundamental component of success in the marketplace, according to Tropp. But it’s more than just a business strategy. He also sees it as an internal, personal quality that should live inside each employee. For him, a critical component of corporate social responsibility is humility.
“The biggest problem we have relative to corporate integrity is when arrogance becomes a virtue and humility becomes a vice,” he says. Tropp defines humility in business as the knowledge that you can and will make mistakes and the willingness to admit them. He also believes humility means knowing that listening to direct reports and having genuine dialogue with them will produce better decisions than those made by a leader alone. When looking at branch managers, Tropp says, the most successful are humble; in their units, they have “better staff retention, larger profit margins, and more growth.” Social responsibility is an absolute part of success, he says.
Tropp is talking about the values embodied within a workforce. And this concept is becoming even more important as the percentage of millennials increases—potentially more than 50% of the workforce by 2020.
Millennials are not looking to fill a slot in a faceless company, says Jamie Gutfreund, global chief marketing officer at marketing consultancy Wunderman. “They’re looking strategically at opportunities to invest in a place where they can make a difference, preferably a place that itself makes a difference.”
A 2015 Cone Communications millennial study found young people say they are prepared to make personal sacrifices to make an impact on issues they care about—including taking a pay cut to work for a responsible company.
As brokers fully embrace the role of advisor to their clients, it could be worth considering where these concepts fit in their organization and in their business strategy. As Tropp says, “Companies of high integrity—no matter how large or how small—succeed. Period.”
Digital health is hot. Healthcare accounts for about 17.8% of U.S. gross domestic product. The U.S spends around $3.2 trillion a year on healthcare, or nearly $10,000 per person, the Centers for Medicare & Medicaid Services estimates.
The challenge of using digital technology to improve health is drawing plenty of ideas and money. More than $8 billion was invested in more than 500 digital health companies in 2016, according to StartUp Health, which seeks to foster digital health innovation. Earlier this year, for instance, StartUp Health announced a three-year partnership with Allianz to develop a portfolio of at least two dozen companies.
Among accelerators, which seek to nurture fledgling startups, Boston-based not-for-profit MassChallenge has a history of helping startups succeed in a variety of areas. Now, it’s turning its attention to digital health technology with the inaugural Pulse@MassChallenge digital health lab accelerator. The program pairs startups with corporations, the state of Massachusetts, pharmaceutical, healthcare and technology companies as well as other organizations. The digital health challenge winnowed more than 430 applicants to cull 31 startups that are participating in the program in the first half of this year.
The MassChallenge digital health startups include the two Liberty Mutual is working with, Gain Life, which uses digital tools to promote behavioral change, and VIT, which uses technology to improve back health. Other startups in the program are looking to use new technology to improve cancer testing, care coordination, fall monitoring, medication management, neonatal care and teledermatology.
What do startups want?
It’s complicated for startups and corporates. For startups, it can be hard to live with corporate partners—and impossible to live without them. Excluding the million-to-one story, startups need corporate partners if they want to survive and thrive. While startups know all about speed of development and speed to market, they find the wheels of corporate management don’t move at the same pace.
In a survey of more than 350 of its startup alumni, accelerator Startupbootcamp found 70% had experienced a long and complicated internal process in working with corporate partners. That’s the same proportion who say they believe it’s important to find a corporate partner. Just over half of startups surveyed say corporations need to do more to address the need to innovate and to disrupt their own markets or they’ll face threats from those more willing and able to do so. The “Collaborate to Innovate” survey found 45% of startups want to collaborate to sell their business and 30% look to corporations as potential customers for their technology and hope to secure pilot projects.
Money Flows into Insurtech
Early-stage startups are drawing not only more interest but also more money in initial funding rounds. Two out of every three insurance tech deals in 2016 took place at the early stage, which is where startups are just getting started in seed or Series A funding, CBInsights reports.
Early-stage insurance tech funding rose 56% year over year to $508 million in 2016.
Among the companies raising money last year, Hippo Analytics, which provides “smart” home insurance, announced $14 million in Series A funding; CoverWallet, which helps small businesses manage insurance, received $7.8 million; cloud-based business brokerage Embroker raised $12.2 million in its second venture capital round; digital life insurer Ladder closed a $14 million Series A financing; and advanced imagery firm Cape Analytics raised $14 million.
Why is the insurance industry turning to startups?
From our perspective, it comes down to the level of variety and innovation that’s available. It’s pretty staggering. If I take Liberty Mutual as an example, each of our strategic business units has a kind of custom approach to leveraging tech startups and insurtech in their own ways that is very much tailored to the customers and the customer segments they address. To some extent, that mirrors and mimics how insurtech is. You have hundreds of various startups out there, each with a different play. That allows us to find the right match for the solution we’re looking for. We, along with all of our competitors, are always looking for competitive advantage, and insurtech offers some unique opportunities to learn and to leverage new ideas in a rapid way.
How is Liberty Mutual Benefits working with startups?
Our Liberty Mutual Benefits business unit offers a suite of employee benefits products and service, including disability, life, voluntary and absence management, along with individual life and annuities.
Liberty Mutual Benefits is one of the sponsors of Pulse@MassChallenge. It’s a Boston-based incubator that’s focused specifically on digital healthcare startups. We selected that, from the Liberty Mutual Benefits standpoint, because it’s tightly aligned with our strategic focus of helping companies manage disability and wellness. It was a unique opportunity to get access to and view many startups and then narrow it down to a couple that were a mutual match.
How do you decide which ones are the right match?
Ultimately you look for the idea. Some of these are later stage, so you look at if they’ve done any customer testing, and you look for a match with your strategy and their idea, the niche they’re trying to fill: does that meet something that’s an area that you’re focused on or trying to specifically address?
One of the startups we’re supporting is VIT, which looks to bring connected devices and analytics into the workplace. This is a product that helps to monitor back health. It’s a unique idea. Back injuries and back health are drivers of disability and workers comp claims. For us, it’s being able to partner with them and their technology and their thinking. They get access to a very large company, get some consulting, and can put their ideas into real practice. It is this mutually beneficial kind of relationship that’s key. It facilitates that learning process.
The other one is Gain Life. It’s a behavioral change company that uses digital therapeutics to help unlock the intrinsic motivation to provide personalized, evidence-based behavioral change. I find that a fascinating one. Many insurtech startups out there are geared at transactional types of things. Here’s one that’s getting at how you use technology to make behavioral changes, which can be some of the hardest things to unlock.
What do the startups gain from the process?
My impression is that the startups are eager to have a company like Liberty participate with them and bring customer and market insights to make their product more effective and rich. There is a lot of learning. The thing we want to be sensitive about is to bring that value add without ruining the magic that a startup has. Different startups will have different needs. A lot of time it is getting access to market, market insight and a better understanding of customers in a real-world and at-scale scenario. That’s one of the primary drivers for startups. Startups are small, and they have flexibility, and they’re able to quickly adapt and move to where the market is. The main thing that they need is a better and closer read on where the market is.
Is this process speeding things up?
It absolutely is. Of course, it comes down to management mindset. One of the things I’m most proud of is the Liberty Mutual Benefits team, which has a long, strong heritage in the markets in which we operate. Working with startups strengthens this idea of truly embracing the test-and-learn mindset, and not being afraid to test an idea, take it out to a dozen people, see what the reaction is and hear that, and not get wedded to it.
Those are things their parents have (and often pay for on their behalf), so why bother? While auto, home, and supplemental life still have an important space in any voluntary benefits strategy, the reality is the workforce is changing—skewing younger and more tech savvy than ever before. As millennials overtake baby boomers among American workers, benefits must shift as well.
What does that shift look like? For starters, it’s moving from desktop monitor to mobile. To borrow a line from Field of Dreams, when it comes to millennial employees, “If you Snapchat it, they will come.” (Never mind that most millennials are too young to know what Field of Dreams is!) Bottom line, the metaphor still works: to engage millennials around benefits, you need to hit them in their pocket—not in their wallets, but on their phones.
Gallup research shows that 51% of millennials (ages 18-29) “couldn’t live without” their smartphone. So a winning benefits strategy—with core or voluntary programs—begins with mobile. Not an app, per se, certainly not just for the sake of saying you have one. But rather, a smartly designed, mobile-enabled way for them to access benefits information, documents and IDs/records. Millennials, and the Gen Z workers that are hot on their heels, grew up largely texting, snapping and swiping. Investing in mobile technology that’s built on user-centric principles will put you big steps ahead in engagement and allow you to reap true dividends going forward.
Second, younger workers want benefits for their pets almost as much as, if not more than, for themselves. Last year, a Harris poll found that American pet owners spend more than $15 billion on veterinary care. Of those, 65% are millennials, 19% of whom carry pet insurance. And at 54%, millennials also are more likely than any other generation to buy their pets birthday presents. If you scan social media, many of them also set up Instagram accounts for their pets. Helping take care of these furry family members is a key way to engage millennials, especially since many in the younger half of the generation are still on their parents’ health insurance plans. They’re willing to spend part of their discretionary income to protect their pets—all you need to do is give them access to a plan to do it. Only 9% of employers nationwide offer pet insurance; it’s an easy way to set your organization apart in the race for millennial talent.
Lastly, they desperately need help reducing college debt. It’s a top concern for more than one fifth of Gen Z employees, the newest entrants into the working world. The national reality is undeniable: young employees are entering the workforce under the crushing burden of student loan debt. The cost of financing their education is blocking out all other financial plans and decisions these employees can and should be making—choosing comprehensive medical care, saving for retirement, or buying cars and homes. Forward-thinking employers, such as PricewaterhouseCoopers and Fidelity, are offering unique benefit options like an employer match to go toward student loan repayments. While such matching funds are taxable under current law, pending legislation may be considered by Congress in 2017 that would allow such contributions to be non-taxable.
According to a survey from American Student Assistance, 76% of respondents said their choice to take a job could be swayed or decided based on an employer’s willingness to help repay student debt. Combine that with the $1.3 trillion in collective U.S. student debt, and you have the makings of the next frontier in employee benefits—for millennial workers and beyond.
Shanahan is president, CEO and founder of Businessolver. email@example.com
What was it like competing in the Antarctic Ice Marathon?
You fly onto Antarctica and sleep in a tent. And one morning you wake up and go for a marathon. Fifty people did it. I came in eleventh.
Why on earth would a reasonable person do such a thing?
Up until a few years ago, I didn’t run at all. In January, I entered this thing called the World Marathon. We run a marathon on each of the seven continents in seven days. It starts in Antarctica, then goes through Chile, Miami, Madrid, Marakesh, Dubai and Sydney.
Have you always overcompensated?
I guess I’m pretty driven. Running does many things for me. I put my running shoes in my suitcase, and that means I get to run in some amazing places. I recently ran in New York, Dubai and Hong Kong.
Were you athletic growing up?
Definitely not. My father was a mechanical engineer for Nestle. I grew up in Canada, in the United States, in Africa, Asia, Switzerland, the U.K., all over. It was wonderful—an incredible, privileged upbringing. But it made you a really useless sportsman. I didn’t play a lot of ice hockey in Tanzania.
It must have been difficult socially.
In my Tanzanian boarding school, I was the only English kid, and I showed up with a Canadian accent.
When did you settle in London?
Having grown up around the world, my base throughout my working career has been London. It remains my favorite city.
I think it’s a very cosmopolitan city, possibly the most cosmopolitan in the world. It’s full of a long and rich history, but it’s also modern. And you can eat pretty well.
What do you like to do when you’re not working?
Besides running, my other passion would be motorcars. I’m a bit of a gear head.
Not by American standards. I’ve got about 10 cars.
The 1958 Austin Healy 106. It’s red and pretty. It’s not the most valuable car. It’s not the fastest car or the most practical car. And it breaks down every time I drive it. That’s part of its appeal.
What’s the most interesting thing in your office?
Two kilos of whey protein mix.
What about Cooper Gay’s recently changing its name to Ed? Why?
We respectfully retired Mr. Cooper and Mr. Gay. Then it was—“What do we call ourselves?” We thought of mythical gods, street names in London, where Churchill was born or buried. All insurance people know that the industry started with guy in a coffee shop named Edward Lloyd. Today he’d be called Ed.
What keeps you in the industry?
I love it, I do. I spring out of bed in the morning. I have a passion for it, and I think I’m OK at it.
Who was your most influential business mentor?
Richard Titley, the deputy chairman of the Sedgwick Group, a proper, thorough professional. He showed me you can achieve by being yourself and by being good. I aspire to that.
What gives you your leader’s edge?
Hard work and luck.
The Hearn File
Favorite Beatle: Paul McCartney. “No, I’m not a Wings fan.”
Favorite Vacation Spot: The French Alps.“Sitting on the balcony after a day of skiing—there isn’t a better place for me.”
Favorite Band: AC/DC
Favorite Actor: Robert DeNiro
Favorite Book: Any travel guide
Nearly 2,000 miles away on a family vacation on St. John Island, I felt lost. We planned the trip to avoid the gridlock caused by the presidential inauguration and to find some peace and quiet to recharge our batteries for the year ahead.
The first call came from our home security company; thankfully, our alarm system automatically alerted the fire department. It’s estimated they arrived within six minutes. Then began a flood of calls from concerned neighbors. I felt in my gut that it was bad, but I wasn’t prepared for what I saw upon returning home.
I think of myself as a pretty informed insurance executive, yet I felt like I had no path. The initial shock prompted us to jump immediately into action—figuring out where to sleep, where to go. I had a general idea of which phone calls to make and in which order, but I never realized how traumatizing it is to experience a loss like your home.
Even the seemingly smallest things sent us spiraling. The boys didn’t have their winter coats. Peter and I didn’t have shirts, ties or shoes for work. My office briefcase was gone. The kids’ school stuff and family keepsakes were gone. The smell of smoke permeated everything. Even the dry cleaner couldn’t get the stench out of our clothes. Days after we got home, Bobby’s middle school application was submitted, soot-covered but on time. When you’re uprooted and lose most of your possessions, even the best insurance can’t make everything right.
Both our broker and our insurance carrier were very responsive. Our broker met us at our home. Our insurance carrier put its best adjuster on the job. They stepped up at a very stressful time and took away some of the angst. At the front end were things like lining up temporary housing and moving into a hotel.
But which expenses are picked up? Which aren’t? Do I rent furniture? Does someone take charge, or is that my job? How are the contents handled? What are my coverage limits? The inventory process alone was daunting. Did we keep any receipts? If asked, could you name everything in every closet, drawer or cabinet?
There were emails, phone calls, texts, appointments with contractors, meetings with architects. As days passed, the steps became a little clearer, and we outlined the three buckets—our dwelling coverage, our contents coverage and our living expenses coverage. But then the questions came creeping in again. What is an environmental hygienist? What’s a demo contractor and what does he do? Whose job is it to find the rebuild contractor? Should we use a restoration contractor or a custom builder?
Fire officials suspect the cause of the blaze was electrical, although even that is unclear. The fire started between the kitchen and the family room and ran through the walls to the second level. The downstairs sustained the heaviest damage, but even the upstairs bathrooms were ruined. What were our options for the things that were damaged by water and smoke?
Insurance is designed to make you whole after a loss. But the real opportunity for brokers is all the details in between. When clients are not sure who’s in charge of what, it’s your chance to walk them through the process and leverage your relationships. From the moment we got the call that there was a fire, there was no road map, no direction. That’s the broker’s opportunity to have immediate and clear instructions of what to do. That’s the broker’s opportunity to make a customer for life.
It’s interesting to head an insurance organization for more than 20 years and talk regularly about what we do and then see it all play out on my own journey through a claim. In every detail, I could see and feel the importance of customer service, customer experience, strong relationships and trust. Your clients are used to a high standard of service. They want information and need as little disruption as possible. They want, and deserve, all the touch points along the way—especially when their heads are spinning. Remind your colleagues about what really matters. It can make all the difference.
As I continue to work through how to handle everything, including the months of renovations and repairs we have ahead of us, I’m admittedly still feeling a bit scattered. An incident like this is all-consuming. I wasn’t prepared for it. This was a very personal experience with very personal loss, including our three-year-old dog, Cesare.
I’m not sure how long it will take us to get over the emotional impact of the fire, but I can tell you that working with great teams of people will certainly help in our journey to put the pieces back together (and I assured young Bobby that it was going to take a while, but he would be sleeping in his featherbed bed soon enough).
I hope you will indulge my personal reflections here but also take away the real message: the last mile with any customer, including an insurance guy, is the most critical.
To write something that will be relevant when it hits your inbox (pretty much eliminating fruitful discussions of Obamacare repeal and replace and tax reform.).
So let’s revisit the current state of FATCA and NARAB. And, we’ll review a “covered agreement” the Obama administration finalized with the EU. The Trump administration will implement it (or not). If it does, we will see how the new guard may deal with international regulatory issues.
The new administration and the likelihood of tax reform this year create two opportunities to reverse the Obama Treasury Department’s decision to subject p-c insurance transactions to the FATCA (Foreign Accounts Tax Compliance Act) regime.
The regulatory provision exempting so-called foreign-to-foreign transactions from FATCA expired January 1. That means insurance brokerages and carriers globally are technically subject to the FATCA requirements if they place coverage that insures any U.S.-based risk even if none of the parties (broker, carrier, client) is physically in the United States. U.S. brokerages with foreign offices or affiliates cannot place any coverage with a carrier that isn’t compliant with FATCA. Foreign competitors may not feel so constrained, because they likely are beyond the reach of the IRS and therefore have a competitive advantage.
We have traction in Congress soliciting support for a complete exclusion of p-c insurance transactions from FATCA. I’m hopeful enactment of that exclusion is achievable soon.
Legislation authorizing the creation of the national licensure clearinghouse, the National Association of Registered Agents & Brokers (NARAB), on which we worked so hard for years, was enacted in 2015. Now, all we need is for the president to appoint the board so we can get it up and running.
The cumbersome nomination process saw many of the insurance commissioners who had been asked to serve bowing out before completion. President Obama did formally nominate a sufficient number of members to constitute a quorum, which would have allowed NARAB to actually get started. Unfortunately, the Senate failed to confirm any of those nominees.
So we start again. And the NARAB board is not exactly at the top of the new administration’s priority list. President Trump has a slew of political appointments that must be made first, including the new director of the Federal Insurance Office (FIO). President Obama’s director did the legwork creating the initial list of candidates and shepherded that process, all of which means we are now waiting—again.
One of the primary powers the FIO has under the Dodd-Frank Act is the ability to enter into “covered agreements” with other countries that concern carrier-related oversight and regulation. An agreement struck between the U.S. and the EU in January would address three main areas:
- Group supervision of insurance and reinsurance groups domiciled in the U.S. or EU
- Reinsurance, specifically with respect to local presence and collateral requirements
- Information sharing between supervisory authorities.
The stated purposes of the agreement are to:
- Eliminate, if certain conditions are met, local presence and collateral requirements for reinsurers domiciled in the other party’s jurisdiction as a condition of entering into a reinsurance agreement with a domestic insurer and/or as a condition of recognizing credit for the reinsurance
- Establish worldwide prudential insurance group supervision authority for the “Home Party” (domicile of the worldwide parent) without prejudice to group supervision of the “Host Party” (where the group has operations, but not the parent’s domicile)
- Establish best practices and promote the exchange of information between supervisory authorities of different parties.
The primary U.S. goal is to ensure continued U.S. insurer and reinsurer access to the EU, which has been cast into doubt by EU “equivalence,” which the U.S. does not satisfy. The primary EU objective is to eliminate U.S. individual state collateral requirements for foreign reinsurers. Both the U.S. and the EU largely achieved their objectives.
The real question now is what the Trump administration will do with the covered agreement. Under Dodd-Frank procedural requirements, the proposed agreement was submitted to Congress for a 90-day layover period. When that expires, the U.S. can execute the agreement, with five years to ensure state requirements are compliant or have been preempted.
The National Association of Insurance Commissioners already is publicly opposing the agreement. Small and regional carriers are wary of proposed new group supervision requirements. And some of the large carriers are not satisfied, because they still would not qualify under the agreement for the full privileges and benefits of EU “equivalence.”
The Trump administration can derail the agreement by:
- Simply withdrawing it from congressional consideration (as with the Trans-Pacific Partnership)
- Refusing to sign the agreement after the layover has expired
- Withdrawing from the agreement at any time, as the agreement permits
- Not effectuating the agreement once it is in place.
Of course, I have no idea what will actually happen. So we continue to wait and learn from what transpires. I can’t wait to see what that is.
The blaring horn startled me back into my own lane. “What just happened?” I asked my dad during one of my first driving lessons. “I thought I did everything right. I put on my signal, I checked my mirrors. I didn’t see anyone!”
“What happened,” he explained “is your blindspot.”
Back then (no, I’m not going to tell you how long ago), cars didn’t have camera assists and vibrating steering wheels to keep you from potentially cutting off another motorist. Cars had blindspots, and you had to learn how to navigate around them.
Well, cars aren’t the only ones with blindspots. It seems we all have them. Blindspots have been defined by Robert Bruce Shaw in his book Leadership Blindspots as an “unrecognized weakness or threat that has the potential to undermine a leader’s success.”
Blindspots are areas where we lack awareness of a weakness that is obvious to those around us. John Maxwell says blindspots are those parts of our lives where we do not see ourselves or our situation realistically. In a study titled “Finding the First Rung,” leadership coaching consultancy DDI found 89% of leaders have at least one blindspot in their leadership skills.
Where do blindspots come from? Shaw identifies several root causes, which include:
- Experience Gaps. It’s hard to understand something that falls outside your experience.
- Information Overload. In an attempt to compensate for being overwhelmed by information, some of us oversimplify.
- Emotional Bias. If you have an emotional investment in something, you might slant the facts in the direction that best suits you.
- Cognitive Dissonance. You try to hold two views that conflict.
- Misaligned Incentives. Being rewarded and rewarding others for behaviors that conflict with the common good.
- Hierarchical Distortions. The higher up in the organization you are, the more filtered the information you receive is.
- Overconfidence. You assume your decision-making process is superior.
Some of the most common blindspots we have are those about ourselves. You may overestimate your strategic capability, value being right over being effective, or fail to balance the “what” with the “how.” We often fail to see the impact we have on others, or we may even think the rules don’t apply to us.
But you can also have blindspots when it comes to your team. Leaders with team blindspots don’t accurately evaluate the capabilities and motivations of the team. They don’t accurately see team members’ strengths and weaknesses. Because of unrealistic assumptions about the team members’ competencies, they may overburden them with too many projects rather than focusing on two or three key initiatives. Some leaders organize their team structure in a way that works best for their own self-interest but that might not be the most effective model for the team. Some trust the wrong individuals and avoid having tough conversations. A glaring team blindspot is not developing a successor.
Blindspots regarding the market include treating opinion as fact, misreading the political landscape, underestimating the competition and being overly optimistic. Leaders afflicted with market blindspots can’t judge the trends and threats or conceive of future changes. They assume their core business will remain viable despite shifts in the market.
I know, I know. You are reading this and saying that’s not me—which is exactly what you would say if you had a blindspot. (Remember that car in the other lane!)
So how do you know if this is something you need to address? Since you can’t fix a problem that you don’t know about, the first step in overcoming blindspots is diagnosing them. Shaw recommends two methods:
- Look for recurring weaknesses. The best way to do this is to look at your past mistakes. Ask yourself what the most significant mistakes you have made are and what caused them. Are there patterns? Do the patterns suggest a recurring blindspot?
- Solicit feedback from those who know you well. Ask your colleagues to evaluate your potential lack of awareness regarding your staff, company and markets. An excellent way to do this is with a 360-degree feedback tool. There are several excellent tools on the market. One of my favorites is The Leadership Practices Inventory. There are also the Reiss Motivation Profile and a quick online assessment at whatsmyblindspot.com. Alternatively, there is a quick paper-and-pencil assessment in the back of Leadership Blindspots.
You also might find these five techniques helpful with increasing your control and awareness of your blindspots:
- Get out of the office, broaden your contacts, and spend more time with customers and employees.
- Become a devil’s advocate. Seek out things that challenge what you believe.
- Develop peripheral vision. Learn to read subtle cues from your team. Ask probing questions. Seek contrarian views.
- Build a network of trusted advisors and truly consider their opinions.
- Promote productive team fights and encourage people to challenge you.
Of course, you can always choose to remain blind to your blindspots. But I will caution you: that could put you on a collision course.
It’s the agency owner you met at a conference and clicked with over cocktails, the one you enjoy catching up with at networking events. It’s the industry mentor who runs a larger organization and willingly shares benchmarking information. It’s the business owner who runs a firm similar to yours in a different region.
Our comfort zone is where valuable connections are born because we can let our guard down. Over time, relationships cultivate trust. A conversation in one meeting may turn into a business deal five years down the road. By investing in relationships we are also creating pathways for business development.
Relationships are key. But due diligence is equally important. Just because a comfort-zone agency offers to buy your business does not mean that’s the best offer. Perhaps this agency is a match—you are confident in the owner and the firm’s track record. But is that enough to close a deal?
Due diligence that is completed in a thoughtful, collaborative manner can actually advance a relationship and create even more trust between two organizations. Just as you spend the time to nurture a relationship, you should dedicate the time to thoroughly vet any deal before finalizing an agreement. It’s the right thing to do for you and for the colleague you respect.
When we analyze the behaviors of top-performing agencies and the best practices they follow to guide their success, we have seen that one of those habits is staying focused on strategy. It’s easy to get sidetracked by an appealing offer or promising deal, especially if the other firm is an organization we know and trust. Still, we believe it’s critical to step back and return to the basics. There is no fast lane for growing an agency. There are no shortcuts for vetting a deal to ensure an offer will deliver the value expected.
Spend time honing relationships with industry peers—develop your comfort zone. And, when the time comes to get down to business, take the time to honor that deal and relationship by vetting it thoroughly and even consulting with a third party to be sure your vision has clarity.
Deal announcements in January 2017 were down from year-end December 2016, a typical “hangover” effect following the flurry of year-end activity. However, the fall-off this year was greater than normal, with only 33 announced transactions in January compared to 59 in December (down 30% versus the normal seasonal drop of 7%).
Arthur J. Gallagher & Co. announced five transactions in January, nearly one quarter of the company’s total announcements from all of 2016 (23). Jardine Lloyd Thompson Group and Lake Michigan Credit Union each announced two acquisitions during the month. Independent agencies (those not backed by private equity) were the most active buyer group in January, representing nearly 40% of announcements (13 of 33) after representing only 24% of total deal activity during 2016. Public brokerages were also more active in January, representing 24% of January announcements after just 7% in 2016. The 2016 December hangover must have hit private-equity backed brokerages the hardest. This segment announced only six deals in January (18%) after announcing 45 of December’s 59 total deals (77%).
Notably this month, the middle-market subsidiary of Marsh & McLennan Companies, Marsh & McLennan Agency, announced the signing of its definitive agreement to purchase J. Smith Lanier & Co. Founded in 1868, JSL had annual revenues of approximately $130 million, across 21 offices with 600 employees.
JUST Capital is trying to provide transparency into how our country’s major corporations are living up to American values. In doing so, it has assessed and ranked 897 of the largest publicly traded companies in America, including 46 insurance companies, which it defines as both brokerages and carriers. In total, these companies represent about 92% of the U.S. stock market value.
Companies are ranked according to how they perform against 10 drivers that Just Capital has determined are most important to the American public, based on their surveys of roughly 50,000 Americans. The drivers include worker pay and benefits, worker treatment, leadership and ethics, domestic job creation, environmental impact and community well-being.
Those companies falling within the top 50% of the insurance group can access a full JUST Capital assessment of their performance, including where they fall on each of these drivers, how they compare with the rest of the industry in each area, their strengths and areas for improvement.
The 2017 Edelman Trust Barometer reveals that the general population’s trust in business, government, NGOs, and media has declined broadly. Edelman, a global communications marketing firm, has been tracking trust in 2012 and has never before seen this type of decline in all four areas.
As we forge ahead in the era of uncertainty, insurance companies have an opportunity to redefine how they are viewed by the public. Whether or not you agree with the assessment, this list offers one view into where you might stand today.
There was a new kind of attack on the Internet last fall. Tell us about it.
Some bad actors seized control of a large number of devices, like video cameras, that connect to the Internet and used them to orchestrate a very, very large denial of service attack that left a lot of websites inaccessible for hours. It was a demonstration of the power that these bad actors or organizations could exert over what is basically a large part of the Internet itself. It affected such sites as Twitter, Netflix and PayPal. It also affected cloud service providers, including Amazon Web Services, which is even more worrisome.
What made this different from past attacks?
It was actually an attack on a part of the Internet infrastructure itself. The object of the attack was one of the domain name service providers (the organizations that help direct traffic across the Internet). To my knowledge this was the first time an attack has been mounted against that part of the Internet infrastructure. They got a lot more bang for their buck by going after a foundational element of the Internet instead of attacking an individual website.
Why is the use of Internet-connected devices in the attack worrying?
The number of connected devices (household appliances, electronics, locks, motor vehicles, etc.) has exploded. Most connected devices come out of the factory with very simple user names and passwords. Unless the new owner changes that, the bad guys can send out bots to see if they can find devices that have these simple unmodified user names and passwords and make them into slaves or additional bots within the overall network.
Why is this significant for insurers?
This is an issue for insurers when you think of connected homes, connected cars and all kinds of commercial property, factories, etc. These are potential vulnerabilities that no one thought about as vulnerabilities three or four years ago.
First, there is a direct implication for any insurer that is using the Internet of Things as part of any insurance product: for example, connected homes, connected cars, connected commercial property, even wearable devices for injured workers that are in rehabilitation programs. The reliability of the data going to insurers could be compromised. The whole point of the Internet of Things for insurers is to get new kinds of data that let them be smarter in terms of how they’re pricing, underwriting and adjusting claims. This vulnerability potentially undermines the basic value proposition of the Internet of Things for insurers.
There is something even more ominous. Bad actors could wreak havoc by taking over basic functionality within a car’s steering system or braking system. That could cause individual accidents or a lot of accidents. It could cause a lot of losses that were not anticipated. The nightmare scenario is the cyber warfare dimension. It’s not an insurance issue, but you could have a state actor or terrorist organization that wants to wage cyber warfare on societal infrastructure, power grids, water supply systems.
Sure, you want to start using that new webcam right out of the box, but there’s an extra step you should take before you connect it to your home network and expose it to the Internet. Many connected devices come with factory settings for the user names and passwords, such as admin and 1234 or something just as simple. Many users don’t bother to change them. That’s how the Mirai malware was used in October to mount the largest distributed denial of service (DDOS) attack to date and shut legitimate users out of top sites like Twitter and Netflix. That attack targeted the Dyn domain name service provider, which helps to shuttle traffic around the Web.
DDOS attacks seek to overwhelm sites with requests. By targeting a service that sends traffic to other sites, the attack was able to jam up some of the most popular sites.
The malware allows hackers to search the Web for connected devices whose user names and passwords haven’t been changed from the factory defaults and to take them over. Infected devices, known as bots, can be ordered to mount attacks without the owner’s knowledge. Hackers may command so-called “botnets” comprising tens of thousands of compromised devices. Botnets were formerly assembled with infected personal computers, but the explosion of Internet-connected devices—and better security practices among computer users—has made the Internet of Things the new target. Changing the factory default user names and passwords on your
Internet-connected devices can make life a little harder for Web criminals and keep your device from being drafted into a zombie botnet army.
The Department of Homeland Security suggests keeping the software up to date on all your Internet-connected devices and making sure your home wireless network stays secure.
Another growing security concern: voice-activated devices. It turns out digital assistants like Amazon’s Alexa, Apple’s Siri and Android devices using Google Now are perfectly happy to talk to strangers—and maybe do their bidding.
Your father, Jack Rhodes, was the mayor in Lake Village, Arkansas, when you were growing up. What was it like being the son of a small-town mayor?
My father still holds the record for longest-serving mayor in Arkansas (33 years). I had to behave a little more than my friends. My behavior had to be exemplary. He wouldn’t stand for anything else.
And he was also the municipal judge.
Even though my dad had no legal background, he held municipal court every Monday morning. One of the main things I learned from observing him was he treated everyone the same.
What was Lake Village like back then?
It was a terrific place to grow up. The population was about 3,000. It’s on the Mississippi River, so it’s a delta community, mostly agricultural. Cotton, soy beans and rice were the three primary crops—they still are.
What was the population like?
The population was about 50% white and 50% African American. There was a large Italian community. They were primarily farmers. My high school friends were from Old-World Italian families. I grew up on great Italian food. We had Chinese families. We had Jewish families. We had Lebanese families. For such a small population, it was a melting pot of diverse cultures.
What did you learn?
I was exposed to diverse cultures at an early age, and learning their customs, traditions and food was a very broadening experience.
What does your perfect weekend look like?
My wife, Tricia, and I have a place in the mountains of North Carolina, outside of Asheville. Tricia has picked up golf, so we play together. We love to hike. We just love the outdoors. I’m getting into fly fishing. There are some beautiful trout streams nearby. I love to hunt. I go to a friend’s place in south Texas, where we turkey hunt and bird hunt. There’s nothing like duck hunting in flooded green timber in Arkansas.
I understand you’re also something of a wine connoisseur.
I enjoy a good Cab. I enjoy some of the Italian wines, Chiantis and Barolos. Tricia and I have been out to Napa and Sonoma. We love Italy, so we’ve been to Italy a number of times. When you go to those areas, wine is a part of the deal.
What are you reading these days?
American Icon: Alan Mulally and the Fight to Save Ford. It’s about his experience when he joined Ford Motor Company, when they were on the verge of bankruptcy. It’s quite a story in leadership.
Tell me a little about Stephens Insurance.
Stephens Inc. is an investment banking firm. The Stephens family owns 100% of Stephens Inc. and 100% of Stephens Insurance. We’re separate entities, but we’re joined at the hip. Property-casualty is 65% of our revenues. Employee benefits is 35%. We have about 160 team members. Our client base is really all over the United States.
You’ve been in the insurance industry since 1973. What’s kept you in the business?
If you don’t love people, if you don’t love building relationships and interacting with people of all types, you don’t need to be in the business.
Who was your most influential business mentor?
W.P. Gulley Jr. He was a mentor and a great, great friend. A couple years after we moved to Little Rock and opened Rhodes and Associates, we merged with a savings and loan agency that Bill Gulley’s family started. He introduced me to a lot of people after we moved to Little Rock.
What business leader, in any industry, do you most admire?
That would be Warren Stephens. I have tremendous respect for his integrity and how he conducts himself on a day-to-day basis.
How would your co-workers describe your management style?
I think they would describe me as a team-oriented manager who promotes collaboration. I’m certainly not a micromanager. I encourage people to do what they do best.
What is something your co-workers would be surprised to learn about you?
That I really relax on the weekends.
If you could change one thing about the insurance industry, what would it be?
There’s just a consolidation arms race, and I’m not certain that’s a good thing for our industry.
What gives you your leader’s edge?
Making sure we get the right people in the right seats on the bus.
The Rhodes File
Favorite Wine: Silver Oak
Favorite Author: Harlan Coben (“I just like cliffhangers. His books have always kept me intrigued.”)
Favorite Movie: It’s a Wonderful Life (“To this day, I watch it every Christmas.”)
Favorite Musician: James Taylor
Favorite Vacation Spot: Jumby Bay, Antigua
Favorite Little Rock Restaurant: Ristorante Capeo
Favorite Capeo Dish: Veal scaloppini or veal marsala
For ideas on how to do battle with ransomware, check out these websites:
- Federal interagency document: www.justice.gov/criminal-ccips/file/872771/download
- Europol’s “No More Ransom” www.nomoreransom.org/
According to Verizon’s 2016 Data Breach Investigations Report, 30% of phishing emails get opened. Wombat’s 2016 State of the Phish study found phishing attacks had increased by 60%. Email attachments are the primary delivery vehicle for ransomware, followed by infected web pages and email links.
Educating employees about the impact of phishing risks on the business can help lower these percentages. Employees must be made aware how critical it is not to click on a link without scrutinizing the legitimacy of the email. To put teeth into the training, try ethical hacking, sending an infected email to employees to see if they click. In such cases, the duped user can be required to take additional hours of training.
Jerry Irvine, of the U.S. Department of Homeland Security’s Cyber Security Task Force, says security applications such as VectorShield, which are inserted into a browser to immediately encrypt a user’s browser session once it is hit by ransomware, are very useful.
“The app instantly infects that session to destroy just those malicious files. This way the malware doesn’t hit the rest of the system,” Irvine explains. “It’s just one of many network segmentation strategies to set up walls within the systems to limit the infection to that one segment.”
Irvine advises users to immediately unplug the computer, disconnect all peripherals and other connected devices, and remove the thumb drives. “The goal is to get the infected system quickly off the network.”
A well-considered disaster recovery plan lays out best practices, controls and procedures, arguing for the assistance of a security consultancy. Testing the controls and procedures on a routine basis will ensure everything is working.
Lastly, it can be helpful for all businesses to collectively and anonymously contribute their experiences to law enforcement agencies and industry organizations battling the scourge. For example, websites such as Europol’s No More Ransom will help a business regain access to its encrypted files or locked systems—in some but not all cases—obviating the need to pay a ransom. The organization has created a repository of encryption keys and applications assembled from previous hacks that can decrypt certain types of ransomware.
The FBI is another source of encryption keys and applications, says Alan Cohn, a former assistant secretary for strategy and planning at the Department of Homeland Security who is now counsel at international law firm Steptoe & Johnson. “Since all of us are vulnerable to ransomware attacks, we have a common cause in coming together to defy it,” he stresses. “Insurance brokers and carriers are part of this common cause, as they have a commercial interest in mitigating these risks to the greatest degree possible.”
Working collectively, businesses would be in a better position to thwart the extortionists than any individual company can on its own.
Thousands of other organizations, including a disproportionate number in the healthcare industry, have done the same. No one really knows how many businesses have been hit by ransomware attacks, because they are typically kept private. In most cases, the victims simply pay up, usually in bitcoins, and their computer system is set free.
The ransoms are less than eye opening—usually in the few-thousand-dollar range. This was the case in February 2016 when malware infected some computer systems at Hollywood Presbyterian Medical Center in Los Angeles. The hospital paid a $17,000 ransom (about 40 bitcoins) for the decryption key. Three days later, it regained control of its systems.
But this was not the case at Kansas Heart Hospital. After the hospital payed the ransom, the cyber criminal wanted more. The hospital’s security consultants advised against it, and the hospital had to invest in the time-consuming and expensive task of rebuilding and restoring its computer network.
Welcome to ransomware, 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.
Computer systems are at risk of being contaminated by malicious software embedded with infected email links, email attachments and compromised web pages. And in the case of hospitals, someone’s health could really be in jeopardy.
Two primary types of ransomware are prevalent today: one that locks up a computer screen so users cannot access their applications and another that leaves applications running but encrypts the files so they can’t be opened.
Some of the well-known latter ones are CryptoLocker, CryptoWall, CryptXXX and TeslaCrypt. CryptoWall alone has fleeced victims of more than $325 million since June 2014.
In both cases, the usual entryway for a cyber extortionist is a phishing scam that encourages or entices computer users to click on something they shouldn’t. Click on it—and POW! The screen locks up and a scary flashing message appears: “You have 96 hours to submit payment. If you do not send money within provided time, all your files will be permanently encrypted and no one will be able to recover them.” (That is an actual ransomware message.)
Most organizations pay up—and who can blame them? In today’s 24/7 business environment, a few days without access to vital operating systems can be financially devastating, if not ruinous. Savvy cyber extortionists appreciate this reality and keep their ransoms relatively low, making the decision to pay pretty easy.
The problem is the FBI has advised the business community not to pay. The nation’s chief law enforcement officials say paying the ransom will embolden cyber criminals to attack other businesses, including the same company twice.
This means many businesses are stuck between a rock and a hard place. If they don’t pay up, they may have to rebuild their systems from scratch at great expense and time. If they do pay up, they’re flouting the FBI’s advisory.
Adding to the dilemma is the fact that several insurance carriers now offer cyber policies that cover the cost of paying the ransom, which likely makes payment an even more enticing option.
“It’s an ethical dilemma,” says Matt Chmel, an assistant vice president with Aon Risk Solutions. “Say the organization does pay the ransom, is given the decryption key and keeps the attack private. Then, a few months or even years later, it is publicly revealed that the business had unknowingly paid the ransom to an affiliate of a terrorist organization. Imagine the impact on their reputation and future business dealings.”
You have 96 hours to submit payment. If you do not send money within provided time, all your files will be permanently encrypted and no one will be able to recover them.Tweet
If your business has not been targeted and hit with a ransomware demand, you’re one of the lucky ones. A recent survey of IT leaders at more than 500 companies in four countries indicated that 40% had experienced an attack in the past year. In one of these countries, Britain, 54% of the companies in the respondent pool were hit. Most of the ransom amounts were less than $10,000, although one fifth exceeded that figure and 3% were in excess of $50,000.
Ransomware is rapidly advancing. The Justice Department says attacks quadrupled from 2015 to 2016, averaging an astonishing 4,000 a day. The U.S. is most affected, accounting for 28% of infections globally, followed by Canada and Australia with 16% and 11%, respectively, according to a report by IT security firm Symantec, which attributes the statistics to hackers’ focus on developed and affluent nations. The service sector is most often successfully hacked, with 38% of infections. Manufacturing is next with 17%.
Healthcare organizations like Kansas Heart and Hollywood Presbyterian are another primary target of ransomware. One study indicates healthcare providers are 4.5 times more likely to be hit by CryptoWall malware than organizations in other industries. Hackers target healthcare providers because of the strict regulations in place to protect patient confidentiality—this provides strong incentive for providers to pay the ransom.
“Hospitals are susceptible to ransomware because of the urgency of healthcare,” says Richard Chapman, chief privacy officer at University of Kentucky HealthCare, a large healthcare provider in eastern Kentucky. “We have patients coming in around the clock, seven days a week. If the computer system goes down for even seconds, it can spell the difference between life and death in an emergency situation.”
Chapman confided that the hospital system has not experienced a ransomware attack. But as someone charged with protecting the privacy of patient medical care records, he is understandably concerned. “Two other hospitals in the state were recently hit,” he says.
Education is another industry in the crosshairs. In the United Kingdom, 63% of universities have been held up for ransom. One school, Bournemouth University, suffered 21 attacks in a single year.
Why target universities? “We have sensitive information on our students that is highly personal, information that may be embarrassing in some cases,” says Reed Sheard, chief information officer at Westmont College in Montecito, California.
Another reason hackers target schools is the state of their technology networks. “Compared to large, well-capitalized business enterprises, universities are easy targets because they have all these legacy systems, are often underfunded and have stretched thin their IT resources,” Sheard says.
Westmont has not experienced a ransomware attack—“as yet,” says Sheard. While he is currently transferring all files related to email, calendars and student grades to the cloud as a loss prevention and mitigation strategy, he acknowledges that even the cloud is vulnerable to cyber criminals. “Phishing is a risk no matter where you store data—on premises or in the cloud,” Sheard says. “You can put in all sorts of guidelines to reduce people’s susceptibility to a scam, but at the end of the day they have to follow them.”
The Business of Ransomware
Roughly 43% of ransomware victims are unsuspecting employees hooked by hackers in a phishing scam. By far, phishing attacks are the major method of reeling in a gullible victim. In fact, 93% of phishing attacks now contain encryption ransomware, almost double the percentage in 2015.
The successful attacks have resulted in an explosion in phishing emails, which reached 6.3 million in the first three months of 2016, a stratospheric 789% increase over the last quarter of 2015.
Practice makes perfect, and this is increasingly the case with ransomware. Hackers are leveraging more sophisticated techniques, as demonstrated in recent cases studied by Symantec, “displaying a level of expertise similar to that seen in many cyberespionage attacks,” the firm states. For instance, hackers have developed user-friendly Ransomware-as-a-Service (RaaS) variants that anyone with a little cyber know-how can deploy from a home computer, acting as a de facto agent for these criminal organizations. The person simply downloads the ransomware virus and perpetrates a phishing scheme. If the victim pays up, the agent gets a commission.
Other enhancements include extending the scams beyond infected email links, attachments and web pages. “We’re seeing adware pop-ups being added to the list of phishing scenarios,” says Jerry Irvine, a member of the U.S.
Department of Homeland Security’s Cyber Security Task Force and CIO at IT technology firm Prescient Solutions. “The hacker knows you like shoes and sends you a pop-up offering a discount. You click on it and inadvertently download ransomware.”
If you don’t pay a $10,000 ransom, the attack could end up costing an organization millions.Tweet
In many ransomware attacks, the hackers are extremely businesslike. The reason is clear: not many organizations are knowledgeable about bitcoin payments, as they have not had any commercial reasons to traffic in the digital currency. So the hackers do what they can to help. “Their customer service is phenomenal,” says Robert Boyce, industry affairs associate at the Council of Insurance Agents & Brokers. “They’ll assist the victimized business through the bitcoin process, sending helpful links on how to pay. It’s become a business.”
To Pay or Not to Pay
When weighing whether to pay up, considerations range widely. “If you don’t pay a $10,000 ransom, the attack could end up costing an organization millions,” Chmel says. “You have the cost to rebuild the network, then you’re down for who knows how many days. You now have to contact your key partners like suppliers and banks about the situation, as well as all your customers, whose orders may now be stalled.”
On top of the business interruption costs, companies also must deal with the expense of hiring a technology forensics firm to assess the breadth of the infection caused by the malware and may also need a crisis management firm to handle the public backlash. In addition to these tangible expenses, companies also confront reputational damage. Existing customers may think twice about continuing to do business with a company knowing that its IT systems were vulnerable. In many cases, the simplest solution is to pay up and keep mum.
There’s another factor that argues in favor of paying the ransom—D&O liability. “Many company directors and officers are worried that if there is an incident and they don’t pay the ransom, they may face liability for not adequately protecting the organization to avoid the catastrophic financial events that occurred in its wake,” says Dan Twersky, assistant vice president and claims advocate at Willis Towers Watson.
A 2016 survey found businesses affected by ransomware endured an average of three days without data access. “The downtime could lead to business losses affecting the financial stability of the entity,” Twersky says.
“Attorneys will argue, ‘Here was an opportunity to avoid a catastrophic event by simply paying what is a pretty nominal fee being demanded.’ And that has certainly been the way most of our clients are ultimately reacting to these events.”
Not that the decision is by any means easy. Take Methodist Hospital in Henderson, Kentucky, for example. It revealed in March 2016 it was in an “internal state of emergency” following encryption of its files by a malware variant known as Locky Crypto-Ransomware. The hospital declined to pay the small ransom demand (four bitcoins, about $1,650 at the time), reportedly shutting down the infected parts of its network and relying on stored backup copies of most files to continue operations. It took five days to get the systems back up and running in their normal state.
Fortunately, the disruption did not affect patient care or patient information, which remained secure in a backup system while the main network was locked down. By acknowledging the attack and its timely response, the hospital also reduced the impact of reputational damage. Nevertheless, five days offline likely had some financial impact on the hospital. In other industry sectors, a lost week could be devastating.
Asked if he would have the same response to a ransomware attack, University of Kentucky HealthCare’s Chapman was uncertain. “I know the FBI advises against paying the hackers,” Chapman says, “but not being in the situation I can’t say what we would do.”
“As long as this continues to be a viable source of income, the bad guys will continue to do it,” says Julie Bernard, principal in the cyber risk services practice of Deloitte Advisory.
Another worrisome issue for many is the possibility a ransom payment may flow to affiliates of a terrorist organization like ISIS or Al Qaeda. Terrorists are keenly interested in ransomware, given the potential for large-scale business disruptions and economic dislocation, as well as access to an easy source of capital. If it leaks out at some point that a business has paid ransom to a terrorist group, the business could sustain severe damage to its reputation.
To pay or not to pay suddenly takes on Hamlet-like confusion. Many technology experts, such as Alan Cohn, a former assistant secretary for strategy and planning at the Department of Homeland Security, are firmly in the latter camp but appreciative of the complicated decision. In his view, cooperation with the government is essential.
“Law enforcement agencies understand the vexing nature of ransomware and are much more likely to look favorably upon victims that are cooperative, even if a ransom has been paid,” says Cohn, now counsel at international law firm Steptoe & Johnson.
What are brokers recommending to clients who express these concerns? “We don’t formally advise them to pay or not to pay,” Aon’s Chmel says. “We tell them the pros and cons for doing one or the other and leave the determination of what to do up to them.”
Compared to large, well-capitalized business enterprises, universities are easy targets because they have all these legacy systems, are often underfunded and have stretched thin their IT resources.Tweet
The availability of insurance to transfer the ransom and related business interruption expenses to an insurer certainly complicates the decision. Several insurance carriers cover cyber extortion, though it is not yet available on a stand-alone basis. As an insuring agreement, it is an optional tag-along to the wider cyber risk/data breach insurance product, with an annual aggregate sublimit of financial protection and an annual aggregate deductible. The boilerplate in most covers the cost of the ransom paid to meet the extortion demand, the expenses paid to hire computer security experts to prevent future extortion attempts, and the fees paid to professionals to negotiate with the extortionists.
Within the more comprehensive data breach policy are other risk transfer products and services, such as credit monitoring, forensic investigations, and crisis management. All of these coverages may be needed for companies to truly sleep easy. However, the devil is in the details.
“Some cyber extortion insuring agreements may not cover the loss if the underlying cause is a phishing email received by an employee who is at fault for clicking on the infected link,” The Council’s Boyce says.
Chmel notes some agreements also exclude payment of the ransom in bitcoin. Obviously, both exclusions may make the policies less valuable than the paper they’re printed on—hence the need for scrutiny. “If the policy is placed properly by a broker with expertise in this area, it should respond,” Chmel says.
Insurance as a Solution
Brokerages as well are at risk of a ransomware attack. “The important thing is to be educated and informed on the possible causes of loss,” says Boyce. To arm against possible attack, he advocates asking a series of “What if?” questions. Senior leadership within a brokerage—the CEO, CFO and CIO, for instance—should ask about the potential impact of an attack on systems like HR or the finance and accounting. This analysis will foster the development of risk mitigation tactics, such as walling off the system from other systems in the network.
Another benefit of this evaluation is that it will assist brokers with leveraging their own cyber risk analyses on behalf of clients. In collaboration with their insurance markets, brokers can provide extremely valuable cyber-risk services. “The insurance industry plays an important role in modeling, reducing and transferring risks,” says Rep. Ed Perlmutter, D-Colo. “This is why the data breach insurance market has begun to take off in the last several years.”
Perlmutter has a point. After years of dabbling in cyber insurance, the insurance industry now has some historical data to underwrite the risks more closely. Competition in the growing market is another benefit for brokers and their buyers, generating more realistic pricing and more flexible terms, conditions and self-insured retentions, Chmel says.
Cyber insurance has become so important in preparing for and mitigating cyber attacks that Perlmutter introduced a bill last September (H.R. 6032) to provide buyers a 15% tax credit on the premium they’ve paid for data breach coverage. “The legislation will help small- and medium-size businesses realize they should take these threats seriously and utilize the insurance industry as a resource,” Perlmutter says. “The increase in cyber attacks will only result in more disruptions, expenses and reputational costs.”
The goal of the bill is to encourage small businesses to boost their cyber security. To qualify for the tax credit, buyers must have adopted and be in compliance with the Framework for Improving Critical Infrastructure Cybersecurity, published by the National Institute of Standards and Technology, or any similar standard specified by the Internal Revenue Service.
As the bill and the improvements in the industry’s cyber risk coverages indicate, insurers are playing an increasingly important role in helping smaller businesses that might not have the resources to fortify their networks on their own. “It’s time we realize the national security implications,” Perlmutter says, “and use the insurance industry as a part of the solution.”
- Created the Financial Stability Oversight Council with the power to designate non-bank financial institutions, including insurers, as “systemically important financial institutions” (too big to fail) and subject to enhanced federal oversight
- Created the Federal Office of Insurance, which has the authority to represent the United States in international insurance forums, advise Treasury on insurance matters, oversee the federal Terrorism Risk Insurance Program and, under limited circumstances, overrule state insurance regulations
- Includes the Nonadmitted and Reinsurance Reform Act, which establishes the home state of a surplus lines policyholder as the sole jurisdiction to collect premium taxes on the transaction.
- Strips the Financial Stability Oversight Council of its power to designate non-bank “systemically important financial institutions” and retroactively rescinds all designations
- Replaces the Federal Insurance Office with a new Office of the Independent Insurance Advocate, which would basically give the office a new name. The new director would become a voting member of FSOC, which he is not under current law. The new office would retain most of its existing authority and responsibilities
- Does not address the Nonadmitted and Reinsurance Reform Act.
Like many observers, Yuen doesn’t believe a total repeal of the law is likely. But she adds, “We might expect to see some of the regulations relaxed in the form of new legislation, particularly with regard to deregulating financial institutions.”
The potential for deregulation coupled with tax reform could give a boost to banks, which would increase lending and therefore improve cash flow, Yuen says. That, she says, could lead to an uptick in merger and acquisition deals among banks.
“From an insurance perspective,” she says, “this means we as brokers may see a rise in purchases of reps and warranties coverage—more transactions mean a greater focus on indemnification, and we can help clients attend to this through a transactional risk product like reps and warranties.” Reps and warranties insurance provides coverage for a breach of a representation or a warranty in a purchase or merger agreement.
“We’ll also be paying close attention to how insurers may respond to a greater volume of M&A transactions,” Yuen says. “Will more deals translate to more claims? If so, we’ll watch for a tightening in underwriting for acquisitive institutions, more prevalent dedicated M&A retentions, and potential changes in other terms as well. Of course, as the legislation shifts, we must keep an eye on how regulatory change might need to be addressed from a coverage perspective.”
Since Dodd-Frank took effect, “there’s been a very direct tightening of the banking system,” says John Ward, founder of Cincinnatus Partners, an Ohio-based private equity firm specializing in the insurance industry. Lending has dried up for small business, which has contributed to the dampening of economic growth, he says.
“That’s had an impact on agents and brokers because their business depends on the headwinds and tail winds. Headwinds hamper organic growth, tailwinds help it,” Ward says. “Whatever dismantling or rollback will have a big positive impact because there seems to be a renewed commitment to a pro-growth economic agenda that will only help” agents and brokers.
Ward projects many smaller agencies will see a “pickup” in their internal perpetuation plans as the reins of lending are loosened.
The impact on captive insurers and the brokers who serve them is less clear, particularly if changes are made to the Nonadmitted and Reinsurance Reform Act provision in the law, says Mark Morris, senior vice president for risk finance at Lockton. The NRRA was really designed to streamline collection of premium taxes on non-admitted insurance transactions, and in most states captives fall under that definition.
“There has been an impact on some captive domiciles in terms of whether the taxes would apply and, if so, what the magnitude of those taxes would be,” Morris says. In some cases, the tax question discourages companies from forming captives or encourages them to move existing captives to another jurisdiction.
Due to the complexity of Dodd-Frank and potential impending changes, “this is where we as brokers earn our stripes,” he says. “It’s made consulting more complex because of all the nuances that have changed recently.”
So insurance brokers may breathe a sigh of relief that president-elect Donald Trump’s campaign pledge to repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act might, well, never happen.
“Commercial insurance brokerage occupies just a fraction of the entirety of the financial services community, but I’m pretty confident saying we’re the only financial services sector who got good stuff out of Dodd-Frank, not bad stuff,” says Joel Wood, senior vice president of government affairs for The Council.
And 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. “Unlike in Obamacare, where there’s a budget bill that can get through on a simple majority in the Senate, you don’t have anything like that in Dodd-Frank,” says R.J. Lehmann, a senior fellow at the pro-free-market R Street Institute in Washington.
“Dodd-Frank is a massive piece of legislation that significantly changed the way finance is regulated,” says Aaron Klein, a fellow in economic studies at the Brookings Institution’s Center on Regulation. “You can’t simply repeal and go back to the way things were. The world has evolved.”
The Nonadmitted and Reinsurance Reform Act
Brokers’ biggest concern is one small part of the massive financial regulation law—the Nonadmitted and Reinsurance Reform Act. The NRRA says a policyholder’s home state has the sole jurisdiction to regulate and collect premium taxes on surplus lines transactions.
We’re the only financial services sector that got good stuff out of Dodd-Frank, not bad stuff.Tweet
Congress made clear the law was intended to enable states to create a uniform national approach to regulating and taxing surplus lines transactions. The Council, along with corporate risk managers, the surplus lines industry and others involved in property-casualty insurance, had long pushed for this simplification. If Congress were to repeal Dodd-Frank in its entirety, including the NRRA, that could throw the surplus lines market back into its version of the Dark Ages.
“While the promises of the NRRA are still in the process of being realized, it unquestionably has improved the marketplace for surplus lines products by applying a single-state standard for multistate placements,” Wood says.
Before Dodd-Frank, “you had 50 states that all had different rules, some of which were mutually exclusive,” says Nancy McCabe, of Willis Towers Watson in New York. The new system is “massively less complicated. It’s way better than what it was.” She says a return to the pre-Dodd-Frank system would be awful. The reform, she says, is a “common-sense solution to a previously overcomplicated structure.”
Prior to Dodd-Frank, brokers dealt with “an arcane system that created entire groups within brokerages just to keep track that fees, taxes and filings were taken care of,” says John Wicher, principal at San Francisco-based John Wicher & Associates. The reform, Wicher says, “rationalized a business that was clunky and parochial with state regulators.”
Hints of Change
While a repeal of Dodd-Frank appears unlikely, the law might not remain entirely intact. A hint of how Republican lawmakers will approach changing Dodd-Frank emerged in the last Congress in the form of the Financial CHOICE Act, approved by the House Financial Services Committee last September.
The bill, introduced by committee chairman Rep. Jeb Hensarling, R-Texas, targets a wide range of Dodd-Frank’s provisions. Some of those provisions, such as the power of the Financial Stability Oversight Council to designate non-bank financial institutions (including insurers) as “systemically important financial institutions,” could be repealed.
Unlike in Obamacare, where there’s a budget bill that can get through on a simple majority in the Senate, you don’t have anything like that in Dodd-Frank.Tweet
Three major insurers are designated by the Financial Stability Oversight Council as systemically important financial institutions—American International Group, MetLife and Prudential. MetLife, however, successfully challenged the designation in federal court, a ruling the federal government is appealing. These designations mean the organizations are subject to heightened federal regulation.
Being designated as a systemically important financial institution subjects insurers to additional reporting requirements that raise their costs significantly. For example, AIG CEO Peter Hancock said last year complying with the requirements costs the insurer $100 million to $150 million annually.
Not surprisingly, one of the biggest calls for repeal is from the banking community, especially targeting the Consumer Financial Protection Bureau, which was created as part of Dodd-Frank to provide a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace.
Another insurance-related area in which the future is somewhat murky is the Federal Insurance Office, which was created by Dodd-Frank as part of the Treasury Department. The office has the authority to monitor all aspects of the insurance sector, evaluate the extent to which traditionally underserved communities and consumers have access to affordable non-health insurance products, and represent the U.S. in international insurance matters. The office also advises the Treasury on insurance issues and assists the Treasury secretary in administering the federal Terrorism Risk Insurance Program. Yet the office has a very limited regulatory role, maintaining the primacy of state insurance regulation as spelled out in the McCarran-Ferguson Act. Its preemptive authority over state laws applies only to those laws that conflict with international obligations. “And that’s a good thing,” Wood says. “The state-regulated insurance industry needs to have an equal place at the table of international trade negotiations, and the FIO is a welcome addition to the Treasury Department.”
Wood says the office’s support in 2015 for extending the Terrorism Risk Insurance Act through 2020 was critical. Having a single federal representative for the United States when dealing with international insurance issues, Willis Towers Watson’s McCabe says, makes a “great deal of sense.”
Under the CHOICE Act, the Federal Insurance Office would be replaced by a new Office of the Independent Insurance Advocate, which would basically be the FIO with a new name and would retain most of the FIO’s existing authority and responsibilities.
If legislation to abolish, rather than make minor changes to the office, is approved, brokers would feel an impact, says Mark Dwelle, an analyst with RBC Capital Markets in Richmond, Va. The insurance industry would be left without a single federal voice representing it in international forums. And the National Association of Insurance Commissioners or other organizations would probably attempt to fill the void, he says.
You can’t simply repeal and go back to the way things were. The world has evolved.Tweet
“Dodd-Frank didn’t start the dialogue over global insurance standards, and repealing the law won’t stop those discussions,” explains Francis Bouchard, a senior advisor at Hamilton Place Strategies in Washington. “In fact, bringing the clout and stature of the Treasury and Federal Reserve to the IAIS [International Association of Insurance Supervisors] negotiating table has dramatically enhanced America’s ability to protect the underpinnings of the U.S. regulatory model. Policymakers should be careful not to throw out the baby with the bath water, particularly in an era where both risks and capital are increasingly global.”
One provision that was nowhere to be found in the CHOICE Act is the NRRA. Sometimes silence is indeed golden.
South Dakota 45%
North Carolina 40%
HHS projection 16%
Other projections 30%
2014 Federal Tax Break
- $164.2 billion for employer health insurance tax exclusion
- $163 billion for pension payment exclusions
- $100 billion for the home mortgage interest deduction
- $71 billion for special capital gains tax treatment
- $51.6 billion for charitable contribution deductions
One of the biggest changes at hand is spelled ACA (for Affordable Care Act)—also known as Obamacare. The debate focuses on repeal and replace—and what, exactly, that means.
How can you repeal it when doing so could possibly leave tens of millions of Americans—those with pre-existing conditions and those who can’t afford coverage without government subsidies—without any health insurance at all?
And how can you replace it with something when no alternative has been offered?
Right now, only one thing is certain. Two key figures will play a major role in whatever happens: President Donald Trump and House Speaker Paul Ryan, R-Wis. Together, they will transform Obamacare into their own image—TRyancare, if you will.
And so the work begins.
Two overarching concerns will guide the debate. How can we best expand choice while at the same time controlling or reducing costs? These two guideposts are, of course, not always in harmony.
Where We Stand
Since the law was enacted in 2010, House Republicans have passed more than five dozen bills repealing the law in whole or in part. The most recent attempt, via a 2015 reconciliation bill, made it all the way to President Obama’s desk, where it was promptly vetoed.
President Donald Trump ran in part on a promise to repeal and replace the law. Now Republicans, who control the House, Senate and White House for the first time since 1930, must grapple with the core question of the moment: replace it with what?
Trump outlined a five-point healthcare reform plan as part of his “Make America Great Again” campaign platform. In it, he called for:
- Repealing (some of) the ACA
- Expanding health savings accounts
- Increasing medical provider transparency
- Allowing interstate sales of health insurance
- Replacing the current Medicaid program with block grants to the states.
Rep. Tom Price, R-Ga., a physician and chairman of the House Budget Committee (and presumptive nominee to be secretary of the Department of Health and Human Services), has his own plan. His proposal calls for repealing the ACA, expanding HSAs, allowing interstate sales of health insurance and fundamentally revising the Medicaid program. The heart of the proposal, though, is replacing the ACA exchange subsidies with tax credits of $2,000 for an individual and up to $5,000 for a family to purchase health insurance.
Sen. Orrin Hatch, R-Utah, chairman of the Senate Finance Committee, which also will have a significant voice in the replace debate, has his own plan. It would repeal much of the ACA, expand HSAs, create a sliding scale of tax credits (based on both age and income) for those without access to employer-provided coverage and those who work for smaller employers, and impose cost-based caps on the income tax exclusion for employer-provided health insurance.
Speaker Ryan, a self-proclaimed policy wonk (and at some level the House’s chief public policy development officer), has offered a more far-reaching plan as part of his “A Better Way” package of proposed reforms. His plan dovetails with the Trump, Hatch and Price proposals but is anchored on capping the income tax exclusion for employer-provided health insurance premiums.
The Employer Tax Exclusion
From the commercial insurance broker’s point of view, the most important question is what happens to the tax treatment for employer-provided coverage.
The federal government is starved for cash. There is no end in sight for deficit spending. One of the primary focal points of the new administration and Congress will be tax reform, and they will need to find funds to offset every new tax break they approve for some special interest. They also need to find funds to pay for the income tax credits many Republicans would like to use to replace the ACA exchange subsidies.
Employer-paid health insurance premiums are excluded from employee income for tax purposes, making the so-called “employer exclusion” the largest tax expenditure in the federal budget and thus the biggest congressional target.
The Joint Committee on Taxation says the total value, when including employer-paid healthcare, health insurance premiums and long-term care insurance, was more than $320 billion in 2016.
Famed bank robber Will Sutton is reported to have said, when asked why he robbed banks, “Because that’s where the money is.” While Sutton contended he never said any such thing, members of Congress are not so circumspect. They are looking lustfully at the employee tax break.
Employer-paid health insurance premiums are excluded from employee income for tax purposes, making the so-called “employer exclusion” the largest tax expenditure in the federal budget and, thus, the biggest congressional target.Tweet
Republicans have looked at caps on tax breaks of various types for insurance premiums. One plan would impose a 10% excise tax on all pre-tax benefits given to higher earners. Other plans propose replacing the employer exclusion with a universal tax credit made available regardless of whether coverage is purchased through the individual or group market.
There are also proposals (including Senator Hatch’s) to cap the exclusion at a percentage of average employer plan costs nationwide. The Urban Institute in 2013 estimated capping the tax exclusion at the 75th percentile of the value of employer plans would increase tax income to the federal government by $102 billion by 2023. That means the median middle-class taxpayer would then pay $914 more per year in taxes.
Some proponents say employers would offset the tax increase on the employee with higher wages. Yet the American Health Policy Institute has been unable to find a single study that draws this conclusion.
Speaker Ryan proposes capping the exclusion at $12,000 for individuals and $30,000 for families, and Price has suggested caps of $8,000 for individuals and $20,000 for families. Given the strategic roles of the bills’ champions, this approach will receive serious consideration.
Ryan says any cap needs to be set at a level that minimizes disruption and should be adjustable to address geographic differences in healthcare costs. He also is amenable to omitting health savings and investment accounts from affecting capped premiums.
One thing that does not appear to be on the table—despite concerns to the contrary—is an employer’s ability to deduct benefits it pays on behalf of its employees as a normal business expense.
President Obama has called health insurance delivery through employers a “historic accident.” The same day he made that comment, Sen. Ted Cruz, R-Texas, called employer-provided benefits a “historic anomaly.” Anomaly or not, it is now a well-embedded reality. The American Health Policy Institute recently noted 177 million Americans receive health insurance through their employers. Of that number, 88% said the benefits are extremely or very important to them—“far more than any other workplace benefit.” It also noted 79% of workers would prefer new or additional benefits to a pay increase. “More U.S. workers say they worry about having their benefits reduced (30%) than worry about having their wages cut (20%), being laid off (19%), having their hours cut back (17%), or their company moving their job overseas (8%),” the institute said.
We were going to have some sort of healthcare reform reset discussion in Washington regardless of the presidential election outcome. Many believe that, in their current condition, the exchanges are not financially sustainable.
Absent reform, the future was not promising.
The one bright spot here is that the ACA’s Medicaid expansion and health insurance exchanges for individuals have succeeded at expanding coverage and reducing the number of uninsured Americans. And research shows that having health insurance does contribute to better health and increased access to care.
The Department of Health & Human Services, which is responsible for overseeing the exchanges, reports as of early 2016 the ACA has enabled 20 million Americans to gain access to coverage. That includes 17.7 million non-Medicare eligible adults and 2.3 million young adults (ages 19-25). The uninsured rate has declined from more than 20% pre-ACA to about 11% now, according to the Center on Budget and Policy Priorities.
Coverage gains cut across all racial groups. Uninsured Hispanics dropped to 30.5% from 41.8%; African-Americans dropped to 10.6% from 22.4%; and White/Non-Hispanic dropped to 7.0% from 14.3%.
The current coverage gap is most pronounced, as might be expected, in states that did not expand their Medicaid programs. There is as much as a five percentage point difference in rates of coverage between states that expanded their programs and those that did not.
Despite those gains, the exchanges overall are suffering. The ACA gave seed money to 23 co-ops—private, nonprofit, member-governed health insurance companies selling policies on their states’ exchanges. Of those, 17 have failed. In 2016, 85% of exchange enrollees had a choice of three or more insurers. Today, only 57% do. Five states offer only a single insurer option (Alabama, Alaska, Oklahoma, South Carolina and Wyoming).
The Kaiser Family Foundation found that due to increased subsidies there will be no material increase in 2017 after-tax premiums in the individual market. That doesn’t mean, however, that premiums aren’t rising. Increases for the second-lowest-cost silver plan (the most widely purchased option) range from essentially zero in Massachusetts and New Hampshire to 145% in Arizona. Some 33 states are looking at double-digit increases.
Americans, by and large, want government to focus on healthcare. Three quarters of Americans want President Trump to make healthcare a priority, according to PricewaterhouseCoopers. What they want, however, is not quite so clear. Kaiser found 46% of Americans have an unfavorable view of the ACA, while 40% view it favorably. A May Gallup poll found 58% favor replacing it with a federally funded universal healthcare program providing health insurance for all Americans. Perhaps as a sign of Americans’ confusion and misunderstanding of the issue, the same poll found 48% favor keeping the ACA as is.
Despite the public’s mixed feelings on what should happen to the ACA, most, if not all, Republicans in the House and the Senate, as well as President Trump, appear committed to repealing a wide swath of it.
Candidate Trump stumped for immediate and complete repeal. President-elect Trump hesitated. The House appears to be coalescing around an immediate repeal strategy with intent to build in a two- or three-year transition period to allow for time to create replacement provisions. Several prominent senators, including Lamar Alexander, R-Tenn., who chairs the Senate committee with primary jurisdiction over much of the ACA, are arguing the repeal and the replacement need to be done simultaneously to avoid both political and marketplace disruption.
The one bright spot here is that the ACA’s Medicaid expansion and health insurance exchanges for individuals have succeeded at expanding coverage and reducing the number of uninsured Americans.Tweet
Ironically, it is likely more Senate Democrat support could be mustered if repeal and replace were separated because all of the Senate Democrats who originally voted for the ACA have stated publicly they will not vote for repeal. Voting for a replacement after the repeal, though, would not be inconsistent, and Democrats from Trump-won states will be looking for things to support to bolster their reelection prospects. It is highly likely a reconciliation repeal bill gets enacted very early in 2017 with a protracted replacement debate to follow.
What would that bill look like? We can get a good idea from the 2015 reconciliation bill, by all reports the base text for any 2017 repeal efforts. The 2015 redux bill would repeal the individual premium assistance subsidies and the small-business tax credits. It also would immediately repeal:
- Individual mandate penalties
- Employer mandate penalties
- Cadillac tax provisions
- Annual fee on importers and manufacturers of branded prescription drugs
- Annual fee on healthcare providers covering U.S. health risks
- Medical device tax
- Medicare surtax on high-income tax payers ($200,000 for individuals/$250,000 for families)
- 3.8% investment tax on high-income tax payers
- Health insurance carrier remuneration tax on any annual compensation to an individual exceeding $500,000
- Prohibition on using health savings account/flexible savings account and other health account funds to purchase over-the-counter medications
- Tanning bed excise tax (my personal favorite).
Because Congress would use the reconciliation process to make changes to the ACA, Senate Democrats cannot filibuster and stop a vote, as only a simple majority of 51 is required under reconciliation. Republicans can count on 52 votes. Under the Congressional Budget Act, which creates and controls the reconciliation process, for legislation to qualify for reconciliation it must have a budgetary impact and any increase to the federal deficit must be offset by revenue raisers in the same bill.
Two fundamental repeal debates are taking place at the moment. First, what else, if anything, should be included in repeal? Although there is some dissent within the Republican ranks, the emerging consensus appears to be that repeal should not include popular market reforms, including the plan design requirements.
The Council will advocate for the repeal of two provisions not included in the 2015 reconciliation effort:
- Mandate-related reporting requirements. These widely derided administrative burdens were designed to make the mandate penalty regimes enforceable. Without the penalties, they appear to serve little purpose and instead create an expensive compliance burden for employers and an administrative burden for the Internal Revenue Service. If these requirements are not included in the reconciliation package, the new administration can issue an executive order dictating the obligations not be enforced. The Council will urge it to do so if need be.
- Medical loss ratio provisions. These provisions capped administrative expenses and profits that a health insurance provider could realize—15% in the large-group market and 20% in the individual and small-group markets. To the extent an insurer exceeds these caps, the overage must be refunded to the employer or to the plan participants. The MLR has a direct budget impact since it affects tax collections (every dollar an insurer refunds will not be taxed as income). The MLR also creates a perverse disincentive for an insurer to reduce medical costs since the higher the costs, the greater the administrative expenses the insurer can incur and, thus, greater profits.
Replace With What?
What exactly will replacement look like? Republicans appear committed to retaining the ACA market reforms they originally proposed in the 1990s. These include prohibiting pre-existing condition exclusions, guaranteed issue of policies to all applicants (take all comers) and community rating in the individual and small-group markets.
Republicans understand health insurer concerns that they will be subject to even more adverse selection risk than they have seen to date in the absence of an individual purchase mandate requirement. To solve this, Congress needs to make the individual market attractive (or punitive) enough and affordable enough for individuals to actually buy coverage even when they do not immediately need it—and still ensure the market remains economically viable.
Embedded within those dilemmas are a few unavoidable realities. First, the employer-provided marketplace is working. If you put pressure on that space by limiting or eliminating preferential tax treatment for employers, you could magnify current failings exponentially by putting even more pressure on the individual markets.
Almost none of the ACA reform regime has addressed cost control. At the end of the day, the greatest threat to the current system is its inability to control escalating costs. If the individual market ultimately fails, the subsequent replacement efforts might lead to a complete displacement of employer-provided coverage.
So what are our options?
Expanding Consumer Choice
Although the ACA did little to address healthcare costs, employers are heavily incented to do so because healthcare costs account for 5% to 10% of their compensation expenses and 2% to 5% of their total expenses.
One of the ways they have addressed this is through consumer-directed plans. The percentage of employers offering a consumer-directed health plan tripled from 4% to 13% from 2007 to 2010 and jumped to 29% for 2017.
More than half of all large employers (200+ employees) offer a high-deductible health plan option, and more than 84% of very large employers (1,000+ employees) offer an HDHP option. And 35% of very large employers offer only consumer-directed health plan options to their employees.
Both Ryan and Trump have focused heavily on expanding provider transparency to better enable all market participants to evaluate their options, including consumers through Republican-favored, consumer-directed health plan options. Ryan has also proposed including protections for self-insurance mechanisms, with provisions eliminating states’ ability to regulate terms and conditions of stop-loss coverage for self-insured plans.
Many Republicans are focused on attempting to get greater leverage from health savings accounts, which are a featured cornerstone of their support for consumer-directed healthcare models. It is likely any reconciliation bill would eliminate the ACA limitations on using HSA and flexible savings account funds for the purchase of over-the-counter drugs. It is also likely a reconciliation bill will restore the pre-ACA $5,000 cap on FSA contributions (eliminating the current $2,500 cap).
Beyond that, Ryan has proposed four other HSA fixes that would be eligible for inclusion in a replacement bill:
- Allowing spousal catch-up payments to increase HSA contributions
- Allowing qualified medical expenses incurred before HSA qualified coverage has begun to be reimbursed from an HSA account as long as that account is established within 60 days of incurring that expense
- Increasing the maximum annual HSA contribution that any high-deductible health plan participant can make to equal the total combined allowed annual deductible and out-of-pocket expense limitation
- Increasing HSA availability for underserved populations, such as those who use the military’s Tricare coverage or the Indian Health Service.
Democrats generally do not favor HSAs. They’re viewed as only appealing to (and effectively only available to) the wealthy. The focus by very large employers on consumer-directed health plan platforms belies this view to some extent. Softening the HDHP requirements through the adoption of the following two sets of additional revisions also should increase the blue-collar appeal of these platforms:
- Exempt employer on-site medical clinics, telemedicine and maintenance prescription drug protocols from the otherwise applicable HDHP deductible requirements
- Eliminate the ban on Medicare-eligible HDHP plan participants from contributing to HSAs.
The recently passed CURES Act also included a provision allowing employees at small businesses (fewer than 50 full-time workers) to use their health reimbursement accounts to purchase coverage in the individual market on a pre-tax basis. This would utilize the “employer exclusion” provided the small employer:
- Does not offer its own group plan
- Makes the HRA offer available to all eligible employees on the same terms
- Is the sole contributor to the HRA
- Caps its contributions at $4,950 for individuals and $10,000 for families.
There may be some desire to expand this privilege to larger employers, which would restore an option they had pre-ACA.
Expanding wellness programs is high on many lists. The ACA initiative with the biggest potential to bend the cost curve was the expansion of the tools an employer can employ to incentivize participation. The law differentiates between participatory programs and health-contingent programs. Participatory programs are generally available without regard to health status, and any reward available is not tied to meeting a health-related goal. Health-contingent programs require participants to satisfy a health-related goal to obtain a reward.
For the latter, an employer can incentivize participation by offering up to 30% of the overall premium value (which includes both the employer and the employee contributions) and up to 50% for tobacco-cessation programs.
Rep. Price has proposed allowing the premium differential to be 50% between those who participate in a plan’s wellness offerings and those who don’t.
Participatory programs satisfy the Woody Allen maxim that 90% of life is just showing up. All you have to do is show up to qualify for them. The classic example is a Health Risk Assessment, which often is combined with biometric screening. Because anyone who wants to should be able to participate in a health risk assessment-type program, there are no restrictions from the Treasury, Labor Department or HHS on the magnitude of the incentive an employer can offer.
The Equal Employment Opportunity Commission, however, has finalized rules that attempt to impose restrictions pursuant to its rulemaking authority under the Americans with Disabilities Act and the Genetic Information Nondiscrimination Act. In some cases, the EEOC wellness regime appears to directly conflict with and undermine the federal wellness program regime. The Ryan plan would resolve this by exempting HHS/Labor/Treasury regulated wellness programs from EEOC scrutiny.
There also may be support for broad medical malpractice reform and cost-of-care caps or legislation on the use of reference pricing mechanisms. Trump’s selection of Price to be his HHS secretary, however, likely will mean the administration will oppose efforts to directly legislate any provider cost controls.
The one other change that is vital to employers is ensuring the ACA “nondiscrimination” requirement is limited to ensuring eligible employer plan participants have access to all of the plan options—with terms at least as good as their most highly paid colleagues.
Obama Treasury officials believe the nondiscrimination rule should be written much more broadly so it would be violated if lesser-paid employees do not participate in each plan option at levels on par with their more highly paid colleagues. As a practical matter, this would require an employer to offer just a single plan option, because that is the only way to ensure compliance. This obviously would be at odds with one of the governing tenets: expanding consumer choice.
Accessibility and Affordability
The initial twin ACA accessibility and affordability objectives remain touchstones for any replacement vehicle. Maintaining guaranteed issue and prohibiting pre-existing condition exclusions while eliminating the individual mandate obligation to purchase coverage triggers concerns that individuals will buy coverage only when they need it and that only those who need it will buy it. Fears that declining competition will raise prices and limit choice exacerbate those concerns.
A number of proposals have been circulated in an effort to address this. There is growing realization that premium support is essential for those now eligible for exchange subsidies. The subsidies are likely to be traded in for some sort of tax credit. There also is discussion of tying receipt of those credits to private exchanges either in lieu of, or in addition to, the public exchanges.
Expanding the community rating age bands to allow at least five rating levels also is high on the replacement reform list to make the pricing more actuarially sound. It also would reduce the pricing barrier to younger individuals buying coverage.
Several Republican reform proposals would create high-risk pools through a public-private partnership (using Medicare pricing) to reduce the financial burden on the system and on the high-risk individuals. The idea is that it would put more downward pricing pressure on the larger pool of healthier consumers.
To directly address the adverse selection issue, Republicans are considering imposing conditions on the ability to qualify for the guaranteed issue/no pre-existing condition exclusion. Ryan would require an individual to be continuously enrolled in a qualifying plan to be eligible going forward for coverage from any plan without regard to a pre-existing condition—as was the case pre-ACA.
Several Republican proposals recycle old ideas designed to allow individuals to create (or be placed into) underwriting groups outside of the employer plan context. The most prevalent would allow interstate sales of health insurance. Conceptually, the idea is relatively straightforward: an insurance carrier could offer any plan it offers in its “home” state to consumers outside its borders without restriction. In practice, however, the proposals raise a host of issues:
- How will a consumer’s home state regulator be able to exercise any real jurisdiction over a non-admitted carrier selling health insurance in that state?
- How will an agent or broker assisting with that placement be able to navigate the surplus lines laws in a context where those laws were never meant to be applicable?
- Won’t big carriers with national provider networks have huge advantages over smaller regional players, thereby undermining the increasing competition objective of the proposal?
The primary advantage of an interstate sales approach likely is that it effectively allows state mandate requirements to be overridden because a carrier could domicile in the friendliest state (i.e., the state with the fewest mandates) and then be able to offer a streamlined plan with more favorable pricing in every other state.
What Is Essential?
A recent Washington Post op-ed extolled the virtues of the ACA and its assurance that all Americans have access to “essential care.” Since enactment of the ACA, however, individual and small-group plans have been required to cover much more than just essential care—which was never the original intent.
The ACA required HHS to establish a national benchmark plan to incorporate all of the requisite essential health benefit elements. The national benchmark was expected to offer a streamlined and economical basic plan on every exchange. If a state’s mandates exceeded the benchmark, the state could have continued to impose them as long as it paid any subsidies associated with the extra premiums resulting from them.
Regardless of how and when repeal becomes effective…any final replacement solution almost definitely will require mustering the votes of at least eight Senate Democrats to hit the magic 60.Tweet
The state mandate subsidy obligation was expected to lead to widespread elimination of thousands of state mandates. But that never happened because HHS decided instead to delay the benchmark plan indefinitely. In the interim, it directed each state to develop its own benchmark plan, which generally could be based on the most widely sold plan in the state.
HHS also unilaterally decreed all mandates in place prior to the ACA’s enactment could be included in a state’s benchmark plan without exposing the state to the mandate subsidy financial obligations. So none of the expected mandate reform happened.
This resulted in critical consequences:
- “Basic” exchange (and all individual/small group) policies are much more expensive than they should be.
- The federal subsidy obligations are much higher than they should be (because the federal government is subsidizing all of the state mandates).
- It is much more complicated than it should be for small businesses to insure employees in multiple states.
A replacement regime could be grounded to some extent on the revitalization of the national benchmark plan idea. Rather than trying to do this circuitously through interstate sales, the law could simply dictate a plan based on the national benchmark plan that could be sold in any state without restriction. And guaranteed purchase rights for a previously uninsured consumer could be limited to only the basic benchmark plan (and only during open enrollment periods).
There are a number of different ways these options and ancillary benefits could be configured. Starting with a simpler plan offering the same basic option throughout the country could be a springboard for resolving both the affordability and accessibility conundrums in one fell swoop.
If repeal is the enigma, replacement is the riddle. At the moment, there are many different plans that could follow many different paths. New ideas and suggestions continue to sprout like weeds. All eyes have been on the
Republican leaders as they attempt to sort through the options and plot a unified course.
Regardless of how and when repeal becomes effective (and repeal of significant swaths of the ACA appears inevitable at this juncture), any final replacement solution almost definitely will require mustering the votes of at least eight Senate Democrats to hit the magic 60. The key to solving the riddle ultimately may lie in their hands.
Would you be up for the task? How would you measure your success?
Respecting your roots but not shying away from the speed of change is pretty simple in concept but can be daunting in execution. It’s exactly this sort of challenge that I think our industry ought to be willing to address in 2017.
My goal this year is to challenge The Council: continue finding smart ways to make our firms better and stronger while recognizing that what we have here is special—and built on a 104-year-old foundation.
The first step in all of this is embracing a changing business world. We all know that uncertainty leads to opportunity, that out of discomfort comes innovation. For our industry in particular, things like diversity, technology, and the evolution of risk management come to mind. We have a lot of room for improvement in all of these areas, and with your help, we can move the needle forward. How do we further efforts around women in the industry? How do we bring millennials into the fold?
It is one thing to ask tough questions—it is quite another to spend time and energy on answering them. Addressing diversity in our industry warrants our focus. At our last Council Board meeting, I asked my fellow board members to look around the room at the 45 business leaders around the table. There was one woman and no minorities. In today’s world that is unacceptable and is a microcosm of other issues our industry needs to address. While there is a lot of work to be done, there is also a lot of opportunity within our reach. The Council is in the process of launching a diversity initiative, and seeing this through will be one of our top priorities for this coming year.
Technology and data are also high on the radar. One of our goals for 2017 will be to increase our industry’s use, adoption and innovation around them. If topics like data analytics and blockchain don’t keep you up at night, or worse, you don’t even know what they are, I challenge you to join us in moving the ball forward for the benefit of our entire industry. We’re surrounded by a wide range of new business models we’ve never really seen before, and it’s critical they’re understood and embraced to make customer business interactions seamless.
There will be other issues for us to tackle as the year goes on—many of which you’ll read about in this very magazine—and I assure you that we will be ready to provide useful and actionable insights. In closing, I’m thrilled to be working with you all—my colleagues in the industry—and I look forward to another great year ahead for The Council.
The M&A world was buzzing—Taxes will go up, sell now!—and signs pointed toward a hustle in 2016 that could have broken records. This was before the election, when the majority of professionals in our field suggested that former secretary of state Hillary Clinton would become president.
That’s what could have been. Now, what will be?
That’s the question we ask beginning a new year and a new presidency. Because most industry players expected a Democratic win, the Trump victory immediately changed the game. We stopped, pushed the mental reset button. What now? The pre-election rush to close deals faded, though we believe this is not necessarily a negative.
There appears to be a great deal of confidence that the Trump administration will be beneficial for business, even though we are not sure exactly how. Certainly, the race to sell before taxes spike is not so much a concern.
Some believe Trump will focus more on corporate tax rates (speculating a drop) as opposed to capital gains taxes, predicting a potential increase there.
The fact is, we don’t know for sure what will happen with taxes—capital gains or business in general. What we do know is sellers have backed away from defensive measures. They’re holding on. What we also note are signs of positive growth in the stock market, which historically has indicated an economic uptick. From an M&A standpoint, that would likely benefit firms’ earnouts.
What we know for sure is our steady market continues to have more demand than supply. It’s a seller’s market. We anticipate this to continue. So we believe that 2017 could look similar to the previous two years in terms of number of deals closed—in the 400 to 450 range.
Heading into a new presidential term, following a historical election battle, we feel a bit battle-worn and perhaps comfortable with not jumping to sell or buy before there’s greater certainty.
We don’t know exactly what the future holds in the M&A environment. (Wouldn’t a crystal ball be nice?) We’re exhaling after the pre-election frenzy. And we are keeping a close eye on how a fresh administration will shape the market.
For now, we wait and see.
December had the most deals announced of any month in 2016. There were 57 U.S. brokerage transactions reported during the month, up from just 15 in November. The preliminary deal count for the entire year is 439 reported acquisitions, down from 456 in 2015 but still the second highest annual activity in the last decade.
A large portion of the deal activity in December is attributable to the formation of Alera Group, where 24 separate brokerage entities spread across the country combined to form a new company, backed by Genstar Capital, a private equity firm that previously invested in Acrisure and Confie Seguros Insurance Services. The combined operations represent nearly $160 million in commission income.
Overall, private-equity backed brokerages again represented the largest buying cohort in 2016, accounting for nearly 55% of all reported deals, up from 46% last year. The top four buyers in 2016 all have private equity backing and are the same as the most active buyers in 2015—but in a slightly different order. Acrisure reported 38 deals completed for the year, earning it the top spot for the second consecutive year, followed by Hub International (31 deals), BroadStreet Partners (28) and AssuredPartners (26).
Property-casualty agencies were the most popular targets in 2016 and represented nearly 44% of announced transactions during the year, although this is down from 57% in 2015. Multiline agencies grew to greater than 38% of purchases announced in 2016, up from 28% in 2015. Employee benefits and consulting firms represented 17% of acquired firms this year, similar to the 15% represented in 2015.
It sounds innocent enough and may actually be good advice. That is, if—once you make it—you actually accept you are a success. Ah, there’s the rub.
For some people, success always feels fraudulent. When this happens, it’s called Impostor Phenomenon (also called Impostor Syndrome), which was identified in 1978 by two clinical psychologists, Pauline Clance and Suzanne Imes. They used the term to identify high-achieving people who are unable to internalize their accomplishments and instead have a persistent feeling of being a fraud.
Most of us have experienced moments of Impostor Phenomenon at some point in our lives. In fact, research says at least 70% of us have displayed symptoms. The Impostor’s Club is filled with some very well known people:
Tina Fey, Meryl Streep, Tom Hanks, Maya Angelou, Howard Schultz, Natalie Portman and Michelle Pfeifer are just a few celebrities who self-identify as impostors. This syndrome has no prejudice. No one is immune. It affects all, agnostic to gender, race, culture or creed, introversion or extraversion.
So what causes it? Several studies from 1985 to 2006 identified two key factors that contribute to this syndrome: perfectionism and family environment.
So how do you know if you or someone on your team may be suffering from Impostor Phenomenon? Some common symptoms include negative self-talk, a need to constantly check and re-check work, and intentionally avoiding workplace attention. Sufferers will often overcompensate by staying late at work and not setting realistic workload boundaries. They have persistent feelings of self-doubt and live in fear of being found out as a phony. They will blame themselves when things go wrong, even when it’s obvious there were other factors at play.
In an article in Mental Floss, Manhattan psychologist Joseph Cilona wrote: “Those struggling with imposter syndrome also tend to attribute success to luck rather than merit and hard work, and generally tend to minimize success.”
The Caltech Counseling Center website identifies the three types of impostors:
- Those who believe they are frauds and feel they do not deserve their success or position. They think they are tricking others into thinking they are competent. As a result, they fear being “unmasked or found out.” They fear others will discover how much expertise they lack.
- Those who attribute their success to luck. People with Impostor Syndrome tend to credit luck or external variables to their success and do not believe it has anything to do with their abilities. They might say things like “I just got lucky” or “This was a fluke.”
- Those who discount their success. These folks will proclaim their success is no big deal. They will also have difficulty accepting compliments.
Can anything be done to minimize the impact of Impostor Phenomenon? The bad news is most victims have this little voice of doubt so deeply ingrained in their psyche it is nearly impossible to exorcise. The good news is you may not want to completely rid yourself of it. Impostor Phenomenon brings a natural sense of humility to your work, which can be a very healthy thing. The challenge is to prevent it from becoming a paralyzing fear.
In a Harvard Business Review article headlined “Overcoming Imposter Syndrome,” executive coach Gill Corkindale offered these tips:
- Recognize imposter feelings when they emerge. Being aware is the first step to change.
- Rewrite your mental scripts. Instead of telling yourself people are going to find out what you don’t know, remind yourself it’s natural not to know everything and you will continue to gain more knowledge as you progress.
- Consider the context. We all have times when we don’t feel 100% confident. There are situations when you may, indeed, be out of your depth, and self-doubt is a normal reaction. Just remind yourself this is only for this specific situation and you don’t feel this way all the time.
- Be kind to yourself. We are all entitled to make mistakes. Forgive yourself. Be sure to reward yourself for getting big things right!
Alexis Meads offered some great advice in a Huffington Post article headlined “How to Deal with Imposter Syndrome”:
- First you must become a mental warrior. Be aware of how the doubt shows up in your head.
- Then inhale confidence and exhale doubt. Create a space to remind yourself of the “badass” you are. This could be an inspiration file filled with emails, quotes, photos, whatever reminds you of how awesome you are. Stop the comparison game. Remember you are unique and everyone’s timeline for accomplishments is different.
In a recent New York Times column headlined “Learning to Deal With the Impostor Syndrome,” financial planner Carl Richards wrote that when he hears that little voice in his head he takes a deep breath, pauses for a minute, smiles and says, “Welcome back old friend. I’m glad you’re here. Now, let’s go to work.”
The Impostor Phenomenon pushes him to be his best by embracing the pressure.
Finally, if all else fails, you can fall back on the wisdom of Stuart Smalley from “Saturday Night Live”: “I’m good enough, I’m smart enough, and doggone it, people like me.”
Our dining room table was his bully pulpit, and fact-checking was an act of sedition, prohibited when he was on a roll. On occasion, a courageous teen would put his college education to work to question my father’s draconian position on the war in Vietnam (“Bomb the NVA back into the Stone Age”) or social protest (“America, love it or leave it”). My father would listen incredulously and then ruthlessly