Strategic Pairings

2016-2017 Broker M&A Market

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

Princeton, New Jersey

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

Anthony Kuczinski, President and CEO, Munich Re

A Bull Market

Lower Manhattan is in an upswing.

Workers Comp Remains Controversial

States and Business Press Again to Shift Workers Comp Costs

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

Borderline Behavior

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

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

A Peeping Tom in Your Living Room

Smart technology is collecting your data.

Startups Reinvent Insurance

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

An Acquired Taste for Global

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

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

FAST FOCUS

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

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

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

Alera Group

The Alera Group

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

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

FAST FOCUS

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

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

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

 

Numbers Cruncher

Alera Group

Northern Exposure

Buying Canadian brokerage firms is attractive, but questions abound.

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

FAST FOCUS

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

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

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

Bruce Dunbar

Chairman, McGriff, Seibels & Williams, Birmingham

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

A Real Head Turner

The fourth turning is here.

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

The Canary in the Coal Mine

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

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

Buying Cyber Risk

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

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

Culture Shock!

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

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

Employee No. 97642

Don’t forget the employees during a deal.

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

Carriers Are Investing in Insurtech

If you can’t beat ’em, join ’em.

What Do Startup Insurtech Companies Do?

Here are some categories relevant to your business.

Des Moines, Iowa

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

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

INDULGE: Beer Is Back in Birmingham

Roll Tide Roll

Birmingham, Alabama is coming into its own.

The Last Mile

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

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

Startups Startin’ Somethin’

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

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

FAST FOCUS

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

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

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

 

Read the Sidebars

What Do Startup Insurtech Companies Do?

Carriers Are Investing in Insurtech

PAR Now Offers Brokers Cyber Coverage

Beware the perils of cyber exposures from M&A.

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

Born from the Ashes of Crisis

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

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

FAST FOCUS

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

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

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

 

Read the Sidebars

PAR Now Offers Brokers Cyber Coverage

Callous Capitalism

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

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

FAST FOCUS

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

Cynicism toward institutions and corporate America is rampant.

Insurance has an important role in remediating that problem.

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

Digital Health Growing

A look at investments in digital health companies

Accelerating Innovation

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

Pets and Debts

It’s time to reimagine benefits for millennial workers.

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

Steve Hearn

CEO, Ed

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

Customer for Life

My own journey through the claims process.

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

The Good, the Bad and…the Potentially Ugly?

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

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

The Vision Test

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

Is your blindspot showing?

Give Them Their Due

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

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

How JUST Are You?

JUST Capital ranks the insurance industry.

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

Zombie Webcams

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

Beat the Bots

Video cameras and Web fridges form the new zombie army.

Marty Rhodes

President & CEO, Stephens Insurance, Little Rock

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

Where to Find Help Fighting Ransomware

Fortify the Fort

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

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

The Payoff

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

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

FAST FOCUS

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

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

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

 

Read the Sidebars

Fortify the Fort

Where to Find Help Fighting Ransomware

The Old and the New

How They Compare

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

Dodd-Frank Banking Changes Could Affect Brokers

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

Unscathed?

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

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

FAST FOCUS

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

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

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

 

Read the Sidebars

 

Dodd-Frank Banking Changes Could Affect Brokers

The Old and the New

Highest Projected Silver Plan 2017 Premium Increases

A Big Congressional Target

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

TRyancare

Can access and affordability triumph in repeal and replace?

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

FAST FOCUS

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

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

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

 

Read the Sidebars

A Big Congressional Target

Highest Projected Silver Plan 2017 Premium Increases

With Strong Roots Comes the Foundation for Change

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

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

Wait and See

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

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

The Impostor’s Club

Remind yourself of the badass you are.

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

Trump’s Rx

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

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

Digital Insight

We need to move technology beyond facts and figures to provide insight and actionable intelligence.

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.

Balancing Act

The offset for a corporate tax cut is targeted at taxing employer-funded benefits.

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.

Cybersecurity Skills Gap Threatens Businesses

Hackers are targeting companies with an IT skills shortage.

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.

Fortify the Fort

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

The Payoff

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

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

FAST FOCUS

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

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

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

 

Read the Sidebars

Fortify the Fort

Dying While Human

The palliative care movement is better for patients, providers and payers

This week The New York Times Magazine takes a thought-provoking look at the quest of triple amputee Doctor B.J. Miller “to change the way we die.”

Leader’s Edge Predicts NFL’s $1 Billion Payout

A landmark agreement between the NFL and former players is finally being settled after a five-year fight.

Game Changers

They shook up the industry, shaping it into its current form.

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

Holiday Gift Ideas

OK Google. Where’s my foldable drone?

Incubating Innovation

Q&A with Karen Furtado, Partner, Strategy Meets Action

The Real Cost of Risk

Unearthing the hidden costs of customer risk and measuring the money saved when loss doesn’t happen can drive an insurer’s value.

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.

Our Heaven Is Their Hell

One insurance executive risks his fortune to save lives on the high seas because the world’s governments won’t.

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. 

FAST FOCUS

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.

Insurtech

Some see threat. Others see opportunity.

Investors are pouring millions into startups to avoid being caught off guard.

Peer Pressure

Peer-to-peer insurance is all about throwing spaghetti against the wall to see what sticks.

“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.

FAST FOCUS

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.

 

Read the Sidebars

Insurtech: Some see threat. Others see opportunity.

High Risk, Big Values, but Big Bust?

Energy insurers struggle to maintain sector profitability following a drop in demand, 250,000 layoffs, a soft market and sinking premium dollars.

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. 

Making Sense

Just how do you make sense of data to help your firm?

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. 

Jon Loftin

President & COO, MJ Insurance, Indianapolis

I’m wide open, maybe sometimes to a fault.

Wish You Were Here

Honoring the life and legacy of Dave Oberkircher

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

Digital Body Language

Reading body language to make a sale isn’t what it used to be.

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. 

The Great Divide

The most troubling election in recent history calls for a united response.

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.

Uncertainty Abounds, Opportunity Exists

How will Fidel Castro’s death affect Cuba? Will Trump engage?

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.

Change Gamer

Look inside to grow outside.

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.” 

My Game Changers

These people have made a difference in my life.

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.

Underneath the Rubble

A conventional-wisdom look at healthcare and taxes under the new Republican order.

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. 

Numbers Cruncher

Chronic Back Pain

Foiled by His Beliefs

Regulations Reduce Prescriptions, but Then What?

Anti-Social?

Hacking is growing, with social media sites at risk.

Content Isn’t Free

Q&A with Patricia Kocsondy, VP, E&O Underwriting, Professional Risk, Chubb North America

Listen Up!

If you know what you are doing, being engaged, empathetic and a good listener will save you a lot of money on claims.

Texts, instant messages and assorted other technologies can speed the flow of our conversation in today’s world of instant communications. Yet the same technologies can also reduce the quality of our interactions, causing us to speak to claimants rather than engaging with them.

Is Autopilot the Answer?

Robo advisors open up 401(k) options for smaller-group business.

Some retirement planners have no pulse. They’re that way by design. Literally.

FAST FOCUS

Robos help clients create investment portfolios that automatically rebalance allocations as the market changes.

Established firms, such as Charles Schwab and Vanguard, have launched their own automated programs.

Wealthfront, an early leader among robo advisors, topped $1 billion in assets in 2014.

Prescription Addiction

While money and misinformation fuel America’s opioid crisis, brokers fight to change it.

The opioid story across the United States is harrowing and costly. Harrowing in the tens of thousands of lives lost. 

FAST FOCUS

The nation’s drug epidemic has been fueled by prescription opioids, often used for chronic pain.

Doctors continue to treat chronic pain as a physical ailment, even when it’s not.

In 2013, pharmaceutical opioids accounted for 37% of the 44,000 reported drug-overdose deaths.

 

Read the Sidebars

Numbers Cruncher

Regulations Reduce Prescriptions, but Then What?

Foiled by His Beliefs: A True Pain Success Story

Chain Reaction

Blockchain may be in your future, but do you want to lead the charge?

The digital currency bitcoin is often discussed with a high degree of skepticism. Some praise it while others are super cautious about the potential for fraud. 

FAST FOCUS

Brokers are studying the use of blockchain-enabled technology to improve their operational efficiency.

A cottage industry of new competitors merging insurance and technology are already implementing blockchain technology.

Eventually, the entire insurance ecosystem will move to a blockchain-enabled framework where many current inefficiencies will cease to exist.

Equal Benefits for All

A year after the marriage equality ruling, LGBT employees still need education on benefits changes

Last year’s Supreme Court decision in Obergefell v. Hodges granted equal marriage rights to same-sex couples in all 50 states. The ruling entitles LGBT couples to all of the same financial, tax and estate planning benefits as opposite-sex couples, including, of course, employee benefits.

Rob Cohen

Chairman and CEO, IMA Financial Group, Denver

It’s very complex, regulated business. Like everything in life, change happens only when the pain gets great enough. 

Bounce Back Up

Real leaders continually recharge their batteries and encourage their staff to do the same.

“I get knocked down, but I get up again, you’re never gonna keep me down. I get knocked down…” Come on now, sing it with me! You know the song. 

Crossing the Pond

Non-U.S. brokers need a U.S. license to solicit business in the U.S.

The world seems to shrink a bit every year. Recent machinations related to London brokers crossing the pond to meet with retail firms and their clients is the latest example. 

Listen. Adapt. Excel.

The art of communication

Our Insurance Leadership Forum is both my favorite and most challenging time of year. It’s challenging because it takes months and months of preparation, and when you finally get onsite, it’s a five-day blur. 

Know Your Role

Distinguish between a “partner” and a “leader” so you can expand ownership opportunities and increase your value.

I often think about the importance of individual titles within an organization. I believe they help us understand where we fall on the internal hierarchy and give those outside the organization some semblance of where responsibilities lie. 

HIPAA Compliance for Dummies

Don’t rely on your technology to do it all for you.

If your brokerage is solidly rooted in employee benefits, compliance with the Health Insurance Portability and Accountability Act, better known as HIPAA, is a topic worth your regular attention. Even if you are a property-casualty only firm, you’ll still want to take note. 

ColoradoCare at ILF 2016

2016 holds some critical state-level issues in play that could have a major impact at the national level, like Colorado's Amendment 69

As the 2016 general election draws closer and closer, Americans have some big decisions to make. And while most of the focus is on our presidential candidates, there are some critical state-level issues in play that could have a major impact at the national level.  One of these is Amendment 69 on the Colorado ballot.

Fishman Family and Travelers Help Fight ALS

The Fishman File

Jay Fishman, former executive chairman of the board and CEO of The Travelers Cos.

On-the-Job Training

Fishman credited his mentors with much of his success. Here’s what he had to say about them.

The Economy, in a Nutshell

Questions Brokers Should Be Asking

Advice from the British Insurance Brokers’ Association

Technology Moving In, Taking Over

The automobile model may create insights you can use.

Matching Capital to Risk

Adapt and claim your place.

Download the full Publication here.

Vibe
Midway between New York City and Philadelphia, Princeton is more laid back, but still offers rich history, cultural attractions, shopping and restaurants. Princeton University, founded in 1746, plays a central role. 

Restaurant scene
Farm-to-table restaurants are a tasty trend, but we also have a lot of iconic eateries—PJ’s Pancake House for breakfast, Hoagie Haven for subs, Conte’s for pizza, and Thomas Sweet for ice cream—which were favorite stops for my family when the girls were growing up.

Favorite restaurant
Witherspoon Grill.  It is considered a steakhouse, but Nassau Street Seafood & Produce Co. supplies it with incredibly fresh fish. It’s usually hopping with music inside, and has outdoor seating. It’s perfect for kicking back and people watching, but also a comfortable environment for business dinners or cocktails.

Stay
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.

Cocktails
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.

Do
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.

Active
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.

Factoid
Nobel Prize winner John Forbes Nash Jr., subject of the biography and film, A Beautiful Mind, served as senior research mathematician at Princeton University. Nash was once a special guest at a Munich Re client event at the Nassau Inn.

Tom Wolfe coined the term “Masters of the Universe” to describe the ambitious young Wall Streeters of the 1980s that he chronicled in his best-selling novel, The Bonfire of the Vanities. Like the stock market, the Financial District has had its ups and downs since. But there is no doubt that Lower Manhattan is in the throes of a bull market. In addition to finance, the current Masters of the Universe, navigating the narrow, winding streets of New York City’s oldest neighborhood, are coming from creative industries such as advertising, tech, fashion and media—publishing giants Condé Nast and Time Inc. have both moved here.
They are also living and playing where they work. According to the Alliance for Downtown New York’s 2016 Year in Review, there are now 658 stores, 512 eateries, 323 residential and mixed-use buildings and 30 hotels in Lower Manhattan.
The latest addition to the neighborhood’s skyscrapers and historic sights, such as Trinity Church, Federal Hall and Wall Street, is the Oculus, which serves as the World Trade Center transportation hub—a striking structure designed by Spanish architect Santiago Calatrava. Built by the shopping center developer Westfield Corporation and known officially as the Westfield World Trade Center, the mezzanine is a mecca for upscale shops, including a two-floor Apple store, FordHub, Ford’s experiential retail space, and the latest Eataly. While this Eataly lacks the cavernous feel of the Flatiron location, it is still teeming with market stations offering Italian fare—pizza, pasta, freshly baked breads and wheels of cheese. You can grab a panini or espresso to go or sit down at one of four restaurants, including the Osteria della Pace, which serves Southern Italian cuisine with Downtown views.
Towering above it all is the new One World Observatory, on the 100th floor of One World Trade Center. Far below, in the heart of it all, are two new hotels, the Four Seasons Hotel New York Downtown, an oasis of refinement, and the Beekman, a modern take on the Gilded Age.
The city’s hottest new restaurants, which are also some of its most beautiful, are not only located in Lower Manhattan but also affiliated with hotels, a tad unusual. At the Beekman, New Yorkers from the Upper West and East Sides are actually venturing down, appearing as tourists in their own city to sip cocktails in The Bar Room, a stunning space in the atrium of this former library, and to dine at chef Keith McNally’s Augustine or chef Tom Colicchio’s Fowler & Wells. Le Coucou, a lovely French eatery by chef Daniel Rose, is in 11 Howard, a new boutique hotel in Chinatown. It topped the list of best new restaurants in 2016 for many critics, including Pete Wells of The New York Times, and is one of the most sought-after reservations in town.

Meanwhile, lawmakers in some states will consider expanding the number of workers eligible for coverage. And although a movement to allow employers to “opt out” of providing coverage suffered numerous setbacks in 2016, proponents says they will refile similar opt out bills in at least two states in 2017.

The most common cost-cutting attempt in 2017 likely will be more widespread adoption of drug formularies for use in treating injured workers. These formularies detail which medications doctors can prescribe and are an attempt to reduce the nation’s growing opioid addiction.

Proponents argue there is no evidence prescribing opioid analgesics for pain results in injured workers returning to work faster. States expected to consider drug formularies in 2017 include Arkansas, California, Georgia, Louisiana, New York, North Carolina, Montana and Pennsylvania.

Meanwhile, proponents of legislation to allow employers to opt out of their state-run workers compensation system say they are not dissuaded by setbacks they incurred in 2016.

A one sentence bill filed in the Arkansas Legislature would establish an “optional alternative system to finance and administer employee benefits compensation regarding health, disability, and death benefits.”

Texas currently is the only state that allows employers to opt out of the state-run workers compensation system. Oklahoma lawmakers adopted a similar program in 2013. But that state’s Supreme Court in late 2016 ruled unconstitutional the “Oklahoma Employee Injury Benefit Act,” or “Opt Out Act,” declaring the law creates impermissible, unequal disparate treatment of a select group of injured workers.

Bills filed in Tennessee and South Carolina last year that would have created opt-out systems failed, although supporters say they will keep trying.

Lawmakers in Florida and Illinois will consider placing limits on how much an employer must pay an injured worker.

Although most of the 2017 legislation is expected to address how to stop or slow escalating costs, Washington state lawmakers will consider adding workers in the gig economy to the workers compensation system. The gig economy consists of a growing number of workers who exist on short-term contracts or freelance instead of permanent jobs. The Government Accountability Office says about 40% of U.S. workers fall into this category.

The Washington bill would require businesses who employ contract workers under the 1099 tax system to contribute to a fund that would be used to provide workers compensation and other benefits to contract employees.

“If they don’t want to give us that information, then they don’t come,” he said.

The practice already has apparently begun in earnest. And the inquiries have not necessarily been limited to foreign visitors. In January the U.S. Court of Appeals for the Second Circuit held that customs officers could, without a warrant or probable cause, examine and copy documents belonging to a traveler who was under investigation for a crime completely unrelated to customs or border issues.

The defendant in United States v. David Levy was returning home to the U.S. from a business trip to Panama. Levy was the subject of an ongoing investigation into alleged stock manipulation. He was detained at the airport passport entry point by Customs and Border Protection officers who had been asked for “assistance” by the federal agency investigating Levy. Customs and Border Protection inspected his luggage, including a notebook of handwritten jottings, which they photocopied. Less than three days later, Levy was indicted for a variety of crimes. The notebook was a key piece of evidence used to convict.

So what does this mean for you and your clients who travel outside the U.S.? A few things:

  • Can you be stopped and questioned at the U.S. border? Yes, this is called “secondary inspection.” Expect to miss your connecting flight. If you disrespect the officers during the secondary inspection questioning, expect to miss the next flight after that too.
  • If you are subjected to a secondary inspection, do you have the right to have your lawyer present? If you are a U.S. citizen, yes. If not, technically you have that right only if you are being questioned about matters other than your immigration status, but what is relevant to your immigration status is very broadly construed. If you try to exercise your rights, expect the CBP officers to push back and assert you are making yourself look guilty.
  • Can your electronics be taken from you at the border? Unfortunately, yes. And if your devices are taken, do not expect to get them back for months. 
  • What should you do if your electronics are taken? You must be provided with a receipt for your device(s). You should always write down the names and badge numbers of the officers with whom you meet. If there are privileged, trade-secret or other sensitive materials on the device, you should advise the seizing officer. And you should immediately engage legal counsel to ensure steps are taken to preserve and protect sensitive materials.
  • Can you be compelled at the border to disclose account passwords? No. But the assertion of this right may extend your detention during the secondary inspection and foreign visitors may be denied entry. You also can expect CBP officers to inform you that the assertion of this right makes you look guilty.
  • Are electronic and hard-copy materials that are protected by the attorney-client privilege exempt from disclosure? Not necessarily, but if you notify the inspecting or seizing officer of this fact, then review of those materials is subject to special procedures. These procedures include requiring the CBP officer to seek advice from CBP Counsel before conducting a search of them.

There are good e-hygiene practices you can deploy when traveling internationally with electronic devices that will minimize the damage from such intrusions, both in the U.S. and abroad. You can and should, for example, close all laptop programs and cell phone/tablet apps before entering a border zone. 

The most important thing you can do to protect yourself, though, is to store all sensitive materials in a secure cloud-based environment and not on your devices. If such materials are on your devices, they may not just be yours by the time you cross a border.

At the end of the day, the power of border officials derives from YOUR desire to cross the border. If you are a U.S. citizen or a legal resident, you will be allowed entry at the end of the day (unless you are arrested, but that is beyond the scope of today’s discussion).

For U.S. visitors without legal status, your “admissibility” is within the discretion of CBP officials. That said, you can always decide that entry is not worth the effort. My great hope is our friends and colleagues from abroad do not feel compelled to reach that conclusion.

Sinder is The Council’s chief legal officer. ssinder@steptoe.com

Herrington is a partner in Steptoe’s White Collar Criminal Defense and Financial Services Practice Groups. mherring@steptoe.com
 

And who will watch the watchers? Nearly two millennia after the poet Juvenal asked that question, it remains just as relevant, although in ways the Roman satirist surely never imagined. Vizio, a maker of “smart” televisions, agreed earlier this year to pay $2.2 million to settle charges that it installed software that could collect viewing data from 11 million televisions without seeking the consent of the people doing the watching.

The televisions were capable of capturing second-by-second data on what viewers were watching, whether it was via cable, broadcast, set-top box, DVD or streaming devices, according to a complaint by the Federal Trade Commission and the New Jersey attorney general.

Devices aren’t just tracking what we watch, they’re also listening. That’s why Arkansas police sought a warrant for the audio data collected by an Amazon Echo device at a home where the police were conducting a murder investigation. Amazon turned down the request for the data, but it highlights that when such devices are on, they’re always listening, if only for their “wake” word—or even during Super Bowl ads. After a commercial for the Google Home voice assistant aired during the big game, fans took to the Internet to report that the ad—specifically the words “Okay Google”—had turned on the devices in their home.

Don’t Talk to Strangers

Smartphone voice assistants may be another source of danger. A study by computer scientists at Georgetown and Cal-Berkeley showed smartphones could be vulnerable to hacking by hidden voice commands from web videos, for instance, and prompted to open web sites with malware.  

Speaking of unimagined outcomes, the inventor of sticky tape might not have dreamed that it would fill a computer security need—taping over webcams—for people who just want to be sure the devices they’re looking at haven’t suddenly decided to look back. That very low-tech defense has reportedly been taken up by Facebook founder Mark Zuckerberg and FBI Director James Comey.

The Industry Strikes Back

After a massive cyber attack last fall that was mounted via a veritable zombie host of Internet-connected devices, some of the biggest names in technology and cybersecurity have banded together to boost security on the Internet of Things. AT&T, IBM, Nokia and security firms Palo Alto Networks, Symantec and Trustonic said they were forming the IoT Cybersecurity Alliance Trustonic to combat cyber attacks from connected devices.

AT&T says it has seen a 3,198% increase (that’s not a typo) in attackers scanning for vulnerabilities in web-connected devices. 

“Be it a connected car, pacemaker or coffee maker, every connected device is a potential new entry point for cyberattacks,” says Bill O’Hern, AT&T chief security officer. “Yet each device requires very different security considerations.”

When Your Data Talk

The warning about data collection and pacemakers might have come in handy for an Ohio man who was charged with arson and insurance fraud after he told police he had carried a variety of items from his burning home in a short period of time, the local Journal-News reported. A cardiologist said data from the man’s pacemaker told a different story.

Tell us about Startupbootcamp InsurTech
Startupbootcamp InsurTech is an accelerator. That means taking different types and shapes of startups and enabling them to succeed. Within a three-month period, we give them access to a lot of resources, including best-practice techniques, to help the startups design sustainable business models.

I am working very closely with insurance partners. Our partners include 16 major insurance brands that work directly with the startups to speed traction. We also have a network of investors and mentors. We leverage all of those people, all of those resources, to actually accelerate the startups.

One part of what we do is educational, the other part is about interacting with the right people, to work on the right insurance projects and then win investment as well.

Why is insurance such fertile ground for innovation now?
When you look at what happened in 2014, you had a number of investors realizing the industry was ripe for innovation. They realized a change was taking place in insurance because of digital technology, which was coming to market and becoming more ubiquitous. We also have changes affecting customer behaviors. Uber, Airbnb, Amazon, Google—all of those have changed our customer expectations. A lot of customers want these experiences in their daily lives whether they are dealing with a bank or an insurer.

Are there specific processes that are particularly ripe for change?
We have seen a lot of startups coming in to reinvent the way claims are being handled. Today, 60% to 80% of costs for many insurers are still claims costs. However, claims can be processed differently today. One of our startups from last year’s cohort, RightIndem, is trying to make the claims process far more customer-centric and at the same time far more digitized. Insurers realize they must deliver better experiences for customers and are looking for solutions. Other startups are looking at combining artificial intelligence and visualization to improve the way information is being captured across the claims process.

In the underwriting area, insurers are gradually looking at ways to augment their scoring abilities, not only using internal data but leveraging external data sources. This includes personal and social data to better understand the profile of their customers so they can design more interesting products for them.

In servicing functions, digital assistants operated by artificial intelligence are automating processes. Such assistants will remove people from departments and make repetitive processes a little bit more interesting.

Now AI, like Alexa, allows you to believe you are talking to a human. Insurers are investigating this to improve their customer servicing too.


What makes a great startup?
It’s probably the founding team—people who can see there is a consumer need or an insurance business problem in the market that needs solving. They have scanned the industry and see they can leverage their skills to solve those problems effectively, and they are good listeners when engaging in conversations with insurers. Another characteristic of great startups is execution. At the end of the day, a great idea needs to be supported by a sustainable business model.

What is your experience so far in insurtech?
We continuously meet amazing people coming through the Bootcamp. This includes amazing founders, people who are passionate about what they are doing. It makes you quite humble. There is so much happening in the sector. Things are moving so fast. We are nonetheless fortunate to be working with amazing insurers who want to innovate, transform their business and drive internal resilience. One way they see that happening is by working with us, working with the startups and learning to behave as startups.

Some build global alliances. Others go the M&A route. And still others look to expand into new markets. No matter how you do it, all paths must be approached with caution.

Building out global alliances of like-minded peers that complement existing operations and help growth is one border-crossing method. The nature of such alliances varies, as does the scope of commitment. Over the past few years, some variations have emerged, such as Renomia’s company-centered networks, in which its members operate independently but support each other in cross-border risk placements. Or Brokerslink’s network of independent brokers, whose members are vested partners and equal shareholders.

For more aggressive “individualists” with the means to scale and vast global ambitions, there are mergers and acquisitions. Recent data from global insurance investment management company Conning show the global deal volume in 2015 was nearly $20 billion. This comprised mostly bolt-on transactions that helped brokers develop broader product offerings. Transformational, large-ticket mergers, such as Willis Tower Watson’s, or BB&T’s acquisition of U.K.-based Swett and Crawford, are still infrequent.

But as more brokers confront complex international business decisions requiring a strategic approach to M&A, both types of deals are expected to increase. Insurance intermediation has always been about clients, so when clients look increasingly beyond familiar markets, brokers need to improve their global competencies to retain their accounts.

It isn’t a simple process, and many brokers continue to approach cross-border deals with extreme caution and due diligence. They make sure operations are compatible and complementary, compliance costs are reasonable and options for legal recourse are clear. Translating values and business models to a new, foreign market is an even tougher challenge, as is understanding how your current acquisitions align with your company’s and clients’ long-term strategy. 

“The fundamental question is how you create something truly global,” says Arik Rashkes, managing director for the Financial Institution Group at Houlihan Lokey, the leading investment bank for global M&A. “The notion is to get something that is very efficient and works on the same platform. But you can also find yourself running a hundred different companies, and that’s what people are hesitant about.”

Private Equity a Key Player

As with domestic M&A, private equity is driving a lot of brokerage M&A activity, both in North America and globally. “The insurance brokerage space has been extremely attractive for private equity,” Rashkes says.

“They have been very deep on insurance brokers for over the last five years, and you can see it all across the board.” What private equity firms naturally love here is a steady cash flow, “something you can predict is a huge thing after they got burned with unstable businesses.”  

The notion is to get something that is very efficient and works on the same platform. But you can also find yourself running a hundred different companies, and that’s what people are hesitant about.

Arik Rashkes, managing director for the Financial Institution Group, Houlihan Lokey

Of course, there are obvious advantages to these arrangements for brokers, as they get access to a big capital machine with clear benchmarks for growth and favorable conditions for a leveraged buyout. All this has been good for companies’ price-earnings ratio. But as the interest rate is rising and brokerage price-earnings in North America plateau, the leveraged buyout loses its appeal. The prospect of higher rates this year may push North American buyers to invest more in smaller retailers domestically and globally, and there is no shortage of quality options. As the dollar remains strong against other currencies, solid overseas companies may look like a steal.

Brexit and Trump Shake Up Stable Markets

Another factor that affects global M&A is the increased geopolitical uncertainty. “Cross-border transactions will hurt in the next couple of years due to much commotion and change,” Rashkes says.” Persistent crises in the Middle East and economic troubles in major emerging markets have been a constant backdrop, steering investors toward more stable markets in the United States and Europe. Yet these fairly reliable markets were made much less certain last year by Brexit and the unclear prospects of the European Union framework moving forward, as well as anticipated changes in America’s international and domestic agenda.

President Trump’s dramatic arrival to the White House signaled a new era for both the finance industry and foreign affairs. As we have observed, the current president takes his election promises literally and very seriously. And while we have yet to find out which sectoral and international priorities will top the administration’s agenda this year, it is clear the traditional trade policy, based on a free flow of goods, capital and labor, is being fundamentally dismantled—to the dismay of U.S. commerce and investment partners in Europe, North America and Asia Pacific. If the tide of globalization begins to ebb, so will any residual confidence in global mechanisms protecting foreign investment.

The industry is also closely following how the Brexit process evolves, as it affects Lloyd’s role as a global insurance hub and the U.K.’s access to European markets through the simplified passporting procedure.

Passporting has been a very handy instrument for foreign and U.K. investors to anchor a regional office in the heart of global finance in London, while being recognized by EU states’ licensing authorities as a local entity. As the debate about Brexit’s effect on passporting and the extent of a future U.K.-EU partnership unfolds, companies are confronted with new costs and staggering realities of investing in the EU and Britain.

For Britain-based companies and Lloyd’s, it is essential to preserve the most favorable access to the EU market, which depends on the results of withdrawal negotiations. Under the worst-case scenario, companies’ acquisitions in the U.K. will not enjoy the same benefits as before, which will understandably decrease London’s appeal. In anticipation of that, some global carriers with operations in the City have rushed to exit.

Lloyd’s is not sitting idly either, and is currently working on a contingency plan to absorb associated exit shocks, such as restricted financial market access and more limited access to a potential pool of talent. Lloyd’s accounts for 20% of the City’s GDP and more than £60 billion in written premiums, so there is much riding on the company’s ability to remain in the global insurance marketplace.

Ironically, some industry experts see a silver lining even in the worst-case scenario of Britain’s divorce. They contend London’s independence in financial regulation is worth the cost. Brexit will free regulators and the local industry as a whole from implementing burdensome, Brussels-imposed common market directives, which hurt British sovereignty, not to mention national pride. Euro-skeptics in Britain remember the times outside of the EU when London was a thriving offshore center on steroids for dollar-denominated transactions and a hub for alternative investment and emerging market finance. Nobody dictated when or how authorities would regulate the industry, as is the case with Solvency II and other rules. In return for conceding policy-making power, Brits are troubled by mandatory transfers to support Europe’s poorer regions, which already send labor migrants to the U.K. If done right, they argue, Brexit presents a valuable opportunity to go back to London’s past financial glory and make it more globally competitive and more attractive for potential foreign investment by opening to more capital and less regulation.

John Eltham, the head of North American Broker Business at Miller Insurance Services, in London, says the Brexit referendum has made a major impact on the rate of exchange movements relative to the British pound. “As we earn much of our income in foreign currency but pay ourselves in sterling, this has had a positive effect on profit margins,” says Eltham, who is also the chair of the Council’s International Working Group. “It has simultaneously made the relative cost of acquisition in USD terms lower and therefore more attractive. It is not by chance that Aon chose to re-domicile in London and that foreign capital continues to flow in to the City with investments in both broking houses and major insurance carriers.

It is not by chance that Aon chose to re-domicile in London and that foreign capital continues to flow in to the City with investments in both broking houses and major insurance carriers.

John Eltham, head of North American Broker Business, Miller Insurance Services

“The London insurance market has built a unique infrastructure and concentration of knowledge. This is supported by the entrepreneurial spirit that has seen London establish itself as the leading global financial center, fueled in part by the cosmopolitan nature of its inhabitants. This spirit will not alter post-Brexit.”

Better Buyers than Sellers

While the regulatory uncertainty in London and the U.S. is new, local regulations and compliance rules in other countries such as China have and continue to pose challenges for foreign investors. “Foreign-owned brokers have to go through a set of costly requirements in China, including restrictions on the form of establishment and capitalization levels which are attainable only for the top 10 to 15 global players,” says Alex Yip, Lockton’s CEO for Greater China.

We have also seen insurance companies reducing their exposure in the Chinese market or exiting it altogether. One reason is a growing uncertainty over how national regulators respond to general market volatilities and capital outflows, which underlie the fundamental state of China’s evolving financial system and the government’s goal to keep tight controls over the renminbi. Restrictions on transfers abroad, implemented last year, were disruptive to companies’ operations, affecting their ability to repay loans to overseas investors or pay dividends to foreign stakeholders. Provincial authorities add another layer of bureaucratic riddles, so the cost of compliance adds up, as foreign investors burn money on higher capitalization, local staff training and new technology. 

On the other hand, China and Japan have been on a global shopping spree. Although an Asian investor has yet to acquire a sizeable Western brokerage, the conditions are ripe for local capital to move offshore. Last year the Chinese completed the most international M&A by volume after the U.S., acquiring 777 companies at a combined value of $225 billion. And several insurance companies were targets for Chinese and Japanese investors. Asia has become an increasingly expensive market, as assets have increased in price partly due to foreign investment. Economic growth has slowed or stagnated in some cases, and both countries have amassed a large stash of dollars they can’t spend domestically because of the lower return on investment.
In China’s case, the government is specifically pushing state-owned companies to invest abroad to gain knowledge and a foothold in key markets through the “Go Global” or “One Belt, One Road” initiatives. Both initiatives encourage corporations to diversify investments and seek strategic partners among foreign companies to strengthen their global competitive advantage.  

… And the Pursuit of Technology

Access to technology is an ever-important part of a brokerage’s strategic planning. For some, acquisitions can help gain advanced technologies that transform distribution channels, improve the client interface or provide better telemetrics and predictive analytics capabilities.

According to CB Insights, which tracks insurtech activity, the United States claims the largest share of investment in insurance technology startups at 59% of global deals in the sector. At the same time, smaller markets in Europe, and especially the Nordic region, have moved faster toward e-commerce and operational digitization and showed significant progress in automation and machine learning.

As companies’ profits suffer due to claims unpredictability and low interest rates, cutting operational cost through technology is top of mind for senior management. McKinsey estimates that over the next decade the insurance sector in Europe will shed around 250,000 jobs due to modernization, and most of those losses will happen in repeatable and support functions related to reporting and analysis. As a result, most of the client interface—from risk insurance purchase to claims processing—would happen exclusively online. 

Asia is on the other end of the spectrum. Its growing population and challenges associated with traditional insurance distribution make it an interesting target for overseas insurance technology investors. Difficulties in raising capital and an insufficient number of skilled entrepreneurs in the sector, coupled with the inherent cultural aversion to startup failures, result in a weaker early-stage startup ecosystem in most Asian economies. The lack of quality filters present in the United States and Europe will be unlikely to produce highly competitive Asian versions of Zenefits and Lemonade, conceding the market to foreigners with advanced business acumens, deeper insurance expertise and available cash for a more aggressive expansion.

Foreign-owned brokers have to go through a set of costly requirements in China, including restrictions on the form of establishment and capitalization levels which are attainable only for the top 10 to 15 global players.

Alex Yip, CEO for Greater China, Lockton

In 2015, U.S. and local private equity firms invested $1 billion in Chinese online-based Zhong An Insurance, the largest transaction in p-c insurtech that year. The transaction gave U.S. investors a shot at capitalizing on the fast-growing insurance segment and a stake in the first licensed online insurer that “aims to extend its disruptive approach to the traditional insurance industry.” Accenture estimates that China’s online insurance premiums will grow to more than $60 billion by 2018, increasing the segment’s local market share to 12%. Even though China, India and Japan account collectively for 11% of insurtech deals, Forbes forecast that in coming years we will see more experienced investors from the United States and Europe in this market.

It might feel at times as if the investment world we know is folding. Overall political uncertainty, the lingering economic slump, low interest rates and the lack of confidence in globalization put major cross-border investments on hold. Experts predict that in coming years we will still see activities on the fringe, with smaller deals likely to dominate. Eventually, we are heading toward a busy long-term scenario for global M&A, but only after Europe is in a better place politically, the United States is clearer about its healthcare reform and international affairs, and leaders of emerging markets get their management and operational house in order.

Gololobov is The Council’s international director. Vladimir.gololobov@ciab.com
 

  • 20,000 clients
  • 750 employees
  • 24 firms, 40 locations across 15 states
  • $158 million in revenue
  • Goal: Exceeding $500 million in revenue
  • Ownership: 40% member firms; 60% Genstar Capital
  • Initial makeup: 75% employee benefits firms; 15% p-c firms; 7% wealth management/financial services firms; 3% other.
  • Five-year goal: 45% employee benefits; 45% p-c and risk management; 10% wealth management/financial services.

Even as the Benefit Advisors Network had grown, every time the group gathered, someone else had sold. Consolidators had continued to approach. Challenges for individual firms had ramped up.

From the very start in 2002, the point of BAN had been to share best practices and collaborate for mutual benefit. But that day, a whole new level of collaboration was on the table. The 20-odd people in the room were committing to merge their firms, even while maintaining a sizeable ownership stake, and to collectively take on a private equity partner to grow their companies.

The invitation had been open to all, but those gathered had committed to step up—and step together. One by one, they stood to say why.

“The men and women there spoke to the interest of improving their firms, of working at a much deeper level with the peers they had held in such high regard and admiration and collaborated with already,” says John O’Connell, president of C.M. Smith Agency. “I think it was Alan Levitz who said, ‘Holy smokes, no one said they’re here for the money.’… It was an incredibly inspiring moment, because it set our true north.”

The compass had landed on what would become Alera Group, a brand-new employee benefits, property-casualty, risk management and wealth management firm with investment from Genstar Capital. Composed of 24 entrepreneurial insurance and financial services companies from across the country, Alera came out of the gate in January as the 14th largest privately held multi-line insurance brokerage and seventh largest privately held employee benefits firm in the country. Levitz, who was CEO of GCG Financial, has taken the helm as Alera Group president and CEO.

“To draw the distinction, this was the absolute opposite of an exit strategy or sellout,” O’Connell says. “It was critical to our decision-making process as a group that we needed to be focused on really building a great new company, and not just having some sort of monetization event and fading into the mist.”

The landmark partnership addresses many issues agency owners face, from perpetuation concerns to risk. And in the bigger picture, O’Connell says, “as the market gets more sharp and pointed in its demands, just as in any other industry, having scale and scope and a DNA of innovation is critically important.”

An Open-Book Process

It’s essential to note that BAN continues on. Earlier this year, in fact, some 300 BAN members gathered in San Antonio, and Alera owners took part. It’s not a replacement in any way, but rather, as Levitz puts it, “a logical evolution.” BAN began as a study group and became a shared services platform. Next, there was some sharing of financial compensation. The Alera deal, however, includes accountability around using the services that are on the platform and continuing to build together.

The process, says O’Connell, who serves as BAN’s vice president, “was very open-book. It was not selective in any way. What I mean by that is, we didn’t handpick firms that might have been a little better performing or higher growth. It was open, and anyone who chose, they could learn all the way through.” And Alera still promotes partnership opportunities.   

BAN includes roughly 70 firms. Those that chose not to become part of Alera had their reasons. Some firms have multiple owners or strong internal perpetuation strategies; others weren’t interested in looking at an alternative capital structure. Some had an employee stock ownership plan. And still others thought it might be a daunting project, requiring much time and energy. (And that last subset in particular was right.)

“But overall, of the 24 firms that are part of Alera Group, 20 of them were initially part of Benefit Advisors Network, and they had a history of working together through their owners, through their salespeople, through their account executives, very closely over the last 12-plus years,” says Rob Lieblein, Alera’s chief development officer. “Not only was there trust involved, but they thought about the world and business and strategy the same way. So when the opportunity came about to consider coming together as one, there really was a strong foundation in place.”

As for the other four firms, they were all firms Lieblein had been in relationship with while working with consulting and investment banking firm MarshBerry.

Throughout BAN, however, “I think there was a curiosity,” Levitz says. “A skepticism, certainly. Concern. And on the other side, an optimism and a wow factor to the whole set of discussions. To pretend that all of us weren’t someplace on that spectrum at some point during the conversation would be a mischaracterization. We all went through the process of trying to understand it, what it meant to us as people, what it meant to us as firms, what it meant to our people, and what it might mean within the industry.”

To draw the distinction, this was the absolute opposite of an exit strategy or sellout. It was critical to our decision-making process as a group that we needed to be focused on really building a great new company, and not just having some sort of monetization event and fading into the mist.

John O’Connell, president, C.M. Smith Agency

And they all went through the process of wondering just how long it would take.

Time and Intensity

Back in 2014 the board of the Benefit Advisors Network, as a member-driven organization, first approached Lieblein about coming up with an alternative business model for firms to join. He had strategies ready to present at the start of 2015. It took about six months, Lieblein says, for the individual firms to grasp what Alera would be, how the private equity firm would be involved, how debt could be used and what ownership would mean. Next up was the process of building vision, strategy and objectives, followed by six months’ worth of due diligence, legal agreements and conversations with lenders.

Because the move was unprecedented, because so many firms were involved, and because none of those firms had been through any venture of this scale, wheels turned slowly. Most initially believed the process would take months rather than years.

“It was a challenge keeping everybody enthused,” Lieblein admits. “It was a major time commitment for every single person in each firm to stay together for two years and give 100% effort to this, as well as 100% to their businesses. To their credit—and I think this is an important point—the 24 firms, between 2015 and 2016, grew 8%, which is almost double the industry average. It was a herculean effort by everybody involved.”

Those who made that effort speak of intensity, of complexity, of trenches, and calls and talks and work groups and meetings. But they also speak of community, like-mindedness and a culture of collaboration that pulled them through.

“What was a pleasant surprise for me … was the ability of all of the owners, who are great entrepreneurs, to check their egos at the door to get a deal done,” says Peter Marathas, Alera’s chief legal counsel. “I don’t think I’m overstating it to say we never had any type of issue where we had to reign anyone in. Everybody had a singular view and worked together to get there, to a great result.”

Alera aims to create a national platform, administered regionally, deployed locally. As such, each firm retains its local brand equity, but can use the Alera name to bring national presence and heft. Collaborative opportunities among peers have increased. “We have evidence of a ton of sales activity just since we all came together,” Levitz says. “What’s been really great is the number of collaborative sales—I can’t say have been made, but are being talked about—within the firms, where one firm might have a prospect that’s in another firm’s sweet spot. And we’re already working much more closely than even as a BAN firm we would have done, just because of the accountability.”

Yet, so far, not much has changed on a day-to-day basis for many of the employees of the individual firms. “Other than the fact that now we’re allowed to dream a little bigger,” says Bill Brown, a partner at Ardent Solutions and one of eight Alera steering committee members. “Whenever we would have a great idea before, it would fall on someone locally to either develop that expertise or find that funding. Now we have a greater opportunity, just because of the experience and the resources financially, to build it.” The way of the past might have been to temper creativity with too much reality, he says, but the way of the present is to talk about building something bigger than the individual firm, and bigger than Texas. “Let’s tackle the biggest questions, and not necessarily just our community or local issues.”

The involvement of Genstar, naturally, helps make that a possibility. Brown—who, like the others, never doubted for a moment that Alera would come to fruition—says that of all the equity partners the group met with, Genstar was the one that caught the vision and the enthusiasm.

“Whenever we started talking with Genstar, everyone was on the front of their seats,” Brown says. Other potential partners still viewed the individual firms as “24 separate companies,” he says, “and they just could not understand that we had already built a culture and were now building a company.”

When others brought up the challenges of integration, Brown says, “we kept saying that it wasn’t a big issue, and here’s what we’ve done, and here’s who we are, and here’s how we think…. Genstar believed us.”

It wasn’t that the company would come first and the culture second. The culture—one of collaboration, openness, and the desire to positively impact clients and communities—was already well in place.

Ryan Clark, president and managing director of Genstar, says by the time his firm came on the scene, the culture and shared vision was evident.

“At our first meeting, we had a dinner with principals from maybe half of the companies, and you could tell the common sense of spirit, the camaraderie, the mutual respect they had for one another, the engagement that comes only from working with each other through BAN over a number of years,” Clark says. “It was clear to us that this was something special, and if any group of companies could pull this off, there was that spirit in the room that first night, at that first dinner. And in the meeting the next day, it was palpable that this group of people could do it.”

The Shared Vision

Part of the shared vision was a belief in the distributive equity model. Many who were not owners in the individual 24 firms became owners in Alera Group. There are people in almost all of the firms that now have equity interest, Levitz says, and will share in the upside of any appreciation. “The bottom line is that the current owners of the new firm in total own 40%,” he says. “While certainly there was a financial transaction where Genstar was buying 60%, we are heavily invested in the new company, and we think the vast majority of our compensation from doing this deal will come from whatever we can do over the next five years, rather than what we did in the past.”

Because the large majority of the firms had already worked together through BAN, there was no need to immediately integrate computer platforms or other technology. The partnership with Genstar, however, means firms that might not have been able to invest in building their business in the past will likely have greater opportunities in the future. Alera’s level of accountability and trust means if the group collectively decides to implement a shared platform, for example, once the discussions end and the decision is made, there will be 100 percent buy-in, Levitz explains.

Levitz and GCG got involved in 2015, adding weight and validation to the effort. (As Levitz became CEO of Alera, his brother, Rick Levitz, who has been GCG’s president of wealth management, became the firm’s managing partner.) It didn’t take long for the group to recognize Alan Levitz was the natural choice to lead Alera. Besides his ability to “wrangle” the entrepreneurs and make every meeting productive, as Brown puts it, Levitz had a different perspective with experience in benefits, p-c and wealth management.

“I think, even to this day, many of the benefits firms are still a little myopic around benefits,” Levitz says. “They’re having to remind themselves we’re going to be much more than just a benefits company…. I was involved in running a business as opposed to running a practice.”

We have evidence of a ton of sales activity just since we all came together. And we’re already working much more closely than even as a BAN firm we would have done, just because of the accountability.

Allan Levitz, president and CEO, Alera Group

Alera certainly could have been just a benefits company. “But I don’t think we ever really considered it, to be quite honest,” Levitz says. “We already have $25 million, in round numbers, of p-c revenue.”

Adds Lieblein: “I think the market is still coming to grips with 24 firms coming together as a single entity versus just being loosely tied together in some way…. Some of the smartest people in the industry have tried to do this for so many years and never have. So why would this small group of people—many of them they may not even have known—be able to pull this off? A lot of times I find myself, particularly in talking with industry consultants, explaining what happened, and it’s like, ‘OK. Now I get it. It’s not what I thought was taking place.’”

One other thing that didn’t take place: 24 individual deals. “That probably would have created a lot more of the challenges we were afraid of all along,” says outside legal counsel Mike Harrington of Harrington & McCarthy. He represented Alera Group firms with Genstar’s legal team of Ropes & Grey.

“These were individual deals packaged together as a single deal, and we were lead transaction counsel,” Harrington says. “We also had the assistance of a bunch of the firms’ trusted advisors as well, to deal with the individual situations on a case-by-case basis. The deal terms were largely the same, but that was the way we settled upon it, as far as the challenges and numbers. That was really the way to do it. All the facts and the history that goes along with each of the individual firms were different, obviously, but we settled upon a process where we could look at these in very similar—if not the same—light in terms of a legal acquisition and sale document.”

Leaving a Legacy

Looking back now, O’Connell says the process has afforded an opportunity to see things from a different macro perspective—including that of an investment thesis. Learning the pros and cons of the industry overall, he says, “was very, very eye-opening.”

“In that context, there’s plenty of room across the continuum of the business for big players, medium players and small players,” he says. “But I think we’re seeing a sharpening of competition and focus within the advisory space.”

The practice of simply providing a renewal and a spreadsheet to clients once or twice a year has long been dead, he says. Small boutique firms that hope to succeed must have very deep and narrow areas of focus. But multi-line firms must be bigger and stronger, with a “very broad array of tools and outcomes to deliver to a client. If you don’t, then the market is very punishing.” Alera, then, is right on trend, and those involved say they wouldn’t be surprised if others see how it works and decide to follow suit.

As for Levitz, he speaks of the biggest surprises so far: the level of support for each other, for the overall effort and for him—as well as Alera Group’s ability to pull Lieblein to “the other side.” Until March of last year, Lieblein was executive vice president at MarshBerry. (Billy Corrigan, the former chief financial officer for the international division at Marsh, rounds out the Alera leadership team as chief financial officer.)

“All of us have an aspirational goal, and mine was to leave a legacy,” Lieblein says. “I left a great career to join the other side, and it’s really, really exciting.”

There was no “other side” for chief counsel Peter Marathas, the managing partner at Marathas, Barrow & Weatherhead. His new role is similar to what it has been for many years. “Just more concentrated,” he says, “and a hell of a lot more fun. The first Benefit Advisors Network meeting I ever attended, there were seven members jammed into a small conference room down in Florida. The invitation to me was, ‘Come hang out with us, make some friends, talk about what’s going on in the industry, but don’t expect to be paid because we can’t pay you.’ But I met with those folks … and it became a wonderful relationship for me.”

As an employee benefits attorney, Marathas’s role has long been to provide compliance support. But his counsel has gone far beyond insurance issues to include guidance on a wide variety of business issues. “So when serious discussions began about a group of BAN members forming together to become one, I was part of those discussions from the very beginning,” he says.

Brown, meanwhile, at age 38, talks of the tremendous mentoring relationship that Levitz has offered, and the benefits of working so closely with others he admires. As the entrepreneur—and the son of an entrepreneur—he’s always had multiple mentors and a love of business in general. “But I don’t know that I appreciate yet what it means to not be the owner,” he admits. “That’s probably going to be learned…. There will be some tough times ahead and there will be some lessons learned, but for the time being it feels like all 24 of us got exactly what we hoped for. Sometimes that’s bad, and sometimes that’s amazing. Be we just couldn’t be more excited to share our story.”

So far, those involved say that, when sharing that story, they’ve received support and encouragement from firm members and clients alike. Granted, there will always be those who will “wait and see” how it all shakes out but Levitz points to two already-present positive signs: organic and inquisitive growth. Both, he says, have been “phenomenal.”

In terms of acquisitive growth, Levitz says the sheer number of conversations Alera is having with other firms is “tremendous.”

What was a pleasant surprise for me … was the ability of all of the owners, who are great entrepreneurs, to check their egos at the door to get a deal done … Everybody had a singular view and worked together to get there, to a great result.

Peter Marathas, chief legal counsel, Alera Group

“There are people who are interested in what we’re doing,” Levitz says, “and there are people who are interested in making it successful internally.” As for the clients, he says, “They’ve just heard nothing but great things. They like this national platform that we can all draw from, yet still get the same local service that they’ve all been used to.”

And at Alera’s core, that’s what it’s really all about: “I knew I was in the right place, and doing the right thing, when ultimately, at the end of the day, this was about better serving clients and transforming the client experience,” Levitz says. “When there’s clarity in vision, success is not far behind. I think that’s the place that we see opportunity. We don’t have to work at deciding what we’re going to be or what we’re going to look like. We know what that is. Now, the market will move things, but in general, we know what we’re going to look like. Now we just have to go about the business of making it happen.”

Soltes is a contributing writer. fionasoltes@aol.com
 

Wright, the CEO of insurance brokerage Johnson, Kendall & Johnson, isn’t trying to be an alarmist. He has seen insurers and business owners go to jail out of ignorance of local insurance regulations. Be especially careful in Brazil and Argentina, he says. India? That’s where litigation regarding insurance issues went on for five years after Union Carbide’s 1984 Bhopal disaster. The Canadians probably won’t arrest you. But, he says, “You could get fined like you wouldn’t believe.”

Concerns with cross-border mergers and acquisitions—particularly with our closest trading partner to the north—don’t end with the dangers of negotiating complex regulations. How will Donald Trump’s position on NAFTA affect cross-border acquisitions and regulations in both Canada and the United States? Can smaller companies survive as larger multi-nationals continue to gobble up properties outside their borders? Is there still a place in the modern North American insurance landscape for the medium-sized, privately held company?

Such concerns come amid a boom in cross-border purchases, particularly by U.S. corporations seeking deals with smaller Canadian companies. The boom affects not only the Canadian and U.S. brokers and agents who specialize in cross-border insurance issues, but carriers as well. As Canadian insurers assist companies amid the M&A spike, many of those same insurance companies are being gobbled up in cross-border acquisitions.

“Canadian firms have been very attractive to U.S. companies over the last few years,” says Jeffrey Charles, managing director of international business for Jones Brown, privately held (and “proudly Canadian”) insurance brokerage and strategic consultancy based in Toronto.

Referring to American firms, Charles says, “You’re buying here for 25 cents on the dollar cheaper. Sales are up, prices are up, but I wouldn’t call it a bubble. I think there’s genuine value and there will continue to be.”

Big Appetites

To fully understand the increase in merger and acquisition deals in the Canadian insurance industry, several experts in cross-border M&A say, you need to start with a short history lesson. As in the United States, the insurance broker and agent landscape in Canada used to be dominated by what Charles termed “the man-about-town brokerage.” If you grew up in a small town, you knew him. He was your neighbor who very well might have sponsored your Little League team.

Then came two pressures that led to those small companies being consumed by, usually, larger regional players looking to grow by buying up smaller brokers in their region. The companies wanted to grow, of course, but they also needed to grow to compete with the increasingly massive public companies with “large pools of equity and a burning desire to invest,” Charles says.

And, in recent decades, that man-or-woman-about-town has increasingly been retiring. More and more, Charles and others say, their children aren’t interested in carrying on the family business. They find themselves interested in selling in a seller’s market.

You’re seeing the California company that doesn’t see room to grow there, but sees there are opportunities in British Columbia. They see the chance to grow, they see the exchange rate. The market is more complex than just big always eating small.

Jeffrey Charles, managing director of international business, Jones Brown

Now, the regional players are the hot commodity, both for larger Canadian companies and for larger multi-nationals and even mid-sized regional companies in the western and northern United States.

“You’re seeing the California company that doesn’t see room to grow there, but sees there are opportunities in British Columbia,” Charles says. “They see the chance to grow, they see the exchange rate. The market is more complex than just big always eating small.”

Cross-Border Collaboration

As the landscape of insurers and brokers has changed, the duties of the agents and brokers in facilitating effective insurance coverage for their clients have remained much the same. It’s complicated, but, at least in some ways on the Canadian side, it has become less riddled with potential regulatory landmines.
In 2011, Brenda Rose, vice president and partner with Firstbrook Cassie & Anderson, based in Toronto, headed the Insurance Brokers Association of Canada excise-tax committee, which worked with the Canada Revenue Agency (Canada’s IRS) to simplify tax statutes for companies doing cross-border business. The reform was badly needed because businesses coming into Canada were getting lost—and often fined—amid labyrinthine, sometimes cryptic tax laws that often confused even government officials.
“People doing cross-border business were even getting different interpretations of what taxes were due on what things depending on who gave them instructions,” Rose says. “It was a very difficult environment in which to operate. I think we’ve done a good job of keeping strong safety nets in place while also making it a more business-friendly environment.”
Rose’s company, like those of Wright and Charles, provides consulting services for companies looking to expand into Canada from the United States and other countries. Canadian Insurance 101: “There are two things you legally need in Canada,” Rose says. “A Canadian-licensed insurer and a Canadian-licensed broker.”
If a U.S. brokerage isn’t licensed in Canada, or vice versa, it will work with a firm across the border to assist clients in doing business legally in both countries.
“The overriding message here: If you cross the border, compliance is an important topic besides risk,” Wright says. “The rules are obscure. For one: We see so many people go over assuming that because they have coverage in the U.S., the coverage carries over to their Canadian subsidiary. If you don’t have somebody local on the other side who knows what they’re doing, there can be very costly mistakes made very easily.”
So, Americans like Wright work with Canadians like Rose, and Rose looks to experts like Wright to figure out the U.S. laws, which can also be confusing.
“Considering state regulations, a company coming in can be looking at 50 different rules to do business in the United States,” Wright says. “In Germany they say, ‘Here are your rules. You comply with these rules, you’re good anywhere here no matter.’ You try to explain the rules here to a German and their head will blow off.”

Independent Streak

While the increase in cross-border mergers and acquisitions provides more business to agents and brokers who specialize in the various regulations, it also poses both existential threats and significant opportunities to their companies. As multi-nationals consume small and midsize companies, the pressure increases on those small and midsize companies that want to stay independent.

For small brokers and agents in Canada, the race by larger companies to acquire has created buy-out offers that are often hard to refuse, especially, as Wright points out, “if there is less desire from the next generation to continue the business, especially in a tougher environment.” Midsize private companies in Canada, too, are under pressure to sell to larger companies inside and outside the country.

But there are opportunities for them to thrive, Wright and Rose contend, if those companies can offer the advantages of a massive public company while still providing a level of personal service—the kind that tends to be lost as companies become massive multi-nationals.

You have to have somebody who knows what they’re doing and can spend time figuring out exactly what needs to be done in the complex environment of working across borders.

John Wright, CEO, Johnson, Kendall & Johnson

For example, Rose and the 80 employees at Firstbrook Cassie & Anderson have made a commitment to staying privately held. In fact, she says, the firm uses its smaller size as an advantage.

“Clients can get lost with the massive companies as they move to call centers and handling clients in more of a cookie-cutter fashion,” Rose says. “There are hungry, larger national and international players to buy up brokerages like ours. But we’re dedicated to preserving our place as independent professionals.”

Which creates some unique challenges in the world of ever-expanding international companies charging into the Canadian market.

“We have to be big and powerful enough to actually accomplish what we need to accomplish in this new landscape,” she says. “I need to offer you the choices you need, to have all the choices available, while also following through with our commitment to be the best at working for you at a level that huge companies can’t. There’s a Goldilocks zone you have to stay in to stay independent in this new environment.”

Here’s where the increase in cross-border activity plays to the advantage of companies like Firstbrook Cassie & Anderson, Johnson, Kendall & Johnson and Jones Brown. All three have thrived because they have successfully found that Goldilocks zone in which they can provide all the services and market reach of the big boys, but with a smaller independent company’s ability to focus on building ongoing relationships and meticulously tailored plans critical for companies to successfully navigate cross-border acquisitions, mergers or expansions.

“There’s a lot of people who say, ‘We can do that with anybody or we can Google it,’” Wright says. “You have to have somebody who knows what they’re doing and can spend time figuring out exactly what needs to be done in the complex environment of working across borders.”

Most cross-border M&A experts, including Rose, Wright and Charles, don’t see the current rise in prices being offered by international insurers for their Canadian counterparts to wane any time soon. “I don’t think it’s a bubble,” Rose says. “It’s not the U.S. housing situation. There’s genuine value there.”

And, unlike some in the broader Canadian business community, insurers don’t seem concerned about Donald Trump’s campaign rhetoric regarding NAFTA and the need for tariffs. After all, Canada is the United States’ biggest trading partner with more than $2 billion crossing the border each day. Canada is the single largest destination for U.S. exports. It could be argued that Canada and the United States are the two countries on the planet most closely linked economically. It would be very bad business for both countries to put stress on that longtime economic marriage.

And even in a scenario in which the United States builds economic walls—and Canada surely retaliates—there still will be business.

I need to offer you the choices you need, to have all the choices available, while also following through with our commitment to be the best at working for you at a level that huge companies can’t. There’s a Goldilocks zone you have to stay in to stay independent in this new environment.

Brenda Rose, vice president and partner, Firstbrook Cassie & Anderson

“If I’m insuring a manufacturer in Michigan and they have a plant in Canada, they might not build another one, but they can still buy one,” Rose says. “And they’d do that because the prices are right now.”

Most are optimistic that the U.S.-Canadian partnership won’t devolve that far. Trump is a businessman, after all. If the economy improves under his leadership, more American companies and investors will have more equity to invest in Canada.

“I’m not expecting things to change,” Wright says. “The market is strong, the desire to expand is there. The dollar is strong. All the pieces are still in place.”

Nelson is a contributing writer. omagbob@gmail.com
 

Did you grow up in Birmingham?
I was born in New Orleans, but moved to Birmingham when I was three years old. My parents—my father was from St. Louis; my mother was from Hope, Arkansas—met at Columbia University in New York. My father was offered a career move to Birmingham with a food broker. He eventually started his own brokerage here.

Were you expecting to work in your father’s company?
Not really. After college he told me, “It would be best for you to find your own way in the world. You’ll always be welcome here at a future time.” My younger brother became the president of my father’s business.

What did you want to be when you were growing up?
I wanted to be a success.

Who was your childhood hero?
“Bear” Bryant. He came to the University of Alabama in 1957, when I first started watching football. “Bear” was a larger-than-life personality whose mere presence would silence a room when he entered.

What does your perfect weekend look like?
I’m an outdoorsman. I like to hunt and fish. I have a farm down in Selma, Alabama, where I hunt deer and turkeys.

If you could go hunting with three other people, living or dead, who would they be?
My three sons.

Tell me about Birmingham.
It is the financial and legal center of the state. Healthcare is the largest industry, although the steel industry and pipe manufacturing are still significant. Automobile manufacturing has also grown significantly.

Why did you choose the University of the South?
I wanted to have a liberal arts education. I wanted to meet people from different parts of the country and get exposed to different thoughts, ideas and people.

You’re now in your 46th year at McGriff, Seibels & Williams, including 27 years as CEO. How’d you get started there?
I started as a producer trainee in 1971. I had a relationship with Lee McGriff. We went to the same school and were president of the same fraternity—40 years apart.

What did the company look like in 1971?
We were a local agency at the time, with 25 to 30 employees. Lee McGriff and Dick Womack recruited a team of young people that learned the business really from scratch. Today we have 850 employees in 10 offices around the country. In 2015 we had $3.4 billion in premium sales and $250 million in net revenues.

You sold the company to BB&T in 2004. Why?
BB&T provided the best alternative to allow McGriff to continue to be McGriff. They invested in our strategic plans, provided capital for perpetuation and growth, and most importantly enabled us to maintain our corporate culture.

What’s the most interesting thing in your office?
A potato gun.

You’ve got to explain that.
Bobby Reagan, president of Reagan & Associates, did our agency appraisal for many years, assisted us in strategic planning, and ultimately helped facilitate our transaction with BB&T. He invited us to his lake house in north Georgia one year, where we had a great time, among other things, playing with a potato gun he had built—he’s got an engineering degree. Anyway, we participated in his annual “best practices” survey, so he sent us a plaque. I sent it back saying that I would rather have a potato gun. So he sent us a gun with the plaque attached. The gun has been the featured event at a number of our sales retreats, much to the chagrin of the resorts.

How would your employees describe your management style?
Team-oriented. Sales-oriented. There’s not a lot of bureaucracy at McGriff. We tell people it’s alright to suck up to the boss, but there’s no money in it.

What gives you your leader’s edge?
Without question, our culture. Our sales culture is pretty unique—the flexibility, the teamwork, the esprit de corps, quality people, the hard work and the success.

 

 

The Dunbar File

Favorite Birmingham Restaurants:
Botega’s (Pretty famous for their fish.)
Dreamland (ribs)
The Highland Bar and Grill

Favorite Hunting Spots: South Alabama, South Texas

Favorite Fishing Spot: Gulf of Mexico

Favorite Vacation Spot: See above

Many people left unsettled and divided. Fertility rates are down. Mobility rates hit rock bottom. New policies restrict immigration to new lows. Populations around the world embrace leaders with a distinct bent toward nationalism.

That was the 1930s. We have been here before.

In 1997, two amateur historians, William Strauss and Neil Howe, wrote The Fourth Turning. The authors documented repeating historical patterns in Anglo-American history dating to the 15th century. The book is undergoing a resurgence of sales, thanks to Chief White House Strategist Steve Bannon, who some characterize as the second most powerful man in the United States. He is using the book’s theories as a playbook to shape a new order in America, and people are taking notice.

The book’s premise is that history repeats itself every 80 to 90 years in predictable, four-phase cycles. Each cycle, or “turning,” is about 20 years long. In February Time magazine quoted historian David Kaiser: “Successive generations have fallen into crisis, embraced institutions, rebelled against those institutions, and forgotten the lessons of the past—which invites the next crisis.”

For about four centuries the fourth turning has been characterized as a crisis period in U.S. history. A quick look back at the last three centuries shows fourth turnings climaxing with major wars—the Revolutionary War, Civil War and World War II. They are all about 80 years apart. In each case, an economic collapse, a disintegration of social order, and a declining institutional effectiveness preceded the wars, while a new civic order and institutional effectiveness, along with economic growth, followed them.

According to the authors, 2017 puts us smack in the middle of a fourth turning.

The Turnings

Each of the four turnings has an underlying theme. The first turning is a “high”—society is confident and institutions are strong. The most recent first turning (1945–1964) was the post-World War II era, which is defined in The Fourth Turning as the New American High. The GI generation built many of the institutions that shaped the new world order—NATO, The World Bank, Bretton Woods and The United Nations.

Eisenhower commissioned the Interstate Highway System, wages surged and income gaps closed, favoring a strong middle class. Life was good.

The second turning is an “awakening”—social structure begins to splinter, families weaken, the value of institutions is questioned and ideals are discovered. In second turnings, individual values overshadow institutions. The most recent awakening (1964–1984) was called the Consciousness Revolution. Students rioted, cities crumbled, and the counterculture movement was born. This second turning produced the Civil Rights Act, Woodstock, feminism and Watergate.

The third turning is an “unraveling”—eroding interest in the value of institutions, a cynical culture and a darkening vision of the future. In third turnings, people fear the national consensus is splitting into competing values camps. In the most recent third turning (1984–2008), called Culture Wars, we saw the beginning of the red state-blue state divide. Culture Wars started with Reagan’s new “Morning in America” and ended with a recession.

The fourth turning is called a “crisis”—society’s greatest need is to fix the outside world. There is an urgent need to simplify. Change, risk and uncertainly reach their peak in a fourth turning. The last three fourth turnings climaxed in game-changing wars and laid the groundwork for a rebirth of civic spirit, institution building and economic prosperity—ushering in the high of the first turning.

According to the theory, fourth turnings typically experience four distinct phases in the 20-year period. The first is a catalyst—the last one being the Great Depression in 1929. The second phase is a regeneracy, characterized by the possibility of a reenergized civic life. The third is climax, the crucial moments that confirm the death of the old order and the birth of the new. Last century, this would have been World War II. Finally, the fourth turning culminates in a resolution—a conclusion that establishes a new order.

Where Are We Now?

Neil Howe believes the catalyst for this fourth turning was the Great Recession, begun in 2008, which puts the end of the fourth turning sometime in the mid-2020s. The election of Donald Trump seemed to be propelling America toward a climax, and if the 80-year cycle holds true, the climax would occur sometime between 2019 and 2021.

The authors do not predict exact timing of events of the fourth turning but stated more than 20 years ago that the beginning of a fourth turning could come sometime between 2000 and 2010, spurred by anything ranging from a financial crash to a national election. The scenarios they offer are strikingly familiar, including terrorists blowing up an aircraft and the ensuing retaliation, an impasse over the federal budget that triggers a government shutdown and Wall Street panic over looming debt default.

What’s Next?

The last three fourth turnings climaxed in major wars, and Bannon does not shy away from the possibility. There’s tough talk on the Middle East and China, and increasing tension with Iran. Of course, there’s Russia, and an increasingly belligerent North Korea. “It all looks as if the world is preparing for war,” Mikhail Gorbachev said recently in Time.

He added: “[P]oliticians and military leaders sound increasingly belligerent and defense doctrines more dangerous. Commentators and TV personalities are joining the bellicose chorus.”

Climaxes occur just as the generation who came of age during the last climax have mostly died and gone. The youngest of the GI generation is 93, and most Baby Boomers—the current dominant generation—have little recollection of World War II.

The future ramifications for the insurance industry are astronomical—both in claims and in broker business development. Turnings influence the overall social mood of society. There is a sense among people today that we are living in uncertain times with plenty of risk, and many are looking for ways to protect themselves.

One way to do this could be more scenario planning for catastrophes. Given that the new warfare is more likely to be cyber than nuclear, what are the implications of a complete systems grid shutdown in the U.S., even just for a day? Strategic Air Command and other agencies in the government have been stepping up their planning for such a strike. And in addition to advising their clients, brokerage principals should be looking seriously into their own firm’s scenario planning.

This is real stuff that should not be ignored. These theories are based on undisputed historical evidence that has been true to form for centuries. The question is: Can a fourth turning be avoided or will history repeat itself? As the late philosopher George Santayana said, “Those who cannot remember the past are condemned to repeat it.”

Wright, president of CoachingMillennials, is a frequent collaborator with Neil Howe. warren@coachingmillennials.com
 

I thought about those canaries when I recently sat on a regional business economics association panel along with another investment banker and partners from two private equity firms. In discussing the global M&A outlook, the group agreed we are looking at an unprecedented marketplace in which valuations in all industries are incredibly aggressive.

One panelist noted that in the short term we could expect only blue skies ahead. There are many reasons to believe this. Since 2013, the number of private equity funds created to focus on the lower middle market (defined as firms between $100 million and $500 million in revenues) has increased significantly. More funds mean more available capital. Even in a market with high-priced assets, private equity groups are in the business of deploying capital. They need to continue to invest. Capital deployment in today’s market comes with a smaller margin of error, partially because of the high valuations required to get a deal done.

A recent report by GF Data says middle market valuations achieved a peak in 2016, so fund creation and valuations are at a high watermark. These market characteristics help make this a good time to be a seller. Buyers are often forced to be aggressive on good investment opportunities because they need to put their capital to work. It does not appear there are fewer sellers as in past cycles, but there are definitely more buyers. This strong demand is partially responsible for the valuation increase.

While one panelist’s “blue skies ahead” optimism for the short term M&A market feels good, we certainly need to watch and see what happens to the canaries. Government regulation is a big question mark. New regulations concerning tariffs and trade could have a lasting effect on the economy. Tax reform may affect corporations and individuals, but to what end? We expect interest rates will continue to slowly rise, but the general consensus is the slight uptick will not affect lending capacity. Obviously, the threat of global instability—or U.S. conflicts with Russia, Korea or in the Middle East—would have a negative impact.

No one could pinpoint anything specific. It was more a sense that the euphoric times we are seeing today are unprecedented. The days ahead seem bright, but all good things come to an end.

M&A has a cyclical nature. At this point, no one seems able to figure out when the canary will draw its last breath.

The Latest Deals

There were just 21 deals reported in February, down from 40 in January. There were 74 deals completed in the first two months of 2016—61 fewer deals than in the same period a year ago.

Private-equity backed independent agencies have been the most active buyers this year. They account for 24 of the 61 deals—nearly 40%. P-C agencies have been acquired most often. They make up nearly 50% of all the announced deals in January and February (30 of 61). 

Arthur J. Gallagher & Co. has been the most active buyer with seven acquisitions through February. Notably this year, Baldwin Risk Partners and its affiliated company, Baldwin Krystyn Sherman Partners, have announced several transactions. They have been the second-most active buyer this year, behind Gallagher. Baldwin has announced three p-c agency acquisitions in the Florida market, where the parent company is based.

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

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

The Wall Street Journal reported that, although Yahoo disclosed the 2014 breach involving the personal information of 500,000 users in September 2016, the company had “linked the incident to state-sponsored hackers two years earlier.” Yahoo reportedly discovered the 2013 breach, which involved private information on more than one billion users, in December 2016. Combined, they represent the largest known breach of personally identifiable information (PII). To add to the company’s problems, the Securities and Exchange Commission opened an investigation into whether Yahoo violated its guidance to disclose cyber events that could have a material impact on investors.

Upon learning of the 2014 breach, Verizon signaled that it might seek to renegotiate the deal under the “material adverse change” clause of its purchase agreement. Indeed, the companies recently agreed on a $350 million reduction in price and a division of potential future liabilities arising from the breaches.

Cyber Due Diligence and Risk Management

Buying a company—or even certain assets of a company—means buying its past, present and future cyber risks, including its privacy and regulatory issues, infrastructure weaknesses, and software and hardware vulnerabilities. Brokers should be aware of this, whether buying or selling a brokerage practice or advising clients seeking to acquire or divest assets or entire businesses. 

For example, without conducting cyber due diligence, the buyer risks purchasing a company with active malware within its system. Or a company’s security controls could be so weak that interconnecting the buyer’s and seller’s systems could quickly compromise all operations. Or the seller’s intellectual property could have been stolen or serious breaches of PII could have occurred, exposing future market share.

A company’s data are some of its most valuable assets. It is important to know if the data being purchased have been stolen, disclosed or compromised. The Wall Street Journal reported in 2012 that Chinese hackers had unfettered access to Nortel’s systems for nearly a decade, using seven passwords stolen from executives. They stole technical papers, R&D reports, business plans and anything else they wanted. The paper noted that, “Mr. Shields [the internal investigator] and several former colleagues said the company didn’t fix the hacking problem before starting to sell its assets, and didn’t disclose the hacking to prospective buyers. Nortel assets have been purchased by Avaya Inc., Ciena Corp., Telefon AB L.M. Ericsson and Genband.”

This type of activity continues today. Electronic espionage, theft by insiders and intelligence gathering by nation states are commonplace. Cyber defense company FireEye noted in a 2016 report that it had “observed several likely China-based threat groups targeting companies engaged in M&A-related activity.” 

Brokers should realize that no matter the size of the deal or perceived sophistication of the parties, the security of digital assets cannot be taken for granted. “To assume a company has adequate protections against theft of confidential information or intellectual property is to take an enormous and unnecessary risk that could change the value of the underlying deal,” note Tom Smedinghoff and Roland Trope, co-editors of A Guide to Cybersecurity Due Diligence in M&A Transactions, which will be published in early summer 2017 by the American Bar Association.

The Impact of Cyber Due Diligence on a Deal

Cyber due diligence is critically important to buyers and sellers. Evidence of a strong cybersecurity posture can be marketed as an asset and result in a higher valuation of target companies. Weak cyber-security practices, however, can cause a reduction in purchase price to offset necessary expenditures to correct security issues or resolve potential liabilities—or it can scuttle the deal altogether. 

In 2016, the New York Stock Exchange and Veracode conducted a survey of 276 public company directors and officers to better understand cyber risk-management practices in the M&A environment. Of the respondents, 85% indicated the discovery of major vulnerabilities in a target company’s software assets would likely or very likely affect their final decision on the acquisition. Although 52% of the respondents said they would buy the company at a significantly lower valuation, 22% of them said a high-profile data breach would cause them to decline the acquisition.

A similar study, performed a couple of years earlier by the UK law firm Freshfields Bruckhaus Deringer, surveyed deal-makers instead of directors, but it had comparable findings. Of the survey respondents, 90% said previous cyber breaches could reduce the value of the target company, and 83% said a deal could be scuttled if previous breaches were revealed. 

Significantly, the report noted that the opinions of the respondents did not necessarily indicate that cyber due diligence was occurring. “It is odd that most respondents to the survey said they were concerned about cyber security risks but that most respondents aren’t actually doing anything about them during the M&A process,” the report noted

The Yahoo—Verizon acquisition has likely changed that.

What to Do

Brokers can help clients by advocating for a robust cyber-risk assessment early in the M&A process. This can range from a review of documents to a comprehensive analysis of the IT infrastructure and cyber-security program, including vulnerability scanning or penetration testing. The scope of the assessment will depend on the size of the company, sensitivity of data, compliance requirements and complexity of business operations.

If a company manufactures (or even uses) products with embedded software or uses wireless devices, it is important to check for security vulnerabilities, as the engineers that develop this software or select the devices usually work outside of IT and may not consider security risks during the innovation process. Medical devices, automobile computers and hotel door-locking systems are recent examples of products that have been hacked.

Cyber-security programs should be assessed against the best practices and standards applicable to the company. For example, a global manufacturing company that contracts with the U.S. Government, accepts credit cards at its outlet stores and administers its own health plan may have to meet the ISO 27001 standard for information security, the National Institute of Standards and Technology cyber-security requirements, the Payment Card Industry Data Security Standard, and the HIPAA Security Rule.

Cyber due diligence also must check whether privacy and security compliance requirements are integrated into the cyber-security program. The European Union imposes strict data protection obligations with respect to PII, and its new General Data Protection Regulation, which goes into effect in May 2018, strengthens them and includes breach notification provisions. Fines under the General Data Protection Regulation can be onerous, reaching up to 20 million Euros or 4% of total worldwide annual turnover of the preceding financial year, whichever is higher. European Workers’ Councils and national data protection authorities may impose additional requirements.

A cyber due diligence report should provide detailed findings and enough specificity that potential business interruption or other relevant loss exposures can be identified and quantified. John Dempsey, managing director and global practice leader at Aon, recently noted that, “Accurate exposure quantification can be a game changer. When a company correlates its cyber risks to financial exposures, decisions about whether the price should be adjusted or a deal aborted can be made with greater clarity.”

Quantifying cyber risks also helps the buyer evaluate whether the target’s existing insurance coverage is adequate to transfer the identified risks. Brokers also can help clients manage cyber risks through transactional liability insurance, which includes representations and warranties coverage and may cover the discovery of a cyber event.

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


 

He believes culture is a vital, powerful and often “unconscious set of forces that control individual and collective behavior, including strategies and goals.”

Dale Stafford and Laura Miles in the Bain brief, “Integrating Cultures After a Merger,” say three key elements define culture—behavioral norms that are exhibited at every level within the organization, critical capabilities that define the corporate strategy, and the company’s operating model, including structure and accountabilities.

Companies often face culture challenges as they grow. No time is this more obvious than during a merger or acquisition. When companies join, two cultures meet. One of three things can happen. They can coexist, one can dominate or they blend.

In 2013, Bain did a survey of executives who managed through mergers. They found that the number one reason for a deal’s failure to achieve the promised value was a clash in cultures. Dr. Nancy Rothbard, professor of management at Wharton, says recent studies show a 75% failure rate in acquisitions, and much of the research points to an inability to merge the cultures.

You may be wondering why this would happen. Several reasons have been identified. In a merger/acquisition, it’s much more difficult to assess the qualitative aspects of an organization.  It’s not easy to determine where the cultural incompatibilities may be because they are considered “soft” and not easy, if not impossible, to quantify. “One mistake people make …is assuming they need to completely throw out the pre-existing cultures after the merger,” says Tim Donnelly in the Inc. Magazine article, “How to Merge Corporate Cultures.” Another error is making the assumption that the acquired company will readily accept the acquirer’s culture.  Often, the companies’ fundamental ways of working are so disparate they lead to misinterpretation, which leads to frustration, demoralization and reduced productivity.

The bottom line is culture counts. If decisions are made without considering culture they can lead to unanticipated and undesirable consequences. So what can be done to ensure a successful integration of cultures? Stafford and Miles recommend the following:

  1. Set a cultural integration agenda. This is a job best done by the CEO. There are some difficult choices that must be made. The CEO needs to explain the “what” and “how” of the new company, including the value creation this merger will bring. Executives should avoid vague or inflated statements.  They need to clearly define the culture they want to emerge.
  2. Diagnose the differences that matter. There are a number of tools that can be used to identify and measure the differences among people.
    a.  Management interviews can be used to reveal managerial styles and priorities.
    b. Video and audio recordings of people in their jobs allow side by side comparisons of different ways to work.
    c. Process flow maps indicate how the work is being done.
    d. Customer interviews identify the differences in customer perceptions of each organization. It is critical to pay attention to this important group of stakeholders and not be too inwardly focused.
    e.  Employee surveys identify accepted behaviors, attitudes and priorities.
  3. Define the culture you are trying to build. The senior team must determine any critical gaps that need to be closed. They must also create a detailed picture of the future culture. This should go beyond vision and value statements. Merged companies should adopt a performance contract that states how the new entity should treat customers, manage process and make decisions. Agreeing on performance criteria early in the process can mitigate differences.
  4. Develop a sustainable culture change plan and measure progress. It’s very difficult to co- create a new culture. Intent Workshops can be a valuable tool to help with this. An Intent Workshop brings people together to plan how they will behave collectively and what they will achieve. An important part of the discussion is how the new behaviors will generate value.

Another way to ensure cultural integration is a process called A Six Source Diagnosis, which is defined by David Maxwell in “How to Effectively Merge Company Culture” in Crucial Skills. It identifies the influences that are keeping problem behaviors in place. The six areas to be examined include personal motivation, personal ability, social motivation, social ability, structural motivation and structural ability.

Leaders who have been through a merger know that mergers are challenging and never perfect. It’s important to recognize that culture is deeper, broader and more entrenched than you might think. But if you treat the existing cultures of both firms as a source of strength, it can enhance the chances of success.

McDaid is The Council’s SVP of Leadership & Management Resources. elizabeth.mcdaid@ciab.com

Have a leadership issue you’d like to explore? Email Elizabeth now. Say No to Not Yet!

This story, describing the impersonal aftermath of a merger, was recently shared among a group of industry leaders who were discussing how emotional intelligence affects workplace performance and morale. It highlights a rarely discussed but extremely important element in the deal-making process: culture.

I talk a lot about culture because I believe in it. Those who don’t are missing the boat.

This year’s M&A issue features cybersecurity during M&A, the complexities of cross-border and international M&A, and the intricacies of translating values and business models to foreign markets. As you read along, whether you’re looking to buy or sell at home or abroad, keep in mind the importance of culture when you’re sitting across the table from your potential partner. 

Culture is all about the hard and soft values your organization expresses in its behavior. It is the key to wins and losses. It is your brand. It is your employees. It is your physical office space and the fine print in your employee handbook. Culture is not something you can fake. Culture 101 is about being authentic.

There’s a Deloitte white paper on my desk that warns not to act solely on products or numbers when considering a merger. The paper’s premise is fitting for this issue: “Organizations today undergo mergers, acquisitions and joint ventures for many reasons: among them, to acquire technologies, products and market access; to create economies of scale; and to establish global presence. However, culture has emerged as one of the dominant factors that prevent effective integrations.” Case in point, Employee No. 97642.

Culture has to be baked in to everything from decision-making and leadership style to adaptability and appetite for risk, to how people work together and build relationships. Then, and only then, can it create better value for your clients and ultimately help you realize success.

Let’s face it, culture alone may not stop an attractive transaction (a fact Deloitte also acknowledges). So it is the keen responsibility of the people managing the deal to ensure its success by embracing, instead of ignoring, it. If you’ve recently bought or sold, don’t throw your hands up in defeat. Even after the deal is done, steps can be taken to ensure a smooth integration or, perhaps even better, the birth of a new culture. The point is, your employees are your number one asset and they should not be cast aside.

The 2017 Edelman Trust Barometer found that the credibility of CEOs fell by 12 points this year to 37 % globally. According to Edelman, the primary axis of communications is now peer-to-peer, underscoring the role employees play as your brand ambassadors, whether you realize it or not.

Culture gives meaning to your company. Culture is your internal brand and your external insights. It is your values and beliefs, and it is linked to measurable business results. Done right, making culture a major component of your next merger or acquisition might actually turn a cold file folder stamped with an employee number into a real person eager to go to work every day.

We reached out to the leaders of three insurer-backed venture capital funds— Axa Strategic Ventures, American Family Ventures, and XL Innovate—to solicit information on their recent investments and what drove their interest in the insurtech startups. All three funds grew substantially in 2016 in terms of the number and value of their investments.

XL Innovate is a case in point. “We’ve made nine investments to date,” says Tom Hutton, managing director of the VC fund, launched by XL Catlin in April 2015. “We’re focused on early-stage startups, particularly those with innovative approaches to underwriting and client-facing distribution. Change is needed, and we believe the insurtech movement over time produces these changes.”

XL Innovate has a three-pronged investment focus—startups that present the opportunity to grow a new business, provide data analytics solutions, or have developed what Hutton calls “a transformational operating model.”

Axa Strategic Ventures, which is backed by French insurer Axa, has made investments in the “pure insurance space” and in data analytics, says Manish Agarwal, the VC fund’s general partner. While the fund has an open mind when it comes to insurtech opportunities, it’s very selective. “On average, I get about five solicitations a week to invest in an insurtech startup,” says Agarwal. “With so many different parts of the insurance value chain ripe for disruption, there’s a lot out there to choose from.”

He is especially open to the development and emergence of new direct insurance carriers. “There’s a movement among reinsurers to provide capital to companies that build the front-end consumer-facing product, which they can then back with their own balance sheets,” he explains.

Like the other two VC funds, American Family Ventures, funded by American Family Insurance, is focused on early-stage startups from the seed capital phase through the Series B round, where investors take bigger stakes right before the company starts to scale. The fund is focused on insurance innovators in the distribution space; startups involved in Internet of things ventures, such as developers of home automation and autonomous vehicle systems; and predictive data analytics.

“We started with a $50 million allocation from our parent [in 2014], which grew substantially in 2016,” says Dan Reed, the fund’s managing director, who declined to reveal the size of this capital infusion. “I will say that our team has grown from four people to six people, and we’re doing on the order of 10 deals a year, with investments in more than 40 insurtech startups to date,” he adds.

“There’s been a real sea change in the industry with regard to insurtech startups,” says Matthew Wong, senior research analyst at CB Insights. “Insurers and reinsurers see opportunities to achieve a return on their investments in non-insurance-specific startups while getting their noses under the tent.”

Employee Benefits  Platforms

  • Help businesses offer healthcare and other insurance products to their employees.
  • 49 startups and $1.1 billion in total funding

 

Consumer Insurance Management Platforms

  • Help consumers manage their insurance and claims (including mobile apps to file on the spot).
  • 57 startups and $370 million in total funding

 

Enterprise/Commercial Insurance

  • 92 startups and $840 million in total funding

 

Insurance Comparison/Marketplace Startups

  • Allow consumers to compare different providers and give providers a forum to offer their products.
  • 280 startups and $1.1 billion in total funding

 

Insurance Data/Intelligence

  • Companies that collect, process and analyze data analytics and business intelligence.
  • 100 startups and $2.6 billion in total funding

 

Insurance User Acquisition Companies

  • Help insurers identify new client leads and then manage their acquisition.
  • 75 startups and $325 million in total funding

 

P2P Insurance

  • 30 startups and $85 million in total funding

 

Reinsurance Startups

  • 28 entrants and $795 million in total funding

Vibe >> Des Moines is definitely upbeat. There is a lot of development happening in our downtown area, including a new four-story building that EMC is adding to our current campus. Forbes ranks Des Moines as No. 6 for businesses and careers; Kiplinger ranks us as No. 2 for families.

 

Dining scene >> We have a very diverse restaurant scene. There are many terrific locally owned restaurants, particularly in downtown. If you leave Des Moines hungry, it’s your own fault.

 

Favorite new restaurant >> My favorite new restaurant is Sam and Gabe’s at The Lyon. It is located just east of downtown and has a beautiful view of the river and skyline. The menu is a blend of old-town steakhouse with a contemporary flair. They also have great seafood.

 

Classic eats >> My favorite place to eat is the Des Moines Embassy Club. It is a private dining club with reciprocal agreements. The downtown club is elegant, quiet and has a beautiful view of the city. The service is exceptional, and the food is amazing.

 

Watering holes >> RōCA on Court Avenue provides a wide variety of creative cocktails. My favorite is the “Smoking Gun,” a blend of Bulleit Bourbon, maple syrup, Angostura bitters and wood chip smoke. If a client is a beer lover, I recommend El Bait Shop, which has 222 beers on tap.

 

Stay >> When we have important customers visiting, we like to have them stay at the Des Lux, a boutique hotel in downtown Des Moines. They have very nice rooms, an excellent fitness center and a terrific breakfast. It’s close to our offices and the downtown nightlife.

 

Things to do >> I find that most out-of-state visitors enjoy attending the Iowa State Fair in August. They should also visit the Downtown Farmers’ Market during the summer months. Fitness enthusiasts can participate in the Des Moines Marathon and RAGBRAI (Register’s Annual Great Bicycle Ride Across Iowa).

 

Active >> Des Moines is a very bike-friendly city. There are miles of paved trails for walking, running and biking. A favorite is our Gray’s Lake Trail, a two-mile loop next to downtown. Public golf courses of note are The Harvester Golf Club (one of Golf Digest’s top 100 public courses) and the Tournament Club of Iowa.

German immigrant Philipp Schillinger opened Birmingham’s first brewery in 1884. It was a festive time. As Carla Jean Whitley noted in her book Birmingham Beer: A Heady History of Brewing in the Magic City, Schillinger rode the lead float in the city’s first Mardi Gras parade, drinking to the crowd’s health.

The party stopped with Prohibition, and even though this miserable period in spirits history came to an end, it wasn’t until the repeal of Alabama’s restrictive beer laws in 2009 that local beer production resumed. There are now five craft beer breweries in Birmingham, with another, Birmingham District Brewing Co., scheduled to open later this year.

Laissez les bon temps rouler!

Avondale Brewing Co. The year-round and seasonal beers are named after the folklore of Avondale. The Long Branch Scottish Ale is a nod to the saloon that once occupied the historic building where the brewery is housed. Avondale recently opened a separate tasting room dedicated to funky beers, like barrel-aged saisons, sour beers and Brett beers.
www.avondalebrewing.com

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.
www.cahababrewing.com

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.
www.ghosttrainbrewing.com

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.
www.goodpeoplebrewing.com

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.
www.trimtabbrewing.com
 

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. 

WHO’S INVESTING?

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.

M&A Challenges

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.

Ken Crerar, President & CEO, The Council of Insurance Agents & Brokers 

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.

Skip Counselman, Chairman & CEO, RCM&D

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.

Jim Hackbarth, CEO, Assurex Global

“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.

Tom Tropp, Arthur J. Gallagher

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’s Just?

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.

Paul Jardine, XL Catlin

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. jshanahan@businessolver.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.

Why?
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.

Big collection?
Not by American standards. I’ve got about 10 cars.

The highlight?
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.

My challenge?

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 Good?

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.

The Bad

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.

The Unknown

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:

  1. 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?
  2. 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.

Market Update

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.”

Targeting Privacy

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.

An actual ransomware message

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.

Matt Chmel, assistant vice president, Aon Risk Solutions

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.

Reed Sheard, CIO, Westmont College

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.”

Dodd-Frank

  • 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.

CHOICE Act

  • 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.

Joel Wood, SVP of government affairs, The Council

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.

R.J. Lehmann, senior fellow, R Street Institute

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.

Aaron Klein, fellow in economic studies, the Brookings Institution

“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.

Arizona   145%

Alabama   70%

Oklahoma   67%

Minnesota   55%

Pennsylvania   51%

Tennessee   49%

Illinois   48%

Kansas   46%

South Dakota   45%

North Carolina  40%

Nationwide Average

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.

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.

Struggling Exchanges

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.

Accepting Repeal

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.

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:

  1. Allowing spousal catch-up payments to increase HSA contributions
  2. 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
  3. 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
  4.  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.

Interstate Sales

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.

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:

  1.  “Basic” exchange (and all individual/small group) policies are much more expensive than they should be.
  2.  The federal subsidy obligations are much higher than they should be (because the federal government is subsidizing all of the state mandates).
  3.  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.

Market Update

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 suffocate the nascent rebellion like a banana republic dictator.

My father is no Archie Bunker. At 86, he’s lost a step and repeats himself, but he still understands Keynesian economics. He’s a tried-and-true carnivore capitalist who borders on being libertarian. He has an IQ of 170, and in his heyday he was the regional CEO of a large ad agency. But he has major blind spots and a black-and-white view of the world. His reptilian brain is in fear mode thanks to Fox News and a world that has been reduced to a dozen meds and 3,000 square feet. Before the election, he was angry—always interpreting any action by Obama as a sign of a decline in the values and ethic that made America great. His contradictions would come fast and furious.

“No, I don’t want immigrants. Oh, yes, I do love my immigrant caregivers.”

“I hate socialized medicine, but I love Medicare and don’t want to pay more for it.”

“Bush Jr. was an idiot, but Obama is worse.”

When I listen to Donald Trump, I hear my father. Trump is a manifestation of my dad and a social movement. Trump is perhaps the missing link between my father and a generation of conservatives who could no longer tolerate the hard edges of their own party. They had no clubhouse and were pissed off. When I look at Trump, I don’t see a disgruntled Austrian paperhanger bent on a millennium of Aryan superiority. I do see a POTUS who will be applying his politically incorrect, self-declared pragmatism to a world my father felt had swung too far left, leaving many feeling left out.

T-Rex Healthcare?

Trump favors repeal and replace. He’s got repeal down cold but seems fuzzy on replace. Repeal and replace will consume the new administration, but cooler heads are likely to prevail as the age-old problem of tearing up the tracks of any entitlement becomes an obvious third rail to a reinvented GOP hell-bent on maintaining power. The budget reconciliation process, which does not require a super majority, will be used to slowly emasculate

Obama’s signature legislation, subjecting it to a humiliating death by a thousand cuts. Popular elements of the legislation will be maintained and, in doing so, will continue to confound those who believe reform and affordable, private, market-based healthcare are compatible bedfellows.

Many in Congress and the new president believe only privatization can fix the system and that competition can create an elasticity of demand among payers, consumers and providers that ameliorates an estimated $700 billion of waste, fraud and abuse. However, Trump’s signature multipoint healthcare prescription plan was anchored by solutions that either are flawed or have been tried and tested and have failed.

Interstate competition sounds great, but unless an insurer has critical mass of existing membership in a competing state, it won’t be able to offer competitive insured products against deeply entrenched for-profits and not-for-profits that offer better rates anchored by better provider discounts. My experience is that shareholders get impatient at losses. On the heels of failed exchanges, don’t expect a land rush of new insurers to enter markets even when promised the backstop of local reinsurance pools. Reinsurance pools exist in more than 30 states with minimal impact on loss mitigation. There are no cornerstone ideas in Trump’s Rx for making coverage more affordable that don’t require appropriations to fund subsidies or a cost shift to the middle class in the form of means testing to cap the deductibility of healthcare.

Both sides of the political aisle have their sights set on the revenue to be gained from capping the deductibility of employer-paid benefits. Look for a possible horse trade with employers should the corporate tax rate drop, perhaps resulting in a compromise cap on deductibility of benefit costs. Ironically, we may see some form of a Cadillac Tax resurrected, possibly with an emphasis on imputing the value of benefits above a certain breakpoint to those making above a certain salary level.

Who Wins?

The wind just shifted heavily in favor of insurers. Goldman recently declared fair skies and calm seas for payers as they contemplate the next four years, which are likely to bring less regulation, reduced risk of Medicare introduced as a public option, and the expansion of rating bands to encourage younger consumers to purchase coverage.

The eventual revocation of medical device, research and excise taxes will lead to an Affordable Care Act that is essentially incapable of financing its own deliverables. Any Trump replacement plan will focus on the lowest common denominator of needs and will rely on market-based incentives and tax credits to achieve coverage for the uninsured and underinsured. No GOP replacement proposal tendered to date comes close to replicating the current number of subsidized ACA enrollees. We may see the ranks of uninsured rise as high as 8%.

A market driven and influenced by those who favor Medicare privatization, high deductibles, individual policies and block grants for states to administer Medicaid as they see fit portends a continuation of the age-old conflicts of trying to meet a voter/consumer demand for open access, low out-of-pocket cost and affordable premiums. Medicare remains the third rail. Touch it and you die.

Getting any T-Rex to change his declared course requires patience. You don’t interrupt T-Rex when he’s on a roll, and you never question his alpha status in public or on Twitter. You take him aside later on and present facts to him and give him options to save face. A T-Rex once made it clear to me: “If you’ve got facts, let me see them. If we’re talking about feelings, we’re going with mine.”

Employers are likely to continue cost shifting and celebrate what they hope is a slow diminishment of the role of the Department of Health and Human Services and the IRS in regulating health plans and eligibility. As profits increase from a recovering economy and potentially lower taxes, per capita healthcare costs as a percentage of per capita healthcare spending will decline. This is one-time evidence that will be used to shout down those who might advocate a single-payer push toward Medicare for all.

The Paleozoic Period

As for Trump, my guess is he will move slowly, and the private insurance industry is likely to benefit from deregulation. Yet it’s a temporary Indian summer for the industry. We all have a role to play. We have to educate those in power and introduce fiscal pragmatism and social empathy into the discussion. We can’t act totally out of self-interest or we set ourselves up for more draconian solutions down the road when the proverbial pendulum swings back to the other side—and it will.

Perhaps Trump’s legacy will be that he moved the GOP more to the left and thus saved it from irrelevance. Rather ironic that a T-Rex would save the other dinosaurs from extinction.

We’ll look at two fictional companies to contrast how a slight change in focus can create a completely different result. The decision point will be this: is the focus of our agency technology the transaction and placement of insurance, or is the focus of our agency technology the generation of meaningful insight used to make better risk decisions? Either choice will follow a remarkably similar path but will result in different outcomes.

Let’s call the first firm TipTop. TipTop is at the pinnacle of current agency technology capability. Every firm has varying degrees of automation maturity, but I’ve never seen a firm that hits on all cylinders like TipTop. This agency has a single management system that provides account management, accounting and flawless carrier integration (just suspend your disbelief for the next 800 words). All producers utilize a common customer relationship management system, keeping all prospecting activity current. When a prospect converts to a client, the CRM system populates the management system. Benefits can see property-casualty clients and vice versa. Clients can download policies and certificates from a portal. They can call, text or live chat with agency experts.

When service teams market accounts, the applications and quotes are transmitted electronically. Business is bound, and the corresponding policies, payments and commissions transmit digitally. Carrier reconciliation and financials are push-button events.

Stewardship and pre-renewal meetings are presented on iPads, and everyone has an iPhone. The agency is full of smiling young people in $300 jeans and black turtlenecks.

TipTop probably spends double what your firm spends on technology as a percentage of revenue, but the resulting gains in efficiency and effectiveness propel them well beyond your firm’s overall revenue per employee. They made the hard decisions. Standard servicing procedures and data governance are in full swing. Producers are paid based only on what’s in the CRM. Basically, they made every decision you struggle with, they pushed through the pain, and they now operate as a well-oiled machine. TipTop has a complete digital approach to the placement of insurance both upstream and downstream.

In today’s environment, with a little luck and solid management, a firm like TipTop would solidly trounce every one of our firms by every conceivable metric. TipTop would quickly solidify a place among the largest brokers of U.S. business. Sounds good, right? Unfortunately, there’s a problem. TipTop’s automation focus is too narrow. If the agency doesn’t change its strategy, it will be unable to compete in the new retail economy.

So let’s look at another firm, which we’ll call FutureState. FutureState also interacts via digital channels, but its focus is different. Where TipTop’s automation focuses on the transaction, FutureState’s automation focuses on the data.

Rather than standardizing on a single system and a single set of processes, FutureState chooses systems based on three criteria:

  • Is this the best system for the colleagues who use it?
  • Can this system interact with our data architecture?
  • Does this system net us the maximum amount of data on our clients and trading partners?

Digital communication tools are a dime a dozen, and FutureState’s platform approach ties it right in. If a client needs a certificate, FutureState can download it. If a client needs to change a property schedule, no problem. In this sense, FutureState sounds a lot like TipTop. But because FutureState has a data-centric approach, the content of its client communication is fundamentally different.

When clients log into the TipTop portal, they see a list of active policies with additional documents under those policies; a digital file cabinet full of facts and figures. When clients log into the FutureState portal, they see an overview of their risk health. They can get to a policy, but many times their question is answered in a single picture without ever paging through an insurance policy. Make sense?

Reality Chimes In

Now let’s look at a real-world example.

Log into your American Express portal. The first thing you see is a big round chart of categorized spending. You can play with that visual to quickly understand your current financial state, health or spending dysfunction. Looking for a specific charge? Sure, you can go there, but every time you log in you aren’t presented with just data points; you are presented with insight. Amazon does this based on your spending and browsing habits. Every social network in existence attempts to provide you with insight first, then facts and figures. Given the widespread adoption of these types of service providers, our entire population is being slowly trained to expect immediate answers.

In contrast, we’re all becoming less tolerant of just being handed facts and figures.

So a FutureState client has a more compelling reason to go into the agency portal. Why do your clients call you to ask for policy information? Chances are they have a question they are trying to answer so they can create insight for their organization. It’s great if your agency is viewed as a source of this information, but wouldn’t it be better to actually provide the insight instead of the raw materials?

FutureState answers client questions because it has harnessed the true power of data. It has moved beyond simply providing facts and figures in a digital way and now uses the digital channel to provide insight and actionable intelligence. Our agencies do provide insight today, but it’s usually a manual process that requires a colleague to speak with an insured to get to the heart of the question. FutureState can provide a high-touch service, but it doesn’t have to because it understands a deeper truth: what we know about our clients is more important than how we transact their business. When you get both right, you change the game.

FutureState is poised to be just as successful as TipTop, but its focus on the data over the transaction results in a firm with far more longevity. A combination of deep insurance expertise and an ability to turn data into insight has created a firm that embodies all the goals of modern insurtech startups inside a traditional independent agency. Which firm do you want to be? Neither path is easy, but they aren’t impossible either. The commitment is the same, the costs are similar, but the result is completely different. Deciding what you want your customer experience to be is the first step.

And we expect one of the most consequential deals will be a long-awaited tax reform package.

I’m writing as a Democrat who’s still bruised from November, but the light I see in this new era is the end of six years of gridlock and the ability to get things done. The challenge now is to ensure the bills signed into law do no harm and work to strengthen our markets. And when it comes to tax reform, we’ve got a big opportunity and a corresponding big battle. Preserving the tax exclusion for employer-provided benefits will be the defining issue for our advocacy efforts in 2017.

The groundwork is laid after years of negotiations led by Speaker Ryan, and we’ve accordingly built our advocacy efforts around a potential deal. The tax code hasn’t seen comprehensive reform since 1986, and the corporate rate now stands at 35%—the highest in the world—motivating companies to relocate overseas and further decrease government revenue. The code is also the most convoluted and difficult to navigate. It’s gotten so out of whack that there is still a tax benefit for companies that use goat mohair—an incentive created in 1949 for manufacturers of military uniforms. Uniforms are now made with synthetic fibers, but the mohair incentive is still on the books.

Our member firms stand to benefit significantly from a major reduction in the corporate tax rate. Most corporations do. In fact, a recent survey of multinational CFOs listed corporate tax reform as their top policy priority.

There are few arguments against lowering and simplifying the tax code, but it’s going to be a difficult task with lawmakers considering how big to go. Should it be comprehensive reform that would include reforming individual rates or just corporate reform?

Trump has proposed lowering the corporate tax rate to 15%. Ryan has proposed cutting it to 20%. The final legislation is likely being written and revised as you read this, and the reductions promise to be accompanied by a big price tag for us—a potential new tax on employer-provided health insurance.

When Congress looks at ways to replace the revenue nixed with lower rates, the largest tax expenditure on the books is the exclusion for employer benefits. The exclusion cost the federal government $250 billion in 2015. It’s far costlier than the popular mortgage interest tax deduction or the deduction for charitable contributions. Our fight to preserve the exclusion is a tough one. Every time I raise the issue with a staffer on Capitol Hill, I’m met with a look of angst and concern. It is one of the most frequently considered expenditures to subsidizing lower tax rates.

I don’t have to tell you the holy grail to employer-sponsored insurance is the corresponding tax incentive. We know that employers largely continue to offer health benefits to compete for good talent and do right by their employees, but it’s not difficult to envision how these packages would be scaled back if the tax incentives were altered. Our message to Congress is simple: if you begin limiting the tax exclusion, your constituents begin receiving limited benefits packages. And that’s a dangerous experiment that will affect 160 million Americans receiving employer-sponsored insurance.

The health insurance market is already becoming increasingly volatile, with individual premiums skyrocketing, carrier mergers limiting consumer options and drug prices exploding. Consumers are increasingly paying more for less. The market for employer-sponsored insurance remains remarkably stable despite those variables. Why tamper with a market that works well? (I would use this opportunity to point to Hillary Clinton’s support for employer-provided insurance, but I’m trying to move on.)

Unfortunately, that message doesn’t always resonate with some of the leaders writing the tax reform package. House Ways and Means chairman Kevin Brady, R-Texas, conducted a hearing last summer on the notion that the tax exclusion incentivized consumers to overuse their benefits and resulted in premium increases. And Speaker Ryan regularly suggests that scaling back the tax exclusion would encourage companies to shift money from benefits packages to wages. But we saw that theory debunked when markets strategized for the looming Cadillac Tax—an excise tax that economists predicted would increase government revenue by $87 billion (largely from new taxable income). But as the excise tax neared, there were no indications companies would suddenly be increasing salaries.

This positioning derives from conservative economic theories that consumer-driven health insurance will lower overall costs. Several bills were introduced in the last Congress to encourage consumer-driven health insurance.

Rep. Pete Sessions, R-Texas, and Sen. Bill Cassidy, R-La., in May introduced H.R. 5284, “The World’s Greatest Healthcare Plan Act of 2016.” The bill would limit the tax exclusion for employer-sponsored health plans to $2,500 annually per individual plus $1,500 annually for dependents. This would force consumers to spend more frugally. Although we consider Rep. Sessions and Sen. Cassidy our friends, we strongly disagree with their approach, and we will oppose every effort to limit the benefits-tax exclusion.

Our battle this year is clear: to preserve the tax exclusion for employer plans and to continue to discredit consumer-driven health theorists. We have a lot of allies in this fight, but they will all have parochial distractions. We’re fortunate to have built strong relationships with the tax writers over the years, and we’ll be leaning on them heavily in the coming months to preserve your markets and to protect the insurance that your clients rightly enjoy.

The Center for Strategic and International Studies, a respected Washington think-tank, sized up the shortage and the problems caused by it in a study for Intel that surveyed hundreds of IT managers and professionals in the United States and seven other countries.

“The continued skills shortage creates tangible risks to organizations, and companies say they have already incurred damages as a result of this workforce gap,” CSIS warned in Hacking the Skills Shortage.

Indeed, simple word or rumor of a company’s IT skills shortage alone can lead to cybercriminals sniffing around. More than a third of those surveyed said “their organizations, unable to maintain adequate cybersecurity staff, have been targeted by hackers who suspect a shortage of cybersecurity skills at their organization,” CSIS said.

The survey also reported the following:

  • 25% of respondents said their companies had lost proprietary data in cyber attacks
  • 22% believed they had suffered reputational damage as the result of attacks
  • 17% said the skills shortage had reduced the ability of their company to create new products and services

CSIS said the ultimate solution to the skills shortage is to dramatically increase the number of people educated and trained as cybersecurity experts. That may sound obvious, but the report said the current educational infrastructure is incapable of turning out a much larger and steady stream of IT pros.

“Simply put, most educational institutions do not prepare students for a career in
cybersecurity. Our research suggests that cybersecurity education should start
at an early age, target a more diverse range of students, and provide hands-on
experiences and training,” CSIS said.

“Most institutions of higher education do not offer cybersecurity concentrations and do not guide graduates to cybersecurity professions,” said the report.

CSIS urged universities to work with employers and the government to craft curricula based on real-world needs. “Programs should focus on hands-on learning in the form of labs and classroom exercises to provide people with robust and practical skills in this field,” it added.

While schools and colleges develop a more robust program, employers should consider relaxing degree requirements for entry-level cybersecurity workers “and place greater stock in professional certifications and hands-on experience for evidence of suitable skills.”

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. 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.”

Targeting Privacy

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.

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.

An actual ransomware message

Ransomware is rapidly advancing. The Justice Department says attacks quadrupled from 2015 to 2016, averaging an astonishing 4,000 a day. Beazley has also reported that ransomware attacks among its clients more than quadrupled in 2016, with nearly half of these attacks in the healthcare sector, and Beazley projects these attacks will double again in 2017. According to the Justice Department, 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.”

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

If you don’t pay a $10,000 ransom, the attack could end up costing an organization millions.

Matt Chmel, assistant vice president, Aon Risk Solutions

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.”

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.

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.

Reed Sheard, CIO, Westmont College

“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.”

 

For ideas on how to do battle with ransomware, check out these websites:

Federal interagency document

Europol’s “No More Ransom”

Palliative care is a growing area of medicine that focuses on improving quality of life for patients and their families during a serious or terminal illness. Miller was the executive director of the Zen Hospice Project in San Francisco. The independent nonprofit group trains volunteers in palliative care and staffs its own small-scale residential operation.

Miller’s ideas on palliative care began evolving when he was in an accident during his sophomore year at Princeton that left him with two legs amputated just below the knee and one arm amputated. He found that the only way he could come to terms with his new reality was by seeing it simply as part of being human—suffering and all. He believes that all suffering, even at the end of life, offers the opportunity for some kind of meaning. For one patient in the story, it was the ability to hang out with his friends, play video games, and smoke cigarettes for the six or so weeks he had to live. For others, it’s something else.

But it is different for everyone, and palliative care approaches to serious illness and death enable health care providers to make it personal, take it out of the sterile, hospital realm that leaves people feeling separated and often, alone. As The Times article notes, “There are parts of ourselves that the conventional health care system isn’t equipped to heal or nourish, adding to our suffering.”

Palliative care isn’t just good for patients—it’s actually good for providers and payers as well. According to a Leader’s Edge story on palliative care, one study of palliative care patients saw an average decline of 36.8% in monthly spending for inpatient and outpatient health services; a decrease in hospitalization rates of 34.9%; a decrease in length of hospital stays of 24.6% and a total cost savings of 44%. 

The palliative care movement was given a boost by the Affordable Care Act and other recent initiatives to improve health care quality in the U.S. As it continues to grow, there is an opportunity for brokers to seek out coverage for this type of care and work with carriers to ensure it becomes an important part of their plans.

The New York Times reported this week that the United States Supreme Court denied a request to review a settlement between the NFL and retired players suffering from Alzheimer’s, ALS and other debilitating conditions. “The settlement, worth perhaps as much as $1 billion, covers nearly every former player for the next 65 years; the league’s actuaries estimated that just under 30 percent of them could develop Alzheimer’s or other conditions covered in the settlement,” The Times reports. Individual players could receive as much as $5 million—the amount is based on is based on their age and number of years in the league.

The settlement was originally approved by Judge Anita B. Brody of United States District Court last year, but was brought to The United States Court of Appeals for the Third Circuit and then to the Supreme Court by a subset of retired players who believed the terms were too restrictive and would not cover certain players who developed neurological conditions over time. One of the conditions in question is chronic traumatic encephalopathy (CTE), which is linked to head hits. 

According to the deal, only players diagnosed with CTE before the settlement was approved in 2015 would be covered. The subset of players also argued that the settlement did not adequately account for scientific innovations that may allow for CTE to be diagnosed in people while they are alive. Currently, the disease can be confirmed only in autopsies.

The appellate judges acknowledged the objectors’ points but found the settlement benefited the greater good among players anyway. The Supreme Court also upheld the decision by refusing the case.

Back in 2012, Leader’s Edge covered this topic in a cover story, “$1 Billion Time Bomb,” in which insurance brokers predicted even then this would be a billion-dollar hit for the NFL. The article takes a deep dive into the workers compensation system that allowed many players to take advantage of liberal rules in California to get their claims through—even players who may have done nothing more in the state than sit on the bench.

While California’s rules have since changed, workers compensation is still a vehicle for ex-players to attempt to gain compensation for what they feel is the league’s negligence. Last month, Insurance Journal reported a group of 38 former players has sued to force the NFL to pay them workers compensation benefits for CTE.

The suit asks the federal court to force the NFL to recognize CTE in living players as an occupational disease and pay the players benefits.

Thomas (Tom) J. Rodell
Executive Vice President, Head of Field Operations, Aon
Chairman, The Council, 2000-2001 and 2007-2008

Thoughtful, focused, compassionate

Soon after graduating college, Tom Rodell veered from his chosen field of study in political science and joined the world of risk management. At the time, he did not recognize the import of that decision. Some two decades later, he would face the biggest risk of his life on Sept. 11, 2001. As fortune would have it, his meeting with Aon managers that day was scheduled at the Millennium Hilton hotel across the street from the World Trade Center (WTC). Rodell had spent the day before in Aon’s WTC offices. Nearly 3,000 people lost their lives on 9/11, including 176 of Rodell’s colleagues. Rodell was asked to stay on in New York to assist Aon’s Risk Solutions’ leadership and help employees who were left dealing with the tragic aftermath.

Rodell’s insurance career began with The Hartford in 1973, but he soon moved to Alexander & Alexander, then the world’s second-largest insurance brokerage. Rodell quickly climbed the corporate ladder, landing as the head of A&A’s Insurance Services. When Aon acquired A&A in 1997, he stayed with the company, holding a variety of leadership roles, including executive vice president and head of field operations.

As a member of the board for the National Association of Insurance Brokers, Rodell played an instrumental role in the historic merger of the association into The Council of Insurance Agents & Brokers. He was the only person elected twice as chairman. Rodell also helped form the World Federation of Insurance Intermediaries, the first organization to give brokers from around the world representation at a global level. He served as The Council’s representative on the federation’s board and was elected chairman.

Rodell gave much to his community, serving on the YMCA national board for nine years. As former YMCA USA president and CEO Neil Nicoll said, “Tom’s leadership on the YMCA USA board played a key role in transforming Y services for 22 million participants. Tom’s thoughtful, focused and compassionate approach led to the creation of new programs to address some of society’s greatest social and health needs…. Tom’s mark on the Y will benefit generations to come.”

Rodell has volunteered at Project Homeless Connect in San Francisco and spent the night at Journeys PADS emergency shelter sites in the Chicago suburbs. He and his wife, Sue, now live in Amelia Island, Florida, spending summers in northern Wisconsin with visits to Chicago to see family and friends.


 

Jaap Meijers
Founder, Meijers Insurance, The Netherlands

Family, friends and giving are core values.

Whether it’s racing cars, building a successful insurance brokerage, or giving back to his community, Jaap Meijers has always given it his all. In 1967, Meijers changed careers and joined a thriving broker in Amsterdam. In 1973, he and his wife, Tineke, launched what would become one of the largest private brokerages in The Netherlands. It started modestly, but they believed they could build a business on the core value of family and friends first. These values became the backbone of the business. Not only did he take care of his employees but extended that family approach to clients.

“Our strength is in having the attitude and culture of a family business,” Meijers told Leaders Edge in 2009. “We are involved in the well-being of our people.”

Meijers started providing lunch so the employees could eat together and took care of workers who were ill or faced serious problems. To bring clients into the family fold, Meijers set out to service a client’s entire risk portfolio from business to the personal lines needs of the principals. It worked, and the firm’s business has grown steadily ever since.

When Meijers saw how fast the global economy was expanding, he knew it was important to keep pace with his clients’ growing international business. He joined The Council and was a founding member of the Worldwide Brokers Network, which he chaired from 1996 to 2000. As chairman, he oversaw the inclusion of the network’s first U.S. member. In addition, he served as chair of BIPAR, the European Federation of Insurance Intermediaries.

Charity also plays an important role in his life. Among his many contributions, he served on the board of the Jewish Humanitarian Fund, a foundation to revive Jewish life in the former Eastern Bloc. He was vice chair of an institute that helps children with learning disabilities; chair of an Amsterdam museum fundraising committee; and chair of Young Leadership. In 2008, Meijers was knighted in the Royal Order of Oranje Nassau for his charity work in The Netherlands.

 


Richard E. (Dick) Meyer
Former Executive Vice President, Johnson & Higgins
Former Chairman, Latin American Reinsurance, Bermuda and Global Excess Partners

A man of wisdom, clear decisions and tremendous integrity and generosity

The late Richard Meyer was one of the most respected men in the industry and was widely known for his business acumen, wisdom, philanthropic generosity and desire to help people without asking for anything in return. He graduated from St. John’s University, in New York City, and then served as a lieutenant in the Marine Corps. After his service, he joined insurance brokerage Johnson & Higgins. At J&H he rose to executive vice president and member of the chairman’s office. Meyer was responsible for all national practices and the formation of J&H in London, which helped expand the brokerage’s international reach. He was so well regarded that J&H’s mandatory retirement age of 62 was extended two years because so many former colleagues around the world wanted to honor him.

He continued his business interests after retirement, joining Global Excess Partners, a New York-based insurance agency, and chaired Latin American Reinsurance, of Bermuda, which he co-founded. Meyer also chaired XL Capital until 2000.

One close friend described Meyer as “a quiet, non-demonstrative leader whose few words and clear decisions under fire spoke volumes.”

Meyer was a generous supporter of many causes. Education of the industry’s professionals and non-professionals was one of his lasting legacies. He was an astute investor and helped engineer the mortgage needed to build the College of Insurance. When the college was merged with St. John’s, the building sold for millions more than expected.

His charitable contributions didn’t end there. Meyer was chairman of Boys Hope and Girls Hope at both a regional and national level and was one of the first recipients of the organization’s Vision of Hope Award. He chaired both the risk management and audit committees for the Diocese of Rockville Center and held leadership positions at The Good Samaritan Hospital Foundation and the Children’s Storefront.

He also chaired the Calvary Hospital Fund and was awarded its highest honor for his efforts. A “tree of life” was planted on the hospital’s campus in his name.

 


Snoopy
Retired MetLife Mascot
Ace WWI Pilot

Lovable, friendly, iconic

A comic strip character as a Game Changer? Really? Well, how about a powerful brand that ushered in a whole new era of image making for the insurance industry? That’s a good description of the Peanuts character Snoopy, who was retired this year as the iconic symbol for insurance giant MetLife.

While many of his adoring fans will miss his constant, comforting presence, MetLife explains that he has achieved everything he set out to with the company. And besides, everyone gets to retire at some point. “We brought in Snoopy over 30 years ago to make our company more friendly and approachable during a time when insurance companies were seen as cold and distant. Snoopy helped drive our business and served an important role at the time,” says Esther Lee, global chief marketing officer of MetLife, in a press release. “We have great respect for these iconic characters.”

Snoopy first appeared in Peanuts, a daily syndicated American comic strip written and illustrated by Charles Schulz. While new daily strips ended with Schulz’s death in 2000, old strips are currently running in newspapers under the title Classic Peanuts. It is the most popular and influential comic strip in history. At its peak, Peanuts had more than 300 million readers in 75 countries and was translated into 21 languages.

It’s no wonder MetLife chose Snoopy to give the company a softer, friendlier image. And it worked well as a brand and revenue generator for three decades. With Snoopy Blimps One and Two hovering in the sky overlooking major events and Snoopy speaking for MetLife on TV, he projected the positive image that MetLife sought. It was a company consumers could trust and relate to.

Snoopy also helped improve the image of the industry overall, and other insurers followed suit in using humor and satire to lighten their image. In 1995, 10 years after Snoopy joined the industry, Geico adopted the quirky Gecko, and in 2008, Progressive introduced the peppy cashier Flo.

When all is said and done, who could resist such a lovable character as Snoopy, who often fantasized he was a World War I fighter ace in perilous dog fights with the Red Baron. He also dreamed he was a world-famous author, as well as Joe Cool, a suave college student.

So why would he retire? MetLife is re-thinking its business model, moving away from a traditional product development model to one driven by customer insights. The company is focused on conveying a modern, simplified customer experience and wants to better reflect that in its branding. The company’s new logo forms a “M” and combines the legacy blue with a new green that represents the partnership of tradition with renewal and energy.

“We are embarking on a journey to upend the long-entrenched norms of the insurance industry,” Lee says. “Our new brand reflects our company’s transformation and differentiates us in the marketplace, ultimately driving greater value for our customers and shareholders,” says Steven Kandarian, chairman, president and CEO.

But don’t feel sorry for Snoopy. He will do just fine in retirement with a golden parachute replacing those blimps. Iconix Brand Group, which owns 80% of the rights to Snoopy, will receive a reported $12 million a year in rights fees from MetLife though 2018.
 

When it comes to technology in day-to-day life, the formerly improbable keeps becoming possible. We can simply ask our devices to do tasks for us, to keep track of everything we do and immerse us in imaginary worlds. All of these are themes for this year’s holiday season.

Apple’s Siri got us used to talking to our phones, but Amazon has made that functionality part of our homes with the Echo ($180) and this year’s smaller Echo Dot ($50). Echo looks like a cylindrical speaker, but you can ask its digital assistant, Alexa, to play music from streaming services; read the news, weather and traffic; order pizza; get a ride; and control your Internet-enabled home devices, such as lights, thermostats and the television.

It lacks a cute name, but the Google Home ($129) voice-activated speaker will do pretty much everything Alexa will, but you have to say “OK Google” instead. Google Home, shaped a bit like a fragrance candle, also answers questions about anything you can search on the Internet, tells you what your schedule and travel plans look like, and will translate words for you.

Not stopping at talking speakers, this fall Google unveiled its own smartphones, the Pixel (from $649 unlocked) and the slightly larger Pixel XL (from $769).

Google has also jumped into the hot virtual-reality market. The Google Daydream View ($79) turns a smartphone into a virtual reality platform. Just slide a compatible phone into the headset, and you’re ready for new worlds. Only Pixel phones were compatible to start with, but other phone makers are likely to join in.

The Daydream View follows the lead of Samsung’s Gear VR, which also fits a phone into the headset. The Gear VR uses technology from Oculus, which disabled support for the device for Samsung’s Note 7 phones that have been plagued by fires and explosions.

Sony’s virtual reality headset, the PlayStation VR ($399) released in October, works with the PlayStation 4. That’s cheaper than earlier entrants like the Oculus Rift ($599) and HTC Vive ($799), particularly since for those you need a powerful PC to handle the headsets.

Microsoft HoloLens combines the virtual and the real into “mixed reality” so you can interact with holograms in the world around you. The HoloLens opens up possibilities for science, medicine and business as well as just fun.

Duke University surgeons, for instance, are testing whether the HoloLens can be used to aid in emergency brain surgeries, such as those used to relieve excess fluid pressure in the brain. The development edition was priced at $3,000.

If it’s real action you’d like to remember but at a lower price, consider the tiny Polaroid Cube ($99) action camera, or go higher end with the Garmin Virb Ultra 30 ($400) with voice commands or the latest from market leader GoPro, the Hero5 Black ($400), which offers voice control, a touchscreen and GPS and is waterproof to 33 feet.

If you’d like to go further afield, a foldable camera drone may be just the thing. The Hover Camera Passport ($549) foldable drone from Zero Zero Robotics has face- and body-tracking capabilities to follow you and take panoramic selfies. GoPro offers the foldable Karma drone ($799 or $1,099 with the Hero5 Black), or check out the Mavic Pro ($999). They all fold up for easy transport.

If you just want to get away, there’s always the ultimate gadget, a Tesla electric roadster. That will really take you places. You’ll have to get in line for the Model 3, which starts at $35,000 and won’t be available until a Christmas future.

In what ways are claims departments embracing new technology?
Claims is particularly well suited to experiments and pilots, because they can be rolled out in a specific customer segment, type of claim, line of business or geographic area, among others. Assessing the effects of such ventures is made possible through a variety of metrics that insurers are already tracking in claims.

Is innovation having a real impact on efficiency and claims handling?
Claims is the perfect area to incubate innovation. Emerging technologies have proven they can improve the efficiency and effectiveness of the claims experience. Innovative adoption includes the use of images and video in claims intake sourced from policyholders, aerial imagery and drones; field adjusters using smart glasses; and auto-shutoff water valves, to name a few. The ultimate benefactor of the restoration process improvement is the policyholder through an improved and transparent customer experience. The other areas are certainly efficiency and effectiveness where, for example, a drone can be deployed to a disaster site to assess a claim in unsafe or difficult-to-enter areas.

 

Internally, insurers are dealing with a significant turnover of knowledgeable workers over the next two to three years. They need to look at modernizing their processes to prepare the less experienced workers to perform these tasks. An example of this in action is companies’ use of smart glasses [essentially, a wearable computer] to deploy less experienced field adjusters who can be coached by experienced field adjusters who are working from the office and can participate in several field evaluations without having to travel to the site.

Does technology offer opportunities to detect losses earlier and to prevent them?
Emerging technologies are having a significant impact in all three areas of claims: restoration, mitigation and prevention. Through the use of data, analytics, connected cars, water and motion sensors, and other technologies, the industry is being thrust forward into new areas of focus, where prevention and mitigation are significantly enabled by the technology.

“I think what has evolved is the world of risk in general,” says Debbie Michel, executive vice president of National Insurance Casualty, Commercial Insurance for Liberty Mutual. “Companies are doing their best to manage risk, but new risks emerge every day, whether it is driverless vehicles or cyber risk. It just makes it that much more important to be thinking about the whole picture of risk. It is much bigger than just your insurance premium and money spent on settling claims.”

“We’ve been talking about TCOR for at least 20 years and how we use it in our risk control approach with accounts,” agrees James Merendino, vice president and general manager of Commercial Insurance Risk Control for Liberty Mutual. “The industry at large has talked more about hard dollars—premiums in and premiums out—but they are now starting to come around and say maybe there is something here.”

The concept of TCOR resonates particularly well when discussing workers comp claims, which for larger companies represent one of the biggest and costliest risks.

“Something that gets a risk manager’s or CFO’s attention is talking about the real cost of a $20,000 loss,” Merendino says. “Our studies show that a workplace injury with $20,000 in direct costs would actually cost two to four times more in indirect costs, for a total loss that is close to $100,000. If the margin a business makes is 10%, that business would have to generate $1 million in revenue to cover all the costs associated with that loss.”

TCOR is also relevant to other lines of commercial insurance, such as auto, property and general liability.

“Say a tractor-trailer truck delivering a product overturns,” Merendino says. “That product needs to be refrigerated, so that product is lost and cannot be delivered. Because of the type of business, there is no extra inventory available to replace the order. The business will incur costs to dispose of the ruined product and to produce and deliver new product to the waiting customer, potentially paying overtime to make that happen. Most likely, the business will also give the customer a discount because of the delayed delivery. And all of that happened because of an overturned vehicle.”

After nearly 15 years of a soft market, commercial casualty insurers are focusing on the value they add to their programs as a way to keep their existing customers and attract new accounts. 

“The abundance of capacity in the marketplace has driven downward pressure on pricing, so carriers have responded by highlighting their value-added proposition,” says Gary Shertenlieb, senior vice president of Lockton Companies. “Value can be reflected in pricing, but it also can be enhanced through cost containment of claims, loss control services, data analytics and other administrative and ancillary services. You will find that carriers are focusing a lot more attention on selling those capabilities than meeting the next person’s price.”

“One of the reasons I think TCOR is getting more publicity lately isn’t because it is new but because we are better able to measure it,” says Joseph Peiser, the executive vice president and head of casualty broking for Willis Towers Watson. “Advanced analytics has really helped risk management by providing a more credible way to estimate losses that have been prevented by safety programs.”

“When I started out in this business,” he says, “the hardest part for risk managers was to measure the loss that didn’t happen. Often risk managers need to get funding from their company’s treasurer or CFO for safety programs, and they require a return on investment for money spent. Now because of advanced analytics and more sophisticated benchmarking, a risk manager can show, with a degree of credibility, estimates on the effectiveness of a safety program. Carriers like Liberty Mutual have superb safety resources to help with this.”

Three Prongs of Value

Liberty Mutual views TCOR as a three-pronged program of value-added services for its customers: risk assessment, risk control and claims management.

“The first part is really understanding the risk, diving in and analyzing what the underlying risk is, understanding trends, understanding exposures, understanding the nature of their business,” Shertenlieb says.

“With new customers, part of the assessment includes benchmarking current performance against industry data or our book of business,” Michel says. “It can be difficult to demonstrate what you can do for a new customer and how you can help them control losses. We often use other large customers that have seen positive results as examples. From there, we can discuss areas to target, potential goals, and the best program structure to achieve them.”

Once a client is on board, risk control comes into play. Merendino’s department has 480 employees, 400 of whom are safety engineers and field consultants who handle the risk assessment and risk control aspects of TCOR.

“We conduct interviews and ask a lot of questions to help us and the customer get a sense of where the business is going, what the key exposures are and what might be ahead,” Merendino notes. “Once there is a good understanding of the company’s operation and its root causes of loss, then we develop an action plan to address the key drivers. We can recommend ways to automate or modify activities to reduce risk, but the customer is the one that carries out the plan. That’s why we want to get the customer as involved as possible.”

Michel says one of the things that distinguishes Liberty Mutual from its competitors is its focus on consulting with customers to help them find ways to prevent losses before they happen.

“We’re able to partner with our clients to look at risk factors pre-loss, meaning before the accident,” she says. “We focus on what we do proactively to prevent loss rather than waiting for the risk to happen.”

“I would say more and more we’re seeing that pre-accident focus from the major carriers, and Liberty is particularly good at it,” Peiser says.

Nonetheless, no risk control program can prevent every accident, so to better manage total costs, it is critical to understand up front how a claim will be managed.

In commercial insurance, 20% of the claims account for 80% of the cost, says Tracy Ryan, executive vice president and chief claims officer, Commercial Insurance, for Liberty Mutual. That is why her department uses sophisticated analytics and predictive modeling to ensure the right resources and tools are assigned to every claim.

“We know the earlier we can get on an issue and investigate it, the better the outcome,” she says. “So we gather as much information as quickly as possible so we can get it to the appropriate staff. Our 5,000 claims professionals act as extensions of our customers’ risk management departments. We want to understand a customer’s service expectations and work with them to define metrics so everyone knows how the program is performing. Our commitment to our customers is that we have the right professionals, resources and tools in our claims organization so we can deliver the best outcomes for them.”

“I would say the clients who are most interested in TCOR are loss-sensitive programs, meaning those with a decent-sized deductible,” Peiser says. “We think about a $100,000 deductible is where the interest starts. The client is taking a significant amount of risk and therefore tends to be more attuned to loss activity.”

Michel agrees that larger commercial customers, especially those with high deductibles or those that self-insure, are the most receptive to Liberty Mutual’s TCOR strategy. 

“I think at the smaller end of the market, customers may not focus on it because they don’t have a formal risk manager,” she says. “Companies that understand and appreciate the value usually have formal risk managers in place. Generally, it does correlate to the size of the risk and how sophisticated the program is. It also can depend on how much a company spends on insurance and how big the risk is for the company. For example, manufacturing and transportation are industry classes where risk is a big cost item, and those companies definitely pay a lot more attention to it.”

Our risk management approach is key to client retention, Michel says. “If a customer is in place, say, for five years, we have specific results that show the impact of different initiatives on the business’s total cost of risk over time,” she says. “We can demonstrate what we have been able to do together. In the large account space, our retention is about 90% annually. It sells itself.”

He is wearing a crimson shirt and navy shorts and kiddie sneakers. The child’s pose is reminiscent of the countless nappy-time photos proud parents post to their social media pages around the world.

But three-year-old Alan Kurdi was lying face down on a Turkish beach, his body washed there after his family’s makeshift raft capsized while attempting to reach Greece. Alan, his brother and mother all died—three of the estimated 9,000 refugees who have drowned in the Mediterranean Sea in desperate attempts to escape war in the Middle East and north Africa.

The day Alan’s body was discovered, Catrambone and the crew of his Migrant Offshore Aid Station—or MOAS—were rescuing 332 refugees from two listing ships off the coast of Libya more than a thousand miles away. More than 100 of those pulled from the water were children like Alan.

“But you keep thinking about those you didn’t save,” Catrambone says. “It keeps driving you on to do more.”

And so, even after having pulled more than 27,000 refugees from the waters of the Mediterranean, Aegean and Andaman seas in three years, Catrambone is far from satisfied. Last winter, his team launched two new boats to assist Syrian refugees crossing from Turkey to Greece. Those craft are named the Galip and the Aylan in honor of the two brothers who drowned in September in the region “to the world’s horror,” he says.

During its time so far in the Aegean Sea, working the route between Turkey and Greece, the MOAS team has rescued 1,869 men, women and children from this crossing. In three years, Catrambone, 34, has gone from an innovative and wealthy but otherwise little-known insurance provider from Louisiana to one of Europe’s most celebrated humanitarians. As he taps deeply into his personal wealth (he and his wife spent $5 million just to purchase, retrofit and equip the MOAS flagship, the Phoenix), he and his Malta-based team have swiftly become the face of faith and empathy in action to aid refugees facing death at sea. MOAS, as one member of the European Parliament puts it, “has basically shown European nations what should be done and how it can be done.”

“The governments in the region have done shamefully little as far as rescue operations,” says Roberta Metsola, a member of the European Parliament representing Malta. “MOAS has worked tirelessly to fill that gap. In just a short time, it’s astonishing the visibility this relatively small operation has brought to this enormous humanitarian crisis.”

And perhaps just as important as their work at sea, Metsola says, is the light MOAS continues to shine on those—mostly Muslims—who have lost everything at the hands of radical Islam.

“There is, of course, an immense concern in Europe regarding security after Paris and Cologne, and we must continue to strengthen our protections,” Metsola says. “But we must balance security with our commitment to liberty and compassion. MOAS, in a way, helps Europeans remember the human tragedy amid the turmoil.”

Citizen of the World

Catrambone’s journey from a middle-class childhood in southern Louisiana to life as a wealthy Maltese-based CEO, adventurer and humanitarian isn’t quite as unlikely as it might at first seem. His father, a liquefied natural gas engineer whose job frequently took him overseas, fueled Catrambone’s wanderlust with exotic stories from oil- and natural-gas-rich countries such as Algeria and the United Arab Emirates. His dad even gave him a shortwave transistor radio so he could listen to English-language broadcasts from his father’s locales.

While other teens decorated their rooms with posters of athletes or rock stars, Catrambone mounted a large world map on his wall to track his father’s travels as well as the location of world events he’d hear about in school or on the news. Catrambone, while sitting in a small southern town, was becoming a world citizen without ever leaving home.

After graduating from McNeese State University with a degree in criminal justice studies, he moved to New Orleans and found work as a private investigator for insurance companies looking into the legitimacy of clients’ claims. It was 2005. While Catrambone was investigating a claim in the Bahamas, Hurricane Katrina hit New Orleans. He returned to find his neighborhood under water. “I early on got a deep understanding of what it feels like to be displaced,” he says.

From that disaster, Catrambone saw opportunity. He and a few other newly homeless friends pooled their FEMA checks and opened a Cajun restaurant on the tourist-friendly island of St. Thomas. They served gumbo and “high-octane Bloody Marys.” The short-lived venture taught him two things: how to run a company and how tough it is to stay afloat in the restaurant business.

He continued as a claims investigator, a job that increasingly took him on trips following private contractors into conflict zones in the Middle East—often close to combat and working with private citizens who had nowhere to go if they got sick or injured.

In 2006, Catrambone founded Tangiers Group, which has expanded into a global operation specializing in providing insurance, emergency assistance, on-the-ground claims handling and even intelligence services. As Tangiers grew, Catrambone moved to Italy to be closer to the bulk of his business activity. In 2008, seeking even better logistics in an English-speaking country, Catrambone moved to the Republic of Malta.

To him, the arc of his life’s story makes perfect sense.

“My interest in criminal justice led me to an interest in insurance fraud and investigations,” he explains. “My sense of adventure sparked my interest in managing insurance claims in emerging markets. One thing led to another, and before I knew it, I had a global group of companies that was providing a highly specialized type of insurance services. I think what inspired me throughout was the urge to go to places others feared and to make people feel safe wherever they go.”

By 2012, Bloomberg estimated that Catrambone and his wife, Regina, were worth about $10 million.

But you keep thinking about those you didn’t save. It keeps driving you on to do more.

Christopher Catrambone

“He found a niche and went to fill a need,” says Sasha Gainullin, who is now CEO of Tangiers Group because Catrambone “spends 90 to 100% of his time with the foundation.”

“Chris is an innovator, a troubleshooter—a guy with incredible energy and passion,” Gainullin says. “Right now, those attributes that have made him so successful are being used to grow this very unique, very effective rescue operation. He is consumed with MOAS—it’s his absolute passion.”

So much so, according to those close to Catrambone, that he and Regina have been willing to siphon off much of their personal savings to underwrite MOAS. Besides the cost of the Phoenix, the Catrambones spent $2.2 million of their own money on operations in 2014.

“This is not some stunt to get some publicity or to bolster business,” Gainullin says. “Chris and Regina are putting everything they have into saving as many lives as they can possibly save. This has become their life.”

Shocking Scene

Catrambone’s crusade began as a pleasure cruise. In early July 2012, he and Regina and their daughter, Maria Luisa, set out from an Italian island near Malta for a week-long adventure across the Mediterranean to Tunisia on a 24-foot luxury yacht. As they sailed south, Regina spotted a jacket in the water. One of the family’s guests on the trip explained the jacket likely came from a sunken refugee craft. Refuse, listing craft and floating corpses, he explained, were becoming increasing common sights for those sailing in the region.

Prior to their trip, business forced the couple to miss an event they had hoped to attend—a mass led by Pope Francis devoted to the more than 500 migrants who had died earlier that year attempting to flee war-torn Libya for Europe by crossing the Mediterranean in often barely sea-worthy vessels. Pope Francis blasted the wealthy nations of the world for turning a blind eye to the growing crisis.

In his youth, Catrambone had been a devoted altar boy who had considered becoming a priest. Now he was sailing in luxury through waters teeming with suffering at a time the pope was chastising the wealthy for ignoring those in need. It was a perfect storm for a moral epiphany.

“I’m cruising on my boat at the same time people are out there dying,” Catrambone. “So our heaven is their hell.”

The plight of the migrants became the overriding topic of conversation for the rest of the trip. Catrambone, the driven business innovator, became obsessed with finding solutions.

In early 2014, Catrambone began assembling an experienced search-and-rescue crew capable of pulling off the complicated rescue operations. In Portsmouth, Virginia, they found what looked like a good deal on the size of ship they would need. But the 130-foot fishing trawler, besides being infested with rats, would need a major overhaul. Catrambone and a small crew set sail from Virginia in June of that year, and, after a rough crossing of the Atlantic, reached Malta, where the ship was restored and repurposed. The total cost to resurrect the aptly named Phoenix: $5.2 million.

After adding two speedboats and two helicopter drones, the MOAS crew set sail in late August of that year. They spent 10 weeks patrolling the waters of the central Mediterranean, finally heading home as the waters turned cold and the height of the migration season ended.

Catrambone and his crew had found themselves amid a humanitarian crisis unlike any the region had seen before. From March to October of 2014, 100,000 people departed from the shores of Libya on overcrowded vessels or homemade boats attempting to reach southern Europe—nearly half of the 207,000 people the United Nations estimated attempted to cross the Mediterranean fleeing conflict in the Middle East and Africa. That nearly tripled the previous high in 2011, when nearly 70,000 people fled seeking asylum after the so-called Arab Spring.

More than 3,400 people died in the Mediterranean during 2014.

In their 10 weeks at sea, the MOAS crew pulled nearly 3,000 people out of international waters between Libya and Malta. It was, by any measure, an amazing number of rescues. Still, it was, Catrambone is quick to say, “just a drop in the bucket.” He and his crew, he says, “were absolutely committed to doing more in 2015.”

But the Catrambones couldn’t afford to finance another year with expanded efforts from their own pockets. Besides the millions spent to get MOAS operational, the complex rescue operations cost an average of $400,000 a month. Through that winter, the MOAS team ramped up fundraising efforts. But money came in slowly.

Metsola says she believes that MOAS was slow to attract funding because of misperceptions about its work. She heard grumblings within the European Parliament and among her constituents in Malta.

Those rescued at sea, Metsola points out, go through the same intensive immigration process as any refugee once they are transported to a European port. “They are simply keeping people from dying,” she says.

People may not realize, too, that MOAS is “doing what people might believe our governments are doing but are not.”

“The concern in Europe over this flood of refugees blinded some to the incredible humanitarian crisis at sea,” she says.

The governments in the region have done shamefully little as far as rescue operations. MOAS has worked tirelessly to fill that gap.

Roberta Metsola, European Parliament member representing Malta

But MOAS’s efforts to raise money gained steam through 2015. Catrambone and his team greatly expanded their online presence. Several major media outlets ran stories on their efforts. Philanthropy groups such as U.S.-based Global Impact began collaborating with them. Doctors Without Borders joined their effort, placing a team of six medical professionals on the Phoenix from May to September last year.

As that operation was ending, during which 9,000 refugees were given assistance, the photo of a boy dead on a Turkish beach shocked the international community.

“MOAS was itself bringing the level of visibility of the crisis to a new level in 2015,” Metsola says. “Then came the horrific image of the child. The tide of compassion turned.”

Growing Support

As the image of Alan rocked the Western world, the death of countless Rohingya children in the waters off Myanmar continued to go mostly unnoticed outside Southeast Asia. The United Nations considers the Muslim Rohingya in Myanmar to be one of the most persecuted minorities in the world. Attacks by the majority Buddhists and military government intensified in the spring of 2015, leading to another massive exodus. In May 2015 alone, fishing crews rescued more than 1,000 people along the coastlines of the Andaman Sea in the southeastern Bay of Bengal. Tens of thousands more attempted to flee by boat, most often paying smugglers who overload their aging craft to increase profits.

Nearly 100,000 Rohingya and Bangladeshis fled their homelands on smugglers’ boats in 2014 and 2015. More than 1,100 people are estimated to have died off the coast of Myanmar since 2014, according to the United Nations High Commission for Refugees. The number of people trying to cross the turbulent waters in 2015 was up about 30% from the previous year.

While MOAS was scrambling to keep its intensifying operations in the central Mediterranean afloat, Catrambone took on another massive project: when migrant crossings slowed out of Libya, his team would sail 1,800 miles to Southeast Asia and begin operations off the coast of Myanmar.

“He can’t resist trying to help out,” Gainullin says. “It’s halfway around the world, but he had to do something because he knows MOAS is a model that’s working for people.”

On Nov. 11, 2015, the Phoenix reached Bangkok after 38 days at sea. After weeks of repairs, the ship and crew began searching the waters for refugees. In Southeast Asia, Catrambone says, the Phoenix might do as much good as a tool to raise awareness as it will as a rescue ship.

“There is no significant rescue operation in the area—none at all—while it’s a very similar situation to what we see in the Mediterranean,” he says. “We see ourselves as global citizens running a global organization. We are there trying to see how we can best be of service. Whether we do that by helping draw the world’s attention to the issues at sea there or by providing support to people or by carrying out full-fledged missions—that remains to be seen going forward.”

At the same time the Phoenix was sailing for Bangkok, the MOAS team quickly organized a third operation to assist the mostly Syrian refugees—like Alan’s family—attempting to flee their war-torn country by crossing the Aegean from Turkey to Greece.

From Greece, MOAS launched a 160-foot-long, custom-built emergency response vessel, the Topaz Responder, carrying the two high-speed rescue craft named in honor of the brothers who perished in September. They encountered an exodus far larger than the one the previous year.

As the MOAS efforts grow, Catrambone is confident the awareness of the human toll of the wars and persecution of minorities will grow worldwide. He hopes that heightened awareness will inspire the world’s governments and citizens to help finance the much larger operations needed to stop deaths at sea.

“We are confident the awareness we raise will inspire donors all over the world to contribute to our missions,” Catrambone says. “Apathy can only be challenged with compelling truths that move people to become part of solutions.”

MOAS ended up raising nearly $5 million in 2015, “about enough to cover operations costs from the year,” Gainullin says. Considering its massive expansion, MOAS will likely spend just more than $10 million on operations by the end of 2016. Thankfully, donations from around the world have kept pace with the expanding mission. Private donations as of October had nearly covered this year’s expenses. 

A Business Left Behind

As Catrambone immersed himself in saving refugees at sea, his company, Tangiers Group, and its growing network of subsidiaries, has also expanded. There’s only so much time in a day, so much of the day-to-day business operations have shifted to Gainullin, a Russian-born, American-educated insurance industry wiz who, as he describes himself, sometimes plays the “boring realist.”

“Chris is very innovative—he has this incredible imagination,” Gainullin says. “Maybe it’s the Russian in me, but I’m more the black-and-white, proof-of-concept guy. I’d like to think our personalities have helped make the company what it is.”

Tangiers Group is an insurance company that seemingly can provide service to almost anyone anywhere on earth in almost any form of trouble. It provides coverage for everything from aircraft and drones to kidnap and ransom situations.

“We had a case where somebody got stabbed in the eye in Afghanistan and needed to be transferred to Dubai for emergency medical treatment,” Catrambone says.

Chris is an innovator, a troubleshooter—a guy with incredible energy and passion. Right now, those attributes that have made him so successful are being used to grow this very unique, very effective rescue operation.

Sasha Gainullin, CEO, Tangiers Group

The company’s field agent based in the region got to work. “We took care of everything and then got them home safely. In many cases, our clients request a qualified English-speaking doctor, and our people on the ground are able to deliver one to their hotel room in a matter of a few hours.”

After a bus crash last year: “We were asked by an insurance partner of ours to find treatment for all the victims, organize evacuations and follow up until everyone was back at work safely,” he says.

“Chris may not have been an expert in rescue operations at sea, but he obviously brought a lot of expertise from his business experience,” Gainullin says. “We already have a deep understanding of the world and of getting people out of bad situations anywhere around the globe.”

The Nightmare Continues

In what has been described as the largest relocation of humans since World War II, the United Nations estimated more than three million people arrived in Europe fleeing Syria, Iran, Afghanistan and north and east Africa.

Increasingly, those making the perilous crossing by boat in 2016 have been women and children.

“This trend may continue to rise as more families are travelling,” a United Nations study concluded. “In addition, an increasing number of reports suggest that women and children are being sent ahead or trying to join their male relatives who are already in destination countries.”

With all they have accomplished, though, Catrambone still feels that he, Regina and his growing team of support staff are far from doing all they should be doing for the world’s refugees.

“The thought of us having saved 12,000 people already—saved them from death and given them a new life—is incredible,” he said. “These are 12,000 men, women and children who could have so easily drowned and had all their hopes dashed forever. Instead, they have a shot at building something positive and, hopefully, if they are successful, giving something back themselves. But the problem is so massive, you feel like you’re never doing as much as you could be doing.”

In 2015, investors reportedly pumped more than $2.5 billion globally into dozens of insurtech startups—more than three times as much as in 2014.

In 2016, the pace of startups and venture capital interest appears to be just as energetic, surpassing the $1 billion mark in the first six months. A total of 47 deals were announced, compared to 74 in all of 2015, according to KPMG and CB Insights. Since 2011, nearly 350 investors have pumped money into the burgeoning insurtech space.

Why are there so many unique and well funded industry competitors in such a short period of time?

“I don’t think anything happens all of a sudden,” says Scott Walchek, CEO of insurtech startup Trov. “There has just been this wonderful collision of technologists like myself reading the signals that are cast daily by millennials using their smart devices to control their lives, related to the inability of an industry to recast its products and services to address this fundamental change.”

In other words, insurance companies are slow to realize and address the fact many young and even older people prefer their business-related interactions to occur through texting, social media and email, rather than face to face.

Consequently, they tend to find traditional insurance-related communications and transactions as outdated as princess phones.

“The insurance industry is confronting its ‘Janus’ moment—carriers and agents looking backwards at yesterday to protect the book of business, while the rest of the world is facing forward to better serve customers,” Walchek says.

“The traditional industry, by and large, hasn’t built the right technology, isn’t agile enough, and doesn’t understand consumer behaviors. They’re only now sensing what is a very real threat.”

Lemonade has loudly broadcast its intentions to disrupt traditional insurers and intermediaries. The “lemons” represent what the company contends is the sour aftertaste that many of today’s personal lines insurance buyers take away from their buying experience; the “lemonade” is the supposedly sweeter alternative.

Lots of people with deep pockets are lining up at the Lemonade stand. So far the company has attracted $13 million in seed funding from big venture capital firms like Sequoia Capital and Aleph. Its global reinsurer partners are a Who’s Who of the industry, including Lloyd’s of London, Everest Re, Hiscox, XL Catlin, and Berkshire Hathaway’s National Indemnity. Reinsurers are particularly interested in Lemonade’s business model, which cedes the entire risk to those companies. In effect, Lemonade acts like a captive, though it isn’t. Captives insure a special niche of policyholders who all have something in common, such as obstetricians, who historically are at a high risk for lawsuits.

Lemonade’s clients, on the other hand, represent a broader range of policyholders seeking renters or homeowners insurance. To fit clients into the peer-to-peer mold, Lemonade uses a unique method to divide policyholders into individual peer risk pools.

Lemonade is licensed to do business in New York State—for now. The insurer has plans to plant flags nationally and enter other lines of both personal and commercial insurance.

First P2P?

While Lemonade claims to be the first P2P insurer in the country, the most recent roots of this model stem from Europe, where P2P insurance has been operating successfully for several years.

At its core, P2P is a risk sharing network where a group of associated or like-minded individuals pool their premiums together to insure against a risk. But there is a wide range of variations on that theme and Lemonade is only one of them.

For example, Friendsurance—the first brokerage version of P2P insurance—was launched in 2010 in Germany. Friendsurance is backed by large investors like Horizons Ventures and the European Regional Development Fund. Guevara made its debut as a P2P automobile insurer in the United Kingdom in 2014. Both predate Lemonade.

These companies use crowdsourcing and other forms of social networking to create a shared insurance experience. In their model, peer groups team up to absorb each other’s risks, with everyone contributing premiums to a pool to insure each other’s losses. In effect, policyholders reach out to each other to form peer groups—risk pools—for insurance purposes.

Lemonade departs from that model. It has no crowdsourcing or social networking—no policyholder generating leads. Instead, Lemonade forms peer groups based on each policyholder’s choice of a charity. The carrier apparently differentiates its peer groups by the psychographics of a policyholder’s choice of good will. Could animal lovers be a better risk than someone who contributes to the American Cancer Society? And do all animal lovers have similar risk? Lemonade thinks it’s got the answer.

This risk pool method might be due to the influence of Dan Ariely, the insurer’s chief behavioral scientist. Ariely’s research into how people feel about insurance has been crucial in creating Lemonade’s business model. His dislike for the traditional insurance industry is evident in his harsh pronouncements.

“Imagine that you wanted to create a system that would get the worst out of people,” Ariely says in a promotional video. “You would start by getting people to give you their money, and then you would promise to give them things back later when bad things happen to them. But when something bad happens, you would start fighting with them. Plus, you would show them you don’t trust them, and you would have extra-small print that says we don’t cover this and we don’t cover that.”

Ariely is the founder of The Center for Advanced Hindsight and is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University. His TED talks have been watched more than 7.8 million times. He’s also a New York Times best-selling author of books such as Predictably Irrational and The Upside of Irrationality.

Ariely’s altruistic attitude appears to influence Lemonade’s view on claims also. Once the peer groups are formed, claims are paid out of each group’s pool of capital. If claims exceed the money in the pool, Lemonade’s reinsurance absorbs the remainder. If not, what’s left over in the pool of collected premiums at the end of the policy period goes to the group’s charitable cause, minus the 20% that goes to Lemonade.

Lemonade claims this business model reduces the possibility of claims frequency and severity since group members ostensibly care about the charity they’ve chosen. Theoretically this reduces the group’s potential for aggregate losses, as more money would then flow toward the chosen charity instead of claims. Ideally, it also decreases the likelihood that someone would commit insurance fraud, since the unspent premium goes to the common cause.

The Millennial Mind

OK, so it’s a strange concept, but it’s one that is predicated on some savvy marketing. Lemonade’s target market for renters insurance is young people just starting their careers. Not only does it offer a very competitive price for renters insurance to these individuals at a time when their pockets are thin, it adds a dose of altruism with the charity concept. When are people apt to be most altruistic? Generally, when they are young.

Lemonade’s policies also are purchased online, using the company’s smartphone application. Millennials can buy the insurance the same way they order a pair of shoes from Zappos or arrange for Uber to take them to the airport. You get the picture.

Do brokers and agents need to be concerned about Lemonade, which has no use for these intermediaries? Not right now, since the carrier is competing in just one market in just one state. But down the line, there is reason to give pause for consideration. That’s because of the insurer’s plans to broadly expand into other lines of insurance and geographic markets. Assuming it gains a foothold with all those cost-conscious, tech-savvy and selfless millennials, as those individuals age—and possibly own or manage businesses in future—they may decide to sweeten their relationship with the carrier.

When you’re old and slow-moving, you tend to get a lot of arrows in your back. That’s why the industry—carriers, agents, brokers and the entire distribution network—all want Lemonade to fail.

Dax Craig, CEO, Valen Analytics

“The P2P carrier model has the ability to potentially disrupt niche insurance markets, both personal lines and commercial lines,” says Francois Ramette, a partner in the advisory insurance practice at PwC.

Other top-tier industry consultants concur. “If P2P works in personal lines, there is no reason why it would not work in other lines, including commercial,” says Tanguy Catlin, a senior partner in the insurance practice of McKinsey & Company.

Test and Learn

In September, New York’s insurance department—considered one of the country’s toughest regulators—gave Lemonade the green light to sell renters and homeowners insurance. Now that New York has opened its doors, other states are sure to follow.

While Lemonade’s current claim to fame is that it is the first P2P insurer in the United States, it won’t be the last. Other P2P entities dot the global landscape, in addition to Guevara and Friendsurance, which recently raised $15 million to expand beyond Germany into other parts of Europe.

In 2014, P2P Protect Co. opened for business in Hong Kong. In 2015, PeerCover was launched in New Zealand, Riovic in South Africa, TongJoBao in China and insPeer in France. And there are others.

At present, the different P2P startups are testing the waters. Like Lemonade, most are engaged in just one or two lines of insurance. If their tryouts are successful, the presumption is they will learn from these experiences to branch out into other lines of insurance.

What might some of these markets be? “Doctors could come together as a pool and insure themselves in a captive through Lemonade, as could truckers and other professions and industry groups,” PwC’s Ramette says.
Catlin, from McKinsey, has a similar perspective: “I don’t see why 20 pizzeria owners in Chicago couldn’t put their business risks together in a peer group to buy business owners insurance.”

Friendsurance has already extended its model into additional lines of insurance. “So far, we offer car insurance, home contents, legal expenses, private liability and electronic insurance,” says Tim Kunde, the firm’s co-founder and managing director. “In the future, we plan to add additional insurance categories.”

So will Lemonade. Asked if the sky is the limit insofar as the company plans to become a multinational multiline insurer, Daniel Schreiber, Lemonade’s co-founder and CEO, replied, “I don’t see why not.”

Not that this will occur any time soon. “Lemonade has been very careful and methodical, selecting lines of insurance that are very safe from a risk assumption standpoint,” says Fred Eslami, a senior financial analyst at A.M. Best. “The combined ratio for renters and homeowners insurance in New York State is about 78%. Even tacking on their 20% fee, that’s 98%—still quite safe. The assumption is that they will continue to be very conservative going forward.”

This cautious approach is evident in the time it took Lemonade to get its insurance license and enter New York’s marketplace. “For nearly a year, they whipped up a lot of intrigue about their business model, without informing us and others what exactly it might be,” Eslami says. “They’re extremely savvy, marketing-wise.”

Lemonade is in no rush to grow, agrees Dax Craig, CEO of Valen Analytics, a provider of predictive analytics solutions focused on insurance underwriting. “Like other P2P startups, they’re in a ‘test and learn’ environment, which is something traditional insurance companies don’t do well,” he explains. “Most traditional insurers want to ‘go big or go home.’ Lemonade, for now, wants to be small and nimble, learning from its experiences to improve its processes and technology to the [benefit] of the customer. These lessons will then be applied to the other lines of insurance it enters.”

And that’s not just traditional lines of insurance, Schreiber projects. “We’re looking to develop new forms of insurance that have yet to exist,” he says. “We’re not burdened by legacy technology and distribution costs to make this happen.”

While Schreiber is mum on what these new insurance products might be, Craig says Lemonade is “well positioned for microinsurance opportunities like insuring film sets for short periods of time or developing unique cyber-risk policies that transfer discrete risks the industry has yet to touch,” he says. “There will be some throwing of spaghetti against the wall to see what sticks.”

Uber Insurance

Lemonade is essentially a technology company that markets, underwrites and sells insurance without taking on any risk. The obvious comparison is Uber, a technology company performing the same functions as a taxicab dispatch service without actually being one. Lemonade sells insurance policies to consumers at a flat fee that represents 20% of the premium, similar to the percentage fee-based revenue model of Uber, Airbnb and other tech companies in the sharing economy. Like these Internet stalwarts, Lemonade does what it does at a lower operating cost than traditional competitors, which allows for extremely competitive prices—as low as $35 a month for homeowners insurance and $5 a month for renters insurance.

The company’s extremely competitive prices are based on several factors. One is Lemonade’s unique structure, which allows for lower operating costs than traditional insurers’ underwriting expenses (about 27.5% in 2015).

The industry’s high expense ratios are caused in part by many carriers’ legacy IT infrastructures. A July 2015 report by McKinsey & Company criticized the industry’s antiquated IT networks and systems as the “root cause for [insurers’] failing to leverage economies of scale, driving high IT costs, as well as mushrooming operational costs.”

A 2016 report by Deloitte also castigated insurers’ IT infrastructures as a factor creating “existential challenges” for the industry. The report’s title succinctly summed up the gloomy situation: “Insurers on the Brink.”

The P2P carrier model has the ability to potentially disrupt niche insurance markets, both personal lines and commercial lines.

Francois Ramette, partner, PwC

By contrast, Lemonade has brand-new, state-of-the-art technology with all the expected bells and whistles—fully mobile, digital, frictionless and embedded in an app. Instead of agents and brokers, the company uses chatbots, a computer program simulating intelligent conversation via text and other methods, to automate the marketing and business interactions between the company and prospective customers.

“There’s this widespread realization today that agents and brokers are these people you went to lunch with in the past, whose only job was to protect their books of business over the next two decades,” says Scott Walchek, CEO of Trov, an insurtech startup that received $25.5 million in new funding in August to launch on-demand insurance policies for specific devices like a laptop computer, smartphone or a musical instrument. “Why pay for something you may not really need?”

Lower Overhead

By removing brokers and agents from the picture and adapting sophisticated technology tools to its purposes instead of having to rely on an aging IT infrastructure, Lemonade is able to charge lower premiums than other insurers in New York state.

Lemonade potentially saves on costs in yet another way. There is vivid marketing cachet to its charity angle, which Lemonade takes advantage of. “Not a penny of the money left over after losses are paid goes toward underwriting profit—the case with traditional insurance companies,” says Schreiber. “Since we don’t absorb this unclaimed money, we have no reason to ever want to deny a claim or delay its payment.”

But there is a flaw of self interest in Lemonade’s charity structure since policyholders don’t receive an annual tax deduction for their philanthropic contributions, even though it is their money going to the charity. Instead,

Lemonade gets a healthy tax break because it can write off the donations. That has the potential to save the company millions in the future. From Lemonade’s perspective, maybe that’s not a flaw at all, but Schreiber sees otherwise.

He projects policyholders will be able to receive the tax break in future, if the company can persuade New York state legislators to rewrite current laws that disallow insurers from providing rebates to customers. While rebates are viewed favorably in many consumer transactions, this is not the case in the insurance industry, where they are illegal in many states. The question is whether providing the tax deduction to a consumer fits the definition of a rebate. For now, Lemonade is taking a conservative stance and not risking reproach.

A spokesman for the New York Department of Financial Services says officials discussed this option with Lemonade but are not considering any changes to the law at this time.

There are obvious reasons to give Lemonade more than cursory attention. Since the insurer foregoes the use of brokers or agents in its current incarnation, expectations are that this will remain the case in the future—if and when it expands geographically and into other lines of insurance. Asked if this will indeed be the case, Schreiber replied in the affirmative. “We fully intend to become a national multiline insurer, and someday an international multiline insurer,” he says.

For competitive reasons, he did not elaborate on what these plans were, how they would be achieved (a key question with regard to complex commercial lines products), or a time frame in which they would occur.

For now, the overwhelming consensus of several interviewees is that Lemonade will make a significant dent in New York City’s homeowners and renters insurance markets, given its competitive premiums and the large population of young people who rent in the Big Apple and love high-tech, high-touch solutions.

Whether the company’s ambitions to become a successful multiline, multistate insurer will prevail is uncertain, although Lemonade does have its admirers.

“Dan is blazing trails in an industry like insurance that is old, slow to react and unsophisticated technologically,” says Craig, of Valen Analytics. “When you’re old and slow-moving, you tend to get a lot of arrows in your back.

That’s why the industry—carriers, agents, brokers and the entire distribution network—all want Lemonade to fail.”

The competition presented by the country’s first P2P model is not being taken lightly. “Even if traditional carriers changed the agent-broker dynamic,” Walchek says, “they’d still be stuck with legacy technology, antiquated distribution structures, and heavy brands.”

Harsh Words

Lemonade is one of hundreds of startup insurance businesses in the fast-growing insurtech space, which together have attracted billions of dollars from top venture capital firms. All are aimed at an industry they consider to be ripe for disruption. The difference is that most insurtech startups target discrete aspects of insurance, like claims administration, underwriting or marketing. Lemonade is fully an insurance company, albeit a very unusual one.

“In tech parlance, they have the full stack, doing everything traditional insurers and brokers do but doing it less expensively while providing a better customer experience,” Craig says.
Ariely blames the insurance industry for becoming a Goliath amidst these many Davids. He maintains that insurers have squandered the social value of a common cause in the name of money. In other words, the industry has figured out how to fleece consumers, who give carriers money for little or nothing in return.

Undoubtedly, this caustic description will not rest easy with many insurance companies, particularly those that have built their reputations and brands on a sincere desire to pay all fair claims quickly and in full.

Doctors could come together as a pool and insure themselves in a captive through Lemonade, as could truckers and other professions and industry groups,” Ramette says.

Ariely nonetheless lumps all insurers together as some sort of international crime syndicate, without actually calling it that. “Sadly, this is where the insurance industry is right now,” he says.
Schreiber does not disagree. “There is a profound conflict of interest at the core of the insurance industry’s business model,” he says. “That’s because carriers view every dollar they pay consumers as a dollar less to the bottom line.”

In numerous articles touting Lemonade in messianic terms, Schreiber and other senior executive leaders of the company denounce the traditional insurance industry as capitalist kingpins.

No punches were pulled in his interview with Leader’s Edge. “The public no longer views insurance as a social good but as a necessary evil,” he says. “People just don’t trust insurance companies, knowing that insurers either won’t pay their claims or won’t pay them in full.”

What really gets Schreiber’s goat is that, when insurance companies have an underwriting profit, they keep this capital. Lemonade does not. “It’s not our money,” he says. “Ethically, it belongs to the policyholders.”

Lemonade, he says, is “spiritually” a mutual insurer in the original conception of this type of insurance company, in which groups of farmers, lumberjacks or firefighters pool together their resources to insure each other.

Lemonade is not registered or organized as a mutual insurer, which is owned by policyholders who have little in common except for their ties to a carrier. Schreiber is simply borrowing the communal feelings of the word “mutual.” In fact, he blasts current mutual insurance companies. “What used to be mutual insurance decades ago has lost its way,” he says. “As these small mutual insurers—formed by covering different groups—grew to be gigantic organizations, the sense of community they started out with went astray.”

Schreiber is not alone in this assessment. “If you look at Lemonade and other P2P models, they’re a throwback to the earliest days of the insurance industry, similar to mutual insurance companies insuring farmers and lumbermen,” says Pradip Patiath, senior partner in McKinsey’s insurance practice. “People knew each other and pooled their resources to insure themselves. Everyone had the interest of the group at heart in keeping claims down. But as these groups got larger and larger, they became today’s insurance companies, bad reputations and all.”

Of course, not everyone in the industry concurs with this assessment, among them Chuck Chamness, president and CEO of the National Association of Mutual Insurance Companies.

“Mutual insurance companies operate in a complex, competitive and heavily regulated market to provide their member policyholders with a legal contract backed by large pools of capital available to pay future claims,” Chamness says. “Lemonade is attempting to leverage mutuals’ proven advantage of policyholder alignment, but only time will tell if it has the ability to win in the long term—and it’s a long-term business.”

Lemonade is not a captive either, although some smaller captives may appear to be similar to a peer-to-peer business model since all of the policyholders are part of a community of sorts.

While Lemonade officials say their business model can easily be converted from personal to commercial lines and still disintermediate brokers, just how scalable is it to make a meaningful move into the commercial arena?

And would that disintermediated model even be competitive with what already exists?

Already, some brokers have innovated looking for other ways to serve niche markets, similar to the peer-to-peer risk pool option. Dan Keough, CEO of Holmes Murphy & Associates, created Innovative Captive Strategies back in 1999. It offers several types of commercial insurance through various captive insurers. While the bottom line has some similarities to Lemonade—they pool the risks of like clients and can dramatically cut premium costs over time—their similarities may end there, which is a good thing if you’re a commercial broker:

  •  ICS policyholders take risk and ownership of their individual captives. This allows for larger commercial risks. The Lemonade policyholders take no risk.
  • ICS captives have proven their effectiveness in taking on large scale complicated commercial risks. They’ve got 18 years of history behind them. Lemonade, so far, is in its infant stages of risk taking and there are only large scale questions in its portfolio about what kinds and sizes of commercial risk it could take on.
  • ICS captives work with brokers around the nation to service clients and still show large savings in premiums for their clients. Lemonade must disintermediate brokers as part of its cost cutting.

While these different types of risk transfer don’t line up exactly, they do share many common attributes. As the industry slowly settles on a common definition of peer to peer, it could become apparent that this “new” approach to insurance could substantively have existed all along.

You could even question Lemonade’s insurance carrier bona fides. Although New York officials assure it is a properly licensed insurance carrier, Lemonade assumes no underwriting risk like a normal insurer. Instead, after taking its 20% cut, the entire risk is assumed by its policyholder risk pools and reinsurers (the type of behemoth carriers for which it holds so much disdain). In effect, Lemonade is little more than a management company relying on reinsurers to make it profitable.

Disruption or Interruption

Few would disagree the insurance industry has a poor reputation among much of the public. But does Lemonade change the paradigm in such a way that its more communal, technologically sophisticated, altruistic and cheaper version of insurance will bury traditional insurers in its dust? That’s doubtful. Even with bargain-basement prices, Lemonade isn’t likely to take the lion’s share of New York’s renters and homeowners insurance markets.

“With a combined ratio of 98—give or take—they’re at 2% breakeven, and that’s in a good year,” Best’s Eslami says.

The analyst recently visited Lemonade’s website to get a feel for what he would be charged to buy renters insurance. “They ask a bunch of good questions,” he says. “The end result was that their premium was definitely lower for me but not by much. They’re competitive but not to my mind at the point of stealing the market.”

Ramette from PwC has a similar perspective: “They might gain some traction, but it is way too early to talk about them in terms of market disruption.”

Lemonade’s first two days in business appear to affirm these views. In the interest of “transparency” and “honesty,” the company released a blog by Lemonade’s chief Lemonade maker, Shai Wininger. Wininger disclosed several metrics, including the insurer’s first 48 hours of sales, which added up to $14,302 in gross written premiums. Assuming this $7,000-plus rate of business per day continues over the course of a fiscal year, the company would take in the less-than-staggering sum of $3 million.

In tech parlance, they have the full stack, doing everything traditional insurers and brokers do but doing it less expensively while providing a better customer experience.

Dax Craig, CEO, Valen Analytics

Wininger needs to make more lemonade.

With regard to the disintermediation of brokers and agents if Lemonade enters additional lines of insurance, some in the industry think the impact will be minor.

“My short answer is that brokers will not be disintermediated any time soon,” says Ramette. “The potential success of renters insurance in New York may not be repeatable in other states or in other classes of risk. New York City, for instance, is a very concentrated market with similar demographics.”

On the other hand, Craig projects that Lemonade and follow-on P2P startups will disintermediate agents and brokers over the next 10 years in high-transactional volume markets like personal lines, “much like Progressive and Geico have done without brokers in personal auto insurance,” he explains. “But agents and brokers will continue to win when it comes to more complex transactions that require professional, trusted advice. Were I an intermediary, that is where I would focus my energies in the future.”

Asked to elaborate, Craig says instead of competing in automobile, renters/homeowners insurance and small business owner policies, “agents should focus on things like workers comp and specialty markets like mining or trucking.” Midsize and larger brokers, he says, with sophisticated risk management expertise in areas such as directors and officers liability insurance and employment practices liability insurance, have little to fear, although they should not be complacent.

“Lemonade and other startup P2P companies may chip away at some specialties as they grow,” Craig explains.

Brokers and carriers might also consider the old maxim “If you can’t beat ’em, join ’em” and form their own P2P models or buy existing entities. “I don’t see why traditional brokers in the states can’t form similar P2P models as an alternative option for buyers,” Ramette says.

Eslami has the same view about traditional insurance companies. “The big insurance companies definitely have the resources to buy these tech startups and use them for their own benefit,” he says.
McKinsey’s Catlin agrees. “I can see major insurers start up their own P2P ventures or simply buy one of the companies that are out there, taking equity stakes in a Lemonade or the ones that follow,” he says. “Look at all the insurance companies that have recently launched venture capital funds to do just that—to buy technologically proficient startups.” Among these insurers are Axa, XL Catlin, MassMutual and Aviva.

Taking Stock

All in all, consumers have different expectations now about how they want to buy products and be served by sellers. They purchase shirts, shoes and gadgets on Amazon with a single click. They’re eager to lease unseen homes for weekends on Airbnb. And they routinely arrange for cars driven by nice people at Uber and Lyft to pick them up at airports and street corners.

In all these transactions, there is no exchange of cash or handing over a credit card. Such effortless and pleasant interactions have become table stakes.

Much of the traditional insurance industry is not yet in the game, but it’s getting there.

“The big insurance companies are coming closer to these startups in terms of efficiencies, developing smartphone apps to take pictures of insured losses and to make the filing of a claim and its payment easier and quicker,” Eslami says.

There’s this widespread realization today that agents and brokers are these people you went to lunch with in the past, whose only job was to protect their books of business over the next two decades.

Scott Walchek, CEO, Trov

There’s no question the image and operating structure of the insurance industry needs to change. Its reputation is as tarnished as Grandma’s silverware in the attic, and its IT infrastructure is creaking like Grandpa’s knees. But are traditional insurers and brokers bound to end up in the same heap as taxicab companies, record stores, video rental businesses and travel agencies?

Not by a long shot. There’s just more competition, something the industry has dealt with since the days of Lloyd and his London coffee shop. In the near term, insurers and brokers can even bide their time, thanks to Lemonade’s conservative “test and learn” approach.

There’s even the risk that, once Lemonade and other P2P startups grow, their social, communal aspects will fade. “While digital and social media have enabled Lemonade and others to re-create these types of peer groups, as they grow they, too, face a very similar future,” warns McKinsey’s Patiath.

If this happens, the sleek, fashionable insurer may become just as dowdy as the companies it decries.

Put that in your lemonade and stir it.

For insurers in the highly risk-sensitive energy space, themselves grappling with a prolonged soft market, the challenge is how to offer competitive pricing but still retain underwriting discipline and profitability.

“Our challenge right now is the price of oil and gas in the energy market,” says Carmella Capitano, vice president of Energy Casualty at Starr Companies. “We want to make sure we are writing the bread and butter accounts, the right accounts, but it is challenging when there are so many bankruptcies and losses. You need to look at overall profitability of the accounts—the bottom line, not just the top line—so that when prices get back to a more normal level we’re still there even though some of our competitors may not be.”

The oil and gas industry has a history of booms and busts, but the current price collapse, which began in late 2014, is the deepest downturn since the 1990s. Earnings are down for companies that were logging record profits. They have shut down a huge number of rigs, significantly rolled back investment in exploration, production and infrastructure, and laid off an estimated 250,000 workers. Prices that once topped $100 a barrel are hovering between $40 and $50 per barrel. At one point earlier this year, prices fell below $30 a barrel.

“We are witnessing a continued downturn in terms of overall activities, both offshore and onshore,” says John Stilwell, executive vice president of Lockton Companies. “Upstream (where the oil is found, drilled and produced), midstream (where oil is transported) and downstream (for refining and petrochemical operations) all are feeling the impact of a sustained collapse in commodity prices. It is definitely a fight for survival for many of these companies.”

How long the prices will remain between $40 and $50 per barrel, or marginally higher, is anyone’s guess, but industry experts do not anticipate a rebound until at least next year. And even then, the consensus is that it will be some time, if ever, before prices return to $90 or $100 per barrel.

“I think we will see the trend continue, at least for a while, absent any dramatic change in the commodity environment,” Stilwell says.

Falling Prices, Falling Premiums

The falling oil prices have severely affected energy sector insurance premiums. Stilwell says industry estimates of premium, at roughly $4 billion prior to the 2014 downturn, now stand between $1.6 billion and $1.9 billion. This is due to rate softening and a significant decrease in exposures and activity.

On its face, that sounds devastating. But insurers continue to make profits on their energy accounts, and while some carriers have stopped writing certain types of business, none have pulled out of the energy sector altogether.

“In some cycles we have seen…oil prices were going down, but we often saw insurance prices going up. But in this cycle, oil prices are going down, and insurance prices are also going down and going down pretty rapidly,” says Bruce Jefferis, CEO of Aon’s Energy Practice. “There is an abundance of capital in the insurance market in general and also for energy companies, so when there is a lot of capital, insurers tend to compete on price. It is a good buying opportunity for energy companies when they really need it, but insurers obviously struggle with that too.

“When prices first started dropping, a lot of insurers resisted premium drops, but at some point, you can’t deny it any more. You either continue to move with the market and retain your market share or you let it go. Every insurance company has to make that decision. So far, few, if any, are out of the market. They might have an underwriter not want to do a particular deal, but they haven’t stopped or suspended underwriting in the class. It will take some of those companies eventually pulling out of the business to reduce the capital flow and change that pattern.”

“Insurers are continuing to make money and are profitable,” Stilwell agrees, “but when you look at the downturn in premium and sustained operating costs, I think it will become more and more difficult to continue profitability in this rate-softened environment. What has helped insurers so far is that there haven’t been wide-scale losses, such as natural disasters like hurricanes or other systemic losses in the industry.”

Stilwell says he has not seen any of the brand-name carriers indicating any difficulties in continuing to write energy accounts and most are open to renewing their coverage on most risks.

“I have yet to see somebody drop an individual risk for fear the company is unable to continue financially,” he says. “What I have seen some do is look at the pricing of that risk, determine if it fits their risk appetite, and if it doesn’t, they may look to either price it accordingly or elect to not continue on that risk.”

Picking the Right Risk and the Right Partners

Starr is one of only a few carriers with a dedicated energy team that includes veteran underwriters, loss control engineers, actuaries, credit and financial experts, claims specialists and account service managers. Capitano says to weather the storm, the company is focused on value rather than price and is ensuring its accounts are properly underwritten and have adequate loss control measures in place.

“You want to make sure the pipelines are newer and maintained properly, the sites are maintained properly and that you are sure, from a loss-control standpoint, that all the i’s are dotted and the t’s are crossed,” she says. “You can’t prevent some of these claims occurring, but you can prevent a significant number of them with the right safety steps, making sure the products are up to specs, and so on.”

“We are writing the most premier type of business,” Capitano says. “Overall, Starr Energy has very few bankruptcies among our customers, and that says a lot considering oil and gas prices have been depressed for more than a year. A lot of that is due to good underwriting and working really closely with our credit team.”

“Some people are quoting at much lower premiums,” says Gregory Cropp, assistant vice president and national practice leader for Starr’s Excess Energy Division. “We would rather maintain our underwriting integrity and write profitable accounts with a long-term relationship than compete on price and run the risk of bad accounts.”

“The first and most important thing we do is risk selection,” says Les Lappe, assistant vice president and national practice leader for Starr’s Primary Energy Division. “The top accounts for us are the best accounts within the class.”

“Starr is individually underwriting specific risks, allowing for differentiation for operational scope, current loss history, financial strength and the overall strength of the management team,” Stilwell says.

One of the critical elements of risk selection, Cropp and Lappe say, is picking the right broker partner and the right clients who appreciate a long-term relationship and value continuity and who are not interested in price shopping every year.

“We have very good broker partners who know who we are, what our capabilities are, and those are the folks we want to write more business with,” Lappe says “There are some folks out there who want to control their own business and shop their accounts. Those are not the ones we want to partner with. We want to partner for the long term with brokers who allow us to shine and show our underwriting prowess.”

“Ultimately, during this period of downturn, those traits in a broker are essential to us. And we want those traits in a client as well,” Cropp says. 

Aon’s Jefferis says brokers must be “very agile” in dealing with their clients in these trying times, making sure they are aware of market conditions and helping them change the way their insurance is structured or what to buy and not buy.

“Our clients are in dire need of efficiencies in every area, and naturally, insurance is one of them,” he says. “Insurance in the energy business is a relatively big line item on the expense side. Some industries don’t have to pay a lot for insurance, but the energy business is high risk and has big values, so there is a lot of focus on insurance costs, especially with contractors. We have to be aware of that and thoughtful and proactive with our clients and focus on what we can do to help.”

“We do not want our profitability to suffer,” Cropp says. “We are willing to let an account go if it means losing gross written premium as long as our profitability is maintained. When the market hardens, as it will do, we would expect and our clients would expect we would partner with them during that time too. It is a situation where we will see them through the hard times, and we would like them to see us through the hard times as well.”