Developments in Puerto Rico

While much uncertainty remains, here’s an initial look at where losses might come from in Puerto Rico.

As we planned this month’s features on Hurricanes Harvey and Irma, we began to see the devastation caused by other, ongoing natural catastrophes, including Hurricane Maria. And while we didn’t want to leave the devastating effects of this storm out of our hurricane coverage, digging into the details of Hurricane Maria’s effects is going to take time. 

A Common Language

Q&A with Rod Cruickshank, President & CEO of The Partners Group

Reference-based pricing in health insurance creates incentives for patients to select providers who charge relatively low prices and still offer high quality of care. Insurers offer a maximum price for specific procedures and a network of providers who agree to it. 

It’s High Time We Deal with Pot

But conflicting federal and state law create unclear implications.

A total of 29 states, the District of Columbia, Guam and Puerto Rico have legalized marijuana for medical use. Eight of those states and D.C. have fully legalized marijuana for recreational use.


The U.S. marijuana market generated $6.7 billion in revenue in 2016, an increase of 34% over 2015, according to Business Insider.

According to Forbes, the marijuana industry will create more than 250,000 new jobs by 2020, more than the projections for manufacturing, utilities or government.

Engaging in any aspect of the marijuana business can trigger a whole host of federal violations.

The Road to Recovery

Answering the call.

Almost as soon as I submitted my last column on our industry’s response to Hurricanes Harvey and Irma, unforeseen disaster struck again, and again and again. 

Raising Arizona

Scottsdale, Arizona is an up-and-coming wine destination.

Prague, Czech Republic

Marek Kalbáč, Global Services Director at Renomia, shares the city’s history and new generation.

The Odd Couple

Harvey and Irma packed different types of punches, affecting different lines of insurance.

Arriving in such close proximity to each other, Harvey and Irma will likely be paired in the annals of hurricane history, much like the successive storms that hit the Gulf in 2005. But that doesn’t mean the damage they caused is the same. 

Industry Foundation Spearheading Relief Effort

The Last Mile Begins Many Steps Ahead

In the wake of a catastrophe, it takes painstaking planning to be there for clients.

The morning following Hurricane Irma, Kathy Richichi surveyed the damage to the Marina Bay Club in Naples, Florida, where she is the community association manager. There was a floor-to-ceiling glass wall that had been sucked out and smashed all over the pool deck. The roof of the gazebo had blown off, and more than 500 roof tiles were damaged or ripped from the condo roof. 


For many industry professionals, the post-hurricane response starts long before the storm hits.

Hub International provided daily storm-tracking reports on Hurricane Irma and recovery resources, among other services.

The questions left behind by every storm can become complicated because policies differ.


Read the Sidebars

Industry Foundation Spearheading Relief Effort

Spotting a Vehicle That Has Been Flooded

10 Things to Look For

Today’s modern vehicles have electronics throughout; in the doors, under the seats, behind the dashboard, in the engine and even in the trunk. With so much electronics susceptible to flood-related failure, most cars that took on water cannot be repaired.

Water Wheels

Harvey may have destroyed a million vehicles. Now what?

Besides inflicting immense losses on Houston-area homes and businesses, Hurricane Harvey may wind up destroying more automobiles than any storm in history. 


Initial estimates say Harvey destroyed between 500,000 and one million vehicles in the Houston area.

Several area automobile dealers took a direct hit.

Car sales are up, but many dealers are offering discounts for storm-totaled car replacement.


Read the Sidebars

Spotting a Vehicle That Has Been Flooded

Angels in My Lifetime

Putting aside their own challenges, insurance professionals answer the call in Houston.

Hurricane Harvey made landfall near the Texas towns of Port Aransas and Port O’Connor as a Category 4 hurricane on a Friday night and then slowly—dangerously too slowly—made its way up the coast to Houston and surrounding cities.


Harvey dropped a total 51.88 inches of rain near Mont Belvieu, just east of Houston, making it the biggest rain-producing storm in U.S. history.

Some 185,149 homes were damaged or destroyed, and an estimated eight million cubic yards of trash from flooded homes was generated by the storm in Houston alone.

Putting their own concerns aside, insurance professionals came in force, offering aid, answers and even their own homes.

Tim Prichard

President, Wells Fargo Insurance, San Francisco

Move quickly and adjust your approach based on how others react.

Tech Tackles Hurricane Claims

Drones, phones and more in cat claims.

The last time a major hurricane hit the U.S., phones weren’t “smart” and drones hadn’t taken off in civilian airspace. A lot has changed since Katrina, Rita and Wilma slammed the South in 2005. 

One Truth

Q&A with Jayant Khadilkar, Global Head of Analytics and Technology, TigerRisk Partners

Right Under Our Nose

We don’t always see the potential leaders in our own organization.

DON’T YOU HATE WHEN THIS HAPPENS?! … You search and search but can’t find the mustard in the refrigerator. Then your spouse grabs it off the shelf right in front of you and says, “If it had teeth, it would have bitten you!” 

Too Costly to Ignore

The Council has a new focus on the cost of health services.

In June, I became chair of the Council of Employee Benefits Executives; it has already proven to be a dynamic time to lead this group. 

Model Citizens

Nonprofit and for-profit cat modelers tackle global underinsurance.

You can’t manage what you can’t measure. Catastrophe exposure is no exception. Insurers’ ability to price cat risk depends on knowing who and what is exposed—people, property, businesses and infrastructure—and to what perils.

The Equifax Hack

An empire built on your personal information reveals flaws in its foundation that will be felt for decades.

Every now and then, there is a data breach that is such a watershed moment it changes peoples’ perspectives on cyber events. The first was ChoicePoint in 2005. One of the country’s first and largest data aggregation companies sold personal data on 163,000 people to an alleged crime ring engaging in identity theft.

What’s Your Value: Good or Great?

Even in this robust M&A market, the highest value appears to still be reserved for peak performers.

Is your agency good, or is it great? Are you focused on organic growth, driving new sales and adopting systems to keep your organization razor sharp? Or do you subscribe to the old “don’t fix what isn’t broken” mentality—riding on past successes and the stability of renewals? 

Walk the Talk

Q&A with Zenefits Vice President of Carrier Relations Colin Rogers

Zenefits and OneDigital recently announced that they are forging a new, unprecedented partnership that will give clients access to leading technology and advisory services. We chatted with Zenefits’ vice president of carrier relations Colin Rogers about what made Zenefits change its tune on brokers, how the company will continue to evolve and what makes OneDigital special.

Developments in Puerto Rico

While much uncertainty remains, here’s an initial look at where losses might come from in Puerto Rico.

As we planned this month’s features on Hurricanes Harvey and Irma, we began to see the devastation caused by other, ongoing natural catastrophes, including Hurricane Maria.

Hamburg, Germany

It’s a mix of cosmopolitan and neighborly charm, says Yorck Hillegaart, Executive Board Member/Partner, Funk Gruppe GmbH.

Vegas Will Shine On

Despite the horrible attack that just occurred, Las Vegas remains strong and vibrant.

Let’s Chat!

Insurers are increasing use of digital voice assistants and chatbots.

On Demand

Q&A with Scott Walchek, Chief Executive & Founder, Trov

Jason Smith

President TrueNorth Companies, Cedar Rapids, Iowa

The only thing I'd rather be doing-and I say this with a smile on my face-is be a racecar driver.

The IDF Alpha Team

Book Review

Risk & Reward: an inside view of the property/casualty insurance business
By Stephen Catlin with James Burke

IDF Calling

Stabilizing the World

Placing insurance where it has never been before.

An insurance man at a NATO meeting may sound as incongruous as a dogcatcher in an apiary. Still, Stephen Catlin, London luminary and founder of the eponymous Lloyd’s underwriting business (bought by XL Group for $4.1 billion in 2015), was called to address the West’s most powerful military alliance earlier this year. 


Industry icon Stephen Catlin, founder of Lloyd’s underwriting business, leads the Insurance Development Forum.

The IDF is a unique partnership between the global insurance industry, the United Nations and the World Bank.

The forum aims to cover 400 million uninsured people in the developing world against the effects of climate-related disasters.


Read the Sidebars

IDF Calling

Book Review

The IDF Alpha Team

Brokerages Shift Cautiously into Cognitive Computing

They are limited only by their imagination to help their business.

Meet Algorithm, Your New Partner

Brokers are investing in automation. Is cognitive computing next?

Imagine a future where fancy computers handle your tedious administrative tasks while you do better things, such as delving deeply into your clients’ risk exposures on a daily basis.


Software known as RPA, or robotic process automation, can perform simple repetitive tasks such as data entry.

Such technology can free brokers to provide value-added services.

Many large insurers are investing heavily in cognitive computing, building or purchasing state-of-the-art solutions.


Read the Sidebars

Brokerages Shift Cautiously into Cognitive Computing

What If?

The internet goes dark

The internet has gone down. How long can your business withstand the interruption? One day? Two days? One week? What if the outage were widespread? How long would it take for the financial impact to be ruinous?


No insurance policy absorbs the risk of the world wide web grinding to a sudden halt.

Last year, hackers launched an attack that shut down thousands of websites.

In 2016, 81 internet outages in 19 countries cost a combined $2.8 billion in interruption losses.

What’s Behind Your Client’s Decisions?

Behavioral science provides opportunities to understand and work past natural biases.

Imagine you work for a healthcare management company. You’ve been encouraged to complete a health risk assessment (HRA), and the traditional incentive is $25. (Meh.) Today, however, you’ve been promised an additional $25 grocery gift certificate. A co-worker, on the other hand, has been offered the chance to participate in an office lottery to win up to $125 more as part of a four- to eight-member team. Each week, one such team will be selected from the lottery as a winner; everyone on that team who completed an HRA will get $100—plus $25 more if at least 80% of the team completed assessments.


Behavioral economics considers how a variety of factors influence the way people make decisions.

Such studies could have critical implications for the insurance industry.

Understanding loss aversion, for example, means knowing premium increases upset customers more than reductions please them.

Harvey Insured Losses Are No Record

Flood Insurance

A Convoluted History

A Broken System of Special Interests

Entitlement means flood insurance will be difficult to change.

Under Water

Government thwarts private participation in flood insurance.

First Hurricane Harvey dumped unprecedented amounts of rain on Texas, causing massive flooding along the coast and in the Houston metro area. Then Hurricane Irma cut an unprecedented swath of destruction from one end of Florida to the next, causing flooding across and beyond state boundaries.


Federal flood insurance suffers from actuarial/rate dislocation.

Private insurers are not into repetitive-flooding risks.

Will Harvey and Irma force Congress to reform NFIP or mire us further in flood insurance dystopia?


Read the Sidebars

A Broken System of Special Interests

Flood Insurance

Harvey Insured Losses Are No Record

Security Matters

To keep your best brokers, give them peace of mind now and in the future.

High-performing brokers have seen their compensation packages gutted and their books of business chopped up or redistributed as the result of mergers and acquisitions. They’ve become increasingly vulnerable to losing control over their own financial and life trajectory. 

By the Numbers

Your clients can lower their risk by analyzing their own data.

As analytical tools and technology become more popular and easier to use, we’re beginning to see organizations model everything—from sales forecasts to which Netflix show you’re most likely to watch. Analytics is not new to the insurance industry. 

Motivationally Speaking

Examine others’ incentives when deciding your future.

The popular HBO series “Game of Thrones” recently ended its seventh season with a riveting finale. SPOILER ALERT: The plot took its usual twists and turns, and near the end we lost the character known as “Little Finger,” who had been a long-standing part of the series. 

Telematics Taken for a Ride

Data will be driving commercial auto claims.

Usage-based insurance (UBI) receives a great deal of attention, and with good reason. Within three years, roughly 70% of all auto insurers are expected to use telematics usage-based insurance—also known as pay as you drive (PAYD)—according to SMA Research. 

The Texan Way

Have a plan and execute it.

The very essence of insurance is designed to make you whole after a loss. I’ve talked before about claims management and shared my own personal experience after my house burned down earlier this year because how you are treated in the aftermath of a loss event is an important story to tell. 

Spreading Cyber Around

Cyber coverage is popping up in multiple places. Look widely to recover claims.

Cyber attacks are becoming increasingly complex, lengthening recovery times and taking a greater toll on business operations. Numerous attacks have zeroed out servers; corrupted, encrypted or exfiltrated data; or caused sustained denial of service to systems. Many of these consequences may occur in a single attack, and coverage under a cyber policy may not be the only avenue to recover losses.

Undoing Obama

Change made through regulation doesn’t seem to stick.

One of the priorities of the Obama administration was modifying the contours of the employer-employee relationship by expanding the scope of legally mandated employer obligations. The Affordable Care Act employer mandate was one example of this, of course.

The Human Connection

A successful negotiation engages your emotional intelligence.

A house, your salary, a car, insurance rates…

If we were playing the old game show “$100,000 Pyramid,” you would say “Things You Negotiate,” and you would be right.

Tale of a One (Trick) Unicorn

A close look at China’s Zhong An reveals the pitfalls and potential of insurtech startups.

China’s aspirations to move up the global value chain have shifted the country’s focus to greater consumer spending and a service-oriented economy, built on indigenous technology and innovation.

Stake in the Ground

Q&A with OneDigital Chief Growth Officer Mike Sullivan

OneDigital and Zenefits announced last week that they are forging a new, unprecedented partnership that will give clients access to leading technology and advisory services. 

Defining Leadership

It took nine drafts of this column before I finally surrendered to the printer.

I look forward to our leadership issue every year. It’s generally a time when I can give you my perspective about leadership in general or reflect on something positive that happened over the summer, like the impressive work of our 14 college interns who recently completed their time with us (and who may be knocking on your door in the near future).

Blind Ambition

Recognize your own weaknesses and cope with what you don’t do best.

As a CEO, passion for the business can be a beautiful thing. But when that passion extends to being engaged in every last detail, things can get ugly.

The Becker File


David Becker is the brains behind Cottingham & Butler’s 14 years of spectacular organic growth.

In a masterpiece of marketing, Dubuque, Iowa, now calls itself the “Masterpiece on the Mississippi.” Indeed, in recent years the city of 58,000 has been lauded for its lively, art-infused riverfront development, growing technology and financial services industries, and relaxed way of life.


As CEO at Cottingham & Butler, Becker has become a fixture in Dubuque, Iowa, the hometown he left behind for 20 years.

After nine years as a consultant with McKinsey & Co., Becker came to Cottingham & Butler with no experience in insurance.

Since Becker started in January 2004, the company’s annual revenues have more than quadrupled, to $146 million.


Read the Sidebars

The Becker File


Do activist investors force you to trim, squeeze and shed too much? Or do they make you a better company?

When hedge fund manager and activist investor William Ackman sent a letter to the board of directors of pharmaceutical giant Allergan three years ago, he didn’t leave anyone guessing about his intentions. “Your actions,” Ackman wrote, “have wasted corporate resources, delayed enormous potential value creation for shareholders and are professionally and personally embarrassing for you.”


Economist Milton Friedman, the father of activist investing, criticized calls for corporations to act for the public good.

In 2016, activist campaigns were directed at more than 750 companies.

The insurance industry has largely been protected from activists, thanks in part to tight regulatory oversight.

Broker Update

Data breaches, cyber captives and the silent risk.

St. Louis, Missouri

Robert Harrison, Chairman of the Board/President, The Daniel and Henry Co., shares his big little city.

Broker-Friendly Benefits

Q&A with Kevin Dunn, CEO, Decisely

100 Years!

The Broadmoor will be celebrating its 100th birthday in 2018.

Robert Kestenbaum

CEO, York International, Harrison, New York

My main goal was to control my destiny.

A True One-Stop Shop Nation-Wide

Nationwide is a true broker partner.

When it comes time for brokerages and independent agencies to partner with carriers to insure a client, more and more are choosing Nationwide because of its highly diversified portfolio and its expertise in helping to find the right mix of solutions to protect a client’s assets.


Nationwide offers a full breadth of products and services in its highly diversified portfolio.

Its 90-year history demonstrates that Nationwide will be here in the long term.

Reliability and deep industry expertise are two hallmarks of the organization.

Collaboration Transformation

It’s time to embrace the millennial advantage.

A tidal wave is headed our way in the insurance industry—one that will change our business forever and test our resolve as leaders and as companies. As the leader of one such affected company, I welcome this transformation. 

Blockchains, Cryptocurrencies and Smart Contracts—Oh My!

You don’t have to get bogged down in the technologies to understand what they can do for you.

In today’s fast paced, tech-driven world, consumers and organizations constantly keep a finger on the pulse of new technological advancements. For consumers, it may be due to FOMO (fear of missing out), but for organizations around the world and across industries, it’s the fear of being blown out of the water by their competitors. 

Talk Isn’t Cheap

Consistent, strategic communication delivered with purpose can make a good deal great.

The merger and acquisition process is ultimately driven by communication. Who communicates what—and when and how they do that—at every stage of the buy-sell journey could ultimately determine the success of a deal. 

Cyber Oversight

Cyber security now belongs to boards and executives. Read the owners manual.

Cyber attacks finally grabbed the attention of executives and board directors in 2014 when Institutional Shareholder Services recommended seven of the 10 board members at Target not be reelected because they failed to ensure the company’s digital assets were protected against a data breach.

Fair Presentation at Risk

Follow the rules or pay the price.

The U.K.’s Insurance Act of 2015 imposes a new legal framework that affects every business insurance policy placed in the London market (and every London policy renewed or amended) going forward. The act is good news/bad news for policyholders. 

Die Now, Live Later

It’s all in your mind.

Your mother told you to mind your manners. London commuters mind the gap, and sailors mind the rocks. You know you can mind your own business, but did you know you can mind your mind? Your mother told you to mind your manners. London commuters mind the gap, and sailors mind the rocks. You know you can mind your own business, but did you know you can mind your mind? 

Just a Bunch of Nerds with Jets

Don’t get left behind.

There’s been some chatter lately about an interesting insight published in a McKinsey 2015 report. It revealed that in 1990 the top three U.S. automakers had among them $250 billion in revenue and 1.2 million employees.

Kim Buckey on Healthcare Cost Transparency and Consumer Engagement

Where we are and where we still need to go

We want people to shop around for their healthcare, but we don’t necessarily arm them with all the tools to do so.

What’s New at The Broadmoor?

From pickleball to Christmas among the clouds, check out these new offerings from The Broadmoor.

Safety Push

Q&A with Peter Schermerhorn, COO, Triax Technologies

Melbourne, Australia

Take a look down under with Damien Honan, CEO of Honan Insurance Group.

Atlanta Rising Up

With a new stadium, new ballpark and several major sporting events on tap, Atlanta is taking off.

What is the dark net?

Guess Who’s Watching

A new cyber-security center aims to be the clearinghouse for cyber information, training and response.

In the war against cyber attacks, a major complication is the constant evolution in the scheming originality of the attackers. Last year more than 18 million new malware samples were conceived—an average of 200,000 viruses, spyware, worms and other insidious codes each day.


One study found the average annual cost of cyber attacks worldwide was more than $9.5 million per company.

Cyber thieves want different things, from inside information on a new product to personally identifiable information for credit card fraud.

The National Cybersecurity Center grew from the vision of Colorado Governor John Hickenlooper.


Read the Sidebars

What is the dark net?

Recent Government Action

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

The Evolution of War

Not even war appears capable of killing the cyber insurance market.

A foreign country launches a physical attack by air, sea and land against a large American city, resulting in extraordinary property destruction and the loss of untold lives. Is this war? You bet.


Across the globe, there is no statutorily agreed upon definition of cyber war.

If a cyber attack were considered war, insurers would be on pretty firm legal ground to exclude insured losses resulting from the event.

The world’s inability to come to consensus puts brokers in a very uncomfortable position.


Read the Sidebars

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

Recent Government Action

10 Ways to Stay Ahead of Change

Numbers Cruncher

How a Chatbot Works

The Client Experience Renaissance

Your clients don’t need to be delighted. But they do need utility and simplicity.

Our $5 trillion global insurance industry is in the midst of one of its biggest upheavals in history, and it will affect how brokers interact with and retain their clients. In an industry whose basics have remained largely unchanged for more than a century, longtime players are now scrambling to reshape the entire value chain, from product development to distribution to service delivery strategies. 


With client expectations rising, there’s more pressure to deliver real-time customer service.

A litany of routine tasks can be resolved more efficiently through automation, from processing a claim to sending a cancellation notice.

Customers expect what they want the way they want it when they want it, and technology can help provide it.


Read the Sidebars

How a Chatbot Works

Numbers Cruncher

10 Ways to Stay Ahead of Change

AIG’s Blockchain Pilot a Success

Blockchain Begins to Enter the Market

Broker access is emerging. Business models may be affected.

When AIG announced in June it had completed its first multinational insurance “smart contract” using blockchain technology, Risk Cooperative, a commercial insurance brokerage and consulting firm, was announcing to the industry it was partnering with blockchain tech firm Bitfury to make the same technology available to commercial insurance brokers.


Read the Sidebars

AIG’s Blockchain Pilot a Success

Predicting What Your Employees Will Do

Imagine if brokers could sell that to clients.

It’s a broker’s fantasy world. What if there were enough data at their fingertips to more accurately estimate how many of a client’s healthy employees will suffer a chronic disease in the coming year? Or which benefits options are most effective at retaining employees? Or what potential employee issue is hiding under the radar?


As a long-standing payroll and benefits administrator, ADP has aggregated and formatted data from more than 30 million employees.

The company is using the data in areas such as human capital management and predictive analytics.

ADP is investigating other potential models to help clients understand possible future outcomes.

Don’t Let the Robots Take Your Job

Technology will redefine your client relationships.

Everywhere you turn, someone is talking about the death of the insurance agent. In its “2017 Top Issues” report, PwC says insurance is the industry most affected by disruptive change. This comes from CEOs who are extremely concerned about the speed of technological change, shifting customer behavior and competition from new market entrants.

Heather Steinmiller

SVP and General Counsel, Conner Strong & Buckelew, Philadelphia

When I told Hillary Clinton she was my inspiration for doing the work I do…she said that’s what makes her continue her journey.

Untapped Talent

Your Hiring Biases Hurt Your Business

Given the pace of change in insurance, it’s imperative management not overlook the opportunity to improve growth and profitability by harnessing top talent. Businesses that successfully identify and promote talent without biases, such as gender, have proven to be those best able to compete. 

Office Exposé

Every organization has valuable data to lose.

It’s a nightly occurrence in office buildings worldwide. As the business day winds down and your employees head out the door, computers are left on, laptops are left out and passwords are scribbled on sticky notes in plain sight.

How to Maximize Your Greatest Asset

Run your business as if it were for sale.

Think about your organization from the lens of a buyer. Put yourself in the acquisition seat for a moment. Now, what does your business look like? 

Starving Your IT Budget

Your failure to upgrade means your luck may be over.

The recent WannaCry ransomware outbreak was the major global cyber attack that security experts have been warning of for years. It wreaked havoc by encrypting data on an estimated 230,000 computers in 150 countries and demanding a $300 ransom paid in bitcoins to get the computer decrypted (which reportedly did not work in some cases). 

The Ripple Effect

Amazon’s acquisition of Whole Foods has changed the game.

The announcement of Amazon’s acquisition of Whole Foods has caused a ripple effect through the retail grocery industry. While most analyses focus on the market strength and reach of both brands, a look under the hood reveals some trends and direction that will continue to affect the way business—all business—will be done as we continue to hurtle into the future. 

Fiduciary Rule Roulette

With the June deadline past and the January one approaching, has anything changed? Well, yes. And no.

Right now, Washington has become a town built on exciting sagas: investigations into Russian relationships, the ongoing Obamacare repeal-and-replace debacle and the tax reform debate. They are all great examples of potentially titanic developments that could result in fundamental changes to the way we do business. 

What’s Up with Watson?

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

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

Boom Boom! Pyrotechnics Insurance Is Growing!

An industry tidbit in honor of July Fourth.

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

States Debate Single-Payer

Harbinger or Passing Storm?

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

Connected Cars Drive Premiums

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

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

Thinking of Retirement?

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

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


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

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

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

To Canada with Love

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

Hartford, Connecticut

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

Phil Rigueur, VP, Joint Venture Markets, Aetna

Healthcare Price Transparency

Recently, some modelers have issued notably different estimates for Maria insured losses. Reports show RMS estimates between $15 billion and $30 billion for total insured losses, and Karen Clark & Co.’s reported estimate is nearly $30 billion in insured losses, with roughly $28 billion coming from Puerto Rico. However, AIR Worldwide has estimated Maria insured losses from Puerto Rico alone could range from $35 billion to $75 billion.

Clearly, there is still a great deal of uncertainty around the effects of this storm, and we will continue to monitor the developments. However, in an effort to gain some initial insights into Maria and, in particular the effect on Puerto Rico, we spoke with Sean Kevelighan, CEO of the Insurance Information Institute, on-site at The Council’s annual Insurance Leadership Forum in October.

“We’re still in the middle of a very active hurricane season, and we are seeing the impacts of Hurricanes Harvey, Irma and now Maria,” he says. “And these are all different events in a lot of ways. You saw with Harvey a flood event, with Irma a wind event, and what’s most different for Maria and the insurance market is there was a significant amount of industry built in Puerto Rico, with the likes of pharmaceuticals and others. That’s why we’re seeing a pretty broad spectrum in terms of the amount of costs that the industry could incur—especially on the commercial side, you really saw a spike in those estimates.”

Kevelighan echoes some of the thoughts behind AIR’s estimate. The modeler notes that “roughly 60% of the AIR-modeled losses are generated by the industrial line of business. Unlike many islands in the Caribbean, whose economies rely heavily on tourism, the economy of Puerto Rico is largely driven by manufacturing—primarily by pharmaceuticals, petrochemicals, electronics, and textiles within that sector. (It is estimated, for example, that there are more than 80 pharmaceutical manufacturing plants in the territory.)”

AIR notes that some of the uncertainties that come into play in Puerto Rico have to do with the potential effects of things like demand surge—increases in the price of labor and materials following a natural catastrophe—business interruption losses and business continuity planning, and infrastructure challenges during recovery. “The slow and extended restoration can lead to higher levels of damage to insured properties as building envelopes remain open to the elements.”

Kevelighan noted that the possibility exists for increases in reinsurance and commercial rates coming out of Maria, but exactly what and how, remains to be seen. On a larger note, he says that the trend in extreme weather is on the rise but presents opportunity for the insurance industry.

“You can go back to 1980…and you’ll see a significant increase in terms of frequency and severity, most of which are in the meteorological or hydrological—storms and flood type events. What I think is important for the industry to focus on is less about…the politics of what’s going on and more about how we get to the solutions. And that’s a real opportunity for the insurance industry…let’s see how we can mitigate the risk and make our communities more resilient. This is what we do as an industry, and I think we’re well poised and have a really good opportunity to do that.”

He brings up reauthorization of the National Flood Insurance Program at this crucial time. Multiple experts have noted that there is the potential for large uninsured flood losses with all of these storms, as it’s often not covered in the policies people have. “Flood has impacted 90% of every major catastrophe. There’ s a flood issue in every one,” says Kevelighan. “We’ve got to increase our education about that. It’s unfortunate that our customers are not as educated [about flood] as they could be, and honestly the reason is the private market’s not there. If you think about what we could do with flood if the private market was in there and it was able to market itself like we see in other areas like auto insurance and home insurance, and we’re able to educate people…not just to help people appreciate why insurance helps but also appreciate what it’s going to take to mitigate the risk, because honestly the insurer and the customer don’t want to suffer the risk.

“We need to overcome and/or remove the politics from the program in order to make it more modern and actuarially sound. History shows the government does not know or appreciate underwriting, and that is in large part because politics gets involved. This is not going to be an easy issue to overcome, and that is going to be the biggest hindrance to the private market entering into more flood insurance offerings.”
Kevelighan also discussed the importance of rebuilding infrastructure with resilience in mind.

“We hear a lot about infrastructure spending—we’re going to spend a trillion dollars potentially on infrastructure. Can the industry help? And educate people? If we’re going to spend money on infrastructure, [let’s] make sure it is ready to withstand what we’re seeing in terms of natural catastrophes.

“I think there’s going to be a good a case study that comes out of the difference between Irma’s impact and Harvey’s impact. In the state of Florida, after Hurricane Andrew, you saw building codes go up and get more solid in a lot of ways…And then you look at Harvey, in that area of Houston where building codes are virtually nonexistent. So you’re going to see an illustration and a comparison of communities and what resilience does. And as an industry, we need to be helping our customers understand the value of that. If catastrophe strikes, how can you build forward instead of just building back to the way it was?”

For more of our conversation with Sean Kevelighan, listen to the podcast at

Patients who choose providers charging more than the max are required to pay the difference. Leader’s Edge sat down with Rod Cruickshank of The Partners Group to discuss the pros, the cons and what providers might think.

Let’s start with the basics of what we expect from reference-based pricing.

We’re trying to bring some normalcy or common language to something that has become complicated. The typical consumer, broker or consultant is lost in the effort of trying to determine what is truly being charged.

Most folks have a different understanding about reference-based pricing. Working toward a common language would be a great start. Look at it from the hospital standpoint where you use a fee schedule based upon what CMS [the Centers for Medicare and Medicaid Services] established. Then you negotiate with your payors on what fees are going to be. This negotiation results in a unique and proprietary fee schedule. Ultimately, this makes it nearly impossible to unpack the true cost of pricing on what you charge for a clinical encounter. This work over time has grown in complexity. No surprise, the result is significant variance from one side of a city to the other.

If we all agree on the language of what a reference-based price strategy is, that means the floor is CMS. The government dictates what’s allowable, based upon Medicare, and then everybody plays up from that floor.

The movement to reference-based pricing is like the holy grail in our industry. Could you please make it simple for everybody to understand what the price of a procedure or an encounter is going to be? Can we just have confidence that when we are going to engage in a contract with this delivery system we know we’re not going to be overcharged for any procedure?
Isn’t that the hope?

For consumers, yes. What about providers?

You must understand the forces at play. We have delivery systems across America that play with these numbers to support internal strategies; maybe they’re trying to grow in some areas and are deemphasizing in others. They may need more money in orthopedics. They may need more money in obstetrics. They might need more money in the surgery center. As a result, they’ll inflate those numbers because they think they’re going to get more encounters there, while they’ll lower others.

You might take a huge tool, a huge differentiator, out of the equation of American healthcare if you remove negotiation on fee schedules. From a provider side of things, and from a payor side of things, you’re changing the game to nullify some of their strategy and their proprietary work.

And therein lies the pushback. If I’m a large, regionally developed facility, I’m going to probably argue that, if I do cardiology better than anyone else, that’s probably because I’ve attracted the best talent. We might be doing R&D or trying to push the envelope on procedures. And I would be able to build an argument that I might be able to charge more for that.

Wouldn’t you want an organization that is dedicated to a specialty to be able to play that game? We allow that game to be played everywhere else in America, right? It may not be attractive depending upon your thought of healthcare as a public service. Yet we want hospitals, clinics, doctor and facilities to just continue to improve and get better and get specialized. So, if they’re developing a center of excellence around a certain procedure, they’re probably going to want to demand a higher reimbursement for everything that goes into that. There might be 300 codes associated with that work, and they want all those to be at a premium to support their work.

If you understand business from their perspective, you start to see that there’s a reason for charging different fees for different specialties or procedures. It’s a business strategy. It’s not because they’re trying to pull one over on us. It’s not because they’re trying to gouge us, though there are cases where I’m sure that does happen.

What are the implications of reference-based pricing in the specialty business?

Here in the Northwest, which encompasses many rural areas, every hospital system has only so many areas of specialty it can afford to fund and build their entire identity around as they try to attract the very best talent. Then, they want those guys to have as many cases under their belt as they can get because, in the specialty business, it’s how many cases do you do a year? Not, can you do a case?

Do you want a surgeon operating on you who does 200 of those a year or 10? It’s a very simple answer: I want the doctor that’s doing 200.
So, this concept of reference-based pricing, it has a place and we need to support it. But it also needs to be flexible enough to afford more advanced strategies. We need to allow for major delivery systems to build centers of excellence and expanded programs to have the freedom to charge a premium because they’re just doing great work. And we ought to demand that there’s evidence-based outcomes that support it.

If we go in with the hammer and we pummel the delivery system universally to get reimbursement down, that may mean that, in your local marketplace, you can’t afford the talented specialist who can make a difference in the surgery room. It becomes real very quickly. Undoubtedly, one of the downsides of reference-based pricing controls might be that some systems wouldn’t have the dollars to invest in higher-quality talent to come in and do specialty work. That would be detrimental to your community and a local economy.

Maybe the government would allow hospitals to submit an application to build a center of excellence and get higher reimbursement through CMS. If you qualify by these criteria, they will allow you to charge more because they’re going to be following outcomes and encounters. I think that’s what it forces and would be a step in the right direction.

So, reference-based pricing might be the floor that we must set for all care and then CMS gets control over additional money based on quality, volumes of encounters, etc., and ultimately, this is why doctors won’t like it—you’re giving control back to CMS to determine when they pay more and when they don’t.

Do you worry that that opens the trajectory to a single-payer, Medicare-for-all model?

Sure. In a way, from a reimbursement standpoint, it is Medicare for all. That’s the other cautionary tale here, do we want to encourage that?

If CMS says why don’t we dictate that, in healthcare reform, it’s reference-based pricing for all, that would be a scary place to be. Large regional systems with scale will dominate, and the rural marketplace will fail. Can’t we all agree we need healthy rural delivery systems? Would any state be wise to accept a strategy that underfunds a rural hospital to the extent it fails and closes? Most rural hospitals are running close to the edge on profitability, and reducing commercial reimbursement would be the tipping point for their failure. This is happening as we speak in some markets.

What I would love to see is federal oversight on allowing communities to have more freedom to do what they need to do to improve the health of their population. In Oregon, we have experienced the success of community health delivery with Coordinated Care Organizations (CCOs). They are legislated systems to deliver for Medicaid populations, and they have managed the hardest populations by doing the right thing and being creative with funding.

What percentage of brokers do you think are actually deploying these types of programs?

I would say it’s a minority still. My guess is that not more than 10% are deploying. I would say maybe 20% to 25% are actively talking and using it as a wedge. And I’d say 75% are not doing it and are probably wary of it and avoiding it.

How have you seen reference-based pricing programs work in the market?

One of the hottest spots in the country around reference-based pricing might be Montana. The term reference-based pricing is pretty much well known to the hospital systems in Montana and to even some of the larger employers. This can be attributed to some area TPAs using it as a sales wedge. The upside of the movement is it opens a more sophisticated dialogue. Most hospitals and provider groups will argue against it. There is much more to cost than just reimbursement. The delivery system can educate us all that “cost” has other important elements beyond fee schedules, like outcomes, severity and recurrence rates, and ultimately quality.

Now if you bring a reference-based pricing model into a metro area, that’s where you end up with most of the drama…because there are a lot more options and a lot more variations in price. Providers will say, “You came in and received service from me. I need to charge you what my normal rate is, and you’re telling me that you’re not going to pay the difference between what your insurance company is paying and what I want to earn for this procedure?” And your answer to your doctor (who you love), is, “Yeah, I’m not paying it, and, if you push me on this one, talk to my attorney.”

When a marketplace hasn’t achieved enough volume in reference-based pricing, drama ensues, and the HR leader and the senior executives of that employer better be ready for the public relations work ahead. If you start to put the member in between the doctor, the health plan and the lawyers, you’re going to pay a deep price in terms of culture and relationship with your employees. And if you’re not really ready for that, brokers will get fired, and employers will move back to a non-reference-based pricing model. There are stories like that out there.

Do you think in these situations the providers just aren’t aware of the agreement or they just don’t care? Or maybe both?

A little bit of both. When you have a variation of reimbursement, some people get paid more and some people don’t get paid as much. But most docs know it’s out there, and if you’re part of large groups you’ve probably been educated on it. But none of them are welcoming it. So there’s going to be a burden of drama that’s going to have to take place to get to the tipping point.

I think reference-based pricing doesn’t become a usable language for us with our customers until a lot of people go before us and end up taking the pain. There’s going to have to be some people who really get their noses bloodied, and there’s going to be brokers that get fired and there’s going to have to be some drama in the marketplace before all of a sudden it’s the rule of the day.

In the end, reference-based pricing is the village that we must walk through to the destination of improving the health of the member. It’s not the destination. It’s just a point along the way.

Twenty states currently have legislation or ballot initiatives pending to fully legalize its use, 14 of which already have legalized marijuana for medical purposes. If all those efforts succeed, as many as 28 states and D.C. could have full legalization regimes in place by the end of 2018, and 34 states, D.C., Guam and Puerto Rico would allow medical use.

And business is booming. The U.S. marijuana market generated $6.7 billion in revenue in 2016, an increase of 34% over 2015, according to Business Insider. Forbes reported in February the industry will create more than 250,000 new jobs by 2020, more new jobs than the Bureau of Labor Statistics projects for manufacturing, utilities or government during the same period. Bloomberg, citing a 2016 report from Cowen & Co., stated that revenue could grow to $50 billion by 2026.

There is only one problem: under federal law, it’s illegal to grow, manufacture, sell, possess or use marijuana.

So what does that mean for those seeking to insure marijuana businesses in the United States?

Under the federal Controlled Substances Act, a Schedule I drug, substance or other chemical is one that:

  • Has a high potential for abuse
  • Has no currently accepted medical use in treatment in the United States
  • Has a lack of accepted safety of use under medical supervision.

The U.S. Drug Enforcement Administration classifies drugs. It’s generally illegal under federal law to possess, distribute or dispense a Schedule I drug for any purpose. Since the statute was enacted in 1970, the DEA has classified marijuana as a Schedule I drug. It shares this status with heroin, LSD and peyote. In contrast, cocaine and methamphetamines are classified as Schedule II drugs, permitting their sale and use under specified conditions.

The DEA has the authority to reclassify a drug to a different schedule if new evidence arises. To do so, it is required to obtain a scientific and medical evaluation and a recommendation from the U.S. Food and Drug Administration on whether the drug should be rescheduled. The FDA considers eight factors, including the addictive effects and the current scientific knowledge related to the drug under review.

Even though so many jurisdictions have legalized marijuana for medical purposes, and physicians in most of those states are prescribing it for various maladies, as recently as 2016 the DEA refused to reclassify it. It recommended marijuana remain in Schedule I, finding “no currently accepted medical use in the United States,” even though it will soon be used for just that purpose in a majority of states.

The ramifications of the FDA’s inaction are far ranging. Engaging in any aspect of the marijuana business can trigger a host of federal violations. A “legal” marijuana business can be prosecuted under federal drug and money-laundering criminal statutes. Those who assist those businesses can be prosecuted as co-conspirators or as aiders and abettors.

It is a separate federal crime to manage or control any place for the purpose of manufacturing, distributing, storing or using marijuana. Landlords who lease space to marijuana businesses are liable for that violation. Receipt of more than $10,000 from a marijuana business is a felony. Engaging in any financial transaction with a known marijuana business for the purpose of promoting a known marijuana business is a felony.

In 2009, the Obama Justice Department issued its now-infamous Cole Memorandum—named for its author, Deputy Attorney General James M. Cole, and titled “Guidance Regarding Marijuana Enforcement.” The memorandum instructed federal prosecutors not to target medical marijuana dispensaries and users for federal law violations if they are in compliance with their respective state laws. As the memorandum put it:   

The enactment of state laws that endeavor to authorize marijuana production, distribution, and possession by establishing a regulatory scheme for these purposes affects [the] traditional joint federal-state approach to narcotics enforcement. The Department’s guidance in this memorandum rests on its expectation that states and local governments that have enacted laws authorizing marijuana-related conduct will implement strong and effective regulatory enforcement mechanisms that will address the threat those state laws could pose to public safety, public health, and other law enforcement interests.

There are two important qualifications to the guidance. It focuses only on state legalized medical marijuana and does not extend to recreational use. It also does not bar prosecution. Instead, it outlines a list of priorities to determine whether prosecution may be warranted, including preventing:

  • The distribution of marijuana to minors
  • Marijuana sales from supporting criminal enterprises, gangs and cartels
  • The diversion of marijuana from states where it is legal under state law to other states
  • State-authorized marijuana activity from being used as a cover or pretext for trafficking of other illegal drugs or other illegal activity
  • Violence and the use of firearms in the cultivation and distribution of marijuana
  • Drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use
  • The growing of marijuana on public lands.

Congress also has weighed in. It included the Rohrabacher-Blumenauer Amendment in a 2014 spending bill. That amendment prohibited using federal funds to arrest or prosecute patients, caregivers and businesses acting in compliance with state medical marijuana laws. The 9th Circuit Court of Appeals ruled in 2016 the amendment protects patients and providers acting in accordance with state medical marijuana laws, despite DOJ’s arguments to the contrary.

The Department’s guidance in this memorandum rests on its expectation that states and local governments that have enacted laws authorizing marijuana-related conduct will implement strong and effective regulatory enforcement mechanisms that will address the threat those state laws could pose to public safety, public health, and other law enforcement interests.

Guidance Regarding Marijuana Enforcement (the Cole Memorandum), U.S. Department of Justice

The Treasury’s Financial Crimes Enforcement Network (FinCEN) issued guidance on how federally insured banks can service marijuana businesses, which are legal under state law and in compliance with the Bank Secrecy Act—a law they would otherwise violate.

The FinCEN guidance says that, in assessing the risk of providing services to a marijuana-related business, a financial institution should conduct customer due diligence that involves evaluating several factors, including:

  • Verifying with the appropriate state authorities that the business is duly licensed and registered
  • Reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business
  • Requesting from state licensing and enforcement authorities available information about the business and related parties
  • Developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers)
  • Ongoing monitoring of publicly available sources for adverse information about the business and related parties
  • Ongoing monitoring for suspicious activity
  • Refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk.

A financial institution that provides financial services to a marijuana-related business would be required to automatically file a suspicious activity report (SAR) every time it receives funds from the business. The depth of the report would depend on whether the business is violating state law or engaging in more threatening conduct (such as distributing marijuana to minors, allowing revenue to go to criminal enterprises, and trafficking).

New Administration, New Policy?

Attorney General Jeff Sessions has a jaundiced view on marijuana. Since being sworn in, he has been quoted as saying:

  • “Good people don’t smoke marijuana.”
  •  “Medical marijuana has been hyped, maybe too much.”
  • Marijuana is a “life-wrecking dependency” that is “only slightly less awful than heroin.”

And he has issued a memorandum directing the Task Force on Crime Reduction and Public Safety to undertake a “review of existing policies in the areas of charging, sentencing and marijuana to ensure consistency with the Department’s overall strategy on reducing violent crime and with Administration goals and priorities.”

In May, Congress reenacted the Rohrabacher-Blumenauer Amendment (a requirement with each new budget year) barring the DOJ and DEA from using any funds to prosecute those acting in accordance with state marijuana legalization regimes. In signing that bill into law, President Trump said it “provides that the Department of Justice may not use any funds to prevent implementation of medical marijuana laws by various states and territories. I will treat this provision consistently with my constitutional responsibility to take care that the laws be faithfully executed.”

The pundits are split on whether that is a positive or negative statement and how it bodes for future treatment of the issue in the Trump administration. White House chief of staff John Kelly may offer some contrary evidence. In a widely quoted Washington Post piece, General Kelly said marijuana was “not a factor in the drug war” and “arresting a lot of users” is not the right solution for the country’s drug problem. “Whether it’s veterans or anyone else, if it helps those people, then fine,” he said.

In September, however, following a written recommendation from the Department of Justice, the House Rules Committee blocked a floor vote for the Rohrabacher-Blumenauer Amendment. The amendment was deemed “out of order” for the 2018 House Appropriations bill, despite its inclusion in appropriations bills since 2014. Nevertheless, after President Trump struck a three-month deal with the Democratic leadership to extend the current federal budget and debt ceiling until December 2017, the amendment was granted a temporary extension by proxy. Whether it survives the December budget debates remains to be seen.

Congress Attempts Federal Legalization

In August, Sen. Cory Booker, D-New Jersey, introduced the Marijuana Justice Act, the first congressional bill ever introduced to fully legalize marijuana under federal law and encourage state legalization. The Marijuana Justice Act would:

  • Remove marijuana from the Controlled Substance Act schedules (thereby overriding the DEA and FDA determinations)
  • Resolve some of the outstanding issues regarding federal law and the marijuana business (such as access to banking services)
  • Prevent deportations predicated on marijuana offenses
  • Provide expungement and resentencing for marijuana offenses at the federal level
  • Create a “Community Reinvestment Fund” of $500 million for programs such as job training, reentry and community centers.

Although the prospects for the bill are thin in the current political climate, legalization of medical marijuana at the federal level may be within closer reach. Senators Brian Schatz, D-Hawaii, and Orrin Hatch, R-Utah, are co-sponsoring the Marijuana Effective Drug Study Act (MEDS Act), introduced in September. The MEDS Act would take steps to remove barriers impeding research into the benefits of medical marijuana. Hatch says the MEDS Act will “encourage more research on medical marijuana by streamlining the research registration process” without forcing the DEA to reschedule marijuana. It would “make marijuana more available for legitimate scientific and medical research,” Hatch says, and “protect against diversion or abuse of the controlled marijuana substances.”

The Banking Issue

About 70% of cannabis businesses have no bank accounts. Despite FinCEN guidance, no major U.S. bank appears willing to fund marijuana businesses. That may be understandable. If they do, the FinCEN guidance requires filing of a Suspicious Activity Report, which could be read as an admission by the filing bank that it is violating federal laws. In a moment in which the administration’s final marijuana policy is unclear, creating such an evidentiary record may not be that appealing to the compliance-focused banking sector.

In response to the shortage of available banking services, Colorado (which became one of the first two states, with Washington, to legalize recreational marijuana in 2012) created a new class of financial institution called a “cannabis credit cooperative.” The Los Angeles Times reported no such institutions have been formed, partly because the Federal Reserve is unlikely to approve them. Colorado also has authorized the creation of a credit union for the cannabis industry, but the Federal Reserve denied the credit union access to a master account and the National Credit Union Administration refused to insure its deposits.

The only two markets currently offering effective product liability coverage for the recreational markets as required under Washington state law are United Specialty Insurance, through a program offered by Next Wave, and James River.

Norm Ives, cannabis program manager, Mosaic Insurance Alliance

In Washington state, some banks purportedly have been willing to open accounts for state-licensed marijuana businesses, but they do not appear to have made any loans to marijuana businesses and they are not expected to do so any time soon.

In the emerging world of crypto currencies, some issuers are looking at filling the banking void by using the blockchain system. Tokken, for example, offers one such online platform that purports to enable credit card payments for the legal marijuana industry through use of blockchain technology.

What About Us?

So, does insurance coverage exist? If so, from whom? And is it worth the paper it’s written on?

To date, there have been very few cases evaluating whether insurers must pay claims that are illegal under federal law. In a 2012 case in Hawaii, the federal district court ruled in favor of USAA’s denial of a homeowner’s claim based on the theft of marijuana plants. The plaintiff had contended the theft fell squarely within the clause covering “trees, shrubs and other plants.” The court refused to enforce this provision because “the plaintiff’s possession and cultivation of marijuana, even for state-authorized medical use, clearly violates federal law.”

In a more recent federal case in Colorado, the court found a marijuana dispensary and cultivation facility may be entitled to coverage for harvested plants damaged by smoke and ash from a wildfire, rejecting the insurer’s argument that the products were uninsurable because of federal law’s classification of marijuana as a Schedule I drug. The court ruled the insurer’s argument that it could not be required to pay claims related to illegal activities under federal law was not valid because the insurer had elected to issue the policy with the “mutual intention” that the marijuana inventory be covered.

The emerging view in the legal community is “there should be coverage under policies sold specifically to marijuana-related businesses operating legally in their home states,” says Jeff Sistrunk in Law360.

Bob Morgan with Much Shelist, an Illinois law firm, chairs its Cannabis Industry Practice. He previously served as the coordinator for the medical cannabis program in Illinois and oversaw development of the state’s medical cannabis regulations.

“I’m not sure I would say insurance is a top-three challenge for the industry, but it definitely is in the top 10,” Morgan says. “My clients and others in the industry think of insurance as a secondary problem right now, but it ordinarily would be much higher on the list.”

That is because mainstream insurers and brokerage firms largely appear to be steering clear of the growing industry. Until two years ago, Lloyd’s had offered some coverages, but it subsequently withdrew them, explaining at the time:

Based upon a thorough review of all positions, unless and until the sale of either medicinal or recreational marijuana is formally recognized by the Federal government as legal (as opposed to subject to non-enforcement directives), Lloyd’s has asked that underwriters should not insure such operations in any form (including crop, property or liability cover for those who grow, distribute or sell any form of marijuana or cover for the provision of banking or related services to these operations) in the United States.

Instead, the gap left by these players has created a specialized industry of cannabis insurance brokers, covering everything from “seed to sale” in a piecemeal approach. Two examples: Colorado All Green Insurance, which “has been supplying Cannabis Insurance Solutions since 2009,” and Cleveland-based Cannasure Insurance Services, which “offers marijuana business insurance for growers, physicians, dispensaries, collectives and more in medical and recreational marijuana states.”

Norm Ives, the cannabis program manager for Mosaic Insurance Alliance, says that, in Washington state, “the only two markets currently offering effective product liability coverage for the recreational markets as required under Washington state law are United Specialty Insurance, through a program offered by Next Wave, and James River.” He also says Attorney General Sessions’ comments critical of the industry “have dramatically shrunk coverage supply.”

Mike Aberle, senior VP at Next Wave Insurance Services, is a California-based managing general underwriter and program administrator who runs the firm’s CannGen subsidiary. It offers specialized cannabis insurance programs in any state that has legalized the business. He says the biggest challenges are the regulatory uncertainty combined with underwriters’ general lack of knowledge of the industry.

There is a constant need, Aberle says, “to educate both the retail insurance broker and policyholders.” This can be difficult given the constantly shifting nature of the regulatory regimes and the players in the space. He says these factors make it “challenging to maintain and support a constantly evolving industry.”

Cash management is just never as good as electronic financial management.

Bob Morgan, chair of Cannabis Industry Practice, Much Shelist

Coverage for What?

While Morgan says violent crime is lower in marijuana businesses than in other similar businesses, “primarily because of all the cameras and other security that the businesses have in place, which discourage crime both for the facilities and the general area,” there are a host of unique, industry-specific issues that present risk.

Perhaps most importantly, Morgan focuses on the banking issues that have created cash orientation for the industry. This arrangement, Morgan says, “creates both increased theft exposure and records that are not as good. Cash management is just never as good as electronic financial management.” The constantly shifting regulatory landscape also makes risk identification more difficult he says. And, as Ives notes, those requirements vary radically from state to state, magnifying the insurance complexity.

Perhaps the single most significant exposure is product liability. The state of Washington requires marijuana licensees to maintain product liability insurance as a condition of licensure. In a Bloomberg report on the industry, one attorney asserted marijuana-related product liability litigation “is likely to include suits for physical injury arising from intoxication and suits for physical injury arising from long-term effects including addiction. It also will include consumer suits alleging deceptive and improper marketing, such as campaigns targeting minors… Companies selling marijuana for medical use could be subject to the same sorts of claims asserted against makers of conventional prescription drugs, such as failing to warn about side effects.”

At a recent Colorado murder trial, a man who murdered his spouse faulted the manufacturer of the cannabis edibles he had ingested. He said he had not been warned ingestion “could lead to paranoia, psychosis and hallucinations.” This seemingly supports this conjecture. (The court rejected the defense, and the defendant pleaded guilty and was sentenced to a 30-year term. The defendant’s family filed a civil suit in 2016 against the manufacturer of the cannabis candy.)

Other coverages are what you would expect: crop, theft, fire, business interruption and employment practices liability insurance. Aberle says even in more traditional coverage areas “the products are new and there are many unknowns,” which exacerbates the underwriting challenges.

Morgan says traditional coverages like D&O and EPLI can be difficult to obtain for a stand-alone cannabis business. “To evade some of the restrictions on marijuana businesses,” he says, “some operators are dividing their operations into separate companies, typically putting all of the real estate and hard assets into one company, paraphernalia sales into a second company, and the [illegal under federal law] cannabis dispensary into a third separate company…If the cannabis business is a subsidiary of a larger holding company that includes non-cannabis businesses, these types of coverages are often obtainable.”

Ives says the biggest problem he sees is “carriers purport to offer the coverage but include exclusions for any products that contain cannabinoids, essentially negating the value of any such coverage in the marijuana space.”

Similarly, Aberle cites a competing product liability policy “knowingly sold to a marijuana business that excluded ‘psychoanalytics that cause mental or physical impairment,’ which seems to exclude from the scope of the coverage the primary product they were seeking to insure.”

Aberle stresses the coverage you are buying “is all what the form says,” and he believes Next Wave has built the better mousetrap. He says it’s “the oldest and largest program in the industry” based on modified ISO forms and is “dominating the market.”

Good people don’t smoke marijuana.

Jeff Sessions, U.S. Attorney General

Ives agrees it’s “critical that the insured understand the precise scope of the coverage they are purchasing. The devil is in the details here.” At the end of the day, he says, the old adage applies in spades: “Buyer beware.”

Sinder is The Council’s chief legal officer.
Gold is a Steptoe and Johnson associate.

An earthquake in Mexico toppled buildings and killed more than 200. Just one day later, Hurricane Maria devastated Puerto Rico (see our sidebar on this topic) and left it with what has been described as an “apocalyptic” humanitarian crisis. And as of this writing, the latest catastrophe is in California, where wildfires have burned nearly 200,000 acres across the state, destroyed thousands of homes and businesses, and killed more than 200 people. Hundreds are still missing.

These catastrophes highlight the unfortunate fact that disasters happen every day, everywhere, and there’s no telling what’s around the corner. It is during these events however, that our industry shines the brightest.

Our industry spends millions of dollars each year on advertising, promoting what we cover and why. Now is the time for us to put our dollars where our advertising is and make our clients’ lives whole again and get businesses back on their feet. The angels in this business are the claims adjusters on the ground, helping you talk with your customers, making sure the pieces are working the way they are supposed to. This is no small feat and happens from the moment the water begins to recede and the fires smolder.

We just came off our annual Insurance Leadership Forum in Colorado Springs. Time and again, we heard the same message from industry peers and keynote speakers alike: the foundation of our business is built on community, collaboration and helping people rebuild. We are there to answer the call and to help our clients and their businesses along the road to recovery. And it is a long road in many cases, that begins long before the storm actually hits (see our article on Hurricane Irma claims).

We mobilize our people, take the lead and get down to the very core of our business, providing support that is critical to both short-term and long-term recovery. Oftentimes, as you will read in our feature, “Angles in My Lifetime,” insurance professionals put their own concerns aside to offer aid and answers not only to their reeling clients but also to others in need who just happen to be there. Despite the unpredictability and severity of risks around the world, our industry’s service and focus never wanes. It is a profession unlike most others, one that requires tremendous humility and professionalism, and that is the story we all need to tell.

Inevitability, technology has and will continue to transform our business models by enhancing our intelligence with data in real time. It creates efficiencies and helps us serve our customers in a more informed way. When the rubber meets the road however, and our clients face a catastrophe, computers alone can’t make them whole. Technology won’t show up on their doorstep to guide them through a difficult and sometimes painful process. Forging ahead with new tools is part of any business, but having a human touch cannot be underestimated.

This account from our Houston feature sums it up:

“Everyone worked hard and did things that we definitely do not do during the course of our normal business day. I had one lady pull me aside and say, ‘I never thought I would meet real angels in my lifetime, and then y’all showed up.’”

Enjoy this month’s issue, and thank you for your service to your clients and to our industry.

To paraphrase Lana Bortolot in her recent Wine Enthusiast article, “Raising Arizona: Outsider Wines Travel to New Heights,” as producers in the sun-drenched state push the envelope with high-elevation wines, it’s time to take a serious look at Arizona.

While Arizona is a relative newcomer to wine production—Gordon Dutt opened the state’s first commercial winery in Sonoita in 1979—Spanish Jesuit priests actually planted the first grapes in Arizona soil when they came to the area as missionaries in the 16th century. Dutt, a scientist at the University of Arizona, conducted early research on the soils and climate zones of Sonoita, a high-altitude basin surrounded by the Santa Rita, Huachuca and Whetstone Mountains, and found them to be similar to Burgundy’s conditions. Most of the more than 90 wineries in Arizona produce grape varietals from France, Italy and Spain. But Arizona wines are not “fruit forward,” says Kent Callaghan, whose award-winning wines have been served at the White House. “They are dense, burly wines that age well and, in our case, need age,” Callaghan. “The wines tend to be distinctive and tend to be high quality.”

If you love wine and are visiting Scottsdale, you should tack on a couple of days to explore the vineyards and wineries in the Sonoita and Willcox American Viticultural Areas, most of which are just a three-hour drive from Scottsdale (see below for three more quintessential Arizona side trips you can take in three hours). But you don’t need to leave the city to taste Arizona’s innovative wines. The five wineries that have tasting rooms in Old Town have recently launched the “Scottsdale Wine Trail.” You can download a map at Also raising Scottsdale’s profile as a wine destination is FnB, one of the city’s top restaurants. Co-owner Pavle Milic’s curated wine list, which includes some of Arizona’s best vintages, helped FnB earn a James Beard Award nomination for Outstanding Wine Program.

In other news, Scottsdale’s reputation as the posh place to stay in the Sonoran Desert is aging well. The Phoenician has completed its largest refurbishment since opening in 1988. The lobby, shops and restaurants have been remodeled, and a complete rebuild of the spa is on track to be finished by the end of December. Hotel Valley Ho just upgraded its swanky mid-century modern rooms and suites. And the Andaz Scottsdale Resort & Spa, which opened in December 2016, garnered a spot on the Condé Nast Traveler 2017 Hot List.

What’s to love
Prague’s strategic position in the middle of Europe makes traveling across the continent fast and easy. The historical city center is beautiful, and there are areas where modern architecture is emerging, like the Hotel Josef, designed by the famous Czech architect Eva Jiricna.

New and exciting
Visit the Letná District to see the new generation of Prague citizens. It has become the hipster quarter with a lot of cafés, fashion boutiques and bookshops.

Dining scene
A new generation of chefs with international experience has emerged over the last 10 years. You can get anything from high-quality banh mi to typical Czech food. We have three Michelin restaurants—La Degustation Bohême Bourgeoise, Alcron and Field. Kalina Cuisine & Vins in the Old Town lacks a Michelin star, but it can compete with any of these restaurants.

Favorite new restaurant
Momoichi Coffetearia. I like the steampunk coffee and Japanese and Middle Eastern fusion dishes.

Favorite Czech restaurant
The first Lokál opened in 2009, and now there are many around the city. If you want to eat high-quality, typical Czech cuisine, this is the restaurant. They serve traditional dishes like fried cheese with tartar sauce, goulash and roast sirloin in sour cream sauce with dumplings.

The best places for cocktails are La Casa de la Havana vieja and Hemingway Bar, which are famous for their innovative drinks, including many Cuban classics. As for beer, Lokál serves our famous Pilsner Urquell from huge tanks.

The Golden Well Hotel near the Prague Castle is expensive, but it has terrific views over the whole of Prague. It also has an award-winning restaurant by chef Pavel Sapík, whose family has a heritage of hospitality dating back to the 17th century.

Thing to do
Even though it’s touristy, you should walk over the Charles Bridge, which opened at the beginning of the 15th century. It is decorated with baroque-style statues and leads to Prague Castle, connecting Old Town with New Town. Be sure to try Trdelník, a traditional sweet from Transylvania, at one of the street stalls.

Hidden gem
If I could recommend one off-the-beaten-path place to visit, it would be Vrtbovská Garden under the Prague Castle. The baroque-style garden was built during the beginning of the 18th century and is on the UNESCO World Heritage List.

In fact, they’re a bit of an odd couple in terms of the forces they packed and the territory they covered, and that means they will have different impacts on different types of insurers.

After Harvey made landfall in a relatively remote part of South Texas, largely sparing Corpus Christi, it quickly became a rainfall event. “We’re going to look back upon Harvey as a rainstorm that coincidentally had a hurricane associated with it—it was just a coincidence,” says Tom Larsen, principal of industry solutions at CoreLogic.

The storm system sat on the Texas coast, bringing with it “a significant amount of rainfall way beyond what you’d see with a typical storm…. The level of flooding in Houston was a surprise,” says Larsen. “Surprises are never good.” The record rainfall meant a lot of bayous overflowed, which added to the flooding.

“The very interesting thing about Harvey, which is very unusual, is the bulk of the private insured loss is commercial and industrial…because those are the properties that are likely to have private flood insurance,” says Karen Clark, president of Boston-based catastrophe modeler Karen Clark and Co. The next highest is auto. Residential is third.

We're going to look back upon Harvey as a rainstorm that coincidentally had a hurricane associated with it-it was just a coincidence.

Tom Larsen, principal of industry solutions, CoreLogic

Irma moved faster than Harvey, Larsen says, and the levels of flood in Florida didn’t approach the surprise of Harvey. “The extreme flooding from Irma was up in the Jacksonville area,” he says. “It was geographically constrained.”

As far as auto claims, Clark says, Florida likely experienced less auto loss because autos are more susceptible to flooding. “Irma will be more typical for a wind event in terms of losses, with residential claims first, then commercial, then auto,” Clark says.

Mark Dwelle, an insurance analyst with RBC Capital Markets, says offshore losses caused by Irma comprised a sizable portion of the loss on top of the domestic loss.

“Given the structure of the Florida market, with so many monoline insurers, there will be a much higher reinsurance component to the overall loss,” Dwelle says. “Our sense is that commercial pricing could firm up a little, but in the loss-affected lines, mainly property and reinsurance rates will probably rise in the loss-impacted zones, Florida and Gulf. The hard part to gauge is whether that will be enough to move the needle globally for reinsurance rates. Definitely the comments coming out of the Monte Carlo Rendez-Vous were not overly bullish relative to what we’ve heard from other big events.”

The possibility of more significant hurricanes this season could portend a shift in market conditions after years of a soft market, says Evan Taylor, a risk consultant with NFP. “If you had a few really awful hurricanes, that would really do it,” he says. “If you stack several hurricanes and get a lot of property loss, it could definitely change the renewal cycle for the next several years.”

In the aftermath of disaster, people look for ways to help those who are suffering. There are many options, from on-the-ground aid to sending supplies. One of those behind-the-scenes efforts is being carried out by the Los Angeles-based Insurance Industry Charitable Foundation.

According to the IICF, by mid-September more than $410,000 was raised through the IICF Hurricane Harvey Disaster Relief Fund. By that time, the Harvey relief effort had received contributions from more than 1,000 individuals as well as insurers, agent and broker groups, and others.

The foundation also established the IICF Hurricane Irma Disaster Relief Fund in mid-September to respond to the needs of victims of that hurricane.

The foundation said $7.4 million in initial relief fund support for Hurricane Harvey had been committed by IICF board companies and supporters. The amount is expected to increase as giving and matching campaigns continue. Taking into account donations from companies not involved with IICF, the initial minimum collective insurance industry support exceeded $15 million.

“With Hurricane Irma following so closely behind Harvey, there is unprecedented need for support of the community at large, and those involved with the IICF have answered the call without hesitation,” said Bill Ross, CEO of the IICF.

Fallen trees, railing damage. It struck hard, she says.

She wasted no time calling Laura Ambrose, the Brown & Brown agent who handles her account. “She answered the phone, and she was right there for me,” Richichi says. “Ambrose is not just an insurance agent; she is a really caring, open person. It isn’t just about the job. There’s definitely a personal touch…. She’s just an easy person to talk to. She answers every question without hesitation.”

Richichi rode out the storm on the property, an experience she describes as tough and scary. In addition to enduring the hurricane, she brings to light the many difficulties that arise in the aftermath of a natural catastrophe. The lack of electrical power, for example, meant no relief from the heat of Florida in September. It also meant her neighbor was temporarily stranded in her ninth-floor apartment because there was no working elevator to transport her child, who has a disability and can’t walk down the nine flights.

Mobilizing Ahead

Ambrose is part of the Brown & Brown team in Naples that powered up the day after the storm and worked with a skeleton crew to respond to clients such as Richichi. She and other agents working through natural catastrophes must be able to respond immediately after an event to help clients with claims issues, and their work often starts long before a storm makes landfall.

“I look at myself as partnering with them,” says Ambrose, who has many condo association clients. “I had reached out to Kathy before and let her know that I would be in touch with her after the storm.”

Ambrose says there was no power but they communicated via cell phone. (All of her association clients have her cell number.) The storm hit in mid-afternoon and lasted several hours, closing some streets, Ambrose says. “She was sending me pictures and calling me. We’ve had a relationship for five years. I don’t mind going the extra mile.

A storm that size, that effectively covered the entire state, every office from Coral Gables to Tallahassee was affected.

Chris Gardner, president, Hub Florida

“I reached out to her as I did with all my associations. I walked her through the process—what the association’s responsibilities are, what the owners’ are. I explained to her to mitigate the damages. Do everything you can to prevent that damage from getting worse.

“As an insurance agent, this is what I am trained for. Having the support of Brown & Brown and the head of the southwest Florida office, Jason Cloar, made it easy to get out and start helping clients faster. It freed me up and allowed me to get out into the field and assist people in need, which is where I was really needed.”

Insurance professionals, especially those in storm-prone areas like Florida, often take painstaking efforts to ensure they are ready to respond to an emergency. But even those plans don’t always go according to script. The sheer size of Irma, for example, was a differentiator.

“We have eight offices in Florida, and virtually all were affected,” says Chris Gardner, president of Hub Florida. “Normally, we’re relying on other offices in the state in the case of a catastrophe. In this case, it wasn’t really an option…. A storm that size, that effectively covered the entire state, every office from Coral Gables to Tallahassee was affected.”

But longer-term strategic thinking meant that Hub Florida had backup for its backup. The company’s hurricane crisis resource center in Chicago was there to help deal with the situation. Hub’s Risk Services Division worked with corporate communications to launch a preparedness and claims information support process out of the center for Hurricane Irma (as well as for Hurricanes Maria and Harvey). A national operations team, led by Todd Macumber, president and CEO of Hub’s Risk Services Division, mobilized to deliver daily storm-tracking analyses, preparedness and recovery resources, office closures, contact information, and claims resources and information.

This response, begun before the storm hit, carried on throughout the storm and for days after. The team used email and social media to ensure clients were fully aware of office openings and closings, claims resources, and information and support they would need.

“We began preparation calls with Risk Services. We were going through rehearsal and contingency plans four days out,” Gardner says. “Our troops on the ground were prepared to cope with the storm. Our team in Chicago did a great job.”

Brown & Brown of Southwest Florida was able to power up both its Naples and Fort Myers offices the day after the storm, though working slimly. “Those who could return to work did,” says Cloar. The company began proactively filing claims and sending agents out to properties as soon as clients could be reached. “Leading up to this event, there was a lot of anxiety,” Cloar says. “We wanted to make sure we were prepared as an organization.”

A national operations team…mobilized to deliver daily storm-tracking analyses, preparedness and recovery resources, office closures, contact information, and claims resources and information.

Each Policy Is Different

Every storm leaves in its wake a litany of questions, and these can become complicated because policies differ. Cloar cites the many questions about deductibles. Hurricane deductibles are a percentage of the total insured value, he notes. Answering such questions involves reminding people of what their percentage is, how deductibles ultimately work and how they might apply in their circumstances.

Another policy issue Irma raised was coverage for losses stemming from the actions of civil authorities, such as evacuation orders, says Natalie Dominguez, assistant vice president and claims manager at AmWINS Brokerage of Georgia, who handled Irma claims. “Does it take damage to trigger that coverage? Every policy is different, so you really can’t give a blanket answer.”

There are also questions about process. “We emphasize to people that they have the right to make the necessary repairs to their property to preserve the property prior to an adjuster showing up,” Cloar says. In addition, they have to take steps to document the damages, such as taking pictures of the damaged areas.

Cloar says Brown & Brown representatives have also attended condo association board meetings to answer questions about association responsibility versus unit owner responsibilities and have gone into the field with adjusters. Although southwestern Florida did not sustain the catastrophic damage suffered in parts of the Florida Keys, the storm ripped off roofs, flooded the ground floors of some buildings and caused power outages.

The Tally So Far

As far as actual claims go, Gardner says intake has been surprisingly low for what it could have been. “We’re probably about 35% to 40% of what had been expected,” he says. “Folks are really focused on business-interruption claims and off-premises power interruption.” He says they also have questions about flood sublimits and windstorm deductibles.

Although the numbers are still being tallied, Boston-based catastrophe modeler Karen Clark and Co. estimates Irma caused $25 billion in privately insured property damage, including $7 billion in the Caribbean. Modeler AIR Worldwide offered even higher insured estimates, with Irma causing $25 billion to $35 billion in the United States and an additional $7 billion to $15 billion in the Caribbean.

Leading up to this event, there was a lot of anxiety. We wanted to make sure we were prepared as an organization.

Jason Cloar, EVP, Brown & Brown of Southwest Florida

Hurricane Maria, which devastated Puerto Rico as well as other smaller Caribbean islands, will only swell that total.

But despite the destructiveness of Harvey, Irma and Maria, 2017 doesn’t appear likely to overtake 2005 as the costliest in terms of insured property damage. That year saw three of the 10 costliest hurricanes in history. In fact, the most destructive—Hurricane Katrina—caused an estimated $49.79 billion in insured damage in 2016 dollars. Hurricane Wilma, sixth on the list, caused an estimated $12.48 billion in 2016 dollars while Hurricane Rita, ninth on the list, caused an estimated $6.82 billion. That, of course, could all change when the insured damages of Hurricane Maria, which plunged Puerto Rico into a darkness that could last months, are tallied. Estimates of Maria’s damages are only beginning to emerge, but a preliminary projection from AIR puts them as high as $80 billion.

Speaking in late September, before damages from Hurricane Maria were tallied, Eric Uhlhorn, principal scientist at AIR, said the numbers still lag behind 2005 figures. But at the same time that year, Uhlhorn said, “we were dealing with Hurricane Rita, an ‘R’ storm, and we’re just on the ‘N’ storm right now. The indications are that the activity in terms of hurricane development should remain elevated into the second half of the season. Things should start tailing off, but by no means are we done yet.”

Hofmann is a contributing writer.

“It depends on how deep it is,” says Smith. “Certainly if it’s gotten up into the dash, for sure, the car should not be repaired. If it’s something like water in the floorboard and they haven’t driven it, it’s just rising water, the chances are you can fix it if you fix it right.

“But I’m going to give you a caveat: when water gets into a car, the carpet that you normally see in a car can be cleaned. It’s nylon. It doesn’t hold the moisture. You can put it outside in the sun and let it dry. But it’s what underneath—the padding, the jute if you will—that is like a sponge that holds the moisture. In short order, a couple of days, the odor will be horrific. So, your first clue on a flooded car after a few days is the smell.”

What happens to individual car owners’ vehicles? Once owners who have comprehensive insurance report that their cars have been flood damaged, the insurance companies will send adjusters out to inspect the cars on a first-come, first-served basis. If the adjuster declares the vehicle a total loss, it will be transferred to an auction facility managed by one of the two major salvage auctions, either Copart or Insurance Auto Auctions.

It’s the cars that did not have comprehensive coverage that consumers need to be on the lookout for. Because insurance companies and auction houses never see these vehicles, there won’t be any record of the vehicles’ having been flooded. Unscrupulous car owners will dry them out and repair them without reporting they were flooded. These are usually going to be older, paid-off cars since most banks require a comprehensive policy when writing a loan.

“One of the things that worries me an awful lot about cars, is under the seat on these GM cars there is a wire that runs from the tensioners on the seat belts,” says Smith. “Anytime you have an accident when a seatbelt is detonated, there is a signal to the tensioner in your seatbelt that tightens and locks that seatbelt so that when you go forward you don’t go that far forward. We replace those tensioners anytime airbags have been deployed. There is a connector under the seats that you plug in, and if a car has been underwater and someone doesn’t take the proper steps to protect and clean that connector, the chances are not whether it’s going to fail, it’s when.”

Flood-damaged vehicles typically are sold for scrap or recycling but can in some cases find their way into the market for sale to unsuspecting buyers. Buyers should demand to see the vehicle’s title. If an insurance company has been involved in paying for any repairs, it will have the title marked to indicate that is has been in a flood or even totaled. But there is a 40-day window for such a notification to take place.

While there is no sure way to know if a vehicle has been damaged by a flood, the National Automobile Dealers Association offers these tips to prospective buyers to spot flood-damaged vehicles:

  • Check a vehicle’s title history using the National Insurance Crime Bureau’s VinCheck, the National Motor Vehicle Title Information System or a commercially available vehicle history report service, such as Experian or Carfax, etc. Reports may state whether a vehicle has been flood damaged.
  • Examine the interior and the engine compartment for evidence of water and grit from suspected submersion.
  • Check for recently shampooed carpeting.
  • Look under the carpeting for water residue or stain marks from evaporated water not related to air-conditioning pan leaks.
  • Inspect for interior rust and under the carpeting, and inspect upholstery and door panels for evidence of fading.
  • Check under the dash for dried mud and residue, and note any mold or a musty odor in the upholstery, carpet or trunk.
  • Check for rust on screws in the console and in other areas water would normally not reach unless the vehicle was submerged.
  • Look for mud or grit in alternator crevices, behind wiring harnesses and around the small recesses of starter motors, power steering pumps and relays.
  • Inspect electrical wiring for rusted components, water residue or suspicious corrosion.
  • Inspect other components for rust or flaking metal not normally found in late-model vehicles.

Initial estimates say Harvey destroyed between 500,000 and one million vehicles as it stalled for days over the area this summer, dumping an unprecedented 51 inches of rain before moving farther inland and dying off. The 640,000 vehicles flooded in Hurricane Katrina more than a decade ago could seem a pittance by comparison when the destruction is all finally tolled.
Several area automobile dealers took a direct hit from the flooding spawned by Harvey.

“If I had to guess, I’d say it was $52 million in new car inventory in the greater Houston area alone,” says Steven Wolf, chairman of the Houston Automobile Dealers Association and principal of Helfman Dodge Chrysler Jeep Ram and Helfman Fiat Alfa Romeo Maserati in Houston. The association comprises about 175 franchised new car and truck dealers and more than 100 associate members that work directly with auto dealers.

“I know one store lost 400 cars, another store lost 300 cars. Let’s say 2,000 new and used. I know there are some Ford stores down south that lost their inventory,” says Wolf.

McRee Ford in the Houston suburb of Dickinson apparently was hit the worst, losing its entire inventory of new and used cars, rental cars and customer cars in the shop for repairs. Mitchell Dale, grandson of founder Frank McRee, currently runs the dealership and says he expects insured losses of $33 million and another $1.2 to $1.5 million in uninsured losses. Ironically, the dealership had just built a new facility 28 inches higher off the ground to protect against flooding. The extra 28 inches was no match for floodwater that reached four feet and submerged vehicles stored outside.

“We had eight inches of water in the new facility and we had four feet in some of our other areas like our body shop,” says Dale. “All the vehicles on our lot were flooded. The rising water is what got them, so they were flooded inside.”

Dale says he knew the storm was going to dump a lot of water on his dealership but had no idea it would be 22 inches in an eight-hour period and as many as 51 inches total during the five-day rain.

“If you look at the forecast for this storm, we knew it wasn’t going to be a major wind event,” says Dale. “The problem was going to be a water event. They anticipated the water issue to be pretty substantial, but what do you do with 1,100 vehicles? Where do you go? How do you take them? Maybe we could set some of the computers on top of desks. We could have probably done a little to try to save some of it. We just built this brand-new facility…about 28 inches higher than our old building, so we took into consideration our experience in the past with some flooding and we felt like we were going to be OK.”

Insurers’ Response

Carroll Smith, chairman of the Texas Automobile Dealers Association, the statewide trade association representing more than 1,300 franchised automobile dealerships in nearly 300 communities throughout Texas, says he’s heard nothing but positive feedback from dealers working with their insurance carriers.

In Harvey, there was more than $400 million in vehicles moved that we insure. The $400 million represents how many vehicles were moved that were in that storm’s way. Maybe they were moved inside, maybe they moved to higher ground on the dealership lot, but that helps gives the magnitude of just how much work was done to prep for the upcoming storm.

Doug Timmerman, president, Ally Insurance

McRee works with insurer American Road, which was on-site as fast as Dale was. “Insurance companies were on the scene immediately,” says Smith. “The first day that [Dale] could even get in, his property insurer had 50 people there to remediate. I’m hearing nothing but good news about the way everybody handled it.”

Harvey made landfall near Houston on Friday, Aug. 25, but it wasn’t until the hours between Saturday night and Sunday morning that its full wrath was realized. It was then that Dickinson received 22 inches of rain in an eight-hour window. Yet less than 48 hours later, insurance adjusters had arrived to inventory McRee’s damages. By Thursday, American Road had already moved two thirds of the totaled vehicles off the lot to make room for new cars. One week later, McRee was back in business and selling new cars again.

A similar story played out across the street at the Gay Buick GMC Dealership, which estimates it lost 900 new, used and customer cars.

Doug Timmerman, president of Ally Insurance, which handles the majority of insurance for General Motors dealers, wouldn’t provide an estimate of Ally’s losses but says Ally was able to work with area dealers to get a substantial amount of inventory moved out of harm’s way before the storm hit.

“This is going to sound like a crazy high number, but it’s going to put things in perspective,” Timmerman says. “In Harvey, there was more than $400 million in vehicles moved that we insure. The $400 million represents how many vehicles were moved that were in that storm’s way. Maybe they were moved inside, maybe they moved to higher ground on the dealership lot, but that helps gives the magnitude of just how much work was done to prep for the upcoming storm. Obviously, it was substantial storm, but we feel very good with what we did in combination with our dealers to reduce our exposure.”

Wolf says other insurers also have reason to feel good about their response. “I gotta tell you, the insurance companies are unbelievable,” he says. “The good ones—the Chubbs, the Pures, Farmers, State Farm, USAA, Allstate—many of them are totaling the cars just with pictures. You send them a picture of a car underwater, they’re totaling it. My understanding is even if it’s close, even if it’s just in the carpet, they’re totaling it. It expedites, and it protects against future risk down the road if there’s an electronics problem.”

Insurers have also offered special discounted pricing for their claimants who need to replace flooded vehicles.

“I’m really happy with what these insurance companies do,” says Wolf. “The flood damage victims get special pricing on the new cars from the manufacturer. The manufacturer requires a letter from the insurance company saying the vehicle had a claim as a direct result of the hurricane, and we’re not having any issue getting that paperwork from the insurance companies. They get employee pricing which is significant. This is the real deal. The customer presents a letter saying they had a claim from the hurricane, they get employee pricing, which is 6% behind cost.”

Wild West of Cars

What will become of the totaled vehicles? Royal Purple Raceway, site of the annual NHRA Spring Nationals, suspended all drag racing activities through the end of the year to help store as many as 100,000 of the damaged vehicles. Using its 400-acre footprint in the Houston suburb of Baytown, Royal Purple Raceway has become a temporary storage facility for cars, trucks, boats and construction equipment destroyed by the storm. The track will resume its regular racing schedule in the new year.

“Some things transcend racing, and when you see half of our city underwater, you obviously have to prioritize your energies and resources,” says vice president and general manager Seth Angel. “The destruction created by this storm can only be described as biblical. It will take quite a bit of time for things to return to normal, and considering this city has done so much for the Angel family over the last three decades, we very much want to be part of the recovery.”

Meanwhile, a steady stream of tow trucks brings more destroyed vehicles to the Royal Purple lot daily.

“It’s like the wild west of cars down there,” says Smith. “It’s incredible. In Houston when you drive around, you might say, ‘Well, what happened? I don’t see any signs.’ There’s not flooded cars by the side of the road, there’s not buildings blown down. The only indication when you ride around is there might be sheetrock and carpet that’s stacked out by curb. But other than that, it looks like absolutely nothing has happened here.”

Sales Up

Meanwhile, the flooding’s effect on such a large number of vehicles has created a mini-boom for car dealers as people rush to replace lost vehicles.

Some things transcend racing, and when you see half of our city underwater, you obviously have to prioritize your energies and resources…It will take quite a bit of time for things to return to normal, and considering this city has done so much for the Angel family over the last three decades, we very much want to be part of the recovery.

Seth Angel, vice president and general manager, Royal Purple Raceway

“People have to get to their jobs,” says Smith. “They have to get around. They have to get supplies. They have to take kids to school. The sales that we are seeing thus far typically are people who can afford a new car without the benefit of a settlement from an insurance claim yet.”

Wolf cautions that, while sales may be up, profit margins are not.

“We’re selling a lot of cars, but our margins aren’t what they usually are because of this employee pricing,” says Wolf. “There’s a lot people who had 2015, 2016 vehicles who are buying cars, and they normally wouldn’t be buying cars. We’ve got customers who bought just about a month ago, and they are buying another car because that car flooded.”

“Business is very brisk now,” Dale says. “People out of necessity replaced the vehicles that they lost. The majority of the vehicles that we’re selling now are people replacing vehicles that were totaled. We had a family in here yesterday that lost three vehicles, and they were in here buying three vehicles.”

Patten is a contributing writer.

In its wake, it left more than 70 people dead, billions of dollars of damage, and hundreds of stories of strangers helping strangers. Several of those stories involve insurance professionals who were scrambling as early as Sunday to rescue customers from flooded homes and begin processing claims.

Randy King, a partner in Avalon Insurance Agency, an affiliate of Wright Flood Insurance, was keeping constant vigil on the rising water in his central Houston neighborhood, worrying not only about the clients he expected would have a tough time in the storm but also about a home he had just closed on but not moved into.

Nearby, one of his personal lines clients, Claude “Lee” Martin, a respected community leader and elder at the Westbury Church of Christ, was monitoring the storm from his two-story home, thinking Harvey just might spare his neighborhood. It stopped raining in his neighborhood Saturday afternoon, and he even spent some of the day swimming in his backyard pool.

But Saturday evening, rain started falling everywhere—in record amounts. Martin’s daughter and her family came to stay at his house because he has a second floor. They moved what they could upstairs, including a small air conditioner.

Some estimate Harvey dumped 27 trillion gallons on land, or enough to fill the Astrodome 86,000 times.

“I checked at 3 a.m., and it hadn’t stopped raining,” says Martin. “It just appeared to hit and stay here. Water was coming in under the doors. By 6 a.m., it was a foot and half deep in here. I walked down the street a bit, but the current was real strong and it could pull you into a storm drain if you didn’t know where they were.”

By Sunday afternoon the power had gone out, and he was fashioning a raft out of pool toys to evacuate his grandchildren from the waist deep floodwater that had by then engulfed his house.

Meanwhile, in the Houston suburb of Sugar Land, Westbury Church of Christ teacher LeeAnn Moody had thought she too would be safe. “I was sure that I could stay home and not be affected,” says Moody. “We’d had hurricanes before with no damage. My son kept asking me to come to Katy and stay with them.”

The storm was so long and so intense that the days seemed to run together, Moody says. She knows her son Kyle drove from Katy, Texas, to rescue her but cannot recall if that was Sunday or Monday. “It rained several days before he came to get me,” she says. “The last time Kyle called me to say, ‘I’m coming to get you,’ I finally said, ‘Yes, I’ll go.’ I was getting scared, and the waters were rising up the driveway quickly.
“With roads being closed by the minute, there was no guarantee that he’d get to me, but he did. Kyle and I walked through 18-inch-deep water with my frightened dog, one suitcase and whatever else I could carry.”

Hometown Hero

This one really opened my eyes. It ruined everything…Now we start from scratch and do it over. This type of event really takes people under. But I feel pretty good about staying here. I like this area, and I’m ecstatic that Wright did everything that should allow me to rebuild myself…I really feel like I’m going to be able to get out of this OK.

Claude “Lee” Martin, Houston community leader and elder at the Westbury Church of Christ

Randy King’s roots are in Westbury. The Avalon partner is a member of the Westbury Christian School board and married his wife at the Westbury Church of Christ. “I’m really tuned in to what the school is about and what the people are like. They were my first priority,” he says. When King discovered the extent of Moody’s flooding, he reached out to help her, offering up the house he had just closed on as a place for her to live while he helped rebuild her home, which included tearing out the wet sheetrock and insulation, rebuilding the walls, re-flooring and painting the interior.

King is delaying moving into the new home until he can get Moody back into hers, which he expected to have accomplished by the end of October.

Moody says King is “a little like a comic hero. Randy is always joking and funny but the first one to offer help.” Along with King’s help, the Westbury Christian faculty helped Moody pack up her house. And the football team and coach helped demo the damaged areas of the house. “Some of my own anatomy students were right there with me in the mess helping to demo, throw wet items out and pack my things up in boxes to move,” Moody says.

Martin echoes the response from King and from Wright Flood. Not only were the adjuster’s estimated damages exactly what Martin was expecting, but the communication and swift action were crucial.

“I’ve known Randy for years,” says Martin. “On Monday, he got my claim filed. On Wednesday, the adjuster called to say he was trying to come to Houston from Florida but the airport was closed. He got out here Thursday and said he was sorry it took so long. He was really professional. To me, the communication took a lot off my mind. I’m quite happy. The process has been handled extremely well.”

You look for people who look like they need help. You may get inside and find people who had too many other volunteers already. Maybe they just needed something like a fan or a dehumidifier to dry things out. But many needed all the help we could give.

Brett Herrington, president of Marsh & McLennan Agency Southwest

This comes in the face of losing a great deal. “This one really opened my eyes,” says Martin. “It ruined everything. All our memorabilia—that’s just stuff. Now we start from scratch and do it over. This type of event really takes people under. But I feel pretty good about staying here. I like this area, and I’m ecstatic that Wright did everything that should allow me to rebuild myself. It will probably take about a year to get the house back to where it was. I really feel like I’m going to be able to get out of this OK.”

All the Help We Could Give

According to the National Weather Service, Harvey dropped a total 51.88 inches of rain near Mont Belvieu, just east of Houston, making it the biggest rain-producing storm in U.S. history. Some estimate Harvey dumped 27 trillion gallons on land, or enough to fill the Astrodome 86,000 times. For perspective, Houston’s highest annual rainfall recorded at George Bush Intercontinental Airport north of downtown Houston was 49.77 inches.

Harvey affected far more homeowners than businesses. Richard Blades, chairman of Houston-based Wortham, said he expects 85% of Harvey claims to be residential and 15% to be commercial. Some 185,149 homes were damaged or destroyed, according to data from the Texas Division of Emergency Management. An estimated eight million cubic yards of trash from flooded homes—soaked drywall, flooring, furniture, clothing and toys—was generated by the storm in Houston alone. If stacked together in one pile, it would be enough to fill the Houston Texans’ football stadium two times over.

King admits to being scared as the rain started pounding his neighborhood Saturday night. “Saturday night through Sunday morning I was worried it was going to come in. It was just raining, raining, raining. Just constant pouring rain…. I had everything I needed upstairs, and I wanted to stay and ride it out. I never went to bed. I stayed up and watched the radar. At 2 a.m. Sunday, the water in the street was starting to get pretty high so I started putting everything upstairs.

I am crying because I don’t know any of you and you all have been working all day in my home helping me. I have seven strangers in my home getting me through the worst time of my life.

Harvey victim to Denise Douglas, senior account executive at Ally Financial

While both of King’s houses were spared, it wasn’t until Tuesday that water in the street receded enough for him drive his car. “I came into the office on Tuesday to help man the phones,” he says. “My partners work from their houses, but only one of them was answering phones, because the other got flooded and didn’t have any electricity.” The partner who was on the phone also had six inches of water in her house, but because her electricity never went off, she handled calls along with several other employees who were able to work out of their homes.

Other brokers and industry professionals heeded the call, showing their desire to help beyond just assisting with claims.

Reinsurance brokerage and risk/capital management advisor TigerRisk Partners sent a volunteer force of employees led by a former Navy SEAL to aid in rescue and recovery. Staging in San Antonio, the team assembled from several TigerRisk offices and embarked for Houston with a truck loaded with a flat-bottomed boat, tools, provisions, supplies, several ATVs and several four-wheel drive trucks.

“While we’re dealing with the economic aspects of the disaster, there are Americans in real need. In the face of so much suffering, we feel compelled to help,” says Rod Fox, CEO of TigerRisk.

The volunteer team was led by David Fernandez, an operations specialist at TigerRisk and former Navy SEAL. “The situation is a lot worse than people understand,” said Fernandez from a truck ferrying supplies from San Antonio.

Brett Herrington, president of Marsh & McLennan Agency Southwest, says several employee teams rallied to help displaced colleagues with tear down and removal of water-soaked items but they also stopped to help others in their area who needed it.

“You look for people who look like they need help,” says Herrington. “You may get inside and find people who had too many other volunteers already. Maybe they just needed something like a fan or a dehumidifier to dry things out. But many needed all the help we could give.

“Between sales and support, our people spent more time worrying about their colleagues than they did themselves,” he adds. “And it wasn’t just their colleagues. Many stopped wherever it looked like people were in need of assistance.”

Ally Financial senior account executive Denise Douglas had to be rescued from her flooded home on Monday and within days was volunteering time to help customers and even an elderly neighbor of one of Ally’s customers because she had no one else to help her.

“As we were helping one of the ladies gut her home and throw out all her belongings, she started crying,” says Douglas. “I walked up to her and put my arms around her and said, ‘I can’t imagine what you are going through watching years and years of memories be thrown to the curb.’ She turned to me and said, ‘That is not why I am crying. I am crying because I don’t know any of you and you all have been working all day in my home helping me. I have seven strangers in my home getting me through the worst time of my life.’”

Everyone worked hard and did things that we definitely do not do during the course of our normal business day. I had one lady pull me aside and say, ‘I never thought I would meet real angels in my lifetime, and then y’all showed up.

David Cullins, an Ally Financial account executive

Richard Beatty, an Ally Financial commercial product specialist, spent Tuesday rescuing as many as 25 people from the Blackhorse neighborhood in a friend’s boat.

“We heard a rescue boat had capsized in the Blackhorse neighborhood and people were missing, so we headed to Blackhorse,” Beatty says. “En route, a sheriff’s deputy pulled us over and requested that we follow them to the Bear Creek subdivision where a paraplegic needed to be rescued. When we arrived and launched the boat, the two deputies asked my son and me to stay on shore, as the boat was not big enough. As we were waiting we figured we could launch my boat there as well. The National Guard helped push the boat off the trailer, and we began rescuing people.”

“The experience is one that I would not wish upon anyone, but if I had to go through any type of disaster again, I would want these people with me,” says David Cullins, an Ally Financial account executive. “Everyone worked hard and did things that we definitely do not do during the course of our normal business day. I had one lady pull me aside and say, ‘I never thought I would meet real angels in my lifetime, and then y’all showed up.’”

Patten is a contributing writer.

Your office is in San Francisco. Do you live in the city?
I work out of San Francisco, but I actually live outside Salt Lake City. We also have a home in Houston.

How did your Houston home fare in Hurricane Harvey?
Thanks for asking. We had water come up to the top of the foundation, but it didn’t come into the house. We have lots of friends who weren’t so fortunate. Eighty-five percent of people in Harris County didn’t have any type of flood insurance.

Wow. And you’re probably looking at months of recovery.
It is going to take years to fully recover. The city of Houston has experienced three 100-year floods in the last 10 years.

What do you hear from your friends and neighbors?
Although it was catastrophic in nature, you saw the best of people in helping each other. So some good came out of the devastation.

Did you grow up in Houston?
Yes, Houston is my home. I went to school at Texas A&M. I had the fortune to coach baseball at Texas A&M.

While you were still a student?
I was a student coach, then a graduate assistant, then a full-time coach and recruiting coordinator out of school.

And you were a political science major. Did you ever want to go into politics?
I worked on two presidential campaigns. In 1988, I worked for the George H.W. Bush campaign. In 1990, when Bush was in office, I interned with the Treasury Department, in the Office of Legislative Affairs.

What’s your recollection of President Bush?
I think he’s one of the greatest citizens of the United States. He’s just a guy who, in my opinion, always had the country’s best interest at heart.

What have you learned from your experience in a campaign and in government that you have applied to your business career?
You move quickly, and you have to adjust your approach based on how others react. It’s a great life-learning experience regardless of which side of the aisle you sit on.

Were you always interested in politics?
I was. I was involved in student council and other leadership groups growing up. I had the honor of being president of my class at Kingwood High School.

Tell me about your volunteer work with disabled veterans.
I became involved with a project called Entrepreneurship for Veterans about 10 years ago. Every other summer, I go back to Texas A&M to speak with a group of disabled veterans who are starting their own businesses. It’s an intensive time where veterans interact with professors and business leaders. We are also involved with the National Ability Center. Both organizations perform a great role for our veterans.

What’s made you so passionate about the insurance industry?
Insurance for many of us is nothing more than a promise. It’s an awesome responsibility to help individuals and companies plan for events they hope will never happen and to be there to deliver, to help.

If you hadn’t gone into insurance, what would you have done?
I was either going to become a professional baseball scout or go into the insurance business.

What’s the most surprising thing about Salt Lake City?
It’s a unique place to live and work. Downtown is like most metropolitan cities, but you’re within 20 minutes of the very best hiking and world-class skiing around. I think the biggest thing that people would find surprising is that Salt Lake is quite diverse.

Have you had one mentor who’s been most influential in your career?
Mark Johnson, the longtime baseball coach at Texas A&M. He’s been a great mentor to me. He’s a legendary baseball coach—he’s in the College Baseball Hall of Fame and the Texas A&M Hall of Fame. You learn a lot from someone when you compete 60 to 70 times in a season. He’s still one of my closest friends, which is a bit odd given he’s my father’s age and he has kids my age.

What is something your co-workers would be surprised to learn about you?
Probably that I’ve been involved in politics. You don’t really advertise things when you know that 50% of the population doesn’t share your thoughts or beliefs. And they’d probably be surprised to know I still enjoy a Harley ride up and down the mountain.

If you could change one thing about the insurance industry, what would it be?
Perhaps being more innovative; we need to embrace change and technology to forge ahead.

What gives you your leader’s edge? I work with a lot of good people who work tirelessly to improve their clients’ situation, and that’s fun.




Vacation Spot
Maui, Hawaii

“Anything that has Chevy Chase in it.”

Reo Speedwagon and Train

Last Book Read
House of Nails: A Memoir of Life on the Edge, by Lenny Dykstra

Business Leaders
Warren Buffett and Jack Welch

Audi SQ5

The iPhone was introduced in 2007, and it would be another seven years before the FAA approved the use of a commercial drone over land.

Today, more than three quarters of American adults use a smart phone, and drones fly everywhere. That’s dramatically changing how insurers—and insurtech startups—handle claims after the widespread damage caused by Hurricanes Harvey and Irma in Texas and Florida.

“Going back 12 years, it’s changed tremendously,” says Jim Wucherpfennig, vice president of property claims at Travelers. Years ago, adjusters would carry separate equipment to do tasks such as measuring distances and roof slopes, record audio and take pictures. “It’s a big leap forward. We’re able to do a lot more with just smart phones.”

To expedite claims after this year’s hurricanes, insurers such as Travelers, Farmers and Chubb are flying drones while insurtech firm Snapsheet is putting mobile phones to work and Esurance is using predictive analytics and aerial images.

Travelers has deployed about 85 drone-certified claims professionals to assess damage to residential and commercial customers’ property in Texas and Florida. The company now has about 300 claims professionals trained to use drones and expects that number to climb to 600 in the first quarter of next year.

“The drones help us adjust the claims more rapidly and really enhance the customer experience when we can go out and see all the damage on that first visit with a drone flight, write the estimate and give the customer a check for the damages so they can start the repairs and get their lives back in order,” Wucherpfennig says. “The drones help us streamline the entire process.”

It’s also safer for adjusters who don’t have to climb dangerous roofs. There’s another attraction for customers who agree to drone surveys: they can see the damage in real time as the drone takes video and photos of their roofs.

Farmers has deployed drones for the first time in a major catastrophe in Texas. Drone cameras capture higher-resolution, 3-D images that detail physical damage and generate analytic reports in minutes. Farmers is also using geocoded mapping software to overlay its policies and post-hurricane aerial imagery to help triage claims electronically. Smart phones play a role, as Farmers’ customers can file claims from anywhere they have a connection.

Smart phones are revolutionizing hurricane auto claims. Chicago-based Snapsheet says it handled thousands of auto claims for its insurer clients in the first week after Harvey. Snapsheet provides the technology and support for carrier-branded apps that enable customers to take pictures of their damaged vehicles with their phones and submit those with their claims. Snapsheet employees write the estimates, enabling insurers to pay claims more quickly.

“From the time we receive the assignment, we’re processing and estimating these claims in a little over a day on average,” says Andy Cohen, Snapsheet’s chief operating officer.

“The traditional claims process requires physical resources on the job site, maybe driving around to inspect vehicles,” Cohen says. “Our ability to ingest a claim, estimate it accurately, and enable the carrier to pay it, allows the individual to replace an asset faster, whether that’s Houston, Galveston, Florida or South Carolina.”

While the customer doesn’t see what goes on behind the scenes, Snapsheet says its virtual claims model enables it to match its workflows to the demands of the disaster to sort hurricane-related claims from everyday ones.

“That allowed us to process thousands of claims before a standard insurance carrier would even be able to get to the scene,” Cohen says. “Speed really does matter in this. Getting the customer paid out, that’s why the insurance is there. That’s the moment of truth in the customer experience.”

People tend to connect blockchain with cyber currencies like bitcoin, but in what other ways is the distributed ledger technology being put to work today?
In situations where there are multiple parties involved in a transaction, distributed ledger technology (DLT) can help create a single “truth.” For example, processing a trade in the financial industry involves multiple parties, their IT systems and multiple departments across those trade participants. Processing the transaction over distributed ledger technology offers significant efficiencies over current practices. Instead of copying the data and storing it in multiple databases, processing with DLT can be validated and time stamped to confirm that all parties are recording the same messages. That saves significant amounts of duplication of effort as well as errors and reconciliation. We’re looking at that as at least one of the uses.

For insurers and reinsurers, are we still in the testing phase for the technology?
Absolutely. I haven’t come across any full application that’s in production or being used across a specific type of business. However, there are pilot projects under way. The R3 consortium is in the process of working on three or four pilot projects in insurance. There are a couple of other examples. AIG and Standard Chartered did a project using a specific type of distributed ledger technology called hyper ledger fabric, working with IBM to create a commercial insurance master policy. Allianz did a pilot project to create a smart contract using distributed ledger technology for catastrophe swap contracts. All of these are pilot projects. I’m not sure there’s anything that’s in production or being widely used.

How do you see distributed ledger technology being used in insurance going forward?
My personal perspective is that the low-hanging fruit is back-office efficiency gains.

When a transaction gets executed in insurance and reinsurance, there are multiple parties—especially in reinsurance, it is usually a multiparty transaction. By using distributed ledger technology, we can avoid counterparties’ recording their own version of “the truth” on their systems and then having to deal with the inefficiencies and complexities and reconciliation. All that can be eliminated if distributed ledger technology is used to recall the transaction; that then can be used by multiple parties. That is the near-term application of this technology.

How will the technology impact areas such as claims?
Claims follow contracts. When a contract is executed between different parties using a DLT framework, then all parties that are involved now have access to that, and only authorized parties can make a change. As soon as a change is made, then every party that is on that distributed ledger gets notified of that change. In theory, you could put claims as one of the nodes on that distributed ledger, and as soon as a claim occurs, it triggers a payment that then gets notified to everybody that’s on the ledger. That may be a little far out. One way that may happen soon is a claim gets notified to the ledger by the party experiencing the claim and as soon as that happens everybody on that distributed ledger gets notified that there was a claim. Ultimately, that’s connected to payment systems or banks. If DLT verifies that it is a legitimate claim, and all parties on the network agree to that, then that claim can be paid directly as well without any manual intervention, without any duplicate data entry.

Can those claims be tied to a parametric trigger?
That’s a lot easier. Those are what’s called self-executing smart contracts. Once you agree to that smart contract, as soon as an index triggers, like the PCS Catastrophe Loss Index or another index like what New Paradigm is doing with wind, then the entire process happens through the ledger automatically in terms of payments and everything.

Can you tell us about your participation in the R3 Centre of Excellence and how this will expedite the spread of distributed ledger technology in the industry?
At TigerRisk, we are focused on staying on top of technological developments. There are a couple of different aspects to our participation in R3’s Centre of Excellence. First, we can stay abreast of the developments in the DLT world through the R3 consortium. As a member of the consortium, we have access to all the projects that are done by the consortium, all the research materials and other information.

Second, we can work with R3 to solve some specific issues, such as bringing efficiency to the back-office process. R3 has a DLT platform called Corda, and we are working on a prototype using that platform to see if we can create this DLT framework to improve back-office efficiency. That is a two-pronged approach from our perspective. It’s staying on top of the developments—and R3 is a great resource for that because the consortium includes many banks and insurance companies—and then doing this private project work with them to create efficiency in the back-office processes.

How will DLT affect brokers going forward?
In the near term, I’ll come back to these efficiency gains. There is a significant amount of pressure on brokers to improve efficiency in their back office that creates significant savings with a direct impact on the bottom line. It creates a very efficient and trusted process where you don’t have any of this reconciliation or any errors. From a client perspective, that’s a great thing. If a client is working with a broker that’s using this technology, that’s in the best interest of the client. Now, the process is safe; it’s secure; it’s trusted and it happens quick. Clients become part of that distributed ledger. They have visibility and can see what is going on rather than having to wait to hear from a broker.

Is there a wider impact?
Everybody at TigerRisk is excited about this technology and its impact. Technology is an enabler for innovation. If we can take away mundane tasks from humans, they can focus on innovating new products and new ideas. Technology like this can replace that very easily, and that’s one of the key reasons for us to be involved.

In his book Unlimited Power, Tony Robbins calls this type of event a mental scotoma, which he defines as a mental blind spot. According to Webster, a scotoma is actually “a spot in the visual field in which vision is absent or deficient.” Robbins uses the term to underscore how these mental blind spots can keep us from seeing things that are right in front of us.

I hear examples of this all the time. I will be talking with someone about sending an emerging leader to a Broker Smackdown, a Council program designed to build business acumen in emerging leaders, and they will respond, “I don’t know who I would send. I don’t think I have anyone.” According to Robbins, the way to overcome a scotoma is to look at things in a different way, to reframe the way you see something.

Russell Conwell, the founder of Temple University, used the parable of Acres of Diamonds in the early 1900s to help people see things differently. The parable tells the tale of Ali Hafed, who travels the world looking for something that is in his own backyard. Conwell reminds us that to see things differently we must be open to the possibilities around us. We overlook the value of something because we believe we already know it. We must learn to look at the familiar in new ways—some of the best inventions (snaps, the cotton gin, the lawn mower) were created when people found a new approach to an everyday thing.

I believe, as an industry, we may suffer from a mental scotoma when we think about who the emerging leaders are in our firms. I contend you have diamonds in your backyard that you might not be seeing. So, let’s talk about different ways to identify emerging leaders.

Stephen Blandino, in his blog “Signs of an Emerging Leader,” suggests the following guidelines:

  1.  Look for the people in your firm who have influence, the folks who have the respect of others. Be sure to look beyond big personality.
  2.  Who takes initiative in your office? The first sign of a potential leader is demonstrating an ability to lead oneself. Identify the people who seek responsibility—not accept it, but seek it—looking for projects to take on.
  3.  People who possess forward-thinking ability, who think with innovation and creativity, could be the people to move things in the right direction. They see the world as it can be. They want to disrupt the status quo. They will not be confined to what is. They see better ways to get the job done.
  4.  Who in your office has strong people skills? Those who know how to work with other people will know how to influence people. This is a sure sign of an emerging leader.
  5.  Is there someone on your team who has the ability to motivate and mobilize others? The ability to see the need is only half the job. Knowing how to respond to that need and get others to help shows the potential to progress toward a higher leadership level.
  6.  Look at your problem solvers. True leaders are the ones who, instead of whining, wrap their head around the problem and work to solve it.
  7.  Emerging leaders are teachable, with a desire to grow, improve and be excellent in all they do.

In a Forbes article titled “The Best Talent You Have May Be Right Under Your Nose,” contributor John Baldoni, international author on leadership, tells us that sometimes our most talented leaders get overlooked because their supervisors have them in positions of low visibility. To spot this hidden talent, he tells us, look at teams that meet their deadlines and do it in ways that other teams envy. Engage these teams in conversation and listen for those who talk about the effort and skills of the people on their team. These are the people to consider for roles of higher responsibility.

Tony Richards of Clear Vision Development Group, in his blog “How to Identify Emerging Leaders,” writes that the following characteristics and traits are present in the folks who are your future leaders: (1) mental toughness—they rise to the occasion when things get difficult; (2) resiliency—they recover quickly from adversity, have a great ability to handle criticism and “eat critical feedback for breakfast”; and (3) strong communication skills—they write, speak and listen well.

While it is important to bring new talent into our industry, let’s be sure we are also developing the talent we already have, the emerging leaders who are sitting right under our noses, on the shelf, next to the mustard.

McDaid is The Council’s SVP of Leadership & Management Resources.

Recent developments with the CEBE board reminded me of the importance of keeping our most experienced, seasoned colleagues (including yours truly) engaged in fulfilling work that leverages our acquired knowledge. We veterans are a bit fatigued by years with clients on the reform roller coaster. A deep frustration has bubbled up over the lack of progress we’ve made as a country solving the drivers of healthcare costs. We’re not a group that is acquainted with so many roadblocks. We’ve built our careers around getting things done, and we have a bias toward action.

Specifically, Council members have grown increasingly frustrated at the lack of attention paid during the never-ending ACA repeal-and-replace debate to the underlying problem—cost. Some CEBE board members have voiced a desire to drive initiatives that go far beyond our traditional scope at The Council. They passionately agree that, absent enhanced engagement, nothing of significance will change. Not only will this jeopardize our industry, but our country will continue to suffer the consequences of an unsustainable healthcare system.

At the risk of stating the obvious, this problem is much larger than we. We are just one of many important stakeholders, including patients, providers, payers and regulators. We cannot lose sight of the entire equation as we strive to improve the system for our clients.

In that vein, the CEBE board has established a task force to explore how The Council can acknowledge this core issue of cost and appropriately engage in a larger dialogue. We all know partisan politics is at a high point in Washington. Gaining consensus on any issue—much less the hot button healthcare conversation—is extremely difficult. We must find a way to balance our noble, aspirational goals with practicality and with the charter of the CEBE board.

Over the last few months, this task force has had a spirited debate about our mission and options for tackling this challenge. We’ve nailed that radical candor thing, by the way. I had the opportunity to have one-on-one conversations to augment our group discussions; after each interaction, I’d think of the old saying that goes something like, “If you’re the smartest person in the room, you’re in the wrong room.”

I learned something new each time I spoke with someone about this. And therein lies the nexus of our role. We have a great deal to add to the ongoing healthcare conversation in our country. And the more we can disseminate our ideas backed by real data and case studies, the more we can influence the outcomes of this debate.

With this in mind, we have decided to make our priority producing thought-provoking educational pieces from differing perspectives on the underlying problem, the price of health services (medical and Rx). We’ll focus on pricing transparency, “legitimate” pricing and alternative payment models. By highlighting the different components in the complicated “price of health services” equation, we’ll educate legislative stakeholders and inspire informed questions back to Council members.

The Council is in education mode on this issue versus actively lobbying at this time. A 360-degree dialogue is needed to understand the challenges from the perspective of all involved, and brokers are uniquely positioned to educate on this topic given their expertise in local healthcare markets.

Over the coming months, you will begin to see more focus on these topics in The Council’s content. In fact, I hope you will take a look at one of our first offerings in this area—the Vital Signs spotlight section in this issue. In it, you’ll find a deeper dive into the topic of reference-based pricing.

How can you help? I’m glad you asked. You and your colleagues are critical to content development. Please consider the approach we’ve outlined and think about who within your firms has expertise and/or passion for these topics. The Council is prepared to dedicate time and effort to this, but our collaboration is necessary for this to be successful.

You might be wondering how you and your colleagues can fit anything else into your often overscheduled workweek. While that struggle is real, I believe there is a way to run our businesses while devoting some time and energy to our macro environment. I’d like to thank all of the members who have been actively engaged and invested time in very thoughtful dialogue on this serious issue. And I look forward to more to come.

Walsh is SVP and partner at Woodruff, Sawyer & Co.

To take part in this work, please reach out to Cheryl Matochik.

CEBE Cost Task Force

Jenn Walsh (Woodruff-Sawyer)
Kerry Finnegan (Mercer)
Maria Harshbarger (Aon Hewitt)
Jon Trevisan (BB&T)
Nancy Mellard (CBIZ Benefits & Insurance Services Division)
Brad Plummer (Cottingham & Butler)
Austin Madison (The Crichton Group)
Brian Robertson (Fringe Benefit Group)
Den Bishop (Holmes Murphy)
John Kirke (IMA)
Rod Cruickshank (The Partners Group)
Mitch Andrews (Plexus)
Dan Gowen (Wells Fargo Insurance)

This is why the world’s economic losses from natural hazards are 70% uninsured—more than 90% uninsured in many low-income countries.

The business of cat risk modeling has grown during the past few decades as insurers increasingly demanded predictability in return for underwriting risk in places like Florida. As a result, when a series of hurricanes struck the U.S. in August and September, insurers were able to tap into a staggering wealth of real-time information about possible losses under various scenarios.
Multiple times a day, as Tropical Storm Harvey and Hurricane Irma advanced toward Texas and Florida, the community of cat-risk analysts embedded in the leading insurers ran and reran detailed loss models based on enormous amounts of data about property values, weather behavior and flooding—all data that in the modern era help insurers price risk and decide whether to expose their capital to it.

But data about property value and exposures don’t exist for most of the world. Where data are scarce, so is insurance. And the same is true of effective interventions to reduce exposure and build resilience.

Underscoring this point is the recent devastation and loss of life from monsoon flooding that left more than 1,200 dead in Bangladesh, India and Nepal. By contrast, the massive flooding from Harvey, which hit Texas around the same time, cost some 60 lives. The death toll from Irma was north of 50. The reason the U.S. death toll was much lower than it was in Asia is preparedness informed by years of data and analysis that has led to better building standards and emergency response systems.

Modelers, and the data they collect and analyze, have become the critical foundation for building resilience in cat-prone regions rich and poor. Even in strong economies, the proportion of insured risk can be low, as Harvey demonstrated in Texas, where flood losses dominated. But at least in those markets, a mature insurance industry is able to fund investments in the practical application of data, science and analytics.

In low-income nations, by contrast, the work of cat modelers is largely philanthropic. The commercial incentive to invest is minimal. Lack of commercial motive isn’t the only obstacle to developing cat models. Numerous academic organizations build models but not generally of a type that has utility outside of research.

The issues of commercial incentives, transparency and standardization in cat modeling were the subject of a discussion with members of the Insurance Development Forum (IDF) at the Global Insurance Forum in London in July. On the dais were representatives of the largest professional cat modelers—Risk Management Solutions (RMS) and AIR Worldwide—and the nonprofit Oasis Loss Modeling Framework. The mission of Oasis, which gets most of its funding from the insurance industry, is to increase the availability of models by encouraging all manner of modelers to use its open source code and providing free access to nations most in need.

The notion of giving away all this valuable information might pose a threat to the for-profit sellers of proprietary models in the market. The founding organizers of the IDF—including more than a dozen global insurers and brokers and the United Nations and World Bank—recognized this. That’s why the IDF established a working group charged with finding a way to bring the ability to measure and price risk to vulnerable, underinsured markets in a way that is commercially viable for all stakeholders.

“The next big phase of activity for the [IDF’s] risk mapping and modeling group…is looking at interoperability,” Dickie Whitaker, Oasis CEO, says. “It’s fantastic…that RMS and AIR relish the opportunity to have that conversation, because if they’re not part of that conversation and they’re not part of the solution, there won’t actually be a solution.”

Or at least not an optimal solution.

Oasis is working with local academics and national and regional governments not only to build models—for example, for flood in the Philippines and for cyclone in Bangladesh—but to teach people in those countries how to do it themselves and to give them all the necessary tools for free, Whitaker said. When the Philippine and Bangladesh projects are completed, “We’re going to be able to see how we can replicate that around the world. It’s ‘modeling for the masses.’”

The for-profit firms, rather than resisting this effort, have in fact joined it. RMS, for example, has been funded by the U.K. and Germany to help the governments of the world’s 70 poorest countries close the so-called protection gap. And AIR has listed its models on the Oasis online marketplace, OasisHub.

RMS global managing director Daniel Stander cites his firm’s commitment to transparency. The company discloses its model methodologies to its clients. This doesn’t just help insurers refine their underwriting practices. It also helps insurers demonstrate to regulators and rating agencies that they truly understand their risk and are adequately capitalized.

Cat risk models do much more than help insurers manage their exposures, Stander says. “Models make markets,” he says. “Risk and capital cannot find each other unless there is a common language to describe what is being transferred. And the commercial models are that reference view for that trade, the standard around which a market can form and function.”

The markets that need to be made today, though, aren’t in Miami or Houston. They are in Bangladesh, the Philippines and scores of other at-risk, underinsured nations.

Daniel Kaniewski, AIR Worldwide vice president, says: “Simply understanding your risk would be a huge benefit regardless of when that mature insurance market comes along.”

Winans is principal of Chris Winans Consulting.

The second was the 2013 Target breach involving the theft of credit card and personal data on 110 million Americans. And the third was this September, when Equifax, one of the country’s largest credit bureaus, announced that data on 143 million people had been stolen, including names, addresses, Social Security numbers and birthdates. The theft also involved 209,000 credit card numbers and 182,000 credit dispute documents.

Although there were plenty of major cyber incidents in between these events—such as the multi-pronged attack on Sony in 2014—ChoicePoint and Target rang alarm bells and moved the needle on the cyber-security market. We can expect the same from the Equifax incident.

The Equifax breach finally may advance federal legislation regarding breach notification and spur other regulatory agencies, such as the Securities and Exchange Commission (which recently announced, it too, was breached), to mandate certain activities in cyber-security programs and reporting on cyber attacks.

Like a tsunami, insurance markets will be affected by resulting claims and increased risk and compliance costs flowing from the breach and any forthcoming regulatory actions.

The Equifax breach particularly highlights the risks associated with unauthorized access to large databases of personally identifiable information (PII) and the impact these breaches can have on ordinary individuals whose data may be used in fraudulent schemes, identity theft, or other crimes. The ugly truth underlying all of these incidents is not how much money it costs the company that was breached; it is how much it costs everyday people who have to keep their jobs and personal lives intact while trying to clear their credit report and resolve claims for accounts or loans they did not apply for.

A 2013 Bureau of Justice Statistics report found that identity theft cost victims $24.7 billion in 2012—more than all other property claims combined. More recently, the 2017 Identity Fraud Study released by Javelin Strategy & Research said 15.4 million people were identify fraud victims in 2016, an all-time high, with losses of $16 billion. Now, with identity theft protection as a popular employee benefit, expect increased claims on behalf of individuals if the Equifax data are used for nefarious purposes.

A little-known aspect of the whole data breach lifecycle is the role the credit bureaus have played and how breach notification has boosted their business. When any company’s PII is breached, it has to hire one of the three major credit bureaus—Equifax, TransUnion or Experian—to send out required notifications to the people whose data have been compromised because they are the only organizations with current contact information for everyone, including former employees who may be living elsewhere. Depending on the size of the breach, the fees charged by the credit bureaus for this notification service can be sizeable. But Equifax is spared this expense; it can simply send its own notifications.

The cost savings in notification, however, will do little to offset Equifax’s legal bills. The company already faces at least 23 potential class action lawsuits. The Federal Trade Commission has confirmed it is investigating the breach. New York Attorney General Eric Schneiderman says he is investigating the incident. Two congressional committees have announced hearings. The Senate Finance Committee has asked the company to respond to a request for information. And the Massachusetts attorney general has filed a lawsuit against the company for failure to protect consumers’ PII.

The Equifax breach appears likely to affect the company’s bottom line. Credit bureaus have built up quite a business selling identity theft services, such as credit monitoring and alerts, credit score reporting and lost wallet assistance. They used to refuse to put a permanent fraud alert or a credit freeze on accounts until state breach laws required them to do so. Why? The more breaches there were, the more money they made. In fact, Equifax CEO Richard Smith made his mark at the company by focusing on acquiring new sources of personal data, such as employment records, and on mining and selling various data reports. This strategy added employers and insurance companies to the firm’s client list and revenue to its financial statements.

The impact of the Equifax breach, however, will not be limited to the company and affected individuals. The incident also will cost businesses and the federal government. The information stolen in the Equifax breach is the precise information that is used in the authentication procedures of financial institutions, the Social Security Administration, and the Centers for Medicare & Medicaid Services.

“One important impact of a breach of this size is that it can be a systemic shock to established procedures of authentication,” says Paul Bond, co-leader of ReedSmith’s Information Technology, Privacy & Data Security Group. Indeed, banks and lending institutions are reportedly examining their authentication procedures and reconsidering doing business with Equifax.

The Wall Street Journal reported Equifax’s 2015-16 lobbying disclosure forms indicate the company spent more than its counterparts in lobbying Congress to limit liability regarding “data security breach notification” and “cybersecurity threat information sharing”—perhaps in anticipation that such a breach could occur. In addition, Equifax made political contributions to 13 members of the Financial Services Committee in the 2016 elections and lobbied to trim the power of regulators. This now will likely have a snapback effect as legislators and regulators feel the pressure to take action to protect individuals whose data was not adequately protected and was disclosed in the breach.

Equifax struggled to be forthcoming with information about the breach to assist companies using its services or individuals whose data had been stolen. It delayed announcing the breach for six weeks after it was discovered, and its lack of transparency will likely prove to be a costly mistake for Equifax and everyone affected.

Equifax is certain to remain in the cross hairs for some time to come, and insurance agents and brokers need to stay informed and prepared to help clients with claims and questions.

Westby is CEO of Global Cyber Risk.

Are you good? Or are you great?

We all want to think that our agencies are great and will fetch the highest value in the market. After all, we started the business and grew it, and it’s likely supporting a comfortable lifestyle. So most owners believe they deserve an attractive asking price when they go to market. And, in our opinion, there’s nothing wrong with wanting a high value for the business.

But is that what the business deserves?

Are you doing the work to generate at least 20% new business written as a percent of your prior year’s commissions and fees and growing organically by 15% annually? Our proprietary benchmarking suggests that most firms write around 12% new and grow in the low to mid-single digits. Very few have figured out how to run a sustainable, high-performing business.

Even in the most robust mergers and acquisitions market the insurance industry has ever seen—with multiples at an all-time high—there is a misconception about what price a seller will get. Many believe that, because of high demand, good and below-average firms still deserve the highest market value. But that’s not the case—not in any market.

Are you good, great or just hanging on to a really good lifestyle business?

If you want to take advantage of today’s active M&A market and truly maximize your value, there’s work to be done. Despite the high multiples being offered in the insurance industry M&A market, not every agency is worth 9 times EBITDA (earnings before interest, tax, depreciation and amortization). We can approach the market with optimism, surely. But we should not be overconfident about what value the market “should” bring our businesses because of buyer demand. Buyers still want to acquire organizations that are worth the investment, and they are willing to “pay up” for high quality.

Sellers ultimately express that, while money plays into the ultimate decision of which acquirer they’ll partner with, it’s not everything. They want better opportunities for their people and clients. They’re looking for opportunity to grow their post-closing income. They want to know that their people, organization and community will be taken care of after they’re gone. There needs to be a balance between maximizing value and finding a good partner that will fulfill these goals.

At the end of the day, it’s natural to want to maximize the selling price of your organization. But wanting the highest value for your business without having the growth and profitability track record to back that up can create an appearance of greed that turns off most buyers. It is a delicate balance. When you take a step back and consider what you really value—beyond dollars and cents—and what a buyer needs to realize to make the deal attractive, then you may just strike that value-partnership balance. The key is to know where you fit into the market. Be honest about where your organization stands today and how you could improve.

Recognize that, while valuation is certainly at an all-time high, there are still some companies that are good and some that are great. Your multiple will reflect performance and future capabilities. High tide raises all ships, but some boats are just nicer than others.

Now, it’s your decision—will you be good or great?

Market Update

Deal activity in September 2017 was consistent with the prior month, at 29 deal announcements. Year-to-date activity through September is up from last year roughly 7%, at 357 total announcements versus 334 announced transactions through September 2016. Nearly half the transactions announced so far this year have been acquisitions of property-casualty agencies, and more than 85% of all announcements have been traditional retail brokerages.
Acrisure remains the most active buyer in the marketplace, having announced 30 transactions so far year to date. Hub International is a close second at 27 announcements, with BroadStreet Partners and Arthur J. Gallagher at third and fourth with 23 and 21 deal announcements respectively.

During the month, it was announced that private equity firm KKR was selling its minority interest in Alliant Insurance Services to company management. It is estimated that KKR made 2.5 times its original investment in 2012 on the sale, with the original value of the business at $1.8 billion and current valuation at $4.5 billion. Private equity company Stone Point Capital continues to have a stake in Alliant.

It was also announced this month that OneDigital Health and Benefits will be taking over as broker of record on an estimated 8,700 Zenefits insurance accounts, following several years of controversy at Zenefits regarding investigation into its insurance brokerage activity, among other internal disruptions. Zenefits is confident this will create less channel conflict with brokerages in the insurance space and allow it to better serve its brokerage customers.

Trem is SVP at MarshBerry.
Securities offered through MarshBerry Capital, member FINRA and SIPC. Send M&A announcements to M&

[Editor’s note: If you missed our conversation with Mike Sullivan, chief growth officer of OneDigital, check it out.]

Leader’s Edge: Tell us what is behind this shift in your strategy.

Rogers: Everything starts with the client experience and should tie back to that. Some time ago we began thinking about how we optimize that experience not just across the HCM [human capital management] platform and payroll but also across benefits. However, benefits is a little bit of a unique situation in that this idea of remote, digitally enhanced brokering hadn’t really penetrated the small group segment. Zenefits was really good at catalyzing the acceleration of that in small group.

As we started to serve larger companies, we found that the relationship aspect of brokering was a critical component that our model just didn’t address well. When you move above the 50- or 100-employee mark, depending upon which state you’re in, there is more back and forth in terms of carrier negotiating based on the client’s needs, and there were some gaps that couldn’t fully be incorporated into the technology. We began to understand that if we really wanted to continue to serve [our clients] in the best possible way, we would eventually have to work with local brokers.

We still believe strongly in this model, but experience has taught us that we need to be flexible and adapt to what customers are telling us. We evolved from the anti-broker sentiment of the early days to focus on what is the absolute best client experience, which is the combination of our leading technology and local presence of experienced brokers—that is what the market really wants, especially outside of the small group segment.

We began looking at progressive, national footprint brokerages who had some like-minded thinking around how technology could accelerate and enhance the client experience and who were very rooted in the local presence and knowledge. Looking at the challenge through that lens, one organization quickly stood out, OneDigital.

Small groups have always been difficult for commercial brokers to make any profit on. What do you do differently with your software that makes this efficient and profitable?

At a high level, our platform reduces the manual process, busy work and paper involved with HR, benefits and payroll. The result is a much more streamlined, transparent and enjoyable experience for the company and its employees. If you think about the lifecycle of an enrollment, the employer goes through carrier selection and plan selection, then the employee goes through carrier and plan selection, and then there’s a bunch of paperwork completed and it’s submitted.  And if it’s wrong, it gets pushed back out to the broker before it finally gets entered at the carrier, and the whole process is dependent on paper and passing these gates. Employer to employee, employee to broker, broker to carrier…. I think fundamentally what Zenefits brought to bear was, we’re going to take all of that, we’re going to digitize it from the quote through enrollment…and then, to the extent possible, push that data electronically to carriers.

So under 50, how much interaction are they going to have with a broker? Is that still more of a technology play in your business model?

It’s actually segmented even further than just under 50. If you think about the way OneDigital approaches the marketplace, they have a certain brokering setup for the 1-10 market, they have another for the 11-25 and then 25-50. OneDigital will service all of those groups in a face-to-face manner if required, but the 1-10 and 11-25 for the most part can be handled telephonically and OneDigital does a great job of that…they’ve really figured that out over the last 15 years. For the 25 and up segment, there will be a lot more face-to-face activity with the brokers because it’s necessary as those groups get larger.

What are your plans to go upstream in the marketplace?

We already have a number of clients in that segment; it’s just continuing to build the technology to offer the flexibility that clients with larger groups require. So that trajectory has never really changed that dramatically. I think what accelerates it now is the capability to bring deep, local brokering experience into that equation. The plan is what the plan has been, which is thoughtfully continue to progress up market with the right ingredients to serve the client, and I think this relationship with OneDigital really fast forwards one of the ingredients we think we need to go do that.

What are you going to do with the 10,000 other cases that you haven’t handed over to OneDigital? Are you going to continue to act as a broker for them?

There are two pieces to this puzzle. One is servicing of the existing book, which is the 7,000 clients that OneDigital is going to manage moving forward. OneDigital is the best in the business at managing small groups at scale through their back office in terms of conventional brokerage. So, they were the natural fit to take over that existing book of business, and we’re going to work closely with them to continue to service those clients. And the clients will have an enhanced experience because they’re going to have someone locally to support them.

The second piece of the equation is the go-forward approach, driven by our Certified Broker program, of which OneDigital is the first partner. The approach is to combine best-in-class technology and best-in-class local knowledge and brokering experience and being able to say to a client, “Hey, we’re in a position now where we can offer you the software, we can offer you the local presence that our previous model didn’t necessarily support, and we can bring that to you flexibly depending on your geography and what size group you are. And in the future, we will expand that channel beyond just OneDigital. There will be potentially a selection of partners based on whatever MSA [metropolitan statistical area] you happen to reside in as a small or mid-size business.

When you talk about your Certified Broker program and having a local presence, is the vision to have one broker per region?

The vision is to have more than one, but it will be very targeted. In every MSA, frankly, there are several brokerages that are dominant, and those usually don’t number in more than two or three. So the idea is to really find who those key partners are, and it doesn’t always have to be the biggest brokers in the area. It’s got to be the right, progressive nature of the brokerage, and there’s got to be some synergy in terms of culture and willing to invest.

Can you give us any insights into what your data contracts with brokers will look like? Are they going to gain more access to the data that is collected through this?

Yes, that’s the hope. Because we are a system of record, we obviously have significant amounts of data. We do a lot of benchmarking now across that data that we can surface in an anonymized, aggregate manner through all of the gates of security. But we certainly think that’s a huge potential value prop for the broker. The intent here is to optimize the client experience. If we can educate them on what companies like theirs are buying across markets, segments and industries, and that makes the broker more valuable to the client, we want to do that. We’ve started down that path, and we have some of that benchmarking data available. We certainly look to enhance it within all the confines of how we treat data to make sure it’s valuable to brokers in a growing fashion as we roll this out.

What is it about the culture of both of your company and that of OneDigital that fits so well together?

Culture obviously starts with people, and I think we noticed early on in our conversations that we are very well aligned on providing a better experience for customers—Zenefits through our technology and automation and OneDigital through the back-office processes and local, experienced brokering. Some elements of our cultures are very different, but we are perfectly aligned on the critical priorities, and both companies feel like we are changing the marketplace and doing better things for the consumer and driving better access to care.

We don’t think anyone has optimized this experience between broker and tech anywhere in the 50 to 500 marketplace and that is what we are trying to deliver by partnering with progressive brokers like OneDigital.

And while we saw how remiss we would be in leaving the devastating effects of this storm out of our hurricane coverage, we know that digging into the details of Hurricane Maria’s effects is going to take time.

Recently, some modelers have issued notably different estimates for Maria insured losses. Reports show RMS estimates between $15 billion and $30 billion for total insured losses, and Karen Clark & Co.’s reported estimate is nearly $30 billion in insured losses, with roughly $28 billion coming from Puerto Rico. However, AIR Worldwide has estimated Maria insured losses from Puerto Rico alone could range from $35 billion to $75 billion.

Clearly, there is still a great deal of uncertainty around the effects of this storm, and we will continue to monitor the developments. However, in an effort to gain some initial insights into Maria and, in particular the effect in Puerto Rico, we spoke with Sean Kevelighan, CEO of the Insurance Information Institute, onsite at The Council’s annual Insurance Leadership Forum in October.

“We’re still in the middle of a very active hurricane season and we are seeing the impacts through Hurricanes Harvey, Irma and now Maria,” he says. “And these are all different events in a lot of ways. You saw with Harvey a flood event, with Irma a wind event, and what’s most different for Maria and the insurance market is there was a significant amount of industry built in Puerto Rico, with the likes of pharmaceuticals and others. That’s why we’re seeing a pretty broad spectrum in terms of the amount of costs that the industry could incur, especially on the commercial side, you really saw a spike in those estimates.”

Kevelighan echoes some of the thoughts behind RMS’ estimate. The modeler notes that “roughly 60% of the AIR modeled losses are generated by the industrial line of business. Unlike many islands in the Caribbean, whose economies rely heavily on tourism, the economy of Puerto Rico is largely driven by manufacturing—primarily by pharmaceuticals, petrochemicals, electronics, and textiles within that sector. (It is estimated, for example, that there are more than 80 pharmaceutical manufacturing plants in the territory.)”

RMS notes that some of the uncertainties that come into play in Puerto Rico have to do with the potential effects of things like demand surge—increases in the price of labor and materials following a natural catastrophe—business interruption losses and business continuity planning, and infrastructure challenges during recovery. “The slow and extended restoration can lead to higher levels of damage to insured properties as building envelopes remain open to the elements.”

Kevelighan noted that the possibility exists for rises in reinsurance and commercial rates, coming out of Maria, but exactly what and how, remains to be seen. On a larger note, he says that the trend in extreme weather is on the rise, but presents opportunity for the insurance industry.

“You can go back to 1980… and you’ll see a significant increase in terms of frequency and severity, most of which are in the meteorological or hydrological—storms and flood type events. What I think is important for the industry to focus on is less about… the politics of what’s going on and more about how we get to the solutions. And that’s a real opportunity for the insurance industry…let’s see how we can mitigate the risk and make our communities more resilient. This is what we do as an industry and I think we’re well poised and have a really good opportunity to do that.”

He brings up reauthorization of the National Flood Insurance Program at this crucial time. Multiple experts have noted that there is the potential for large uninsured flood losses with all of these storms, as it’s often not covered in the policies people have. “Flood has impacted 90% of every major catastrophe. There’ s a flood issue in every one,” says Kevelighan. “We’ve got to increase our education about that. It’s unfortunate that our customers are not as educated [about flood] as they could be, and honestly the reason is the private market’s not there. If you think about what we could do with flood if the private market was in there and it was able to market itself like we see in other areas like auto insurance and home insurance, and we’re able to educate people…not just to help people appreciate why insurance helps but also appreciate what it’s going to take to mitigate the risk because honestly the insurer and the customer don’t want to suffer the risk.”

Kevelighan also discusses the importance of ensuring infrastructure is rebuilt with resilience in mind. “We hear a lot about infrastructure spending—we’re going to spend a trillion dollars potentially on infrastructure. Can the industry help? And educate people? If we’re going to spend money on infrastructure [let’s] make sure that it is ready to withstand what we’re seeing in terms of natural catastrophes.

“I think there’s going to be a good a case study that comes out of the difference between Irma’s impact and Harvey’s impact. In the state of Florida, after Hurricane Andrew, you saw building codes go up and get more solid in a a lot of ways…And then you look at Harvey, in that area of Houston where building codes are virtually non-existent. So you’re going to see an illustration and a comparison of communities and what resilience does. And as an industry we need to be helping our customers understand the value of that. If catastrophe strikes, how can you build forward instead of just building back to the way it was?”

For more of our conversation with Sean Kevelighan, listen below.

What’s to love
Hamburg is a dynamic, open-minded metropolis with all its qualities but still preserves a laid-back attitude and neighborly charm. Parks, green spaces, forests and waters make up almost 50% of the city. But Hamburg also has cosmopolitan charm. We are always open to new trends, and internationality forms a part of everyday life here. That’s why the start-up scene is continuously growing.

New and exciting
The Elbphilharmonie concert hall, which we fondly call Elphi, is a wave made out of glass, steel and concrete that rises into the sky. It’s worth a visit not only for the spectacular architecture but also for the exceptional acoustics.

Hamburg is famous for seafood. Fresh catches from the North Sea arrive daily at the harbor, where the restaurants offer excellent seafood and commanding views of the port.

Favorite new restaurant
Definitely The Table, run by Germany’s youngest holder of three Michelin stars. There is just one, single, large table made of cherry wood. From here, you can take a look at the open kitchen and observe how unique flavor experiences are made.

Classic eats
I love eating at Tarantella, especially in summer. They have a spacious terrace, which has a nice view of our city park. The restaurant serves a varied range of international food. I’m a friend of seafood; therefore, I always go for something fishy.

Because of the ambience, I prefer to take clients to any of the places around Alster Lake, such as the Anglo-German Club e.V. Another beautiful spot is the rooftop bar Clouds. It’s at the heart of the Reeperbahn and the top of the famous building called Dancing Towers.

I usually recommend the Fairmont Hotel Vier Jahreszeiten or Hotel Atlantic Kempinski, but in October, Hamburg is going to have a new luxury hotel: The Fontenay. It is an architectural wonder, and a Michelin-starred chef will run the restaurant.

Thing to do
Explore our gateway to the world—our harbor. Take the ferry or book a cruise on the Elbe River. You can sail on Hamburg’s so called “green lung,” Alster Lake. But Hamburg also has numerous theaters, museums, operas and galleries that make it a pure cultural pleasure.

Side trip
Hamburg is close to the coast. Visiting the islands is worth a trip. They are blessed with gloriously long beaches and unique natural surroundings. Sylt, Föhr and Amrum—just to name a few of them—are also the poshest places to be.

Editor’s Note: One day before we released the October digital issue of Leader’s Edge, the mass shooting occurred at the Route 91 Harvest Festival in Las Vegas. While we had planned to extol the virtues of the re-energized classics and new entrants on the Vegas scene (and we still will), we could not write about this resilient city without acknowledging the horrific event it has just endured. Our thoughts are with everyone affected by this tragedy and we hope to take part in the healing and hope the city needs.

Caesars Palace Las Vegas celebrated its 50th anniversary last year with a night jump by the Red Bull Air Force skydiving team. Wearing illuminated wingsuits equipped with red, white and blue LED lights, they landed on Las Vegas Strip right in front of the hotel. The stunt was a nod to daredevil Evel Knievel, who in 1967 attempted to jump the resort’s towering row of fountains on his red, white and blue motorcycle, a feat that was successfully completed years later by his son Robbie Knievel.

Caesars Palace will be work and party central for InsureTech Connect 2017, which is held this month. Attendees can be assured that this icon on The Strip is not resting on its laurels 50 years later. The resort recently completed a $75 million renovation of the original Roman Tower (now the Julius Tower), the latest piece of a $1 billion investment that also includes the addition of new villas on the 29th floor of the Palace Tower and 800 renovated suites. Accessed by a private elevator, Mr. Chow opened at Caesars Palace in 2015, making a splash with its Beijing duck and champagne trolley. The hotel is also home to Absinthe, deemed “The #1 greatest show in Las Vegas history” by Las Vegas Weekly.

Other upscale hotels and restaurants on and off The Strip are keeping up. Wynn Encore Resort and The Venetian first upped the ante on swanky new places to catch a few winks when they upgraded their suites in 2015. The Cosmopolitan has added 21 expansive penthouse suites to the formerly empty top four floors of the Boulevard Tower. Targeting high rollers, there is a minimum buy-in of $1 million at the Reserve to enjoy a balcony overlooking the Bellagio fountains, a $56,000 bottle of Louis XIII Black Pearl cognac, and a white grand piano. At the north end, The W Hotel Las Vegas has opened its first hotel inside the SLS Las Vegas.

As for new celebrity chef restaurants, Blue Ribbon at The Cosmopolitan offers signature dishes from the SoHo original (beef marrow with oxtail marmalade) as well as new ones (a tower of shellfish and caviar that comes with bottle of champagne). West of The Strip, chef Brian Howard is dishing up eclectic offerings at his upscale Chinese restaurant, Sparrow + Wolf, which specializes in live-fire cooking. At The Mirage, Otoro Robata Grill & Sushi features inventive skewers and dishes prepared in a Japanese robata grill.

Now that we’re all comfortable talking to machines, more insurers are adding digital voice assistants and texting chatbots to help consumers. Farmers Insurance customers who own an Amazon Echo can now ask Alexa, the virtual assistant, to access their policy and claims information just using their voice. Farmers follows Liberty Mutual, which last year enabled customers to seek auto insurance quotes and answers to questions about home and auto using Alexa. Allstate added Alexa voice assistant capabilities earlier this year.

Nationwide’s Alexa capabilities include enabling users of its SmartRide usage-based insurance program to ask about their personal driving habits to help them drive more safely, and reduce their premiums. Noting that insurance can be complex for customers, Aviva launched an Alexa “skill” that allows customers to ask questions about hundreds of insurance terms. Progressive customers with a Google Assistant can ask the device a variety of questions about their personal insurance.

Since more people are typing rather than talking on their phones, chatbots are getting bigger as well. Among the big insurers, Geico’s chatbot Kate answers questions including those on policies and billing.

But startups are really making their mark with chatbots. Massachusetts-based Insurify provides auto quote comparisons with a Facebook Messenger chatbot. Palo Alto-based Next Insurance offers full insurance signup via Facebook Messenger for small business owners, such as personal trainers, photographers and construction tradespeople.

Lemonade’s chatbot helps customers buy homeowners and renters insurance, and it also settles and pays claims. On-demand insurer Trov enables users to buy insurance for personal items using a mobile app and to settle claims using an in-app chatbot.

Chicago startup HealthJoy provides a healthcare concierge chatbot, called Joy, that helps users navigate care and benefits. And then there’s the Woebot, designed by a Stanford researcher along with psychologists. If you’d like to chat with an automated therapist who’s always ready to listen, check up on you and offer a little insight, Woebot is waiting.


What opportunity did you see when you were deciding to start Trov?
Trov was started with the idea that there is enormous value in the information about the things people own, and Trov exists to help people unlock that value for their own benefit. This remains the heart of the business today and is how we’re able to offer an innovative, data-driven insurance product.

Early on, we figured if we could keep people in contact with, and in control of, the information about their things, we could potentially disrupt multiple big markets: insurance, e-commerce, the sharing economy, retail, advertising, finance and credit. That is what we initially set out to do; we wanted to help people collect information that had previously been hard to gather and then solve the corresponding problems people face when trying to collect this type of information (while also keeping this process fresh, of course).

Recently, there has been a huge change in the attitudes toward and behaviors of one of the most difficult demographics to market to: millennials. We identified a gap in the insurance market here. Most millennials are very unlikely to have any type of content insurance, and yet no one in the insurance space was tapping into this demographic. No one was innovating or thinking outside the traditional box of the industry.

The key opportunity for us was to provide a new, transparent and simple insurance that resonated with this audience. Enabling people, through their smartphone, to protect what they want, when they want, for whatever duration they need, was unheard of in the market. Ultimately, the product had to be ready for the various demands of the tech-savvy, time-poor consumer. It had to be accessible on a mobile device and harness the “nowness” of people’s lives. It couldn’t bog them down with 24-month contracts or archaic customs.

The traditional insurance model means insurers engage with a consumer twice in one year: once when they’ve sold the insurance and again when they ask the consumer to renew. These consumers might engage in the meantime by putting forward a claim, but there are millions of people paying for insurance for time periods when they just don’t need it. Ultimately, it had to be on-demand and it had to be “micro-duration.”

Our policies combined with the technology that supports the app allow us to measure and run a price risk analysis, meaning you pay only for what you use, literally up to the second. This is specifically for the generation that says, “Don’t lock me into any long periods of time; give it to me when I need it. I have to be able to engage with insurance only when it suits me and through my mobile device.”

The on-demand aspect is what we’re especially proud of. It is one of the most important features of our platform and the key opportunity we harnessed and delivered on.

Thankfully, Trov is now at a stage where people can insure an item for just a few minutes with the functionality of the on/off button, which allows insurance to be turned active or inactive. This provides so many possibilities. It removes the restraints of long contracts and the necessity for printed documents; something that’s becoming ever more redundant in the digital age.

How is on-demand insurance changing the industry? How will it?
The ability to effectively switch on and off insurance for any item at will has disrupted the industry in its own way by allowing freedom and accessibility on a platform that’s reliable, simple and attractive for our audience. It provides a level of assurance that is easy to understand and access. The insurance industry was always perceived to be lagging behind. It seemed complicated and inaccessible, and we wanted to change that.

Most millennials are put off by lengthy contracts and “signing their lives away.” They will continue to be unless the industry evolves and keeps up with today’s technological advancements. The ability to simply grab an app and switch insurance on and off for any item at will is exactly what people should want and expect from an insurance product.

The big change, which is of particular relevance, is the meta-narrative under which this all fits: that life and risk hasn’t changed over the last 300 years. People still get up in the morning and care about their things and not losing them. They want to have resilience and know that they can recover from financial or catastrophic loss.

What has changed is the ability to measure life in ever smaller increments. This is only the beginning of what will certainly be a massive disruption.

Are there challenges that make the U.S. more difficult than Australia and the U.K.?
The common challenge with launching any app in the U.S. is the process of going through each state’s submission procedure and sign-off. Every state in the U.S. now has a different set of requirements before you are approved, which can be extremely time consuming. We are making great progress though, working closely with each state regulator.

The U.K. and Australia were much simpler. There is just a single national regulatory body.

In how many U.S. states do you anticipate launching this year? Next year? Where?

We’ve already been approved in 23 states and hope to raise that number significantly by the end of 2017. We’re also looking to launch in Canada and Germany in 2018. We actually have an interactive map at, where you can follow the launch state-by-state and be notified when it is approved.

Cedar Rapids suffered some serious flooding a year ago, with the Cedar River cresting at six feet above major flood stage. What was that like for you and your business?
On Sept. 22, 2016, we were implementing our emergency plans, sandbagging and evacuating our building. At the same time, we were working to service clients and helping other members of the community prepare for floodwaters. Just one week prior, we were celebrating the open house of a new 13-story building in Cedar Rapids and reflecting on the resurgence of our community following the floods of 2008.

What lessons did you learn from that experience?
It was a real test of your commitment, your values, your work ethic. We were just doing everything we could to keep business operating for all those clients who entrusted their personal lives and their businesses to us. At the same time, we were trying to protect our building and trying to help families that were part of our company.

You’ve described yourself as passionate about “things with wheels.” How did that happen?
I like to say you’re born with that. My grandparents still tease me. When I was three years old, I’d stand between the two front seats of their Chevy van, and I could identify the make and model of every car and truck on the road.

Tell me about your car collection.
I’m a European-sports-car guy. My car of choice is Porsche, so the preponderance of what I have are air-cooled Porsches.

Why Porsches?
I’ve always appreciated the engineering, the racing pedigree and their practicality. The great thing about a Porsche 356 or a Porsche 911 is you can put a family of four in that car and go for ice cream. Family is extremely important to me, so enjoying the cars with my family is very special.

Is there such a thing as your favorite car?
For my 40th birthday last year, I found and bought a 1976 Porsche 930 turbo. It’s a pretty special car to me. That car was my poster-on-the-wall car as a kid. It’s the same vintage as me, so we have both picked up a few bumps and bruises along the journey.

It sounds like your father, Duane Smith, shares your passion for all things wheels.
My dad and I always shared a love for cars. In Iowa, you can get your driver’s permit when you’re 14. On my 14th birthday, my dad and I went to the DOT office and waited for them to open up. I took the test and got my permit, and he threw me the keys.

Your dad is also one of the founders of TrueNorth, and he remains the CEO. What’s the best thing about working with your father?
His willingness to take the time to mentor, to play a part in solving problems, and then seeing the results of that over 20-plus years is just awesome. The respect we have for each other, and the energy we get from each other, is pretty awesome for us and our families and the more than 300 employees at TrueNorth.

Was it expected you would work with your father?
No. When I got my driver’s permit, I would drive my father to appointments during the summer. I got to spend a lot of time with him. I really got an understanding from the word “go” of what risk management means to a business.

What would you have done if you hadn’t gone into insurance?
The only thing I’d rather be doing—and I say this with a smile on my face—is be a racecar driver.

If you could change one thing about the insurance industry, what would it be?
That it’s respected as a critical component of security for people and for businesses. I want the industry to be respected, but I also know that respect is earned, so we’ve got to work at that every day.

What gives you your leader’s edge?
My willingness to identify problems of any shape and size and engage with teams in solving them. I’m very much a person who enjoys the thrill of accomplishing things as a team.




Vacation Spot
Grand Cayman Seven Mile Beach and Deer Valley in Park City, Utah

Favorite Musician
U2 (“I just saw them at the Rose Bowl in Pasadena. They did the Joshua Tree tour. It was incredible.”)

Last Book Read
The Leadership Journey by Gary Burnison

Porsche Cayenne SUV

Stephen Catlin, Special Advisor to the CEO, XL Catlin

Helen Clark, Administrator, United Nations Development Program
Joaquim Levy, Managing Director & CFO, World Bank Group

Committee Members:
Inga Beale, CEO, Lloyd’s
Albert Benchimol, President & CEO, AXIS Capital
Gregory Case, President & CEO, Aon
Jean-Louis Davet, CEO, MGEN
Denis Duverne, Chairman, Axa
Daniel Glaser, President & CEO, Marsh & McLennan
John Haley, CEO, Willis Towers Watson
Torsten Jeworrek, CEO Reinsurance, Munich Re
Denis Kessler, Chairman & CEO, SCOR SE
Christian Mumenthaler, CEO, Swiss Re
Christopher Swift, Chairman & CEO, The Hartford
Maurice Tulloch, Chairman, Aviva Global Insurance
Rob Wesseling, President & CEO, The Co-operators Group
Mark Carney, Governor, Bank of England, and Chair, Financial Stability Board
Robert Glasser, Special Representative of the Secretary-General, UNISDR
David Nabarro, Special Advisor to the Secretary-General, United Nations
Stephen O’Brien, Under-Secretary-General and Emergency Relief Coordinator, Office for the Coordination of Humanitarian Affairs, United Nations

Risk & Reward is a valuable and thoroughly enjoyable book penned by a legendary underwriter. In effect, it is three short, distinct and very readable books bound into one, although the sections hang together very well.

The first section colorfully explains how the international wholesale insurance market—and especially Lloyd’s—actually works and is chockablock with anecdotes and examples from Catlin’s 45 years in the market. Never before has the global commercial insurance industry been explained (and laid bare) with such coherent simplicity and candor.

The second section is a brief history of Catlin, the author’s Lloyd’s business (now part of the global giant XL Catlin). It begins when Stephen Catlin entered the market in 1973. “I spent the first five years figuring out if it was the most famous insurance marketplace in the world or just a gambling casino,” he writes. This section covers the growth of Catlin from a business employing two people to one employing 2,500, then its acquisitions, and ultimately its merger with XL in 2015.

Alongside the corporate history, Risk & Reward tells fascinating stories about the action and shenanigans at Lloyd’s over the decades. It includes, for example, details of a secret meeting between senior people from Lloyd’s and Marsh in the wake of the World Trade Center attack, when the underwriters successfully convinced the brokers that Lloyd’s was not about to collapse. “If Marsh had decided to stop placing business with Lloyd’s syndicates so soon after 9/11…it could have tipped Lloyd’s over the edge,” Catlin admits.

The third section comprises the author’s personal musings on successful management—Catlin is an extremely credible source—and on the future of the insurance sector. Catlin’s uncanny ability to see around the corner is proven by his track record.

“No one has ever explained our industry’s value proposition. That’s what the book is about,” the author told Leader’s Edge. “This book shows how the parts come together. I hope it helps people who sit outside the industry, work alongside it, or are looking to join it to understand the big picture.”

No doubt it will. But it’s industry insiders who will be most fascinated of all.

Adrian Leonard

Leader’s Edge readers can purchase hardbound copies of Risk & Reward for the discounted price of £19.99 (equivalent to about $26) plus £9.99 ($13) shipping and handling, by ordering directly from the publisher, Iskaboo Publishing Ltd. ( Please enter Coupon Code LE01. All major credit cards and PayPal are accepted.

Stephen Catlin was first approached to chair the new Insurance Development Forum nearly three years ago. His recruiter was Rowan Douglas, CEO of Willis Towers Watson’s Capital, Science, and Policy division.

“Why me?” Catlin asked.

“We need a heavy hitter,” Douglas replied.

“My question stands!” Catlin retorted. “I think it is a worthwhile cause, but can I add value?”

Catlin was an employee then, following the sale of his Lloyd’s business to XL Group. He had to ask his CEO, Mike McGavick. The boss was emphatically on board.

“Stephen, it is absolutely a worthwhile cause, and I would love us to be associated,” McGavick told Catlin, “and you have the time and the network to do it, so I would like you to do it.”

“I thought about what came next and how I, as an individual, had set up a company from scratch,” Catlin recalls. “When you do that, your first goal is to try to survive, to pay the mortgage. I’d had 10 years of that when I set up the syndicate. Beyond that, for me, adding value and making a difference became much more important. If you do that, making money is a byproduct.”

On the basis that he could add value, Catlin said he would give it a go. “The test was the steering committee,” he admits. “I got it together myself in two weeks. It speaks to the importance of the subject matter to the individuals. They bought into the IDF, and I am fortunate to have their support.”

Even his wife wondered what he could possibly have to say that would interest a room packed with 232 defense players from 42 nations, most in uniform and bemedaled. But invite him they did, and Catlin, not a man to shirk from risk, accepted. “I was the only one in the room with insurance knowledge,” he told Leader’s Edge.

NATO, he explains, had figured out that the world’s resilient nations cause the military alliance fewer troubles than its less resilient ones. “The insurance community is as good as it gets in terms of knowledge of risk mitigation and management, so we add value to their debate,” he says.

Adding value for the less resilient is the underwriter’s main mission these days. “That is my primary objective: to talk about risk mitigation and management. They are the best forms of protection,” Catlin says. “You may want to buy some cover for a tail event, if it is a good value, but mitigation and management must come first.”


That is one of the principles behind a new international body called the Insurance Development Forum, or IDF, which Catlin has led as chairman since shortly after its birth in 2015. It is a unique animal: a tripartite public/private partnership between the global insurance industry, the United Nations and the World Bank. The organization aims to optimize and extend the use of risk management and insurance to build greater resilience among those who are particularly vulnerable when disaster strikes.

Launched at the UN Climate Change Conference in Paris, the IDF is much more than a talking shop. Already it has attracted more than $65 million of state funds to its cause and prompted the announcement of the new Centre for Global Disaster Protection in London.

The IDF has two goals. One is to harness the power of micro-insurance to extend cover to 400 million uninsured people in the developing world against the negative effects of climate-related disasters. The IDF has embraced this challenge, set by the leaders of the G7 nations at their 2015 Summit in Germany and dubbed the “G7 InsuResilience” target.

The protection gap is massive, 70% globally. It ranges from Haiti, where just 1% of risks were covered after the 2010 earthquake, to New Zealand, where comfortably two fifths of losses from the Christchurch earthquake were insured.

Stephen Catlin, chairman, Insurance Development Forum

“It sounds daunting, getting insurance for 400 million people,” Catlin admits, “but the number isn’t so large compared to the global population.”

Micro-insurance is cover you can buy on your cell phone for all sorts of products, from crop insurance to medical expenses to liability cover. Since coverage triggers are parametric, claimants are paid a predetermined amount based on predefined terms, so the payout typically occurs very quickly. “There is a retained basis risk, of course,” Catlin says, “but the trick is to minimize that basis risk” through the use of parametric triggers.

By their nature, such triggers do not anticipate all possible scenarios, but they can be continually refined as insurers build experience.

An IDF working party is going flat-out on the 400 million goal, driven by Shaun Tarbuck, CEO of the International Cooperative and Mutual Insurance Federation, and Joan Lamm-Tennant, CEO of Blue Marble Microinsurance, a for-profit consortium comprising seven international insurance players (including XL Catlin and Marsh & McLennan). They have come together to create and provide socially impactful, commercially viable insurance protection to the underserved through micro-insurance and to build awareness of its possibilities. For example, they are piloting drought protection for small-holder maize farmers in Zimbabwe and climate risk cover for small-holder coffee growers in Latin America. The program uses point-sensor technology to measure rainfall and plant health throughout the growing season, which complements traditional grid remote-sensing data to create a higher-resolution parametric insurance cover.

The IDF’s second goal is all about filling the “protection gap” through state-level schemes. The gap is the uninsured distance between actual economic losses arising from natural catastrophes and other cataclysmic events and the level of insurance in place to cover them. “The protection gap is massive, 70% globally,” Catlin says. “It ranges from Haiti, where just 1% of risks were covered after the 2010 earthquake, to New Zealand, where comfortably two fifths of losses from the Christchurch earthquake were insured.” Eliminating the protection gap in developing nations through state-backed initiatives is Catlin’s main focus. “Our objective,” he says, “is to help countries and communities move from vulnerability to driving resilience and reducing risk by leveraging insurance and its related capabilities.”

Essentially, the higher the share of assets that are insured, the quicker the recovery and the lower the cost to the taxpayer. And it isn’t just a developing world problem—in California, less than 10% of property is covered for quake—but the IDF is focused on emerging countries, where the general understanding of risk mitigation, risk management and insurance is less developed and collecting risk data is a major challenge.

“That is where we always start,” Catlin reiterates. “The IDF is about helping people, organizations, municipalities and governments to understand how to improve risk data, helping them with risk mitigation and then management, and only ultimately asking if risk transfer and the insurance sector can add value. If we cannot, we shouldn’t be there. I say emphatically that this initiative does add societal value and we can do it more economically than governments can by trying to take on the risks themselves.”

One of the powerful benefits delivered by the IDF is that it makes this approach feasible by uniting the world’s leading insurance, reinsurance and broking firms with respected international institutions in a common purpose. From the insurance side, Catlin’s handpicked steering group includes the chief executives of the world’s top three brokerages and 12 of its largest global property-casualty insurers, plus dozens more individuals who sit on the IDF’s various working parties. “These are alpha people,” Catlin says. “They have come to the table because they see a common purpose. All the men and women sitting around it are looking for where they agree, not where they disagree.”

I say emphatically that this initiative does add societal value and we can do it more economically than governments can by trying to take on the risks themselves.

Stephen Catlin

When an individual brokerage or carrier goes to a government, Catlin says, their hosts automatically assume their pockets will be picked. “When we go collectively,” he says, “it is much easier to open the door.”

Already this dream team has had political successes after passing through some very rarefied doors. At the G20 conference in Hamburg in July, U.K. Prime Minister Theresa May announced a commitment to provide £30 million (the equivalent of $39 million) for resilience risk transfer protection for emerging nations and to fund the proposed Centre for Global Disaster Protection.

The United Kingdom’s Department for International Development (DFID) reported that the center will help the poorest countries strengthen their disaster planning and get finances in place before disaster strikes so they can better manage the economic impact of emergencies. It will provide neutral advice, innovation and cutting-edge science to help build cheaper, faster and reliable finance in emergencies.

“We were surprised that Theresa May said what she said when she said it,” Catlin admits, “because it came before any announcement by DFID.” He says the main driver of the commitment was the relationship between the IDF and the DFID.

Members of the IDF team spent the better part of two years designing the center. “It was highly complex,” Catlin says. Meanwhile, Germany’s DFID equivalent, the Ministry for Economic Cooperation and Development, has pledged to put in €20 million ($23.6 million) and to work with the United Kingdom and the World Bank to create a “Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions.” It aims to leverage the synergies of governments, international organizations, civil society and the private sector working together to close the protection gap.

Catlin is enthusiastic about these achievements. “I have to believe that with two leading countries on board, more people from established economies will be taking the same view,” he says. The IDF does not plan to set the agenda but instead will attempt to deliver solutions that help donor nations reach their chosen objectives. The United Kingdom’s DFID, for one, is expected to state its priorities before the end of the year.

Politicians haven’t always been the easiest of partners to recruit, Catlin admits. Elections are bad for global resilience. “One of the biggest global challenges is that, on average, politicians have five years in office, so they care only about what might happen in the next five years,” Catlin says. “When you speak to them about something that might happen in the first five years, they listen. If it is a 10-year event, they pay less attention. Talk about a one-in-25 year event, and their eyes glaze over. If it is one-in-100, they fall asleep.” That, he says, is why it has been difficult to get politicians to think about climate change.

But Catlin wants more commitments from states, and he is working on them, attempting to convince politicians they have a fiscal responsibility that extends over a longer period than their terms of office. He says he is not hesitant to “name and shame” politicians who do not recognize their fiscal responsibilities and believes that, by discussing issues—and their possible ramifications—with politicians, he can “broaden horizons.”

If you believe that established economies have a duty of care to support emerging economies—those nations coming through—then developed-world governments should be thinking about contributing.

Stephen Catlin

He and his teams are also working with other nations’ international development bodies to build support. “I am personally very keen for this not to be seen as a U.K.-German initiative,” he says, stressing that the IDF project, its participants and its targets are international. “We are at the beginning of the story, not the end of it.”

Conversations are going on with other countries, Catlin says, but lobbying the United States is off the agenda for now, given the disarray in many executive-branch agencies. Still, he remains optimistic about a potential American commitment. “Trump has stepped back from completely reneging on the Paris Accord,” he says. “Over time, I believe, he will have to join the debates on climate change and sustainability.”

Catlin is clear in his convictions about who should pay for those who cannot pay. “If you believe that established economies have a duty of care to support emerging economies—those nations coming through—then developed-world governments should be thinking about contributing,” he says. They will do so one way or another, he insists. “If they don’t contribute before the event, then they will afterwards, through disaster relief. But that kind of disaster funding is widely realized to be incredibly inefficient, and the support doesn’t always get to the point of need.”

Catlin returns to the theme of resilience-building. “We need to help the emerging nations understand risk mitigation and risk management,” he says, “then help them to buy risk transfer, through support from established nations.”

Such financial support is given for the good of the target nation, the region and the world, he says. They are a lofty set of goals. “Can we achieve this vision?” Catlin asks, rhetorically. “I don’t know, but if we don’t try, we will never know.”

Leonard heads the foreign desk.

Insurance brokerages certainly recognize the value of cognitive computing, but they’re taking a gradual approach to its use. The experimentation makes sense, proving the value of the tools and serving as a springboard for their wider future use.

“The toughest part in deploying new technologies is making the business case for them,” says Stewart Gibson, senior vice president and chief information officer at USI Insurance Services, which recently agreed to purchase Wells Fargo Insurance Services USA. “Early adopters bear the bulk of the cost of a new technology’s implementation. We’re more interested in being a fast follower, tiptoeing into these new solutions as their value becomes clearer.”

Here’s a brief look at some of the new technologies being deployed at a few large brokerages.

“RPA is probably the most prevalent of the new cognitive tools we’ve been using,” Gibson says. “We’ve deployed an RPA tool from Cisco to perceive threats within our network infrastructure.”

Like other large brokerages, USI’s network overflows with millions of transactions daily. Any one of these interactions can cause havoc if the data being transmitted are infected with malware.

“We’d need an army of network engineers watching all the end points inside the network to discern trouble spots,” Gibson says. “The RPA tool provides this vigilance with little manpower. It’s smart enough to identify what might happen or something that is about to happen right now. Network traffic is then automatically rerouted over backup circuits to limit the potential downtime.”

The brokerage also has implemented a matching tool using machine learning to assist salespeople in configuring risk transfer solutions covering customer risks in the middle market. Called Omni, the tool draws insights from USI’s comprehensive database containing risk-based information on more than 100,000 clients over the past 100 years.

“A rules-based engine populated with algorithms, decision trees and linear regressions helps pinpoint the specific insurance coverages and financial limits of protection a client may need,” Gibson says. “It analyzes clients in a similar industry that had chosen to cover their risks in a specific way and then presents the financial outcomes of these decisions—did the insurance fully protect them or just partly protect them? It then configures a suite of customized insurance solutions for the client.”

USI built Omni from scratch using spreadsheets six years ago. The tool has evolved in the intervening years and has recently been turned into a web application. “All it takes is one button to generate a client-ready presentation,” Gibson says. “Since this is a machine-learning solution, each time we bind new coverages for a client, the tool incorporates this new knowledge in future presentations.”

USI is just starting to evaluate artificial intelligence solutions using natural language processing. “We like the idea of processing simple customer requests without having to be on the phone,” Gibson says. “And we also like solutions that pick up inferences from a customer’s words to fix a problem without having a human involved. We may explore a proof-of-concept of these self-service tools down the line but are not yet ready to go mainstream.”

Like other brokerages, Hub International keeps a vigilant eye on developments in the bustling insurtech sector, where hundreds of innovative startups are developing novel cognitive computing solutions for the insurance industry.

“They’re constantly coming up with new ideas that are challenging the status quo in the (insurance) ecosystem, forcing us all to think about doing things in more efficient, cost-effective and customer-centric ways,” explains Carla Moradi, Hub executive vice president of operations and technology.

One way Hub is utilizing machine learning is to compare its insurance policy submissions on behalf of clients with the actual policies that are issued. Brokers typically rely on people to perform such comparisons, which absorbs time and effort that can better be devoted to customer needs. “The process now takes seconds,” Moradi says. “If an error is identified, humans take it from there.”

Hub also is studying the use of RPA to further streamline workflows. “We haven’t deployed anything yet, but we’ve identified several key areas where there are repeatable processes involving the same keystrokes,” Moradi says. “RPA can be used to do these keystrokes, increasing the amount of time our people spend with customers.”

Down the line, Moradi predicts that brokerages will collect and analyze risk-based information generated by their clients’ gradual embrace of the internet of things. “This is yet a great opportunity for us to provide another high-value client service,” she says.

Few lines of insurance are more data intensive than workers compensation, given the voluminous data produced by hospitals, physicians, nurse case managers, pharmacies, physical therapists, insurance carriers, claims adjusters, and other parties engaged in returning an injured employee to work. Using data mining, natural language processing and machine learning, Lockton is accessing and analyzing workers compensation claims to improve the employee’s experience.

“One of the most common cost drivers of workers compensation is a lack of communication with the claimant, which increases their fear and the possibility that they may hire a workers compensation attorney,” says Mark Moitoso, Lockton’s senior vice president and analytics practice leader. “To better understand how a claimant is feeling, we’re relying on text mining and machine-learning technology.”

Much of the data in the workers compensation claims process, such as the notes taken by claims adjusters, is unstructured. By digitizing this information, it can be easily searched using text mining. “We can look for words and phrases indicating a claimant’s apprehension with his or her progress toward the return-to-work objective,” says Moitoso. “Once there appears to be a problem, our people can step in with compassion and empathy to help solve the dilemma.”

This blissful scene is not at all farfetched. In fact, technology can take on the monotonous functions of broking, freeing brokers to provide the value-added services their clients crave.

The need for these technologies is dire. “Brokers are awash in information, taking in and passing out an enormous volume of data,” says David Bassi, an executive director in consulting firm EY’s insurance practice. “Automating this exchange of information liberates brokers from having to manually key in all this structured and unstructured data.”

RPA Gateway?

The value and range of new technologies spreads across a wide swath of a broker’s business—more to come on artificial intelligence and the like—but it seems like right now brokerages are more readily focusing on back-office automation, where the administrative work of the business is carried out. Software known as RPA, or robotic process automation, can carry out simpler, more repetitive human tasks (such as data entry) that don’t necessarily take knowledge or insight to perform. Consider the tedious work performed by company accountants to close the books. Using RPA tools, these data can be easily extracted from a brokerage’s myriad systems and applications to ensure accuracy and a faster close.

This is good news for accountants. “Smart accountants get to do what they yearn to do anyway—study the numbers to learn where the firm is growing business or losing it,” says Therese Tucker, founder and CEO of publicly traded BlackLine, a financial and accounting software firm that provides RPA tools. “This important value-added activity is lost if they’re hunkering down in the trenches tallying up the numbers.”

RPA also can be employed to fulfill a broker’s legal and compliance obligations. “We’re seeing growing interest in the technology to make sure a broker’s various contracts, reports and disclosures are correct and compliant from a regulatory standpoint,” says Dimitris Papageorgiou, a principal in EY’s people advisory services practice. “We know that some brokers are in a pilot stage with the tool.”

The back-office opportunities presented by RPA are both strategic and tactical. As human workflows decrease, people are able to work more efficiently, giving them more time to build relationships with clients.

“When these technologies work very well, they take out about 80% of the effort for 20 people, meaning that these 20 people now have 20% of the work left to do,” says David Kuder, the Robotics & Cognitive Automation leader at Deloitte Consulting. “Extrapolating from this metric, this means you need just four people to do the work that 20 people previously did. The additional 16 people can now apply their intellect to more strategic uses, working more closely with clients to identify and reduce their losses.”

Other insurance and technology experts agree this value is hard to ignore. “RPA allows a broker to really optimize and improve the efficiency of its back office, particularly if the firm is interacting with different carriers’ legacy technology,” says Ted Stuckey, head of the global innovation lab at insurer QBE in Sun Prairie, Wisconsin.

RPA represents a huge opportunity. You’re able to push people to higher-value work, such as dealing with the more complex transactions where brokers shine.

Ted Stuckey, head of the global innovation lab, QBE

Stuckey describes a recent visit to a midsize insurance brokerage in Los Angeles. “I walked through bullpens of people doing mind-numbing data entry tasks,” he says. “They were working with upwards of 20 different carriers’ legacy systems. From a process automation perspective, in addition to an auditability and integrity standpoint, RPA represents a huge opportunity. You’re able to push people to higher-value work, such as dealing with the more complex transactions where brokers shine.”

These many advantages add up to enrich the relationship with clients. “In our industry, who has the best opportunity to improve the relationship with the end customer? The broker, of course,” Stuckey says. “These technologies present a vital opportunity to improve customer engagement. Right now, the book of business for many midsize and larger brokers is so substantial that it’s extremely hard to stay front and center in the customer’s eyes. These tools give brokers the ability to be there when clients need them most.”

To illustrate the point, Stuckey provided the example of another midsize brokerage partner. “The firm had a team of people whose sole job was to make calls to customers prior to the [policy] renewals,” he says. “Most of the calls went to voicemail. Imagine if they used a chatbot tool using natural language processing to simulate conversations with customers? You’ve just freed up that team of salespeople and account executives to be available every minute for customers’ questions and concerns.”

Moving Past Automation

Automation is one thing, but it’s just a start. Many large insurers are investing heavily in cognitive computing, building state-of-the-art solutions internally or purchasing them from the growing ranks of insurtech startups. Cognitive computing is more than just automation. It uses machine learning to perform human tasks in an intelligent way, incorporating things such as natural language processing, text mining and image recognition.

Most insurance brokerages are said to be just nibbling at the edges of these types of opportunities. “Many brokers are still in the very early days of assessing the benefits of cognitive computing,” says Anand Rao, global artificial intelligence lead at consulting firm PwC. “They’re using a few of these tools but have not yet made truly substantial investments.”

Other consultants agree brokerages are comfortable sitting on the fence for now, waiting to see how the market shakes out. “Unlike large global banks and insurers, many insurance brokers are in a proof-of-concept stage with these technologies,” Kuder says. “There’s been a lot of talk and a lot of hype, and a few brokers will say they’re doing this and that. But only 10 to 15% of brokers are doing much of anything.

“No firm wants to be the first headline replacing a ton of labor with robotics or cognitive automation. But everyone is absolutely experimenting with these technologies or has it on their radar screens.”

Time will tell if this experimentation leads to fuller deployment. For now, the pace is slow. According to a recent survey by consulting firm Accenture, 37% of insurance executives say their companies plan to “extensively” invest in machine learning over the next three years, and another 44% predict “moderate” investment. In another study by the IBM Institute for Business Value, 90% of insurance respondents predict cognitive computing will “strongly impact” their revenue models.

“Both insurers and brokers are closely examining artificial intelligence and machine learning, realizing the significant opportunities they present,” says Ashish Umre, a partner on insurer XL Catlin’s Accelerate disruption and innovation team. “The key for brokers is to identify those strategic areas where the technology will make the most difference in adding value for their clients.”

There’s been a lot of talk and a lot of hype, and a few brokers will say they’re doing this and that. But only 10 to 15% of brokers are doing much of anything.

David Kuder, Robotics & Cognitive Automation leader, Deloitte Consulting

It’s Better Risk Management

While the importance of a strategic, patient approach cannot be overstated, some maintain brokers need to pay attention to what carriers are doing so the playing field does not change around them while they sit on the fence.

“What do all customers large and small want from their broker? They want their risks managed more efficiently and coherently,” says Michael Maicher, head of global broker management at Allianz. “They want convenience, transparency, trust and the knowledge that they are gaining value for the money they’re spending. These technologies help do just that.”

According to Lori Sherer, partner and insurance leader in Bain & Company’s advanced data and analytics practice, “As the carriers collect client risk data in a better format than brokers currently do, they’ll be able to help them better understand these risks, resulting in more accurate and affordable coverages. Brokers are getting paid beaucoup dollars to place the risk today. The more digital this becomes, the less relevant they will be unless they’re investing in the same tools.” Bain & Company’s insurance company clients all have innovation labs and corporate venture arms investing in insurtech startups and have presented the firm with written proposals to use a greater variety of cognitive computing solutions in the future, she says.

Maicher predicts the simple placement of the risk will become less valuable and cheaper. “Consequently,” he says, “brokers need to improve their knowledge of clients’ risks and preferences, accessing relevant data to achieve deeper insights. Clients will pay for this more sophisticated risk advice.”

Insurers are just as vulnerable to these technological forces as brokerages. “Several reinsurers are investing heavily in cognitive computing to do more risk management and loss control with the idea of working closely with the brokers to essentially displace the carriers,” Rao says. “There’s a lot of friction in the marketplace.”

This friction is good for corporate clients, as it ultimately will produce less expensive insurance products with coverages customized to actual needs.

“With lower transactional costs, risk transfer will become more attractive to clients,” says Maicher. “This will result in a higher demand for a greater range of insurance products, increasing the overall size of the market.”

New products also will emerge from the industry, as brokerages and carriers develop a better understanding of client risks. “As more companies leverage the IoT and put their data in the cloud, the related risks are sure to grow,” Sherer says. “The industry is only beginning to understand how to effectively transfer these risks. The opportunities are huge.”

The Labor Question

The key for brokers is to identify those strategic areas where the technology will make the most difference in adding value for their clients.

Ashish Umre, partner, XL Catlin’s Accelerate disruption and innovation team 

If brokerages continue to gradually employ more cognitive computing technologies, their actions are unlikely to result in the mass displacement of labor. The tools are intended to free employees from rote tasks so they can provide more personalized services to clients, meaning little labor displacement, if any, for the time being. Even better, the use of these technologies creates a need for new skills in a brokerage’s workforce.

“Since people will be working more directly with technology on a daily basis, the workforce needs to reflect these skills, either through recruitment or training,” Kuder says. “Different people will be doing different things in the future, repurposed to provide value-added activities that lead to better client services.”

These workforce changes are already occurring. “We’re definitely seeing movement in the market for hiring or reskilling individuals in the automation space,” Papageorgiou says. “This demand for talent actually exceeds the supply, which may be a factor in why some brokers are slow to adopt cognitive computing.”

Thanks to cognitive computing technologies, the services provided by the brokers of the future will become more important as the brokers shift toward more sophisticated advice. In this progression, mergers and acquisitions are likely, both among brokerages and with specific insurtech startups.

“These are exciting times for brokers to innovate and experiment,” Kuder says. “There’s a lot more degrees of freedom to choose where and how you want to play.”

Banham is a financial journalist and author.

The answer is not long at all. The internet is as essential to commerce today as are people. Without a connection, employees might as well stay home and watch Netflix. Oops, can’t do that either.

“If the internet tips over for just 24 hours, it would cause a global economic crisis because all transactions would grind to a halt,” says Stephen Catlin, executive deputy chairman of XL Group. “If the internet tips over for seven days, it would be cataclysmic.”

He’s right for an important reason: there is no insurance policy whatsoever that absorbs the risk of the world wide web grinding to a sudden halt. A company might have a policy covering the business interruption caused by a loss of access to its ISP (internet service provider) or cloud providers. But insurance covering the cessation of the internet itself is just too big a risk for the industry to bear.

“It would be like asking us to find insurance just in case there was no electricity in the world,” says Robert Parisi, managing director and cyber product leader at Marsh. “That’s a cool movie, but no carrier will cover you for that.”

The reason is that insurance policies absorbing business interruption losses typically contain an exclusion for the general failure of “utilities,” which in this case would be the internet. “If the internet goes kaput, there would be big problems for affected companies and the global economy, but it wouldn’t have an impact on the insurance marketplace,” Parisi says.

Could It Shut Down?

Although the internet has never experienced a complete breakdown, parts of it have shut down in the past. In October 2016, for instance, hackers launched a successful distributed denial of service attack (DDoS) against Dyn, a managed DNS (domain name system) provider of internet services to Twitter, Reddit, CNN, Spotify and thousands of other websites, shutting them down. DNS providers translate website names into IP (internet protocol) addresses.

“Approximately 500 companies that relied exclusively on Dyn for their web services suffered extensive downtimes and lost sales,” says Stephen Boyer, co-founder and chief technology officer of BitSight, an internet security firm. “This represented about 8% of Dyn’s customer base. Other companies relied on a variety of DNS providers, making the impact less severe.”

A more recent internet outage occurred for customers of Amazon Web Services (AWS), a provider of on-demand cloud computing platforms to companies such as Airbnb, Time and Netflix. The outage affected countless websites and web services on the U.S. East Coast for several hours in February. The culprit was human error, Amazon later reported.

The financial impact of the Dyn and AWS outages has yet to be tallied. But other internet interruptions provide some sense of the financial cost. In July 2017, a severed undersea cable off the coast of Somalia resulted in a three-week-plus internet outage in the country, costing its economy an estimated $10 million a day. When the prior government of Egypt pulled the plug on the internet for five days in 2011 to restrict communications among anti-government activists, its economy suffered losses estimated at $18 million per day.

Altogether, there were 81 separate instances of sporadic internet outages in 19 countries across the world in 2016. The collective cost of these interruptions was $2.8 billion in global GDP, according to a study by the Brookings Institution’s Center for Technology Innovation.

The center has also projected the cost of an outage across the entire United States: “A national internet outage for one week…would reduce economic activity by at least $54.1 billion. And if that outage lasted an entire year, the economic costs would be at least $2.8 trillion.”

It would be like asking us to find insurance just in case there was no electricity in the world. That’s a cool movie, but no carrier will cover you for that.

Robert Parisi, managing director and cyber product leader, Marsh

These costs would be uninsured—not that companies wouldn’t file claims anyway. “The likelihood is that insurers would deny them, resulting in protracted litigation,” Parisi says. “A lot of subrogation would occur, with one party blaming another party, and so on.”

Could the entire web grind to a halt on a national or global basis? It’s possible. In 2002, an attack occurred against all 13 of the internet’s root name servers—the crucial components that map domain names to IP addresses.

“The attack lasted for an hour,” recalls Jody Westby, CEO of Global Cyber Risk, a provider of cyber-risk advisory services. “The hackers used a botnet to send a flood of messages to each of the servers, which were protected by packet filters. This helped to limit the damage, causing little impact on users.”

The import of the attack is distressing. “The internet was designed with resiliency and not security in mind, meaning if one part went down there would be other parts still left standing,” Westby says. “The fact that all 13 root name servers were attacked was a wake-up call, resulting in replicating the root name servers at a dozen other locations globally. Despite this failsafe, two of the 13 root name servers were attacked in 2007, shutting each of them down for about 24 hours.”

Still, the replication of the root name servers after the 2002 attack enabled the requests to be sent to the “mirror imaged” root name servers and thus minimized the impact of the attack.

The Problem Is Risk Aggregation

The internet’s importance to the smooth functioning of global economies is obvious. Without a connection, businesses would be in a lurch. While insurers and reinsurers consider cyber insurance to be the industry’s most promising market, they are stymied in offering broader coverages.

“It’s just not possible to have a level of confidence in the potential risks,” says Mark Synnott, senior broker and global cyber practice leader at Willis Re. “Right now, it is difficult to test how bad the insured loss could be.”

The problem is risk aggregation. Insurers and reinsurers are unable to gauge with a fair degree of certainty the aggregation of cyber-related business interruption exposures they may be absorbing across multiple lines of coverage, including property, casualty, marine, aviation and transport.

“A well-coordinated attack could result in the simultaneous occurrence of many different types of cyber losses,” says Robert Hartwig, associate professor and co-director of the Risk and Uncertainty Management Center at the University of South Carolina’s Darla Moore School of Business. “Right now, it is difficult to identify, assess and quantify what types of cyber losses might occur in association with other types of cyber losses.”

Minus this ability, the total losses could be unbearable. “It’s not like a natural disaster, where you can offset the risk of an earthquake in Japan with Florida windstorm exposures and Chilean earthquake risks,” Synnott says.

Catlin shares this perspective. “Every other catastrophic risk—terrorism, wind, earthquake and even a pandemic—are all regional or local risks,” he says. “The collapse of the internet is the only event I can think of where the whole globe would be affected in a nanosecond.”

Breaking Down the Risk

It’s just not possible to have a level of confidence in the potential risks. Right now, it is difficult to test how bad the insured loss could be.

Mark Synnott, senior broker and global cyber practice leader, Willis Re

Serious efforts are under way to paint a clearer picture of cyber risks. Traditional property catastrophe modeling firms like RMS and AIR Worldwide and newer cyber-risk rating vendors like BitSight and Cyence are partnering to develop robust cyber-risk models for underwriting purposes.

“We’re trying to break down cyber risk into its constituent parts to identify the key drivers of systemic risk to the insurance industry and then quantify these risks,” says Tom Harvey, senior product manager at RMS. “For instance, we’re looking closely at the various components that make up the backbone of the internet. We’re identifying the different pinch points, whether or not they could realistically suffer a disruption, and what the financial impact would be if it occurred.”

Still, both Harvey and Boyer affirm that modeling cyber risks is a steep uphill climb. “The biggest wrinkle is the adversary, which, unlike the weather, deliberately adapts and changes to get around current defenses,” Boyer says. “There’s always something new that can come up, whereas it’s very unlikely we will have a new kind of windstorm or earthquake. It’s these new vulnerabilities that give pause.”

But he is optimistic that a solution is forthcoming. “We’re just starting to get quantifiable data on the usage of web services through internet telemetry and other means, learning who really is relying on Dyn and AWS and other parties and providers in different regions,” he says. “The next piece is determining the key interdependencies if one or the other is knocked offline.”

The Cyber Insurance Market

As these efforts continue, the industry is confident that cyber-risk insurance will become a major contributor to premium volume in the future. In 2016, U.S. property-casualty insurers wrote $1.3 billion in direct written premiums for cyber insurance, a 35% increase from the prior year, according to A.M. Best.

A study by Allied Market Research tallies total gross premiums globally for cyber insurance at $3 billion today, estimating this figure will skyrocket to $14 billion by 2022. Most of the cyber-risk policies sold over this period will be underwritten differently. Unlike many other types of insurance, there is no standard ISO form for cyber insurance. “No two cyber policies are alike,” says Paul King, national cyber practice head at USI Insurance Services.

Other cyber risk experts agree. “Cyber policies are scattered all over the place,” says Sam Friedman, insurance research leader at Deloitte Center for Financial Services. “Insurers have an innate fear of writing cyber risks, which compels them to put in a failsafe. For instance, the policy might not cover business interruption losses caused when a third party, like a website hosting service, has an outage.”

Hartwig confirms this challenge. “If the company itself is hacked and shut down, this would likely be covered,” he says, “but if it is simply the victim of an attack that occurs to its ISP or cloud provider, chances are it might not be covered.”

While such coverage can be purchased, only a few carriers offer it. Even these coverages require careful reading of the policy language to ensure full protection. “A major issue is if the provider of a company’s network services is interrupted by a factor outside its control—the case with the AWS outage,” King says. “The terms and conditions in the marketplace are not standard across the board on this issue, although the industry is working hard to clarify the language.”

For now, Friedman advises insureds, “Do not assume you have coverage under existing policies. I don’t care if the policy says it covers ‘business interruption.’ The question is will it cover a business interruption if you can’t access your cloud provider or ISP for any reason.”

Brokers Addressing Gaps

Many brokers are confident they can put together an insurance program addressing the various coverage gaps for clients. However, such coverages are likely to have stringent terms and conditions, including tight financial limits, sub-limits, large deductibles and coverage triggers based on the length of the outage. The trigger condition alone can stand in the way of a company’s receiving full coverage.

If the company itself is hacked and shut down, this would likely be covered, but if it is simply the victim of an attack that occurs to its ISP or cloud provider, chances are it might not be covered.

Robert Hartwig, co-director, Risk and Uncertainty Management Center, University of South Carolina

“Many triggers are set at six hours, meaning six hours have to pass after the outage begins for the insurance to kick in,” King says. “The recent AWS failure was 5 hours and 45 minutes, meaning those affected that had insurance couldn’t collect for the loss caused by the interruption in business. At the same time, the industry was a mere 15 minutes from hitting a major potential payout.”

Carriers also want brokers to schedule a client’s cloud-computing providers in the insurance submission to obtain a clearer sense of the risk. “The carriers want to be sure, if a company’s current ISP or cloud service providers are attacked, there’s a backup plan in place to keep the business going,” says Michelle Lopilato, senior vice president and director of cyber and technology solutions at Hub International. “That’s where we as brokers can help our clients do what’s needed.”

Such help will become increasingly crucial. Catlin says, “We’re facing a risk that is growing exponentially [and] need to give real cover to an industry or a company against a cyber exposure that is specific to them.”

Banham is a financial journalist and author.

The result: The team-based lottery prompted 64% of employees to complete the HRA, compared to 44% who were offered the grocery gift certificate and 40% of those offered the basic cash incentive. Even though the base amount was the same for those offered the original amount and those offered the lottery, the possibility of “more” moved people to action.

The HRA scenario played out as part of a study posted at the Behavioral Evidence Hub. B-HUB, as it’s known, is an open, online repository of scientifically tested, real-world strategies developed from insights about human behavior. The scenario used group incentives to harness the power of caring what others think. It also uses micro-lotteries, which encourage people to take an action by offering the chance to win a prize through lottery or raffle. These work because people are tempted by the prize and tend to overestimate their chances of winning. Both strategies are time-tested types of behavioral science interventions. They join a range of activities that demonstrate a deeper understanding of the way people think and, therefore, how they respond. Other examples are comparing one group’s behavior to that of its peers and employing enhanced active choice, in which the decision maker is reminded of the consequences of all available options before being required to make a choice.

Real-World Decision Making

In recent years, a smattering of books, studies and projects in the field of behavioral economics have taken a closer look at the ways people think and act, sometimes using the complexities of the insurance industry as an example. Behavioral economics considers how a variety of factors influence the way people make decisions. The concept has been around for decades, but it’s only recently that these understandings have been applied to real-world challenges.

Grasping what behavioral economics is begins with understanding what it’s not. There’s a misconception that it’s simply understanding the way people think just so you can pressure them to do what you want them to do. Those in the field, however, argue it’s more about understanding natural biases and reworking processes so people can make decisions with logic and intent rather than just emotional or environmental reactions.

As we tend to learn over time, logical and intentional decisions often bring a much more positive result than emotional ones. The less logical choice of not going to the doctor because of a potential rise in premiums, for example, increases risk for everyone involved: the patient bears the risk of a serious health problem going untreated, and the system bears the risk of more expensive treatment later when the issue finally is addressed.

Behavioral economics, then, investigates possible interventions for better outcomes. These interventions might consider the way people choose between options and nudge them in a certain direction. Or they might help people sustain behaviors and form habits, navigate processes, become more engaged or increase understanding. In commercial insurance, brokers who grasp these concepts might be able to overcome, say, status quo bias, in which their clients naturally tend toward inaction. They might also be able to overcome choice overload by streamlining and simplifying options for their clients. Too many choices—especially complex ones—can also lead to immobility.

A paper produced by global investment bank Houlihan Lokey, “Behavioral Economics: A New Frontier for Insurance?” includes recommendations for carriers, but the concepts could work for brokers, too.

Understanding loss aversion, for example, means recognizing premium increases upset insurance customers more than reductions please them. “Customers whose rates fluctuate—down as well as up—are likely to be less happy than those with steady premiums,” the paper notes. 

In commercial insurance, brokers who grasp these concepts might be able to overcome, say, status quo bias, in which their clients naturally tend toward inaction.

The book Nudge: Improving Decisions About Health, Wealth, and Happiness, by Richard Thaler and Cass Sunstein, is chock-full of stories of behavioral economics interventions. In one program, participants quit smoking by regularly depositing money that otherwise would have been used on cigarettes into an account. After six months, if a drug test shows they haven’t smoked, they get the money back. If they’ve smoked, the money goes to charity. Those who take part are 53% more likely to reach their quitting goal.

B-HUB, meanwhile, includes interventions that range from the way default choices affect advance directives in healthcare to the experience of a municipal government in Costa Rica that sent postcards to residents comparing their water consumption to nearby neighbors’ along with usage-reducing tips. The residents receiving the postcards reduced their rates by 4.5% more than those who had received a standard utility bill.
“I think there’s more and more realization that the way humans define and interact with products, policies and programs is critical to those things’ being successful,” says Josh Wright, executive director of ideas42, a nonprofit design and research lab—and partner in B-HUB—that aims to use behavioral science to design scalable solutions to some of society’s most difficult problems.

Highly publicized insurance startup Lemonade is one company that has generated a lot of PR for itself by touting its behavioral science-based business model. Founded in 2015, Lemonade has set out to remake insurance “as a social good rather than a necessary evil,” according to its own materials. Customers are asked to choose a cause they care about, ultimately forming a like-minded virtual group. The company uses premiums to pay claims, and whatever money is left is given back to the shared cause.

Wright is quick to say he’s no expert on Lemonade or its processes. All the same, he notes, “They do have a behavioral scientist on their team, and they’re thinking about the customer experience in a very behaviorally informed way.” They’re also doing some interesting work around trust and honesty, he says, helping customers be more honest about their claims by first helping them be part of a larger community.

“If you end up lying or cheating in some way, you’re not cheating some big insurance company,” he says. “You’re cheating a cause you care about.” Greater honesty means less fraud and more efficiency for Lemonade. Meanwhile, in this win/win scenario, worthy causes also receive the support they need. And while Lemonade currently sells only personal lines insurance, a lot of industry executives are examining its methods to see if the business model might one day be applied to the commercial side.

Behavioral Economics in Insurance

So how can the larger insurance industry employ behavioral economics? Howard Kunreuther, PhD and co-director of the Wharton Risk Management and Decision Processes Center at the University of Pennsylvania, believes one way is changing how the industry frames risk, benefit, cost and losses to policyholders.

“One of my favorite examples is that people buy insurance only after a disaster and then cancel their policies several years later if they haven’t suffered a loss,” says Kunreuther, who also co-authored The Ostrich Complex: Why We Underprepare for Disasters. “They think, ‘What a bad investment. What could I have done with all that money?’ It’s very hard to get the message across that the best return on an insurance policy is no return at all. People should celebrate not suffering damage rather than feeling their premium has been wasted.”

Kunreuther says the most important challenge the insurance industry faces is explaining the role insurance can play in reducing future risks. People need to understand, he says, that insurance protects their property and assets, has an important role to play in helping us understand the risks we face, and can encourage investment in cost-effective loss reduction measures via risk-based premiums. As a protective mechanism, then, insurance is worth spending money on.

Framing risks in a way that helps people pay attention is a start. The book Scarcity: Why Having Too Little Means So Much, by Sendhil Mullainathan and Eldar Shafir, echoes the sentiment: many farmers in poor countries—in some cases, more than 90%—might not purchase insurance, whether related to health or to their crops, believing it’s too expensive. In reality, the authors write, they cannot afford not to be insured, but the message isn’t getting across.

I think there’s more and more realization that the way humans define and interact with products, policies and programs is critical to those things being successful.

Josh Wright, executive director, ideas42

“I was living in Austria a number of years ago, and they had an interesting way of presenting information about not wearing seat belts,” Kunreuther says. “It was, ‘We want you to wear your seat belt, and if you don’t wear your seat belt, we will not pay for your medical expenses should you be in a car accident.’ By framing the problem in that way, people focus on the consequences of not buckling up and will voluntarily wear a seat belt.”

The Wharton Risk Center, for one, would like to see the insurance industry get more creative and innovative in designing new products. “In this regard, the Risk Center has proposed insurers consider selling policies that extend three to five years rather than just the standard one-year policy,” Kunreuther says. “An advantage to consumers of purchasing longer-term insurance is that their premiums would not increase after a loss, nor would they have their policy canceled, thus providing them with the stability they want. Insurers would also have a financial incentive in offering long-term policies. They could reduce their marketing costs, as customers would remain with the firm for a longer time period. And insurers would reduce the variance in their potential losses by spreading the risk for each of their policyholders over several years rather than just one.”

Wright says behavioral thinking might also be used to improve the insurance customer experience. Little things—such as offering a “here’s where you are in the process” meter for a customer filling out an online form—can make the experience infinitely more enjoyable. It’s also important to end well, he notes, as customers are more likely to rate an entire experience as positive if it ends on a good note (regardless of what has happened along the way).

Internally, Wright believes behavioral science could help encourage more appropriate use of algorithms in underwriting. Part of that means understanding the benefits of humans and machines working together. “There’s a huge amount of work in the area of how you get humans to use the algorithms,” he notes, and those tend to be correct “the vast majority of the time.”

Whenever possible, behavioral scientists say, it’s important to observe people as they actually use the product or service being offered, taking note of bottlenecks or problems that might create a bad experience.

When that product or service isn’t working or being used as it should be, “it’s not that there’s something wrong with the people using it,” Wright says. “The reality is that these psychologies are pretty universal. We all have challenges, and our minds work in similar ways. We all have biases or cognitive capacity limitations…. We need to design things effectively for how humans really are.”

Soltes is a contributing writer.

When it comes to catastrophe loss estimates from events like Hurricanes Harvey and Irma, odds are insurers and others will have to wait quite a while before the true cost of the event is known.

Catastrophe models generated a wide range of estimates of insured damage in the immediate aftermath of Harvey, all of which are sure to be revised and revised again. While the models often differed, all indicated Harvey’s toll would fall considerably short of those caused by the three costliest hurricanes in recent U.S. history.

The Insurance Information Institute, citing research conducted by Property Claim Services, a Verisk Analytics business, puts 2005’s Hurricane Katrina at the top of the list, with $49.79 billion in insured damage in 2016 dollars. The next costliest, 1992’s Hurricane Andrew, caused less than half as much, with $24.48 billion in insured damage in 2016 dollars, while 2012’s Superstorm Sandy came in at $19.86 billion.

The highest initial insured-damage estimate for Hurricane Harvey came from Karen Clark & Co., which put total insured loss—not including losses covered by the National Flood Insurance Program—at roughly $15 billion. This included about $2.5 billion in wind damage, $500 million in storm surge and more than $12 billion in inland flooding in Texas and Louisiana.

Modeler AIR Worldwide estimated insured losses—again excluding properties covered by NFIP—would exceed $10 billion, with $3 billion stemming from wind and storm surge. But the insured losses amount to only a fraction of total property losses, which AIR estimates could hit the $65 billion to $75 billion range.

CoreLogic, another modeler, estimated private insurers would sustain less than $500 million in insured flood losses, while wind losses would range in the $1 billion to $2 billion range. Uninsured flood loss could reach $27 billion.

Damage to private and commercial automobiles as a result of Harvey is expected to be relatively high. A spokesman for the Insurance Council of Texas said insurers faced an estimated $2 billion in losses from private automobiles and an additional $1 billion from commercial auto, including mobile homes and trailers.

One critical question is how big a loss the nation’s largest flood insurer—the federal government’s NFIP—will ultimately take. The program was already more than $24 billion in debt when Harvey struck. The program enjoys—if that is the right word given the potential losses—a virtual monopoly on residential property flood insurance and underwrites commercial properties as well. Yet both CoreLogic and modeler Risk Management Services provide remarkably similar answers, with CoreLogic estimating losses of $6 billion to $7 billion and RMS estimating $7 billion to $10 billion. As of mid-September, NFIP had not released its own estimate.

RBC Capital Markets issued an analysis that looks at the historical pattern of loss estimates from catastrophes in general since the terrorist attack on 9/11. “They start a little too low, then they seesaw to being a little too high and often end up towards the higher end of the gap in between,” RBC says.

The company uses as an example the course 9/11 loss estimates took. Initial loss estimates were in the $10 billion to $20 billion range, but “conventional wisdom quickly adopted $50 billion as the going rate.” The final tally was closer to $30 billion. Estimates for Hurricane Katrina followed a similar pattern.

“In our experience, this is the ‘normal’ reaction—to favor the high end of the range until information crystallizes,” says RBC. “As one client commented, ‘taking the over’ on loss estimates has always been the safe play.”

National Flood Insurance Act of 1968 creates National Flood Insurance Program.

Flood Disaster Protection Act of 1973 mandates flood insurance purchase in Special Flood Hazard Zones.

Government launches Write-Your-Own insurance program, where private insurers and producers market and service NFIP policies in an effort to encourage participation in the program. The federal government remains the NFIP underwriter.

Hurricane Katrina and others plunge NFIP into billions of dollars of debt.

Superstorm Sandy continues to add to NFIP’s growing debt. Biggert-Waters Flood Insurance Reform Act becomes law, requiring, among other things, that premiums better reflect the risk insured.

Homeowners Flood Insurance Affordability Act of 2014 delays implementation of some Biggert-Waters reforms and repeals others.

NFIP makes its first purchase of private reinsurance to bolster the program.

NFIP’s debt has ballooned to more than $24 billion. Congress begins debate over reforming and reauthorizing NFIP, which is set to expire Sept. 30. In late August, Hurricane Harvey devastates Houston and other areas along the Texas Gulf Coast, and Hurricane Irma slams Florida in September, ensuring NFIP’s deficit will grow.

Virtually everybody agrees the National Flood Insurance Program is broken. After all, the program is about $24 billion in debt, courtesy of a series of natural disasters starting with 2005’s Hurricane Katrina and exacerbated by years of actuarially inadequate rates propped up by subsidized premiums.

Yet consensus on reform has proven quite hard to achieve, as have congressional reauthorizations of the program. A few years ago, there was even an attempt to expand the already debt-ridden program to include windstorm coverage. As opponents of the proposed expansion pointed out, the private insurance market already provided windstorm coverage, albeit at a price some policyholders might balk at.

The failure to come to terms with reform has led to brief lapses in the program, which didn’t do any wonders for the real estate market, as federally backed loans in flood-prone areas must be backed by NFIP coverage. A significant reform in 2012, which among other things opened the way for actuarially based rating, was partially rolled back two years later after NFIP policyholders facing meaningful rate hikes let their members of Congress know their displeasure.

Why is reform so difficult?

One reason is that the reform debate is philosophical as well as economic, says Joel Kopperud, The Council’s vice president of government affairs.

“This debate falls into the philosophical debate of what the role of the federal government is,” he says. “Some are focused on budget issues and actuarial soundness; others are focused on making sure Americans are covered.”

Another reason is that the debate over the scope and cost of the program doesn’t break down neatly along party lines, says Frank Nutter, president of the Reinsurance Association of America. Instead, regional issues come into play, which is hardly surprising given more than half of the policies are issued in three states—Florida, Louisiana and Texas. “You get strong support from Democrats and Republicans [in coastal states] for continuing a program that has subsidies built into it.”

Don Griffin, vice president of personal lines for the Property Casualty Insurers Association of America, agrees NFIP is “more a coastal and riverine issue.” He says many of the areas that have lots of subsidies are in populous states.

“Subsidized insurance for those who live in flood-prone areas—including wealthy property and business owners—should be viewed as entitlements that have been around just about as long as Medicare and Medicaid,” says Robert Hartwig, co-director of the Center for Risk and Uncertainty Management at the University of South Carolina’s Darla Moore School of Business.

“As the current healthcare debate and debacle illustrate, once an entitlement genie is out of the bottle, it’s almost impossible to get it back in.”

In between, Congress stuck with National Flood Insurance Program precedent and kicked the can down the road once again, giving it three more months on life support.
Insurers are known for coverage innovation. There’s insurance for everything, right? Except for the one area that, especially now, seems conspicuously absent—flood insurance for high-hazard areas.

Whereas countries such as the United Kingdom rely on private insurers to underwrite flood insurance, albeit with government backing, in the United States, Uncle Sam is the underwriter—in the form of NFIP.

That isn’t because insurers don’t want to underwrite flood insurance—they’re almost always looking for new opportunities. Part of the problem is that NFIP actively discourages private insurers from getting into the market. The result has been a debt-ridden public operation that seems to receive public attention only in the wake of catastrophes or when it periodically comes up for reauthorization, as is the case this year. With the program already about $24 billion in debt—a deficit that’s sure to swell as claims from Hurricanes Harvey and Irma are paid—expanded private participation in flood insurance is certain to draw renewed consideration.

The Council supports long-term reauthorization accompanied by reform, including expansion of the private role in the flood insurance market.

“We absolutely believe in a greater private role,” says Joel Kopperud, The Council’s vice president of government affairs. “The challenge is the private market needs access to NFIP data to truly function—it’s important that the private market has access to data that only the Federal Emergency Management Agency has.” FEMA oversees NFIP.

Kopperud says everyone involved in the debate should be concerned about increasing uptake of flood insurance. “It ought not to be partisan—people need to purchase insurance,” he says. “The goal should be expanding the market and broadening the base regardless of whether it’s public or private.”

The challenge is the private market needs access to NFIP data to truly function—it’s important that the private market has access to data that only the Federal Emergency Management Agency has.

Joel Kopperud, VP of government affairs, The Council

Reauthorizing NFIP

NFIP provides federally backed insurance in communities that agree to enforce floodplain management plans that meet federal requirements. Flood insurance is required for owners of property in high-risk areas if they have a mortgage from a federally regulated or insured lender.

Somewhat ironically, NFIP came into existence nearly 50 years ago because private insurers said they could not underwrite flood insurance, partly because they found the risk too unpredictable and they lacked the modeling capabilities to better understand it. But technological advances and other factors, not the least of which is a mountain of capital, have whetted their appetite, provided they can generate an adequate return.

NFIP doesn’t work like traditional private insurance. Policyholder premiums are based on the experience of properties within the larger flood risk zones, which are defined by floodplain maps. A constant criticism of the program has been that the federal floodplain maps often don’t reflect reality, because they’re out of date. The program involves subsidies and premium levels that don’t accurately reflect exposure. It even pays for rebuilding properties in areas that contend with repeated serious flooding.

A series of catastrophes—notably 2005’s Hurricane Katrina—plunged NFIP deeply into debt, which now totals more than $24 billion. At press time, claims stemming from Hurricane Harvey were still being tallied, and estimates of Irma hadn’t even begun. The program appears almost certain to overrun its $30 billion borrowing limit.

The debt burden led Congress to approve major reforms in the Biggert-Waters Flood Insurance Reform Act of 2012, reforms that included allowing the program to charge risk-based premiums, removing discounts to some policies that were not actuarially sound, and eliminating “grandfathering” of older, lower rates. The act also included language that signaled Congress’s desire to open the flood insurance market to surplus lines insurers. Apparently the language wasn’t strong enough, however, as some lenders have still refused to accept policies from surplus lines insurers, saying the language doesn’t specifically say private insurance can be accepted as an alternative to NFIP coverage. 

The reforms took another blow after outcry from some lawmakers (particularly those in coastal areas), the public and others led to the Homeowners Insurance Affordability Act of 2014. Among other things, this act reinstated grandfathering of the older, lower rates and repealed some of the rate increases.

If I’m looking to diversify some risk and not have the reputational issues that have come with being a WYO, the biggest stumbling block is the mandatory purchase requirement—you have to buy a flood policy if you have a federally based mortgage and are in the floodplain. And the way the law reads, it needs to be an NFIP policy.

Don Griffin, VP of personal lines, Property Casualty Insurers Association of America

Reform once again received a boost as Congress considered a series of bills earlier this year, including the Repeatedly Flooded Communities Preparation Act, which would ensure community accountability for areas repetitively damaged by floods; the Flood Insurance Market Parity and Modernization Act, which spells out that flood insurance policies written by private insurers must satisfy the mandatory purchase requirement; and the Taxpayer Exposure Mitigation Act, which would repeal the mandatory flood insurance coverage requirement for properties located in flood hazard areas and provide for greater transfer of risk under NFIP to private capital and reinsurance markets.

Neither the House nor the Senate, however, voted on these bills before the September 8 temporary NFIP reauthorization, which came as part of a congressional continuing resolution that also raised the debt limit, funded the U.S. government until Dec. 8, and authorized emergency funding for hurricane disaster relief.

Private Insurance Proponents

Private insurers have become increasingly interested in participating in the overall flood insurance market beyond the role some have accepted as “Write-Your-Own” companies that service NFIP policies but leave the underwriting to NFIP.

Don Griffin, vice president of personal lines at the Property Casualty Insurers Association of America (PCI), notes that some insurers left the Write-Your-Own (WYO) program because of the reputational problems it presented as policyholders complained about claims handling in the wake of Katrina and other storms.

“If I’m looking to diversify some risk and not have the reputational issues that have come with being a WYO, the biggest stumbling block is the mandatory purchase requirement—you have to buy a flood policy if you have a federally based mortgage and are in the floodplain. And the way the law reads, it needs to be an NFIP policy,” he says.

That lack of choice has led risk managers to also support a larger private role in the market. The Risk & Insurance Management Society supports reauthorization of the program.

We believe that policies purchased on the surplus lines market will satisfy lender requirements. That’s our top priority in reform after long-term reauthorization.

Joel Kopperud, VP of government affairs, The Council

Watt Companies, a commercial real estate firm in California, owns and manages assets invested in office buildings and shopping centers with numerous locations in flood zones.

“We have full flood coverage with the exception of these high-risk zones. These are high deductibles, and there’s really nothing we can get out there other than NFIP. The problem is that our lenders require us to purchase NFIP—it's not NFIP or equivalent,” says Mark Humphreys, Watt Companies’ vice president of litigation and risk management and a member of RIMS’s external affairs committee.

“I would like to see a larger role for private insurers, and I think it’s possible. It’s not going to be a quick process. I can’t see privatization happening overnight. There has to be some way to lead people and lead the lending community into it,” he says.

Joel Kopperud agrees. “We believe that policies purchased on the surplus lines market will satisfy lender requirements. That’s our top priority in reform after long-term reauthorization,” he says.

Support for greater private participation in flood insurance spans the political spectrum.
As might be expected, the free-market R Street Institute is among the many pro-business advocates of a greater private market, as R Street’s R.J. Lehmann and Steve Ellis of Taxpayers for Common Sense wrote in a letter to the House Financial Services Committee earlier this year.

“Because the National Flood Insurance Program historically has charged subsidized or otherwise distorted rates for coverage, it has failed to convey accurate information to property owners and developers about the true risks they face, which can have and has had disastrous consequences,” they wrote. “We do not believe encouraging private insurance would result in ‘cherry-picking’ of only the lowest-risk properties. Shrinking an already broken and unsustainable program can only benefit taxpayers.”

And support came from an unexpected source in a letter to the Senate Banking Committee. Longtime industry critic Bob Hunter, director of insurance for the Consumer Federation of America, wrote that the CFA “strongly supports Congress taking steps during this reauthorization process to allow private insurers to assume a significant amount of flood risk.” The support came, of course, with a caveat. “However, involving the private insurance market on flood insurance requires careful planning since some proposals we have seen would expose consumers to extremely unfair practices and expose taxpayers to more risk…. Any increase in the role of private insurers must be accompanied with robust consumer protections.”

The reinsurers and the modeling companies have improved their risk analysis capability, such as with catastrophe modeling related to flood, so they have more confidence in understanding what the risk is.

Frank Nutter, president, Reinsurance Association of America

But Is It Profitable?

Despite the interest in and support for private insurance in the flood market, uptake has been limited, and there are multiple reasons why—beyond the ambiguous language in the Biggert-Waters Act. Much of it comes down to determining whether this can actually be a profitable market.

“The largest obstacle in recent years…[is] the fact that private insurers must compete against a government-subsidized entity that does not charge rates that are actuarially sound,” says Robert Hartwig, co-director of the Center for Risk and Uncertainty Management at the University of South Carolina’s Darla Moore School of Business in Columbia. 

And charging those same low rates wouldn’t help. In fact, concern that state regulators will too heavily regulate premium pricing has also steered private insurers away, says Jim Auden, managing director with Fitch Ratings in Chicago. Hartwig agrees. He says there is fear that any new flood product would be subject to rate suppression by state regulators, potentially rendering it a perpetual money loser. Under such circumstances, “this is not a business in which an insurer would be willing to allocate much, if any, capital,” he says.

Auden also notes that people outside flood-prone areas aren’t willing to buy the product. “If you’re only selling to the folks who inevitably would be flooded out, you couldn’t make a profit.”

Then there’s the lack of data. According to Ken Evans, senior vice president and chief risk officer of Willis Towers Watson’s Loan Protector Insurance Services, NFIP has closely held its premium and loss ratio information. Because private insurers haven’t had access to the information, they haven’t been able to determine whether the market would be profitable.

Even with these barriers, however, it is important to note that private reinsurers have become involved with NFIP recently and their ability to use data has played a role in this. The program initially ceded some risk to private reinsurance in October 2016 and then transferred a larger book of business to 25 reinsurers earlier this year.

“Reinsurers have a robust capital position, and they’ve been looking for new areas of growth. Government programs such as the flood insurance program offer them that opportunity,” says Frank Nutter, president of the Reinsurance Association of America. He says flood is a diversifying risk so reinsurers have an opportunity to write more than windstorm or earthquake, for example.

The reality is…you’re never going to have a private market that’s interested in insuring repetitive flood areas. To what degree do you mitigate flooding? That’s a question Congress will have to answer.

Ken Evans, SVP and chief risk officer, Willis Towers Watson’s Loan Protector Insurance Services

“The reinsurers and the modeling companies have improved their risk analysis capability, such as with catastrophe modeling related to flood, so they have more confidence in understanding what the risk is,” Nutter says.

Flood Is Growing

Despite increasing support for greater private participation in the flood insurance marketplace, observers agree that NFIP isn’t likely to disappear any time soon.

The program needs to be reauthorized on a long-term basis to encourage the development of a private solution, says the PCI’s Griffin. “We want to see the program continue, we need a long-term reauthorization, companies need to know where they can go.” A long-term reauthorization is “a market stabilization signal to the industry because it says we’re going to stay the course.”

“I believe there will continue to be a need for NFIP for the foreseeable future, particularly for homeowners in high-hazard flood zones,” says Martha Bane, managing director of the property practice at Arthur J. Gallagher in Glendale, California. “There will be continued pressure to offer subsidized rates that don’t adequately cover long-term losses and expenses for private insurers, so the private flood market could be somewhat limited.”

Evans takes a similar stance. “The reality is…you’re never going to have a private market that’s interested in insuring repetitive flood areas,” he says. “To what degree do you mitigate flooding? That’s a question Congress will have to answer.”

The largest obstacle in recent years…[is] the fact that private insurers must compete against a government-subsidized entity that does not charge rates that are actuarially sound.

Robert Hartwig, co-director, Center for Risk and Uncertainty Management, University of South Carolina’s Darla Moore School of Business

The flood peril isn’t going away, and in fact it may be growing, notes Evans. “We’re seeing more everyday occurrences than we have in the past. Is it climate change? Is it Mother Nature taking a different path? More and more, everyday flooding is happening. Brokers are finding more people are becoming more aware of flooding—it’s no longer just coastal areas affected.

“If a broker has more choices, the broker will be able to use these choices to better serve the consumer,” he says. “But no matter how you cut it, flood is very difficult and convoluted to understand, because it’s not the same as hazard insurance. Flood has nuances that are particular to flood insurance.”

Hofmann is a contributing writer.

They’re frustrated and looking for some kind of guarantee that the reward for years of hard work, networking and premier sales numbers will be protected. That kind of guarantee isn’t going to happen under the traditional compensation model most commercial brokerages use. It requires a fresh look at how we incentivize our best brokers.

When a brokerage is purchased, often the buyer wants to see a return on investment as soon as possible. For the insurance broker, this may mean a shifting of accounts and changing commissions. In fact, brokerage commission decreases are occurring across the industry. What was once a fairly predictable financial future has become one of uncertainty, and the pressure to secure new clients continues to intensify at a relentless pace.

Some acquirers are creative in their attempts to motivate new growth. For example, one of the largest brokerages in the industry ties broker commissions to a schedule of new business appointments over the first few years after acquisition. If brokers do not meet the demands for new growth by setting up those appointments, they do not receive a percentage of their commissions.

An Accenture survey found that the top two priorities of brokerages are retaining existing customers and creating a better, more consistent overall customer experience. However, the mandate for brokers to focus on new business flies in the face of those strategic imperatives.

Additionally, most brokerages have compensation models where new business commissions are higher than renewal commissions. New accounts are compensated at 40% or higher while renewals are paid at an average of 20% to 30%, with some going even lower than 20%. This model does not incentivize brokers to be true advisors to their clients. In some firms, the pressure to procure new business is so intense (particularly right after an acquisition) that brokers rarely interact with their clients once the policy is bound. While this may have been historically acceptable, we live in a world where client expectations are rapidly changing, so this approach increasingly presents a new risk—the inability to keep clients.

“The key variables driving overall commercial insurance customer satisfaction are insurer profitability and broker expertise,” according to the J.D. Power 2016 Large Commercial Insurance Study. J.D. Power notes the correlation between customer satisfaction and insurer profitability suggests that “the most profitable insurers are able to support more flexible underwriting standards to meet customer needs more effectively.” As far as brokers go, “The single most critical touch point between a customer and an insurance broker is the quality of advice/guidance provided,” J.D. Power says. Clients want the attention of, access to and expert advice from their brokers. When a brokerage’s model does not support that, people will go to one that will.

The Entrepreneurial Model

We have found that a different model—an entrepreneurial model—more closely aligns with evolving client expectations. This model encourages brokers to look at their book of business as if it is their own brokerage firm. As business owners, we get paid by the carriers the same for new and renewal business (for the most part) while we are building an asset. Brokers want the same thing the owners get: consistent commission levels, equity in their client base and ownership in the firm. The entrepreneurial model mimics the benefits of being a brokerage owner by paying the same new and renewal commissions, providing a contractual equity for brokers’ individual clients and offering the ability to buy stock in the overall firm.

In the entrepreneurial model, customer service reps, account managers, account executives, claims advocates and other key players remain critical to the client experience. Having best-in-class subject matter experts and customer service teams is just as critical as having an ongoing relationship with a broker/advisor. However, unless the broker is leading the strategy, directing teammates and executing the game plan, clients often feel they are missing a critical piece of their overall engagement with their brokerage.

It may seem scary to revamp your compensation approach and give brokers greater ownership over their book of business. There are some definite downsides to this model that need to be taken into consideration. For example, selling the company becomes more complicated since broker equity in the client base would have to be taken into account if the firm is sold. There will be a compression of the EBITDA percentage when renewal commission levels are increased. But in time, the higher retention levels of both clients and brokers should more than offset those dollars. The focus of an entrepreneurial model has to be on building a better company and seamlessly serving clients, not on short-term EBITDA.

While this type of plan might appear to cause brokers to rest on their existing book, we actually have found the opposite to be true. Equity and ownership builds a sense of pride in their book that causes brokers to want to see it grow. They are building something that has value; they don’t want to see that asset dwindle.

And it affords them an opportunity to generate income upon retirement. This is accomplished by paying retiring brokers a lesser percentage of the commission as it renews than what they are paid while working. The difference between the active commission level and the retirement commission level is paid to a new broker, who has the responsibility for servicing those accounts. When retired brokers are paid out for their equity in that client base, the equity position transfers to the new broker, and the cycle continues. This allows for a seamless perpetuation plan without further erosion of EBITDA.

When I speak with brokers about our model, there is immediate disbelief followed by a lot of questions. The difference in their ability to pursue and retain clients, the quality of tools at their disposal, the increase in their compensation, the option to own and the retirement path all seem too good to be true. It’s not, but there is a catch. As is true for all successful business owners, they must be entrepreneurial with the internal drive to build something for themselves.

The traditional brokerage is all about the shareholders, so profits by definition have to be their first priority. In the entrepreneurial model, the owners are brokers, so the interests of the two parties are the same and, therefore, aligned. The result is that it creates a place to build a career and a life.

Jeff Lagos is president of Insurance Office of America.

Insurers have been using big data for years to select their underwriting risk appetite, even helping to price major catastrophes such as earthquakes and wind exposures.

But in today’s new era of insurance-driven data, middle market and larger businesses can use their own analytical data—coupled with industry trends—to make sound business decisions on the potential risks to their organization. Too few organizations are effectively harnessing their data, and many brokers continue to sell on price alone, especially in the middle market and large account space. 

In an ideal scenario, you and your clients should work together using their own data on a micro-focused basis to develop their corporate risk management and insurance program. The data can help confirm many earlier decisions and develop a well-thought-out map to navigate your way through other complex risk management issues. The data will highlight deficiencies in such things as insurance placement and carrier programs, collateral programs, claims programs, risk control programs or a combination of these.

The keys to effectively using an analytics process to navigate an individual company are:

  • Keep it simple and allow the data to talk.
  • Accept that the data will pinpoint issues that may require a change in risk management fundamentals.
  • Establish a corporate commitment to a continuous risk management improvement process.

We use four simple insurance analytics tools that break information down into small parts to enable us to examine the roots of each factor. This lets you better understand the bigger picture. Each tool peels back another layer of information to identify trends and a root cause (or multiple root causes).

Total Cost of Risk (TCOR) is the first and easiest of the four insurance analytics reports to run. Simply, it is a process of taking your annual insurance spend and breaking it down into its individual components. Whether your insurance program is written on a first-dollar, guaranteed-cost, program, or deductible or retention basis, the TCOR report will direct you to where you need to focus your attention—insurance premiums, actual losses, administrative expense and/or collateral.

For instance, if 62% of the insurance spend is in losses, that is a good place to begin to peel back the layers of information to determine the cause. Solving the loss equation in this instance will have multiple positive effects on improving risk, reducing collateral and creating better underwriting terms.

Historical loss data and related information are increasingly being used by financial and insurance professionals to identify macro- and micro-level trends and patterns to help make strategic decisions regarding pre-loss (risk control) and post-loss (claims) programs. Taking the time to look at the various aspects of qualitative loss data allows us to take a deeper dive into historical information to find trends and to determine the root of a problem. The more years of loss history data you use, the better trend and root cause analysis you will obtain.

Charting out trends in data provides the opportunity to sort information into many meaningful ways that align with an organization’s strategic goals. For example, you can chart by types of losses, by division, by location, by state, etc. These charts later become dashboard reports for tracking progress against a baseline or correcting an issue. They help identify and create priorities for initiatives. And they guide you and your clients as you develop goals to support risk management and internal key performance objectives.

Financial analytics take a different snapshot of the same information to project losses into ultimate loss costs—meaning predicting the value of a loss that occurred today by the time the loss is finally paid in the future. This involves examining four different points of information:

  • Retention analysis and loss forecast
  •  Accrual and loss reserve
  • Program comparison and cash flow modeling
  • Collateral requirements.

Understanding the financial implications to your company of any risk retention or deductible program is critical to selecting the most appropriate solution.

Property analytics are an equally important bridge to a comprehensive look at the entire risk management and insurance program. A top-down analysis of a property program begins with proper valuation of assets to ensure the organization has the appropriate insurance limits. This entails a look at the valuation and also a careful look at the construction, occupancy, protection and exposure (COPE), such as the following:

  • Appropriate replacement cost values
  • Construction of the building as well as the building materials used to construct a property
  •  Occupancy of the property (office, industrial, retail or residential)
  •  Protection(s) in place to prevent or mitigate loss
  •  Exposure to the types of risks the property is susceptible to. 

Due to the unique characteristics of each property, it’s important that an organization understand the value of this information to not only help control potential hazards of loss but also to showcase the portfolio in the most favorable light to the underwriting community. There are also many advanced technology systems today that can help in this analysis.

Importance of Risk Assessment

While the use of analytics in risk management and insurance will point your clients in the right direction, it’s important to follow up each analysis with a general risk assessment. The risk assessment process takes the what and how of an event one step further to understand the reason why the event occurred, identifying opportunities to further reduce exposure and costs associated with a claim. Completing this process will allow your clients to take corrective action and change behavior to prevent the loss from occurring again—getting your clients back in line with their organization’s commitment to a continuous risk management improvement process.

Meder is Wells Fargo Insurance’s EVP and head of its Risk Advisory Practice.

In his final manipulative act, Little Finger talked about how he would “play a little game” to determine someone’s motivations for a certain act or series of actions. He would think of the absolute worst possible reason someone could be doing or saying a certain thing. This perspective helped him either eliminate potential alternatives or protect himself from a potential self-serving act.

An interesting perspective from a fictional character. I am not suggesting you should assume the worst possible outcome of every situation you encounter. However, it is typically useful to try to understand someone’s motives during a particular exchange. Have you ever tried to analyze someone else’s motives—putting yourself in their shoes—during a negotiation or sales process?

If considering a sale of your business, it is wise to look at those approaching you from this vantage point. I truly believe most of those who approach you have good intentions. But one person’s good intentions are not necessarily in the best interest of another person—that being you, the seller.

In general, two main groups are coming after you: the M&A advisor and the buyer segment. The boiler room approach that some M&A advisors in the marketplace are using to get your attention can be enticing.

Most of you have likely been called by a “bird dog” telling you about the unbelievable multiple and value they can command for you in today’s hot market. Ironically, the person you are speaking with likely doesn’t know anything about you or your firm. How could they possibly know what your market value could be? Is it really that easy, or do they have an ulterior motive masked behind a great sales pitch? Don’t get caught up in the momentum. Stop and understand whether this message is really the right approach for your firm.


The second group is the buyer field—a group of roughly 35 firms trying to convince other firms to sell to them. Buyers will approach you in multiple ways—via employees who are also M&A reps, outsourced cold callers, local representatives and potentially even M&A advisors trying to represent the sole interests of a specific buyer. Sounds like a lot of activity!

Some buyers will encourage you to talk to others in the marketplace. They want to make sure you are comfortable, that they are the right fit for the next stage in your career. Others may try to convince you they are the only firm out there for you, that you should not hire an advisor, not talk to other firms. They want you to think the valuation they are offering you is very competitive in the marketplace.

Both sales tactics are likely coming from a good place. But the latter is trying to convince you to narrow your focus on what is likely the most important decision of your professional career. Understand what they have to gain from the approach. Of course, it is better for the buyer if you don’t talk to other firms. Competition not only has the potential to drive up the price but also to create a scenario where the buyer (or their advisors) won’t get the deal done.

The bottom line is to be diligent. Understand the motivations of any firm calling on you. Can you create a scenario where you get value from the advisor you choose or the buyer you select and still have a win-win outcome? Of course you can. But make sure you don’t get sold on something that might be well intentioned but doesn’t give you the absolute best outcome.

Market Update

Deal activity in August 2017 slowed to 25 announced deals in the month, down from 35 in July and from the peak of 56 announcements in June. Year-to-date activity through August is up from last year, however, at 321 total announcements compared to 289 through August 2016. California, Texas and Florida have been the most targeted states so far this year.

Acrisure continues to be the most active buyer in the field through August, announcing 29 deals. Broadstreet Partners and Hub International have each announced 23 deals year to date through August.

Notably during August, Seeman Holtz Property and Casualty announced three acquisitions, bringing the total for June, July and August to six, with eight announcements for the year through August compared to only two in all of 2016. Seeman Holtz is based in Florida and has its largest presence there and in Texas and California. It also has locations in New Jersey and Illinois.

Brown & Brown also announced three acquisitions in the month of August, in addition to two announcements earlier in 2017. Historically a very active acquirer, Brown & Brown has announced fewer than 10 acquisitions since the beginning of 2016 (through August 2017).

Trem is SVP at MarshBerry.

A May 2014 Center for Insurance Policy and Research survey of 47 state regulators showed all but five with insurers offering telematics UBI policies and 23 with more than five carriers offering UBI.

UBI costs are dependent upon the vehicle and are measured against time, distance, behavior and place. While UBI is now concentrated in personal automobile insurance and is not yet receiving the same adoption in the commercial auto market, its possibilities there are numerous.

Telematics is an effective tool in validating certain rating factors used by underwriters in pricing commercial auto insurance. It captures important usage data like hours driven per day, annual mileage, time of day driven, radius of vehicle travel and garaging location. 

Today most carriers depend solely on the vehicle garaging and radius that is provided to them on the accord application. Telematics data can tell you that along with secondary garaging locations and a more granular breakdown of radius to provide an even better insight into the risk.

Studies show there is a strong correlation between claim and loss costs and mileage driven. One national carrier said time of day a vehicle is driven can be twice as predictive as traditional insurance rating variables. The number of hours per day the vehicle is driven can reflect if it is being driven multiple shifts per day, which increases the accident frequency and severity potential.

Many telematics providers use supplemental software applications that provide road speed limits, road types, traffic density and weather. This allows insurers to calculate speeding, miles driven off road, types of roads being traversed and number of hours driven during high traffic density periods—which have been shown to be a predictor of crash patterns.

The Insurance Services Offices (ISO) has rating for telematics embedded in the Commercial Lines Manual under Rule 114 Vehicle Telematics Rating. The GeoMetric rating procedure provides a premium discount to certain vehicle types and coverages based on the percentage of time driven in a green zone. A green zone is a set of all locations with lower loss cost bands than the ones of the principle garaging territory. There is a Safety Scoring Rating Procedure in the rule that provides a premium discount to certain vehicle types and coverage based on driving behavior. The safety score is a numbering system that represents the driving behavior risk using qualifying telematics.

Changing Behavior

Behavior identification can provide great value to commercial auto insurance. It can identify key driving behaviors that include hard braking, rapid acceleration, speeding and hard cornering. These behaviors can be used in scoring models to determine risk selection and pricing along with proactive loss control. Pinpointing real-time or near real-time driver behaviors lends itself to a more proactive approach in seeking immediate cures to prevent accidents. In fact, there is telematics technology available today that will immediately notify the driver of unacceptable driving behaviors.

A survey by the Insurance Research Council revealed more than half of drivers changed their driving habits after owners installed a telematics device provided by their insurer. A total of 36% said they made small changes and 18% said they made significant changes. A Federal Motor Carrier Safety Administration evaluation of onboard telematics effectiveness found a 37% reduction in speeding violations per 1,000 miles.

Monitoring driver behavior alone does not solve the problem, but coaching and feedback have shown to make measurable improvements. Some companies are using gamification with telematics to help change driving behaviors. This typically involves drivers competing either head-to-head or in teams against other driver colleagues to see who demonstrates the best driving behaviors. 

Telematics can also have an important role in claims handling. It can provide driving events and driver behaviors immediately after an accident. These include acceleration, hard breaking and steering, direction of travel, date and time, weather details, location of accident, speed and air bag deployment.

The insurer can immediately deploy resources to an accident scene to address the client’s needs. This can mitigate costs of unnecessary emergency response equipment and high towing and storage charges, which adds to the cost of the claim.  Telematics data in claims is quickly moving to more predictive analytics solutions.  Point of impact and severity of crash information derived from accelerometer data can be an early predictor of trauma and the probability of injury.  

Scoring models are commonly used with telematics. They analyze the usage and driving behavior telematics data and provide a numerical score to reflect the risk level.  This score is typically used in the risk selection and pricing process. The models vary from basic event counting and weighting to very complex models that perform analytics on telematics data along with various contextual data. The majority of the scoring models are proprietary and the exact calculations are difficult to determine.

The telematics industry is growing rapidly. What and how data are being used varies by company and is ever-changing as the industry grows. Results have shown telematics can improve risk selection and claim handling, provide proactive loss control, and improve overall book results, both in the short and long term.

Kevin Seth is president of  E-Technology Services.

As millions of people work to put their houses, businesses and lives back together following hurricanes Harvey and Irma, it only makes sense to highlight the topic—and the critical role brokers play—once again. The following is a personal account of Richard Blades, chairman of Wortham Insurance in Houston. We’ve outlined his experience during Hurricane Harvey to bring to light your own processes and preparation before, during and after a loss event. There are always lessons to be learned, and as you read along, take a moment to remember what our industry is all about: customer service, customer experience, relationships and trust.


The message on the homepage of Wortham’s website is simple: Our Houston office has been affected by the flooding brought on by Tropical Storm Harvey. We have activated our Business Continuity Plan and our staff are fully prepared to assist our clients via normal email, fax or telephone methods.

As the city of Houston and the surrounding region reeled in the immediate aftermath of Hurricane Harvey, Wortham Insurance operated in a “business as usual” mindset. And that’s by design, according to Blades: “The most important thing we do is rehearse our disaster recovery plan. Based on where we’re located and where a lot of our clients are located, you have to realize that something like this is a possibility.”

Wortham’s “rehearsal” is actually physical practice. At least once a year, Wortham’s IT department tests the equipment and operating systems inside of a state-of-the-art Mobile Recovery Unit, and employees are required to spend a full day working on a disaster recovery virtual desktop. Each MRU, essentially a giant mobile communication trailer, has space for 36 workstations. When Wortham saw the storm approaching, they took steps to make sure all team members could work remotely and triggered the reservation of two MRUs, which were located out of harm’s way in College Station. They arrived on location on Wednesday night to augment Wortham’s remote capabilities, which use an offsite data center. “When things get hectic, it’s not the time to be making decisions. You need to just execute your plan. Especially during a CAT loss—that’s the most important time to be assisting clients. You can’t be down.”

“We were without email and phones for just a short period of time on Saturday night and we were back up and running in a matter of hours. It was a real team effort. Our employees were able to access files, take calls, field emails and communicate with clients quickly and efficiently,” says Blades.

Still, Wortham Tower took on significant water and at the time of this writing, Blades had no timeline for the building. “We’re operating on the basis that it’ll be at least a couple of months before we’re back.”

That just shows the complexity of dealing with an unprecedented CAT event. In addition to helping clients and the community, you have to take care of your own. “We reached out to everybody through our phone trees, trying to get their statuses quickly,” Blades says. “We’re offering any assistance that we can…. You’ve got to take care of your people first.” About 20 Wortham employees were seriously affected by the storm.

Wortham’s other offices around the state offered support, providing additional team members to process claims and offices for some employees who evacuated Houston to work. And the larger insurance community has also reached out. “It was very heartwarming…to know you have that many associates around the country who were thinking about you and willing to help with genuine offers of assistance. It makes you appreciate the people in our industry,” Blades says.

As Houston’s clean-up efforts continue, stories of the human spirit abound. “You just would be amazed. There are wonderful stories about people helping people. That’s just the Texan Way.”

While it’s still unclear how many Wortham clients were affected (they’re taking in volumes of both personal lines and commercial claims), the storm has made clear how critical flood insurance has become. “There were two stages to the flooding in Houston,” Blades explains. “One was from the initial rain and the second was from the release of the reservoirs. Nobody anticipated that the reservoirs would be breached the way they were. With Houston’s development over the last couple of decades, the city has to do a better job of flood control. People are going to be in unique circumstances and will need federal help. I think more people will buy flood coverage going forward.” (For more on the current state of the NFIP, check out the feature “Under Water” in this issue.) 


We are proud of how our industry has and continues to respond to both Hurricanes Harvey and Irma. Your support and commitment to serving your clients is what makes our industry so special. Our thoughts continue to be with our member firms, their teams, clients, families and communities in Texas and Florida as they rebuild.

Cyber insurance is a growing market, but it’s not the only place to look for coverage from a cyber attack. Robert Parisi, managing director for Marsh’s FinPro practice, says, “As losses get larger, people are examining their coverage and often taking a shotgun approach to claims and notifying everyone they can if they don’t have express cyber coverage.” Parisi says, “The best approach is not to view a cyber event in isolation but to look at all policies—property, E&O, general liability, terrorism, kidnap and ransom, and fidelity—and see where aspects of a cyber event may be covered.”

Cyber Claim History

In the early days of cyber attacks, companies made claims under their property and commercial general liability policies. Coverage questions initially revolved around whether the loss of data could constitute a direct physical loss or damage under a property policy.

One of the first property policy disputes, Home Indemnity Co. v. Hyplains Beef, was based on a claim for business interruption losses arising from a disrupted computer system. In 1995, the federal district court dodged the question of whether the loss of data was a direct physical loss and focused on actual language of the business income section of the policy. The policy required a “suspension of operations.” The trial court denied the claim because, although the disruption made the computer system less efficient, the “suspension” of plant operations had not occurred. The Tenth Circuit affirmed.

However, a case in 2000, American Guarantee & Liability Insurance Company v. Ingram Micro, did find that the loss of data constituted physical damage under the company’s business interruption policy. The court noted, “Lawmakers around the country have determined that when a computer’s data is unavailable, there is damage; when a computer’s services are interrupted, there is damage; and when a computer’s software or network is altered, there is damage.”

The insurance industry scrambled to clarify the issue by specifically excluding electronic data from property coverage. Indeed, the current Insurance Services Office’s Building and Personal Property Coverage Form excludes “The cost to research, replace or restore the information on valuable papers and records, including those which exist on electronic or magnetic media, except as provided in the Coverage Extensions.” The current form’s coverage extensions provision limits recovery to $1,000 at each location.

Bucking the Trend

Some insurance companies, however, are turning away from the ISO language and pursuing the cyber insurance market by including cyber coverage in property policies. FM Global, Affiliated, Liberty, AIG and Zurich all include elements of cyber coverage in their company-issued property policy, while XL Catlin and Allianz have cyber extension endorsements available. FM Global’s website states that its Global Advantage policy covers:

  • Damage to data, programs or software created by harmful viruses or other malware
  • Computer network service interruption due to malicious cyber activity
  •  Third-party data services interruption (cloud outage) leading to business interruption and/or property damage
  •  Resulting property damage and business interruption on an all-risk basis.

This type of property coverage can be particularly important when malware infestations require expensive and time-consuming eradication measures, which may involve replacing equipment.

John Dempsey, founder of Terrabella Risk Consultants, says that as attacks increasingly impair system operations, rather than steal data, companies should pay close attention to how an attack impacts the company’s computer systems. “Multipronged attacks are driving multiple claims,” he says. Dempsey’s expertise in quantifying the impact of cyber attacks and supporting business interruption claims has enabled him to understand where other types of coverage may come into play after a cyber event. “If the nature of the IT hardware changes and a client can show loss of functionality, a credible argument can be made that the loss of use of the equipment supports a property claim that the equipment was damaged.”

The recent attack of NotPetya malware is a good example. The malware was a combination of powerful malware tools that deeply infiltrated systems to destroy data and take over file systems. NotPetya created massive business interruptions at large corporations such as Maersk, Federal Express, and Reckitt Benckiser. Maersk’s CEO has estimated the attack will hit the company’s third quarter financial results by $200 million-$300 million. Shipping company TNT, a subsidiary of FedEx, was still feeling the impact of NotPetya three weeks after the attack, with manual processes still in place and widespread delays in service and invoicing.

Mike Andler, property practice leader at Lockton, has been carefully monitoring the cyber coverage extensions in the property insurance market. “We will have to wait and see the result of recent first-party cyber claim activity and its ultimate effect on the marketplace, especially with respect to terms and conditions, price and available limits.” Referring to that shotgun approach he currently sees, Parisi cautions that insurance companies may begin specifically excluding cyber from those traditional policy products that aren’t necessarily intended to cover cyber events.

Accordingly, organizations have to carefully monitor their cyber coverage. The simple data breaches that required only notification to authorities and victims have given way to complex attacks that require a comprehensive approach to cyber risk management. Today, boards and executives must delve deeper when managing cyber risks and examine the interdependencies between business units and IT operations.

They need to determine:

  • What types of cyber attacks are possible
  • What the impact on operations would be
  • What insurance coverage is needed
  • What financial limits are required.

Understanding the potential impact of cyber attacks is a difficult exercise that requires technical, operational, legal and insurance expertise. Brokers and agents can assist by helping clients view cyber risks as enterprise risks and examining all their policies to identify possible coverage areas for cyber claims. They also can help identify experienced forensic, technical and legal resources that can assist clients in the event of an incident and, perhaps most importantly, help manage the post-event claims process.

Westby is CEO of Global Cyber Risk.

Outside of the ACA the president was unable to make any legislative changes. Instead, the Department of Labor and the Equal Employment Opportunity Commission became the conduits for implementing the president’s policies.

Senior Labor official Phyllis Borzi addressed this explicitly in a widely reported 2014 speech:

Back in the day, when people wanted to make changes, they passed legislation, but what we’ve done with the new DOL regulations is we’ve shifted from the way that social change and legal change and financial change is accomplished through congressional action to two different avenues for making changes: the main one being regulation and the second one being litigation.

There are two primary problems with forcing change through government agencies. First, the Constitution entrusts Congress with the authority to make laws. Theoretically, executive branch agencies have the constitutional authority only to implement policies that Congress puts into place. Second, agency actions done by one administration can all too easily be undone by the next.

This summer, the Trump administration’s Labor Department and EEOC, aided by the courts, are proving the point. They have taken significant steps to begin to dismantle the Obama employment regulatory regime.

Independent Contractor & Joint Employer Rules

In July 2015, the Labor Department published controversial guidance purporting to clarify the rules about who may be treated as an independent contractor instead of an employee. The clarification was widely interpreted as dramatically limiting the scope of who may be classified as an independent contractor.

Labor issued an administrative interpretation six months later (which purportedly has more regulatory heft than a guidance) to clarify what constitutes “joint employer” status. This interpretation increased the liability of bigger businesses by making them jointly liable for the violations of their business partners (and in some cases, by making them solely liable because the partner businesses were not large enough to be directly subject to the requirements).

Then on June 7, 2017, the new Secretary of Labor, Alexander Acosta, unilaterally withdrew both sets of guidance.

Overtime Rules

On May 23, 2016, Labor issued a final rule that would have doubled the minimum salary required to qualify for a “white collar” exemption under the Fair Labor Standards Act, to $47,476 from $23,660 for full-time employees. This would have dramatically reduced the number of employees exempt from overtime pay requirements under the act.

This rule was scheduled to take effect in December 2016. The month before, however, a federal district court judge in Texas issued a preliminary injunction delaying implementation. On Aug. 31 of this year, the court overturned the rule, saying the Labor Department had exceeded its legislative authority. The judge noted that Labor had turned the overtime eligibility test into a question about salary rather than an examination of the duties or tasks employees perform.

A month before the judge’s ruling, Labor issued a request for comments, seeking input on how the rule should be revised. That request is the first step for President Trump to maintain his campaign promise to roll back the Obama administration’s overtime rule. And the Labor Department plans to use the comments it receives to inform the development of a new overtime proposed rule. Any subsequent revision to the overtime regulations will have a significant impact on businesses of all shapes and sizes, including the insurance industry.

EEOC Reporting Requirements

For years, employers with more than 100 employees have been required to file an annual report informing the EEOC of the number of employees they have along with aggregate data on their breakdown by gender and race across different job categories. But late last year, the EEOC expanded employer job reporting obligations, effective Jan. 1, 2017, with the first 2017 reports due March 31, 2018.

The expanded reporting requirements would have added aggregate salary information by job category, and salary would have been broken down by pay band within each job category. To give you a sense of the scope of the expansion, the old reports required the reporting of 180 data fields; the expanded reports would have included more than 2,000 data fields.

The clear goal was to enable the EEOC to better assess potential Equal Pay Act violations. On Aug. 29, however, the EEOC announced it was delaying implementation of the Obama-era rule indefinitely.

Although the reporting requirements have been eliminated—at least for now—pay differentials continue to receive critical attention. For example, the Institute for Women’s Policy Research reported women made on average 80 cents for every $1 a man earned in 2015. The American Association of University Women found as women age, the pay gap increases. Women ages 20 to 24 earn 92% of what men earn, but by the time they reach 45 they earn about 79%.

You and your clients may want to consider having Equal Pay Act audits done to evaluate your compensation structures under the applicable rules. Even though the EEOC will not at the moment be positioned to directly assess your liability (at least through EEO-1 reports), litigation exposure remains. Now is the time to ensure you are compliant.

More changes, including further delay and likely modification or withdrawal of Labor’s Fiduciary Rule, are on the horizon. Not quite what President Obama had envisioned, I am sure.

Sinder is The Council’s chief legal officer and Steptoe & Johnson partner.
Rigamonti is associate counsel in Steptoe’s GAPP Group.

There are hundreds of things we could add to this list. There are those who say that everything is negotiable. We negotiate something every day, including where and when to go for lunch or dinner.

For years researchers have focused on the strategy and tactics of negotiations. Hundreds of books have been written on the skills needed for successful negotiations. We know about BATNA (best alternative to a negotiated agreement), anchor, reservation point and expanding the pie. You’ve heard about distributive, integrative and mixed-motive negotiations. You may even know your negotiation style. Are you competitive, accommodating, avoiding, compromising or collaborative? All of these things are important to know when entering a negotiation. But recently, researchers have begun to pay attention to the role emotions can play in negotiation.

In a Harvard Business Review article, “Emotions and the Art of Negotiation,” Alison Brooks, an assistant professor at Harvard, says, “Over the past decade, researchers have begun to examine how specific emotions—anger, sadness, disappointment, anxiety, envy, excitement and regret—can affect the behavior of negotiators.”

Brooks says this branch of research is proving extremely useful. Most of us can control our emotions to some extent, and having strategies for hiding or using them may be very advantageous. She provides some coping strategies for the emotions of anxiety, anger and disappointment—all of which can derail a negotiation.

Anxiety is a feeling of distress, which usually occurs when feeling threatened. Typically, anxiety surges before or at the beginning of a negotiation. The research indicates that, if you feel or look anxious during a negotiation, suboptimal outcomes could result. Brooks found that people who felt anxious made “weaker first offers, responded more quickly to each move the counterpart made and were more likely to exit the negotiations early.” The research suggests people who express anxiety are more likely to be taken advantage of.

So how can you reduce your anxiety? The same way you can get to Carnegie Hall: practice, practice, practice! Training and rehearsing beforehand will sharpen your skills, which will make the negotiation process feel less threatening and will reduce your anxiety. The role-playing that occurs in a negotiations class can help make negotiation feel routine and less of an anxiety-producing event. (Just an FYI, The Council is offering a negotiations class in November.)

Anger during a negotiation, contrary to popular belief, is not a productive emotion and will not help you get a bigger piece of the pie. Those who are less experienced tend to see the negotiation as a zero-sum game: win or lose. They have what researchers call “the fixed pie bias.”

This type of approach can cause anger. And Brooks says anger can escalate conflict in a negotiation, can bias one’s perception and is more likely to result in an impasse. People who encounter an angry negotiator are more likely to walk away. It’s critical to reduce the anger you feel and the anger you express. One way to keep anger at bay is to build rapport throughout the negotiation. Frame the negotiation in a cooperative fashion and convey you are seeking a win-win solution, not trying to get a bigger piece of the pie.

In a Forbes article, “5 Facts That Will Help You Win Any Negotiation,” contributor Neil Patel suggests you frame the negotiation using the principle of reciprocity, which is one of the six principles of influence. When you go into the negotiation prepared to “give to the other party,” you are expanding the pie and increasing the chances for a win-win.

If you don’t feel your goals have been met, you may feel disappointed toward the end of a negotiation. Brooks says expressing this can be a powerful tool. It may cause the other party to look critically at their actions and decide if they want to change their position to reduce your negative feelings.

Research shows there is sometimes disappointment if the negotiation unfolds or concludes too quickly, leaving some participants feeling dissatisfied, wondering if they could or should have done more. So proceed slowly and deliberately.

In their book Beyond Reason, Using Emotions as You Negotiate, Harvard professors Roger Fisher and Daniel Shapiro look at the five core emotional concerns of the people engaged in the negotiation.

  • Appreciation—Acknowledge the other party’s value and try to understand what they are saying. This will put them at ease.
  • Affiliation—Build a connection and make people feel you’re all on the same team. This helps people collaborate.
  • Autonomy—Respect people’s boundaries and expectations and get the other party to help generate options before making a decision.
  •  Status—Treat everyone with courtesy and respect and recognize each individual’s status.
  • Roles—Use people’s roles to help understand their interests.

Prepare your BATNA, your anchor and your reservation point before you enter a negotiation. Don’t forget to prepare your emotional approach as well.

McDaid is The Council’s SVP of Leadership & Management Resources.

Want to freshen up your negotiations skills? Join us Nov. 8-10 in Washington for “The Skilled Negotiator” workshop. We promise you’ll get lots of practice!

That seems to make insurtech a godsend. It combines sleek financial services with a novel interface, a commitment to emerging technology and a global buzz. China’s insurance market accounts for $476 billion in premium and has expanded 17% annually the last five years. Although insurance penetration stands at only 3.6%, and mobile penetration is lower than in developed countries, global management consultant Oliver Wyman is upbeat: China’s insurtech premiums will add 31% annually to grow from their current $55 billion to $214 billion by 2021.

With a forecast like that, it’s worth taking a deeper dive into China’s insurtech movement. Let’s examine it through the prism of the local insurtech leader Zhong An.

With capitalization of $15 billion, much about this company broadcasts its unrivaled market position and innovation potential. Its establishment by the Chinese giants—Alibaba, Tencent and Ping An—was a coup in 2013. To understand the partnership’s magnitude, imagine Amazon, Google and Berkshire Hathaway joining forces to support an online insurance platform. That is exactly what happened in Zhong An’s case. As China’s leading social media company, Tencent provides access to the broadest audience of potential buyers; Alibaba has the largest e-commerce platform with an online payment system; and Ping An is China’s biggest insurer.

Zhong An leveraged the technology drive and exploited business alliances’ distribution channels through embedding products into partners’ online infrastructure. Its shareholders collected massive data on potential customers, setting the stage for Zhong An’s product development, precise marketing and a wide opportunity for cross-selling. The association with Alibaba’s e-commerce platforms was a powerful lead generator from the start, and Zhong An took over the niche market of merchants’ returned shipment risks.

Subsequently, the company recruited more than 180 partners responsible for trigger events, so the product line now transcends shipping policies to include more than 240 product terms. This broad spectrum of policies has its challenges, as they attract smaller volumes, thus making it expensive to scale. Although the nature of some products seems lighthearted, the business model potentially presents serious competition to Chinese brokers.

Is this a threat to brokers, or is it another cute insurtech unicorn going bust? Given the limited operational time frame, we can make only preliminary assessments, but there are some details worth noting.

For a startup in a highly speculative environment, its premiums jumped meteorically, to the point the company immediately started turning a profit. Currently, 492 million Zhong An customers pay in about $500 million in premiums. It has also been able to build some synergy with the brokerage sector, partnering successfully with the local affiliate of Hong Kong-based brokerage CM Houlder. The two connect, along with the insured, through WeChat, a social platform owned by Tencent. CM Houlder manager Gong Yi described this partnership as unprecedented: “The companies jointly launched mobile applications, which insured 280,000 customers in 25 days. We are currently working on new products with third-party providers, focusing on data analytics and premiums targeting various client groups.”

But as exciting as it was to see Zhong An expand, it was equally painful to witness profits tank 78% to $1.5 million last year. In the first quarter of this year, it bled $47 million.

With 80% of its employees in tech management, underwriting naturally went sideways. Zhong An finally faced the reality: its largest product line, merchants’ returned shipment insurance, has the largest loss ratio. While the company was able to cut claims losses, its premiums in the segment shrank 10% for the first time in 2016. Being tech savvy did not exempt executives from the fundamental laws of running an efficient business, and they have yet to tame the combined ratio and lower operating expenses.

A close look at Zhong An’s operation reveals a more disturbing picture: the top five partners are still responsible for 69% of premiums, while three of the five key products are distributed through Alibaba’s platforms. When premiums for returned shipments hit a snag, the company switched to selling health insurance on Tencent’s websites and ramped up travel insurance through another shareholder, Ctrip. Breaking into new distribution platforms is excruciatingly difficult, but the current acute dependency on select channels is also an existential threat.

Having recognized this hazard, the company tried to bring in new partners. Yet, product distribution remains a major pain point. Partners’ massive service charges and soaring costs of new business acquisition reached $164 million and accounted for 61% of operating expenses in 2016. All this was on top of fees paid to agents for distributing certain lines, exceeding Zhong An’s investments in much-hyped blockchain and artificial intelligence research. Outside partners are also free to terminate the relationship, change the terms of the agreement as applied to policies and fees, or launch competing online distribution platforms. All this puts Zhong An in an impossible bind and threatens the platform’s future growth.

Zhong An’s example is a textbook case of an insurtech startup struggling to engineer truly breakthrough solutions as opposed to just re-creating yet another platform for client interface. Think about your personal experience with rental cars or airline booking. Both have been bundling online sales with insurance long before Zhong An. The company mainly followed in their footsteps, maximizing profits through add-on product sales on shareholders’ websites.

In China, a company must have a compelling reason to partner, but when the product’s innovative value is questionable and the business model is easily replicable, your insurtech unicorn may fall prey to treacherous copycats.

Insurtech is always evolving. Those who don’t get it right at first will likely be back again. And as any respectable contender would, these startups impress on brokers the old-fashioned maxim of appreciating the drive for ingenuity and search for increasing clients’ value.

Gololobov is The Council’s international director.

We chatted with OneDigital chief growth officer Mike Sullivan about what this strategy entails, what it means for each company’s future, and what it was like to meet with the somewhat infamous organization.

Editor’s note: Check back for our conversation with Zenefits, coming your way soon.

LE: Tell us about the business strategy around this partnership.

Sullivan: Many folks have kind of lost sight of the fact that we actually started our entire company in the outsource business. There are hundreds of broker partners that outsource business to us of different sizes, so we built an entire infrastructure in teams and virtual-based employees.

Our outsourced business is a substantial business, and it just got substantially larger. So purely from a business standpoint, this is a major influx of revenue and a major bump to profitability for our company, because there are a lot of cases that we’re going to begin managing—more than 7,000 cases—so it’s a big engagement. That’s first and foremost.

I think that the second thing really is…we’ve just come to the realization that we don’t deploy technology at scale, and we needed to figure out how to do that more broadly because we think it’s what our clients need. This is a big step in the direction of alignment around going to market and deploying technology in a much more integrated way but doing it with a partner that has technology resources and an overall scale.

So you’re doing two things. You’re going to use the Zenefits platform because it scales for new business and maybe for some of your current business. But you’re also taking over 7,000 cases for Zenefits and managing them?

Yes, they’re going to cease to be a broker. And they’re going to align with brokers now. They’re going to do it with what they call Certified Brokers. So this isn’t going to be a situation where all brokers can now go sign up with Zenefits. They’re looking for strategic alignment with firms with scale because they’re not looking for 1,000 brokers who want to put it in two cases and play defense. They’re looking for partners that can process the technology. And they’re starting with us.

But they’re also going to sell it to your competitors. You’re the first of many brokers.

So the question is how many brokers do they end up working with? My speculation is it’s going to be a smaller number of big brokers.

But I think it’s going to be interesting how other brokers ultimately deploy this technology, because it is heavy lifting when it comes to trying to roll out technology to a broad swath of your clients. For example, we’ve spent weeks down in their Arizona operation. We took an operations team into their operation center and looked at it and said, “What work do they do, and what work do we do?”

What’s been very interesting is that we’ve both been trying to be a broker for like 25, 75, 150 life groups, but the work that’s being done is very different. It’s not like a straight outsource deal where we’re saying, “Oh well, you don’t need those people because we do that.” It’s a different type of work that’s being done. We’re opening up an office that’s in the same office building as their operation center down there. There are Zenefits people that are going to become OneDigital employees, and we’re going to integrate teams so that we can do this more efficiently. We’re having to re-create positions, job titles, that kind of thing, to deliver on this. Whoever ultimately decides they’re going to play offense with Zenefits’ technology is going to have to operationalize that. What I feel good about is I think we’re going to be a great combined solution, a differentiated solution for small and midsize employers. Whoever else can accomplish that, have at it.

What is it about the broker role that has been difficult for groups like Zenefits to replace?

It’s very difficult to be a broker for groups that span across a bunch of different segments and geographies. So, if Zenefits had said a long time ago, we’re going to deliver software and we’re going to be a broker in California, they probably would have been more successful at it. They probably would have had people on the ground to support their centralized software solution. But I think what most firms find out, whether it be payroll companies, whether it be tech companies, whether it be financial services organizations, is they’re trying to manage business in a centralized way.

Honestly, it’s what we did 17 years ago when we started the company. We developed a call center and we said, “Hey, out of Atlanta, let’s try to manage business for the whole country.” You don’t know product portfolios…everything is so geographically driven, state-based regulatory driven, and the nuance of networks and products and compliance and everything to do with what brokers in markets know day in and day out because they’re immersed in that particular geography. You try to do that out of a call center in Arizona—or quite frankly what we tried to do out of a call center 17 years ago in Atlanta—and you pretend. You do it as best you can, but you don’t know what you don’t know.

What we have learned is there’s sort of a pivot point. Under 20 lives you can pretty much do remotely. Over 20 lives, you have to be face to face with clients. It seems to be the way things break out, and so we built an entire organization over and under that pivot point.

Zenefits is known for making the small business profitable. Everyone struggles with that. How scalable is this?

It has more to do with the complexity of a company’s benefits program than it does the size of the benefits program. So, for instance, we could use Zenefits technology at OneDigital. We’re 1,000 employees today [but] we’re relatively straightforward: all employees get the same benefits program. We’re not a complex benefits environment. So it’s not necessarily about the number of employees; it’s about the overall complexity of the benefits offering that you’re building.

I think their view is, downstream, they’re going to be much more of a middle-market solution.

The other key piece of it is how to very profitably manage small business. To get this right and to deploy technology into tens of thousands of groups, you have to do work more efficiently than is done today. We’ve been chopping away at that for 15 years. If you look at OneDigital today—and the number of groups where we deploy technology—we have benefits admin technology somewhere in about 5% of our overall groups. Maybe it’s 10%, but it’s probably not more than 10%. How are we going to take that to 50, 70, 80% of our groups? How are we going to manage 100 million millennials coming into the workforce by 2020? We better figure out how to do technology. I think brokers that don’t think they’re going to have to be responsible for that or don’t think that this is coming in a more meaningful way, it really is.

This isn’t about benefits administration. This is about software that runs an entire business. There’s an entire ecosystem. If we can find our way on this path that they’re going down and they can leverage the advisory business that we’re building out, which is substantial, if I was a client, [I’d be] saying, “Wow, I have a team of technology folks and benefits folks and HR professionals explain to me how I can manage people more efficiently as an employer? I’ve not really had someone come in and do that.” And trust me, there’s a bunch of solutions in the marketplace that come out and try.

Payroll companies go out and say, here’s a one-stop shop and we do it all. Technology companies are saying the same, but when you look at what really works, they do their core business really well and the other piece of it they don’t do very well. And that’s across the entire industry. The more we looked at that and the more we struggled with it, we just came to the realization that there’s a better way to do this for clients, but you have to be all in. Which means you have to change the way work gets done, you have to change the map of the business, and that’s what this partnership is about. It’s about changing the map of the business going forward so the clients get a different overall solution.

So it’s about managing people and the efficiency of managing people.

That’s exactly right. It’s about managing people. We’ve come to the realization that, for small and midsize businesses, we need to understand how the role of the advisor evolves. And I think that it can be encapsulated the following way—we have to begin to look at not just the employer being our client but employees and families in the group as clients. This is, in our estimation, putting a flag in the ground that says our role as advisor can get reshaped to go through the employer down to the individual and family. That really can only be done long term with technology. A call center can support it, but it has to be a tech-enabled solution.

This is an entry point to basically say the future is going to look different. We want to be part of that future, and we need to do more for our clients long term. And this partnership is an acknowledgement of we don’t think we’re going to do it on our own, but we need someone on the other side who is not just advanced today but has the financial backing from their investors to build and be around for the long term.

What was your process in coming to terms with Zenefits and their history and then figuring out how to work so closely with them in terms of combining employees and culture?

When the first meeting got set, we probably went to it with a level of trepidation about what we were going to walk into. Like the rest of the industry, we read what happened, and we made judgments about what that meant. But what I will tell you is the reason we are doing this partnership is because of the people. No other reason. They’ve got a world-class group of people leading this company now. And the passion that we came across, the attitude, energy and intelligence of the people at Zenefits, who in a very humble way [want to] get this right going forward, is why we’re doing this partnership.

But this time was different. Leadership is being tested around the world both in public and private places, online and in communities, and I was torn about whether to comment on what is happening around us. It took nine drafts of this column before I finally surrendered to the printer.

Leadership is about responsibility. It’s about passion and motivation. It’s about making change happen and being genuinely concerned for those you lead. Every day, you are faced with mounting pressures—rapidly changing technology, globalization, a 24-hour news cycle, changing client expectations and other business challenges specific to our industry. But you thrive because of your leadership skills. You surround yourself with the best talent, listen and seek your teams’ advice, create a positive and supportive culture, take risks, overcome generational stereotypes, embrace diversity, understand industry shifts and work to attract more great people. There are probably a whole host of other things you’d add to this list, but at the end of the day, your leadership yields both present and future success.

It seems like a straightforward formula.

But something is amiss in today’s culture. I understand the diverse nature of leadership in this day and age. I realize there are different definitions, different expectations and non-traditional approaches. But chaos is not an approach. Bullying is not governing. Creating an atmosphere of uncomfortable angst and indecision is not vision.

When did gamesmanship replace statesmanship?

I have admired and respected many business leaders over the last 25 years. Those who come to mind for me were men and women of principle. They understood the value of communication and compromise. They listened to and deliberated different points of view because it was the right thing to do. From them and through my personal experience with mentors and peers throughout the years, I’ve learned how rewarding pragmatic leadership can be. Being open, clear and authentic leads to better results and greater morale. When I challenge my team, I do it to bring out the best in them, to help them realize that they are capable of something greater. At the same time, I make sure they know that I care about them and their values. Doing these things isn’t a sign of weakness; it’s a measure of respect.

I recently returned from a trip to Italy. When we told people we were from Washington, D.C., they looked at us worried and offered unsolicited observations. After it happened a few times, it caused me to pause and really think hard about how the world has changed.

This month’s issue highlights how trust, communicating your ideas, listening to others’ ideas, and recognizing your own weaknesses can make you a better leader. Ups and downs are part of the job; we all know that. But it is the responsibility of the leader to navigate the noise, build trust, be accountable and put people first.

Thank you for your leadership.

“I’m not sure exactly what the turning point was,” admits Adam Bruckman, president and CEO of OneDigital Health and Benefits. “But as the company grew larger, it just became impossible to keep up with this growth and still stay involved in every aspect of the business.”

A blindspot had been unveiled. Bruckman recognized he wasn’t willing to delegate. He felt if he didn’t do it himself things wouldn’t be done to his satisfaction.

“Essentially, I was worrying way too much about the small stuff rather than developing my team and trusting this team to help lead and develop the business,” he says.

Fortunately, one of Bruckman’s strengths is a willingness to listen and take feedback. And after hearing the same encouragement to focus on the bigger picture “over and over again,” he finally began to do just that.

“Now, we work regularly with our leaders on building out their teams, delegating more of the tactical work and focusing their time on high-value and strategic activities,” he says. Recognizing and working through that blindspot ended up strengthening not only Bruckman but also the company as a whole.

The most challenging thing about blindspots is that, well, we tend to be blind to them.

But as Bruckman and other leaders can attest, taking the time to honestly explore one’s own strengths and weaknesses—even if takes others helping us recognize what they are—is about far more than personal growth. 

The Leadership Literary Landscape

In recent years, a handful of new and updated business books have tackled the balance of strengths and weaknesses and their impact on leadership in varied ways. Robert Bruce Shaw’s Leadership Blindspots describes the blindspot as an “unrecognized weakness or threat that has the potential to undermine a leader’s success.” This might be related to one’s own beliefs and behavior, the capabilities and motives of the team, the capabilities and culture of the organization, or the trends and competitive threats in the industry. But not all blindspots are bad; according to the author, they can be adaptive
and helpful.

Unique Ability 2.0: Discovery–Define Your Best Self by Catherine Nomura, Julia Waller and Shannon Waller is based on a concept by Dan Sullivan, co-founder of Strategic Coach. It focuses on finding the very best version of oneself by exploring innate uniqueness, passions, talents and life experience.

“Because you use [unique ability] so naturally and willingly, it’s constantly evolving and improving as you move through life,” the authors say. “When you give it room and focus on it, that evolution speeds up, and the value you create for others increases, as do the rewards.”

The long-standing model of the Johari window helps individuals understand how they relate to themselves. And the tried-and-true 360 Degree Feedback process is also an effective tool.

However, no leadership discussion is complete without mentioning the celebrated business management book First, Break All the Rules: What the World’s Greatest Managers Do Differently, which was expanded and re-released last year.

Jim Harter, Gallup’s chief scientist of workplace management and well-being, has been involved with Gallup research for more than 30 years, including the studies that led to the initial publication. The work focuses on strengths-based leadership, a concept Harter still finds often misunderstood.

If I do a good job at removing hurdles and roadblocks for the team…and let them do their job…then I’ve done my job.

Steve Brockmeyer, President & CEO, Bolton & Compan

“The approach, which we’ve found to be extremely effective, doesn’t imply you shouldn’t know about or even think about weaknesses,” he says. “The goal is to put employees in positions where they can spend an abundance of their time doing what they do best, knowing they’re still going to have to do some things they don’t love to do. But it’s also becoming aware of weaknesses so you can make those weaknesses irrelevant by partnering with the right kind of people, building the right kind of teams over time, and designing jobs where people can leverage who they are rather than who they aren’t.”

That requires self-awareness on all counts. The way Harter sees it, it’s essential for those in leadership to continue seeking—and exhibiting—discernment of their own strengths. When the leader is engaged, the rest of the employees are more likely to be as well.

“People assume that when you get to a higher ‘rank’ that development is no longer necessary,” he says. “It’s just the opposite. It’s continually important and necessary, regardless of the individual’s tenure or status in the organization.”

We asked some successful leaders in our industry how they continue to explore, grow and—as a result—build out their organizations in healthy ways. And we found that though they may all have different strengths and weaknesses, discovering how they can best support and position their teams for success is a true foundation for leadership.

Steve Brockmeyer, President & CEO
Bolton & Company, Pasadena, California

Self-Described Strengths: Collaborative, non-dictatorial, modeling through example
Admitted Weakness: Conflict avoidance, jumping in too quickly with “solutions”

Brockmeyer has always been a “roll up the sleeves and get it done” kind of guy. So much so that, when he was asked to take the helm at Bolton & Company in 2001, the then-president told him, “You’re doing the job anyway.”

It was the same way with his fraternity, Sigma Nu, at the University of California, Santa Barbara, more than a decade earlier. He was always “setting up, advocating for this, promoting that,” until all of a sudden, at 20 years old, he found himself running the equivalent of a small company with 70 people (an experience he still describes as the best takeaway of his college career).

He continues to prefer doing instead of just talking, he says, but over time, he has learned to step back and let others jump in first.

“I tend to default into problem-solving mode,” he admits. “Not in a dictatorial way or, ‘You should….’ But when someone asks me a question, or many times even if they don’t, I start talking. I tend to jump right to ‘solutions’ and don’t take the time to ask for more clarity or context around the issue…or what they think.”  

After enough conversations ended with confusion and “Thanks, but that’s not really what I was looking for,” he began to recognize the blindspot, and he’s worked to listen more effectively and ask more questions.

“I realized a significant amount of the time the person I was communicating with already knew the answer or the path to take but maybe didn’t even realize it,” he says. “As we talk, they begin to see the path more clearly, and they are solving the issue, not me. Hopefully that gives them more confidence and education that will enable them to grow and become more self-reliant.”

Bolton & Company has invested heavily in leadership development, communications training, mentoring and other initiatives to help its 180 employees grow as individuals. A couple of years ago, Brockmeyer helped establish a “people team” led by a senior-level director of organizational development.

“Our assets are our people,” he says. “That’s all we have, and we need to do a better job with them. It’s that old story: your assets walk out the door at the end of every day, and you just hope like hell they walk back in the next.”

Personal development, he says, doesn’t just happen by chance—and he knows this from experience. Those habits of quickly taking the lead meant he didn’t receive formal training early on.

Don’t wait around for somebody to say, ‘Hey, do you want this promotion?’ Go for it. If you really want it, step up and ask for it.

Duane Smith, President, TrueNorth

“But we’ve got young people up and coming, and I want to make sure they’re getting the support they need to be better at what they do,” he says. Brockmeyer has done his fair share of self-exploration through study, training, mentors (and learning from his own father’s example), and that practice won’t stop any time soon. It’s not just about being a better leader, he says, but rather being a better person—one more able to enrich the lives of others.

“As a leader, I’m not looking for followers,” he says. “I’m looking for people I can help….I joke I don’t know what my role in the company is. But if I do a good job at removing hurdles and roadblocks for the team…and let them do their job and give them the right facilities and support and tools and markets, if I can give them that, then I’ve done my job. That’s who I am. People don’t work for me. I work for them.”

Duane Smith, President
TrueNorth Companies, Cedar Rapids, Iowa

Self-Described Strengths: Visionary, quick starter, win-win
Admitted Weaknesses: Low follow-through, impatience

When TrueNorth Companies presented its “2020 Plan” to employees in 2010, the announcement was alive with possibility. The organization was at $26 million in revenue with 133 employees and, with conservative growth of 5% organically and $5 million through mergers and acquisitions, was projected to expand to 400 people and $100 million in revenue in the not too distant future.

“We shared that with everybody and said, ‘This is an opportunity for everybody here,’” Smith says. “‘If you’re wearing three hats now, and if in the future you want to wear just one, or if you want to wear a totally different hat, we’re going to be adding 270 people minimum over the next 10 years. There are tremendous opportunities within every segment of this firm for you to grow.’ The second thing we told them was, ‘We’ll help you identify those opportunities…but you need to take ownership. Don’t wait around for somebody to say, Hey, do you want this promotion? Go for it. If you really want it, step up and ask for it.’”

The organization is already closing in on those goals, recently at 300 people and $65 million in revenue. “It worked so well that in 2015 we did a 2025 plan,” Smith says. “In 2025, we’ll be over $200 million in revenue with 900 people.”

The key to that success? Not only developing the plan but also communicating it clearly.

Easy enough for Smith, whose own personal mission statement is that he is “passionate about providing vision and instilling confidence in others to follow and succeed.” And by doing what he does best, he has helped others to do likewise.

“I have found that when I am engaged in this capacity, my energy level is very high and it is the best use of my time,” he says. He developed his mission statement using the book Unique Ability: Creating the Life You Want (also by Catherine Nomura, Julia Waller and Shannon Waller).

It’s about putting people in positions to be successful, finding ways to motivate them individually, and realizing some need to see a softer side and others need a kick in the butt.

Adam Bruckman, President & CEO, OneDigital Health and Benefits

Smith is so sold on the benefits of identifying individual passions and exceptional talents that he estimates he’s given away more than 300 copies of the book to others.

But that’s not all: TrueNorth has developed an operating model it calls the Owners Manual, used to communicate focus and lead change. There’s an element called Structured Entrepreneurialism, which aims to balance structure with an entrepreneurial, innovative mindset, creating a dynamic culture of high-performing talent and opportunities.  

“After identifying my unique ability 10 years ago, I re-engineered my life to focus on my personal mission statement and fired myself from the majority of the tasks that were not within my unique ability,” he says. “I had reached a ceiling of complexity that many of us reach throughout our career. I was the CEO at TrueNorth, but I also was the sales manager, producer, peacekeeper, you know the drill…. We were at a crossroads: sell and let someone else fix our issues or roll up our sleeves and fix it ourselves. We decided to fix it ourselves.”

As for “fixing” his individual weaknesses, Smith admits he’s from an era in which people worked harder on improving the negatives than highlighting the positives. It’s taken him decades to change his way of thinking, he says, and he has learned to do a lot of delegating along the way. That’s especially the case when it comes to his challenges with impatience; TrueNorth has grown from one project manager to six, he says, and clear timelines and progress reports help him stay calm.

Adam Bruckman, President & CEO
OneDigital Health and Benefits,
Atlanta, Georgia

Self-Described Strengths: Visionary, collaborative, inclusive
Admitted Weaknesses: Ability to delegate and stay out of others’ areas of expertise

Bruckman considered himself fairly self-aware. But over the last few years, he’s found unexpected new passion, energy and purpose by diving into something he’s long advocated to others: greater work/life balance.

Bruckman, who played lacrosse while studying economics at Tufts University, coached both his sons through junior levels. But then he was asked to become the varsity lacrosse coach at their high school, leading to “a very reflective few months.”

Yes, he leads an organization of 800 employees, one he started in 2000 at age 32. But he also knew that the shared time with his boys would be fleeting.

“I love what I’m doing day to day in my job,” he says. “But I love being with these young men, too, teaching and coaching them. It’s really not that much different. It’s about putting people in positions to be successful, finding ways to motivate them individually, and realizing some need to see a softer side and others need a kick in the butt.”

And as he invested time in doing that, he says, his time at the office has become more streamlined and efficient. He has delegated more, and he sweats the small stuff less. And the organization is all the better for it.

“As you get a little larger, you have the luxury of rounding out your leadership team,” he says. “That has really allowed me to not try to be all things to all people but to really focus on what I do well.”

In recent years, the original leadership team of three tripled, including the addition of a COO and several other executive-level positions. (Digital Insurance and its advisory arm, Digital Benefits Advisors, rebranded as a single operating company, OneDigital Health and Benefits, in August.)

“I love the people side of the business, being able to inspire folks,” he says. “That’s what I do well, and the company is best served when I focus on those things, not when I’m telling our CFO how to manage the
numbers or our head of sales how to close a deal.

But it’s been something that I’ve had to work hard on over the years, to not feel like I have to have the answer for everything.”

The company—which also has an executive vice president of culture and corporate development—offers a number of different initiatives for employees to likewise discover their unique capabilities, especially focusing on growing leadership from within. One curriculum has four levels, from the basics of interviewing as a new manager to attending leadership training at Disney Institute.

“In our industry, particularly on the agency side of the business, there just aren’t a lot of organizations putting in that time and effort,” he says. “We’ve had really great feedback, and it has been extremely valuable with retention and attracting the right talent…. We work hard on creating an environment where it’s more than just a job.”

Damien Honan, CEO
The Honan Insurance Group, Southbank, Australia

Self-Described Strengths: Motivator, ability to set and maintain culture
Admitted Weaknesses: Being too nice, forgiving to a fault

Honan has learned an important lesson about decisions: as a leader, he’s often judged as much for the ones he doesn’t make as the ones he does.

You can’t make everyone the captain of a team when they don’t possess the skills to do it. But teams need more than just a leader.

Damien Honan, CEO, The Honan Insurance Group

Case in point: dealing—or, rather, not dealing—with nice people.

He’s found himself hoping that nice people within the organization would “respond and make it, when all the signs are showing that their skills, efforts and contribution are not to the level we require,” he says. “That impacts the morale and culture. Other people start to feel there is one rule for them and another for us.” It shows, he says, that he’s willing to accept lower standards from some. But hoping never works, he admits.

What does work, however, is helping employees learn what their individual strengths are and, when something isn’t a good fit, helping those employees consider other options.

Honan gives the example of a particular employee in the finance department who had superior people skills but not other traits that would help him rise to leadership in that department.

“We identified that he had the skills to be a producer,” he says. It took 12 months for the transition to happen, “but his results have been outstanding. He is such a high-level producer, and his contribution to the culture of the company has been amazing. Here was someone who was in the back office and didn’t have high visibility within the broader broker side of the business, who is now front and center of that unit.”

Honan also has seen success by recruiting from outside the industry, especially from fields such as teaching (the ability to clearly communicate), science and finance (analytical thinking skills).

Honan’s father founded the company in 1964, and Damien became CEO in 1996. Since then, he has maintained his easy-going style even as the company has grown. He has learned to focus more on his ability to set corporate culture and feels less like he has to step in and do everything himself.

“It takes a while to trust,” he says. “Not trust in the sense that someone is going to be untrustworthy but more that you can trust their abilities will be able to deliver the outcomes, the results, you want. My leadership has developed in the sense of trusting the people around me to live what the vision and the goals of the company are.”

One of those goals, he admits, is to ensure people want to stay at the company for more than simply monetary reasons, that they understand the expectations of what the company is trying to achieve and feel empowered to act within that framework.

“The ultimate mantra is that we want our people to be the best so that everyone else, all our competitors in the industry, want to steal them,” he says. Even across borders.

Honan’s company is based in Australia, but that doesn’t mean he believes all the keys to business success are found there. Rather, he takes a global approach to best practices and ensures his roughly 185 employees have the opportunity to do the same.

“We invest a lot of resources, through the various programs we run, sending people overseas,” Honan says. Conferences and workshops in the U.S. and Europe may see teams of a dozen or more from Honan at a time, “and the primary reason is for our people to learn how others are operating, how they communicate, how they talk about their businesses.” (North American leaders, by the way, tend to be more assertive but also more politically correct, he says.) A number of training and development programs are available at home, too, helping employees capitalize on individual skill sets.

“You can’t make everyone the captain of a team when they don’t possess the skills to do it,” he says. But teams need more than just a leader.

Soltes is a contributing writer.

Age: 51

Family: Married to Amy since September 1995; three sons, Jonathan, 18; Matthew, 16; and Charlie, 11

Home: Dubuque, Iowa

R&R/Family vacations: Hilton Head Island, S.C.

Good works: Board member of Holy Family Catholic Schools, where he helped rebuild its financial, physical and educational infrastructure; member of the Greater Dubuque Development Board of Directors; member of the Washington University Olin School of Business National Council

Books: Thank You for Being Late by Thomas Friedman; Upside: Profiting from the Profound Demographic Shifts Ahead, by Kenneth Gronbach; Competing Against Luck, by Clay Christensen; The Undoing Project, by Michael Lewis; and anything by the late David Halberstam

Geeking out: Reads everything he can about Nobel-prize-winning physicist Richard Feynman. “I also have the Feynman lectures on physics, so I’m geek enough to read that stuff even though I don’t fully understand it.”

Fun time: Golf and fantasy baseball, where he serves as the commissioner of the league he’s been playing in for 20-plus years. “The only area where I question his integrity is on some of his trades,” jokes longtime friend and early McKinsey mentor Michael Farello.

“You have to take the emotion out of it, and he’s very good at looking at things analytically and objectively,” Farello says. “I daresay I think he has won the league more than anyone else over the last 20 years.”

Awards: Washington University Distinguished Alumni

Industry boards: Council of Insurance Agents & Brokers

Motto: Get better

But in the early 1980s, when David Becker was in high school, Dubuque held little promise or opportunity. The collapse of the farm economy and labor disputes resulted in the closing of the local meatpacking plant and massive layoffs at the John Deere factory. By 1982, the unemployment rate soared to 24%. So when Becker left Dubuque in 1984 to attend college in St. Louis, he says, “I never dreamed for a second that I would be back.”

Even as the city’s renaissance began in the 1990s, Becker still hadn’t given it a thought. He was too busy, first selling IBM systems out of a Lincoln Continental, then attending Harvard Law School and, ultimately, as a consultant with McKinsey & Co., advising CEOs on how to run their businesses. Someone should have told Becker never to say never.

To the surprise of no one more than himself, Becker, 51, has now become a fixture in the hometown he left behind for 20 years. He was lured home by an offer to lead Cottingham & Butler, an insurance brokerage owned by the same family since 1887. He figured he could put into practice the messages he’d been preaching from his perch at McKinsey, with the added benefit of spending more time with his wife, Amy, and his three sons.

Since he started in January 2004, the company’s annual revenues have more than quadrupled, propelling C&B to become one of the top 10 employers in Dubuque. Along the way, he’s helped rebuild a struggling Catholic school system and worked with other movers and shakers to forge the city’s future.

From Consultant to CEO

During his nine years at McKinsey, Becker had seen many of his colleagues leave—some to turn around large businesses, some to join private equity firms, others to start their own companies. But for Becker, uprooting his family from Chicago to become the first outsider to lead someone else’s family-controlled business in an industry he didn’t know was not exactly an obvious next step. Some might even view it as a potential minefield.

Becker himself thought the idea was crazy when, early in 2003, John Butler, the owner of the insurance brokerage founded by his great-grandfather, broached the subject over breakfast. At 72, Butler was looking for someone to help him run the firm. Becker’s father, Marvin, served on the C&B board after many years of buying insurance from the company for the Dubuque-based furniture maker Flexsteel, where he was CFO.

He’d been talking up the talents of his son, the Harvard Law grad and partner at McKinsey. Whether the elder Becker, who died in 2015, saw it as a ploy to get his faraway grandkids back to Dubuque is anybody’s guess.

David Becker attended the breakfast meeting as a courtesy. “I basically told him that’s the craziest thing I had ever heard,” Becker recalls. “I don’t know anything about insurance, and I certainly don’t want to be in Dubuque. So I said, ‘Thanks for the waffle, and no thanks.’”

I basically told him that’s the craziest thing I had ever heard. I don’t know anything about insurance, and I certainly don’t want to be in Dubuque. So I said, ‘Thanks for the waffle, and no thanks.

David Becker, CEO, Cottingham & Butler

Several months later, however, Becker started thinking maybe nine years was enough time to be sleeping in hotels 200 nights a year. And like many consultants who spend their days telling CEOs how to do it right, he says, “You get that itch to maybe do it yourself.”

When Becker accepted the offer from Cottingham & Butler, Aon CEO Greg Case, who then headed McKinsey’s financial services practice, invited him to his office for a crash course in insurance. Becker approached his new job as if he were starting a McKinsey study, interviewing the top 30 people to identify the company’s strengths and weaknesses. “Like every business I’ve ever dealt with in consulting,” Becker says, “the people largely know where the problems are and where the opportunities are if you take the time to ask them.”

Becker quickly won the respect of the sales team by burrowing into the details of the business to figure out how producers could better help their clients. “My ability to get my hands dirty is pretty high,” he says. “So I wasn’t just a giant bureaucrat who was going to call them and say, ‘What have you done this week?’ It was: ‘How can I help you be successful?’”

Having won their trust, Becker proceeded to the next big challenge: shifting the culture of the family-owned business so managers felt they had greater authority to make decisions. Butler’s great-grandfather had started the firm in 1887. When Butler joined 70 years later, he was one of just three employees. Over four and a half decades, he built it into a very successful regional brokerage with 245 employees and more than $34 million in revenues. But as often happens in family-owned businesses led by a singular patriarch, employees were reluctant to do anything without clearing it through the chief.

Ten months after Becker started, his leadership was put to the test. While on a bicycling trip in Morocco, Butler and his wife, Alice, were in a serious car accident, leaving Butler unconscious for several weeks and requiring months of rehabilitation. The situation was precarious, both for him and for the business.

“If it had not been for David, my family would have sold,” says Butler, who is the firm’s executive chairman. “As it turns out, we kept going without a hitch.”

Industry-Leading Growth

Under Becker’s leadership, Cottingham & Butler has vastly expanded its vision, its geography and its size. When Becker arrived, every employee worked in Dubuque, even though 98% of the firm’s clients were located elsewhere. So Becker embarked on an expansion plan to establish offices closer to clients, and today more than a quarter of C&B employees work in regional offices spread across 12 states.

Revenues have grown at an annual average of 12%, from $34.4 million in 2003 to $146.5 million last year, and Becker projects the firm will generate $166 million in revenue in 2017. C&B ended 2016 with 805 employees. With few acquisitions, the company’s growth has been almost entirely organic.

“The C&B organic growth performance is industry-leading,” says Bobby Reagan of Reagan Consulting, which advises brokerages on strategy, mergers and acquisitions. “There are other firms that have matched their results for a given year, but there are few that have achieved the consistent growth they have achieved, particularly with their size. For a firm that will exceed $150 million in revenues this year, these growth results are spectacular.”

The C&B organic growth performance is industry-leading. There are other firms that have matched their results for a given year, but there are few that have achieved the consistent growth they have achieved, particularly with their size.

Bobby Reagan, CEO, Reagan Consulting

Early on, Becker reorganized C&B’s insurance advisory business into specialty practices and divorced that side of the house from the medical third-party administrator. Forced for the first time to stand on its own, the TPA became a successful wholesaler of its services. “It’s the power of being entrepreneurial,” Becker says.

Perhaps Becker’s signature achievement has been establishing a health-and-wellness company that capitalizes on the emerging interest in using data to improve employee health and reduce employer costs. HealthCheck 360° is now the fastest-growing business in the C&B portfolio.

Lifelong Learning

To better understand the analytics that would help him know whether HealthCheck’s programs really worked, Becker enrolled in an online course in biostatistics and epidemiology through the Harvard School of Public Health. “My wife thought I was nuts because it was 12 hours of additional work a week,” Becker says. But it was free, and at least it was related to his work. Becker’s recreational reading includes The Feynman Lectures on Physics, a three-volume textbook based on Nobel laureate Richard Feynman’s lectures to Caltech undergraduates in the early 1960s.

In high school, Becker had been a smart but unmotivated student, choosing study hall over attending class as often as he could. But he was competitive, and when challenged by his government teacher, Donald “D.J.” Ruden, to do more, he accepted. Ruden “got under my skin and introduced me to a lot of ideas and books that started to expand my thinking.” Becker soaked up the books Ruden handed him, many of which were about social inequality. “The curiosity he piqued in me has been something that I think has served me really well in my business career and in my life,” Becker says.

And he never forgot about the tremendous impact Ruden had on the course of his life. After Becker returned to Dubuque, he created a scholarship for the city’s college-bound high school students. Each year he and Ruden gather for a dinner with the finalists. “It’s probably the highlight of his year to sit down with people and talk about how they see the world,” Becker says. “For me, it’s a way to just pay tribute to him and the impact he had on me and on so many young people.”

After graduating from high school, Becker left for college at Washington University in St. Louis. Becker, who has three older sisters, was the only one of his siblings to leave Iowa for college. He graduated in five years with a bachelor’s degree in computer science and engineering and an MBA.

He took a job as a systems engineer for IBM but was unexpectedly reassigned to a three-person sales team pitching Unix systems to Southwestern Bell offices. They loaded a Lincoln Continental with gear and drove from city to city in Missouri, Kansas, Oklahoma, Arkansas and Texas. “I was the worst salesperson one could ever imagine,” Becker admits. But as a tech geek he could fulfill the outrageous promises the other guys made in order to close their deals. Within three and a half years, they’d taken their market share from zero to 98%. “Once you get to 98% market share,” he says, “you kind of get bored.”

Besides, IBM was a mess at the time. So at 26, Becker noodled his way into an early retirement program, packed four suitcases and some stereo equipment and started life anew as a law student at Harvard.

But he learned pretty quickly once he had his degree that he really didn’t want to practice law. So he signed up to meet with a McKinsey recruiter on campus. During his case interview, a hallmark of the McKinsey hiring process, the recruiter unwittingly threw Becker a softball: “If you’re Lou Gerstner and you’ve just been hired to rescue IBM, what would you do?” An eyewitness to IBM’s problems for more than three years, Becker gave what the interviewer described as the greatest answer he’d ever heard. “You talk about a good break in life,” Becker says. “That was it.”

He can break down a problem like nobody else. His processor is constantly going on high speed.

Nicole Pfeifer, employee benefits consultant, Cottingham & Butler

Maybe so, but his success at McKinsey was hardly an accident. “He is extraordinarily intelligent, and I don’t use that word lightly,” says Michael Farello, a longtime friend and mentor who was Becker’s first manager at McKinsey. “Because at McKinsey it was hard for people to stand out for their intellect.”

Colleagues admire Becker for his analytical mind, pragmatic approach to decisions and disdain for hierarchy. He typically distills the two or three essential things that matter and pushes people to create a plan for acting on them. “He can break down a problem like nobody else,” says Nicole Pfeiffer, an employee benefits consultant who joined C&B four months after Becker. “His processor is constantly going on high speed.”

Becker has imbued in Cottingham & Butler the idea of having “wildly important goals,” with constant attention to “how you are moving the ball to accomplish those goals on a weekly basis,” says Chris Vogel, vice president of the firm’s transportation practice. “It’s long-term thinking boiled down into day-by-day activities.”

Becker’s management style reflects his many influences. Among the half dozen he mentions are former McKinseyites like Farello, a venture capitalist who encouraged Becker to take the job at Cottingham & Butler, and Jeff Luhnow, now the general manager of Major League Baseball’s Houston Astros. McKinsey, Becker says, provided “amazing training for how to think through problems.” He also got an education in client service. “We spent almost no time thinking about how to run McKinsey. We spent all of our time thinking about how we help clients.”

Personal Growth

With the vision and direction of C&B’s businesses well established, Becker focuses much of his attention on one of the industry’s greatest challenges: recruiting and developing high-quality employees to drive growth. And perhaps fittingly, one of the obstacles he faces is the very thing that first soured him on the idea of joining C&B. “It’s very tricky to find people who want to come and work in Dubuque, Iowa,” Pfeiffer says.

To combat that, Becker has created an environment that gives young professionals opportunities they can rarely find in companies the size of C&B. In addition to logistical benefits like covering housing costs for college interns, Becker offers access to leadership—a rare find for a recent college grad.

“Most CEOs of 800-person companies tend to put layers in between them and new sales people that get hired. David takes the opposite approach,” says Matt King, a former McKinsey colleague whom Becker brought on board last October to be president of regional operations and corporate development for Cottingham & Butler. “Every time we hire a 22-year-old or think about how to develop those 22-year-olds, David gets involved, because he recognizes that, if the program around recruiting and developing college kids isn’t working, that’s hugely problematic for the future, because they will be the rainmaker producers 10 years from now.”

To identify future leaders, Becker establishes personal mentoring relationships and assigns high-potential employees to cross-company projects. More than five years ago, he tapped two people in their early 30s to lead Cottingham & Butler’s largest industry practice, the transportation division.

“I would challenge you to find anyone in the organization who would question David’s motives as being anything other than in the best interest of the business,” King says. “People respect the outcome because they recognize he’s doing it for the good of the organization.”

Most CEOs of 800-person companies tend to put layers in between them and new sales people that get hired. David takes the opposite approach.

Matt King, president of regional operations and corporate development, Cottingham & Butler

When Becker accepted the job at Cottingham & Butler, friends advised him to stick around for three or four years “and then get the hell out,” he says. But over time, the business came to feel like home, and so did Dubuque. “People have a hard time believing it, but I don’t have a high ego need for running a bigger company. I’m having fun. I’m making a contribution.”

Hann is editor at large.

Ackman’s hello-you-must-be-going note was one of multiple salvos he fired at Allergan leaders when they resisted a push by his fund, Pershing Square Capital Management, to sell the company to controversial rival Valeant Pharmaceuticals. Although the proposed deal eventually fell through, Allergan did end up with a new owner, Actavis—netting Ackman and team a $2.2 billion profit for roughly seven months of work encouraging a sale. (His victory, as it turned out, was short-lived; he later lost $4 billion in a separate investment in Valeant and is being sued over the Allergan deal.)

Variations of that exchange—some just as heated, some more conciliatory—have played out in boardrooms around the nation and across the globe in recent years amid the rapid rise of activist investors in the marketplace. Yet some critics of activist investing see signs of a shift away from the era of “shareholder primacy,” the term used by management consultancy Bain and Company.  These critics question whether activist investors are really good for corporations in the long run—especially when draining them of resources for R&D and other urgent corporate growth needs—and point to some pretty damning statistics to back their claims. And yes, they even question activists’ effect on the U.S. economy. Some contend activist investors have contributed greatly to today’s huge income gap between the business class, middle class and working class.

And that begs the question: could a corporate culture shift be in the offing?

At the moment, activists continue to wield outsized power. According to Bain, activists control only about $150 billion in assets under management, a figure dwarfed by the $30 trillion held by mutual funds. Ackman and fellow hedge fund operators—Carl Icahn, Nelson Peltz and Daniel Loeb, among them—typically acquire a 5% to 10% stake in a company, and they move quickly to shake up management, shuffle priorities, spin off divisions or sell the entire company.

Activists contend they bring new energy and a fresh perspective to companies struggling to compete and maintain profitability. But critics contend activists put their short-term interests ahead of the company’s long-term health and push through bad decisions that undermine corporate values like customer service and employee-driven innovation.

It’s probably easier to list the names of companies that haven’t found themselves in a sudden tangle with an activist since the 2008 market collapse. DuPont, Apple, Xerox, Rolls-Royce, Volvo, Yahoo, J.C. Penney, Sony, Wendy’s, McDonald’s, Macy’s, Sotheby’s, Whole Foods, Nestle—all those, and more, have been the focus of activist investor campaigns.

The pace is so frenetic that some companies attract return visits. In late 2012, Peltz’s Trian Fund Management successfully pushed Kraft Foods to spin off its snack food business, creating Mondelez International. A little over a year later, Mondelez became a target of Ackman’s activism.

Prior to the recession, a few dozen companies were subject to activist demands each year, but activist campaigns surged as investors sought to regain ground lost in the market collapse. 

The number of companies targeted by activist campaigns topped 500 in 2013 and surpassed 750 last year, according to the research group Activist Insight. Through May of this year, 434 companies have been on the receiving end of activist demands, the group reports.

Widening the Playing Field

Who’s a target? “Effectively everybody and every sector,” says Daniel Kerstein, managing director and head of strategic finance at Barclays Investment Bank. “It’s really a function of where activists and investors think there are assets that are undervalued or underappreciated by the broader market, where they can make a reasonable return for their money.”

“No firm is safe,” says Duke University professor Jillian Popadak, part of a team of researchers who have done extensive research on activist investors. “It typically used to be that they went for underperforming funds in an industry. But recent evidence, post-crisis, shows they will go for large, popular firms that are successful, even relative to their industry peers.”

The turning point was in 2013, when, for the first time, one third of activist funds focused on companies with market capitalization greater than $2 billion, according to Columbia University professor John Coffee and Rutgers University professor Darius Palia, authors of The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance.

“Seemingly, if a credible scenario can be offered to the market that breaking up a company will yield shareholder gains,” they write, “activist funds will assemble to attack even those companies with a long record of profitability.”

No firm is safe. It typically used to be that they went for underperforming funds in an industry. But recent evidence, post-crisis, shows they will go for large, popular firms that are successful, even relative to their industry peers.

Jillian Popadak, business professor, Duke University

So far this year, almost 28% of the companies targeted were large-cap ($10 billion and above) and close to 17% mid-cap ($2 billion and above), according to Activist Insight.

Popadak cites a couple of theories about why activists are eyeing large companies. One claims they’ve already picked the smaller, easier targets and are now expanding to those that will require a bit more work. The other is that they feel they can now count on institutional investors, who were initially leery of activists, to support their efforts.

Kerstein agrees that traditional investors are showing more interest in activism. “We’ve seen Neuberger Berman effectively initiate the campaign at Whole Foods,” he says. “They were out actively seeking an activist fund in what we jokingly refer to as an RFA, a Request for Activism.” The campaign succeeded, leading to Amazon’s $13.7 billion acquisition of the organic grocery store chain in June. Activist Barry Rosenstein’s Jana Partners was involved in the deal.

With the exception of a couple of high-profile cases, the insurance industry has largely been protected from activists, thanks in part to tight regulatory oversight. Kerstein says there’s greater risk of a deal falling apart in a regulated industry, so activists would need to see the potential for larger return than they’d get in other sectors before launching a campaign against a publicly traded insurance company or brokerage.

Yet those buffers may not last under the current administration. “I think the regulatory environment we’re moving into now, in all likelihood, is going to be a bit more of a laissez faire approach,” he says. “My guess is there’s probably less protection than there may have been in the past.”

Amrit David, a managing director at Barclays, points to another deterrent to activist investors that isn’t likely to change—the insurance industry’s complexity. “It’s very different to say a retailer or a company should spin off a division or sell some stores or revamp the product line,” he says. “When you start dealing in financial services, insurance and banks and others, it becomes increasingly difficult because of the complexity of the organizations, the way they’re linked in on multiple levels and a number of different ways the various business lines interact.”

Kerstein says he has expected activist interest in insurance to expand for a while now, but the industry is faring well in the stock market and the push for increasing share values isn’t as strong as in other sectors. “To my knowledge, it’s been pretty quiet,” he says.

David says a favorable rate environment and the potential for tax reform, as well as a strong market showing, play in the industry’s favor. “That’s not providing a lot of ammunition for folks to come in on,” he says.

But, as two iconic names in the insurance industry can attest, activist investors do come calling.

The Knock on the Door

The Ackmans and Icahns of the world generally get what they want. In 2015, close to 70% of activists in the U.S. achieved at least part of what they sought from a shareholder campaign, according to Activist Insight.

And even where they fail or bow out—as hedge fund operator John Paulson did a few years ago at the Hartford Financial Services Group, and as Carl Icahn has, for the moment, at AIG—they tend to have a lasting effect.

The Hartford, in some ways, seemed like an unlikely target for a shareholder intent on shaking up the institution. It began its storied history in 1810 as a fire insurance company, slowly building an empire over the next century as competitors succumbed to massive claims filed after major fires in New York, Chicago and San Francisco. The Hartford branched out into a wide variety of insurance and financial services, selling homeowners insurance to Abe Lincoln and Robert E. Lee and disability insurance to Babe Ruth, as well as helping to finance the Golden Gate Bridge, St. Lawrence Seaway and Hoover Dam, among other American landmarks.

But by November 2011, fresh from its 200th birthday celebration, The Hartford was wobbling badly, hurt by $2.8 billion in losses sustained in the market collapse. Company leaders had invested heavily in variable annuities in the runup to the crisis, and The Hartford’s stock was trading at less than half of book.

CEO Liam McGee, brought in to repair the damage, felt he and his team were making progress. But Paulson, who had amassed a fortune betting against the subprime mortgage market ahead of the collapse and had watched The Hartford’s annuity problems build up, wasn’t happy with the pace of the company’s recovery. He pushed for the company to spin off its life insurance business and focus on property and casualty. 

They want to know that boards are actively pushing and engaging with management and, to some extent and not necessarily in a negative sense, holding management’s feet to the fire, pushing them to make sure the paths and strategies that are taken are the right ones.

Daniel Kerstein, managing director and head of strategic finance at Barclays Investment Bank

McGee and the board held their ground, aware that regulators were leery of increasing risk for life insurance policyholders. The company forged ahead with its plans over Paulson’s objections, selling portions of its business to AIG, Prudential and MassMutual and backing out of annuities.

Share prices rallied in 2012 and again in 2013, and Paulson backed off his demands, content that the company was on the mend. He didn’t get exactly what he wanted when he started, but he did achieve smaller elements.

Paulson later praised McGee for leading “a generational transformation” of The Hartford and “positioning it to prosper by focusing on operations with industry-leading positions.”

In an interview with Chief Executive magazine shortly before his death in 2015, McGee said Paulson “indirectly did us a favor” when he set his sights on The Hartford. “We certainly didn’t want to be attacked. But it was serendipitous: it gave us cover to pursue what we were going to do anyway,” he said. “People weren’t happy about the new direction, so the attack helped us move to some painful changes in the organization.”

In 2015, as things began to settle down at The Hartford, the company that bought its broker-dealer arm, AIG, landed in Icahn’s sights. With a 4% stake in the company, Icahn began pushing for a breakup of AIG, which was still struggling from the 2008 financial crisis. AIG had recovered enough to pay back a $185 billion bailout from the federal government, but its shares still weren’t performing on pace with competitors.

Icahn also lobbied for the ouster of CEO Peter Hancock, who’d been brought in to lead a recovery from the crisis. The investor described Hancock as “someone who was trying to do brain surgery but was really a knee surgeon.”

Hancock resigned this spring and has been replaced by Icahn’s chosen successor, Brian Duperrealt, who is credited with rescuing Marsh & McLennan amid a shareholder revolt. Recent reports indicate Icahn has decided to back off his push to break up AIG, at least until the new CEO has a chance to try his hand at surgery.

Those encounters and others have had a far-reaching effect on all industries, according to CEOs and board members. Barbara Hackman Franklin, a former U.S. secretary of commerce who has served on more than a dozen corporate boards, recently told Harvard Business Review that activists influence strategic development and the allocation of resources even at companies they don’t target. “The idea that we should ‘think like an activist’ pops up from time to time in boardroom conversations,” she says.

What About Value Creation?

The founding father of activist investing was economist Milton Friedman, who penned a 1970 piece for The New York Times Magazine that sharply criticized calls for corporations to do more for the public good. He argued that a corporation’s primary mission is to boost shareholder value, or—as the title of the essay more bluntly declared—“the social responsibility of business is to increase its profits.”

Joseph Bower, then a young Harvard Business School professor, derided Friedman’s argument, calling it “pernicious nonsense.” Almost 50 years later, he hasn’t changed his mind. This summer, Harvard Business Review published an essay by Bower and Harvard colleague Lynne Paine that’s capturing attention in C-suites and the investment community. Citing Ackman’s involvement in the Allergan deal as a prominent example, the professors build a case that an overemphasis on shareholder value weakens companies by curtailing R&D and innovation and other long-term investments. They warn that activists could do broader damage to the economy and society if they don’t consider the corporation as an entity apart from its investors.

“No doubt, in some cases, activists have played a useful role in waking up a sleepy board or driving a long-overdue change in strategy or management,” they write. “However, it is important to note that much of what activists call value creation is more accurately described as value transfer. When cash is paid out to shareholders rather than used to fund research, launch new ventures or grow existing business, value has not been created. Nothing has been created.”

The idea of creating value could have both internal and external implications. “A lot of the unrest we’ve seen over the past year is rooted in the idea that wealthy, powerful people are disproportionately benefiting from the changes happening in society,” former Allergan CEO David Pyott told Harvard Business Review. “A lot of companies think that they need to make themselves look more friendly, not just to stockholders but to employees and to society. Having a broader purpose—something beyond simply making money—is how you do that and how you create strong corporate cultures.”

But Popadak and her colleagues at Duke found investors, when shaking up a company, often undervalue the importance of corporate culture, which is a mix of intangibles such as pledges to integrity and customer service.

In a piece for the Center for Effective Public Management at the Brookings Institute, Popadak reports that executives interviewed by researchers lamented the lack of attention to cultural values that sustain a business beyond a few quarterly earnings reports, such as avoiding morale-destroying mass layoffs in a downturn.

It is important to note that much of what activists call value creation is more accurately described as value transfer. When cash is paid out to shareholders rather than used to fund research, launch new ventures or grow existing business, value has not been created. Nothing has been created.

Joseph Bower and Lynne Paine, writing in the May-June issue of Harvard Business Review

“As one interviewee put it, ‘We certainly do not get credit for culture-related investments particularly if you think of the short-term nature of some of our investors. Our long-term investors get it and understand it completely,’” Popadak writes.

The Long View

Company culture isn’t the only area in which the effects of a long-term versus short-term strategy can be seen. In an article accompanying this summer’s Harvard Business Review essay, researchers from McKinsey Global Institute and FCLT Global analyzed 615 non-financial U.S. companies and found that companies with an identifiable long-term orientation fared better from 2001 to 2014 than those with an identifiable focus on short-term gains.

“What if all U.S. companies had taken a similarly long-term approach?” they write. “[W]e estimate that public equity markets could have added more than $1 trillion in asset value, increasing total U.S. market cap by about 4%. And companies could have created 5 million more jobs in the United States—unlocking as much as $1 trillion in additional GDP.” 

Other research has questioned the long-term effect of activist investors. A study by the Institute for Governance and Private and Public Organizations, a Canadian think tank, found that companies targeted by activist investors pushing for cost reductions in the United States and elsewhere saw a 4% drop in employment between 2008 and 2013, compared to a 9% increase among all companies.

In today’s ever-changing, tech-driven business environment, the lack of funds being reinvested in the business that is only after short-term shareholder gains can hinder a company’s ability to keep up. In a recent report for Bain and Capital, partners James Allen, James Root and Andrew Schwedel contend the shareholder primacy view is shifting under significant pressures on companies to adapt more quickly to market changes and customer wishes—two things that don’t always dovetail with activists’ focus on cost-cutting and short-term gains in stock value.

“In our conversations with CEOs,” they write, “we consistently hear how difficult it is to free up trapped resources to mobilize against important challenges and opportunities, despite the obvious and growing need for speed.”

While we may be more likely to hear about the quick-moving encounters, like Ackman’s involvement at Allergan, that singe the leather seats in the boardroom, there are activist investors out there who do take a longer look at the business. Kerstein, who frequently talks to hedge fund operators so he can advise clients at Barclays, says sometimes it’s just the most practical approach.

“We’re actually seeing them, in a way, forced to stay longer because they based their campaign on operational performance, which takes a longer time frame to actually implement and show results,” he says. “They don’t get the return until those things start to bear fruit.”

For example, the activist campaign by Jeffrey Ubben at Microsoft took a longer and more cooperative approach. Ubben’s San Francisco-based ValueAct Capital Management has distanced itself from its more aggressive colleagues in New York and cultivated a reputation for conducting activist campaigns through “gentle nudging rather than public shoving,” according to Financial Times editor Owen Walker in his book Barbarians in the Boardroom: Activist Investors and the Battle for Control of the World’s Most Powerful Companies (Financial Times Press).

In 2013, ValueAct contacted officials at Microsoft and asked for a meeting to discuss operations before obtaining a single share in the company. After acquiring a little less than 1%, Ubben and team began pushing for a realignment of priorities and strategies that eventually led to the departure of CEO Steve Ballmer. They secured a cooperative agreement with Microsoft management that gave ValueAct a seat on the board in exchange for concessions from the hedge fund.

“Publicly at least, you hear lots of wonderful things being said about ValueAct by management and by other board members,” Kerstein says, “and you hear lots of wonderful things being said about the board and management by ValueAct.” 

Trian, led by Nelson Peltz, is another fund that tries to avoid quick-hit campaigns, Kerstein says. “They have been aggressive in places, they have pushed out some management teams, but I also think that they have done a pretty good job of focusing the operations in some places and finding ways to cut costs and really pushing management to a level of focus that was attainable—not unreasonable but difficult. They’ve been very upfront: look, this is what we do and this is how things are going to operate when we’re here.”

Preparing for That Knock

Michael Dell, head of the computer company that bears his name, figured out the most effective way to fend off activist investors like Carl Icahn: he took the company private in 2013.

The social responsibility of business is to increase its profits.

Milton Friedman

The increased emphasis on shareholder value had produced “an affliction of short-term thinking” at Dell, he later wrote in The Wall Street Journal. Going private, he said, gave employees “freedom to focus first on innovating for customers in a way that was not always possible when striving to meet the quarterly demands of Wall Street.”

That’s not a practical solution for most companies, of course. To stay ahead, they need to develop a plan for how they’ll respond if an activist investor emerges among their shareholders.

As in many things, the best defense can be a good offense. “The best course of action that companies can take in terms of avoiding shareholder activism is clearly performance,” Kerstein says.

Stock prices are an obvious indicator of how well a company is performing, he says, but sometimes circumstances can overtake a company, or its industry may fall out of favor with investors, driving down value. In those instances in particular, Kerstein says, company leaders need to be ready to explain to shareholders how they’re managing risk, how they’re exploring new lines of business and how they’re keeping costs down.
“These are all things we all, to some extent, take for granted as being the hallmarks of good management,” he says. “I think it’s important to remember that’s really what it is that we’re being pushed to do by activist investors.”

Kerstein says activists look closely at the performance of corporate boards, too. Many investors perceive boards, especially in the United States, as caretakers. “They want to know that boards are actively pushing and engaging with management and, to some extent and not necessarily in a negative sense, holding management’s feet to the fire, pushing them to make sure the paths and strategies that are taken are the right ones,” he says.

That doesn’t mean boards need to fight with management every day, Kerstein says, but they do need to be able to show investors there is a healthy debate among board members and with management. “A board needs to make sure they’re asking the right questions and digging in on issues and ultimately, maybe, agreeing with exactly what management has recommended to them,” he says.

If they’re targeted, CEOs and boards need to become familiar with how that activist typically proceeds. “Each fund has its own style and approach that it takes to companies and situations,” Kerstein says. He says that Barclays engages regularly with fund managers to understand their approach and what they’re hoping to accomplish.

Some campaigns begin simply, with the investor acquiring a small stake and asking questions that any new investor might. Kerstein says it’s critical “to engage with the shareholder, whether they’re an activist or not, and not give them an excuse or something they can look to later as a reason for why they had to take more hostile action.”

Company leaders should make sure they have a team of advisors—including board members and others, preferably with experience dealing with activists—on standby, ready to develop a coordinated response. “Each situation has its own nuances,” Kerstein says. “We’re often asked, ‘Can you help us prepare a response in the event that we have an activist show up?’ I always say there’s a lot of different responses you need and sometimes the best response is actually none at all.”

Duke’s Popadak says companies should be ready to respond swiftly. “My sense is that, from the firms that we’ve interviewed and surveyed, they don’t really have a team in place to think about and deal with a hedge fund activist,” she says.

Telling the story about a strong corporate culture can help company leaders push back at activists asking for quick, major changes that may undermine a company’s long-term health, according to Popadak.

Corporate culture and other intangibles can be difficult to quantify, but numbers can be persuasive to hedge fund managers. Those metrics, she says, can include customer satisfaction surveys, churn rates for employees and any other leading indicators that show how company profits are reliant on product quality, customer service, and employee retention and innovation.

Convincing activists of the value of corporate culture is a challenge, Kerstein says. “Often where we see a positive culture, they see a culture that is rewarding management, rewarding employees, or rewarding other stakeholders at the expense of shareholders,” he says.

Boardroom veterans caution against returning fire with fire, yet sometimes a blunt response to activists is warranted. “You should listen to what they say and respond when you can. But remember: asking is free,” Allergan’s former CEO Pyott recently told Harvard Business Review. “If they say, ‘Hey, we want more,’ you have to be willing to come back with, ‘This is what we can commit to. If there are better places to invest your funds, then do what you need to.’”

Lease is a contributing writer.

Cyber attacks remain front-page news, but businesses are getting a little relief: data breaches are getting less expensive. The average total cost of a data breach declined more than 9% to $3.62 million from $4 million globally, according to the annual IBM and Ponemon Institute data breach study. The average cost for each lost or stolen record declined more than 10%, to $141 in the 2017 study, from $158 last year. That little bit of good news, however, is tempered by the fact that nearly half of the global decline in costs was due to the strong U.S. dollar. That doesn’t help companies in the United States, where the average cost edged a bit higher.

In fact, breaches are most expensive in the United States, where the average per capita cost of a breach was $225, followed by Canada at $190. The United States also leads in notification costs, the study finds. Nearly half the 419 organizations participating in the study pointed to malicious and criminal attacks as the cause of data breaches.

Cyber Captives
While there is plenty of cyber coverage to choose from, more companies are deciding to use captives for cyber liabilities, according to Marsh’s 2017 “Captive Landscape” report. Cyber liability programs in captives have more than tripled since 2012, and Marsh-managed captives using cyber liability programs rose nearly 20% in 2016. The advantages of using captives for cyber include filling gaps in standard cyber coverage and securing coverage for emerging and unique cyber risks. Marsh says it expects that trend to continue.

Silent Cyber
Cyber risk is moving on from the bits and bytes of the virtual world to the hardware of the real one. The latest ransomware attack, dubbed NotPetya, showed that it could disrupt operations in a variety of businesses, including oil companies, electric utilities and airlines. The New York Times reports hackers have broken into the computer networks of nuclear power companies, although not into the operational systems. Cyber-security firm Kaspersky says industrial enterprises have become a growing target of cyber attacks and noted that malware can bring down industrial control systems. Such systems for energy, water, transport and other purposes are increasingly networked or controlled remotely and, so. are exposed to vulnerabilities on those networks, according to risk modeling firm RMS. Those risks carry potential exposures for non-cyber insurers, such as when property damage caused by a cyber attack is not specifically excluded under a traditional property and casualty policy. This “silent” exposure may carry significant risks for insurers, RMS reports. Policyholders may believe that they have coverage under policies that were not designed to protect against emerging cyber risks, according to JLT Re, and carriers may not fully understand the scale of potential losses in incidents where coverage for cyber-related damage is included by default. As for brokers, they need to help their clients understand where they do, and do not, have coverage for the physical ramifications of attacks in cyber space.

Tech Ticker

Advent Solutions Management
Launches Sparta, a portal-based provider of specialist ancillary products for brokers. The startup incubator and insurtech investor says Sparta intuitively suggests ancillary products based on broker input about clients.

Church Mutual Insurance
Receives the Award in Innovation from the National Association of Mutual Insurance Companies for its Sensor Technology Program. The program uses temperature and water sensors to protect vulnerable parts of buildings or areas where valuable and often irreplaceable items are stored in houses of worship nationwide.

Reaches 14,315 homeowners policies as of June 1, up from 6,000 at the end of March and surpassing its year-end target of 13,000 customers. Plans to launch its renters and homeowners coverage in seven new states, including Texas and New Jersey, adding to its presence in New York, California and Illinois.

Receives £5 million ($6.54 million) in a Series A financing round led by Aviva Ventures and joined by Munich Re. The funding will help the U.K.-based company further develop its connected-home systems and increase its underwriting capacity through an MGA agreement with Munich Re.

Next Insurance
Announces American Express has joined its Series A funding round, bringing the total for the small-business insurer to $35 million for the round. Other investors include Munich Re/HSB Ventures, Markel and Nationwide.

Octo Telematics
Wins “Best Insurance Telematics” award at the TU-Automotive Detroit Show for its in-vehicle Surround technology that provides monitoring of driver behavior and vehicle health along with location-based services. Surround is part of Octo’s telematics products for insurers.

Ryan Specialty Group
Names Kathy Burns chief digital officer and SVP. Before joining Ryan Specialty, Burns was CEO of Ventiv Technology, previously known as Aon eSolutions.

The Chicago-based startup closes a $12 million funding round led by Tola Capital, which will be used to accelerate its artificial-intelligence enabled virtual claims platform. Appoints Andy Cohen, formerly vice president of worldwide field operations at CNA, as COO.

Raises $8 million in a Series A funding round led by Ignition Partners and joined by Zetta Venture Partners as well as several insurance industry leaders. Tractable develops artificial intelligence programs to perform visual tasks, such as assessing vehicle damage for auto claims.

Willis Towers Watson
Establishing Home Telematics Consortium with Roost. Will comprise five to 10 U.S. carriers to combine data and measure the effectiveness of home telematics devices in mitigating water and fire losses and in boosting customer engagement.

St. Louis is a great big little city. Home to many wonderful old companies, it has a thriving startup community with an abundance of available capital to invest in innovation and bioscience companies. Many St. Louisans return home because it’s a family-friendly city with easy commutes and wonderful education. 

Restaurant scene
Our restaurants are a mix of classic and trendy. From ethnic cuisine to food trucks to award-winning chefs, St. Louis is a foodie haven. We are fortunate to have restaurateur Zoe Robinson, who has spent decades creating special dining experiences. Her newest place, Billie-Jean, named for her parents, opens this fall and is sure to become one of my favorites. 

Favorite old-school eats
Another Robinson restaurant is I Fratellini, in the suburb of Clayton. It’s a hideaway, a classic Italian restaurant that smells great when you walk in and makes you feel like you’re in Venice. Order the grilled zucchini appetizer and red pepper and spicy sausage lasagna, a festival for your taste buds.

Watering hole
The bartender at the French bistro Bar Les Frères is a pro. It’s warm and inviting inside in the winter and terrific for outdoor drinks in the summer. It is also another one of Robinson’s restaurants.

The business hub of St. Louis has moved west to the City of Clayton, where The Ritz-Carlton is the place to stay. It has a great bar for a nightcap and is within walking distance to dozens of restaurants and shops.

Thing to do
Experience Forest Park. Opened in 1876 and the site of the 1904 World’s Fair, the 1,300-acre park is home to five major cultural institutions: Saint Louis Art Museum, Saint Louis Science Center, Missouri History Museum, Saint Louis Zoo and The Muny, an outdoor musical amphitheater (1,500 of the 11,000 seats are free). There is also the Jewel Box, an art deco conservatory that is open to the public.

Again, Forest Park is the place to be. I go there to bike the six-mile paved loop. You can rent a paddleboat and cruise the lagoons. There are rugby, archery, softball and baseball fields, and a tennis center. You can play golf on two courses, skate on an outdoor rink and fish in the lakes. A bonus is the spectacular views of St. Louis, Washington University and the museums.

How did the idea for Decisely come about?
Two years ago, in 2015, I got together with EPIC Insurance Brokers and Consultants CEO John Hahn and The Carlyle Group to talk about the small-business arena and what was happening in the industry. We started having a conversation around the idea that we could build a broker-centric product in which you could partner with brokers. This was in contrast to what was happening at the time: many direct-to-employer, tech-based employee benefits were coming into the marketplace and threatening the brokerage world. We thought we could build something that was more broker friendly and that we could solve problems that brokers have with respect to margins, profitability and servicing these small businesses more effectively. In December 2016, Two Sigma Private Investments invested in this idea and made a funding commitment of $60 million.

How does Decisely help small businesses and brokers?
We’ve built a core HR platform around employee benefits for small businesses. As their broker of record, we become the small businesses’ trusted advisor. Every client and their employees have a licensed relationship manager who is assigned to them. Any time they have health insurance needs, which includes medical, dental, vision, as well as voluntary benefits, they can consult with us. We built Decisely in a digital manner so that employers can manage their employee benefits as well as life event changes, onboarding services, recruiting, 401(k), and payroll—all via our Decisely platform.

Our platform is free. We help brokers manage small businesses and nurture them into medium-sized businesses. A company may be only 10 lives today because it just started, but once they become a 100-life group, then we hand the client back to the producer or broker to start handling it. We specifically stick to small businesses and act as a nurturing arm for the brokerage firm. We have the ability to work with any brokerage, from the top 25 down to the smallest of agencies.

How does Decisely use technology to improve the benefits experience for small business?
Were we first with technology? No. We have the luxury that others have started for us. Small businesses are thinking about insurance, benefits and HR from a different perspective because of technology. Small businesses are looking to their broker to be more than just employee benefits. They’re looking for them to provide recruiting capabilities, payroll integration, and software to onboard employees. They want technology to manage all of this for them, and they are looking for something beyond what they can currently obtain.

Can you talk about how your experience comes into this?
My experience is looking at how digital technology and e-commerce will transform relationships with businesses. In 1995, I launched Delta Air Lines’ website and ran that business through the first $2 billion of revenue. This is what my real interest is here. The airlines went through a fundamental change and transformed into digital technology in ’96—20 years ago. Technology is just now starting to infiltrate healthcare, and it’s going to fundamentally change health insurance and the whole marketplace as it did the airline industry. Today, no one can imagine not being able to go online and look at pricing transparency to investigate their flights or book their flights. No one can imagine not going online to travel. In 10 years, it’s going to be the same in the insurance vertical as well. People are going to go online to do their research and transact.

People think of New York and San Francisco as hubs for startups, but you’re in Atlanta.
Georgia is a great place to start a business. Airline transportation is really key, and this is the largest hub in the world for Delta Air Lines. There is a lot of venture capital in Atlanta. It’s known for its tech community and entrepreneurs. You can think of companies here that are entrepreneurial, such as Kabbage, a small-business loan provider, and Square, a payment systems provider with a large engineering staff in Atlantic Station. You have great colleges such as Georgia State University, my alma mater, as well as Georgia Tech, which is known for engineering. It’s really a great city.

On the mezzanine level of The Broadmoor’s main building, not far from three Maxfield Parrish paintings depicting the surrounding mountains and around the corner from “Chippewa Indians Playing Checkers” by artist Seth Eastman, is a glass case containing a bottle of Moët & Chandon vintage 1898. It is one of the displays interspersed with works from Broadmoor owner Philip Anschutz’s collection of Western art. As noted on the engraved plaque, the bottle was used to christen the hotel in 1918, a date that heralds the 100th anniversary of the resort.

The Broadmoor is planning a year of centennial celebrations, with each month devoted to a chapter of the hotel’s history. Like the displays, they will tell a colorful tale of the resort and its flamboyant founder, Spencer Penrose. From a riding academy to a skating rink to the Cheyenne Mountain Zoo, Penrose never tired of creating something fun for his guests to do. A hundred years later, his spirit lives on.

Penrose loved the outdoors. In 1923, he purchased Camp Vigil from the Girl Scouts and formed the Pikes Peak Camping & Mountain Trails Association. Today, it’s the location of The Ranch at Emerald Valley. Along with Cloud Camp and Fly Fishing Camp, the resort has opened three wilderness experiences since 2014. You can hike across the valley from the ranch to Cloud Camp, which was built on the foundation of Penrose’s 1927 Cheyenne Mountain Lodge. It’s the kind of place where you can let the world spin without you. Watch the sun rise over the plains from the wraparound deck. Gaze out to Pikes Peak from a hot tub behind your cabin. Sip a Moscow Mule after the flag is lowered at sunset. Views stretch over the plains from the back deck of the exquisite new meeting space, The Overlook, an inspirational setting for a corporate retreat.

Spending a few days at a lodge after the Insurance Leadership Forum is a wonderful way to unwind. If the resort is your base camp, you can enjoy adventures in the surrounding mountains through Broadmoor Outfitters. Two of the newest adventures are zip lining and falconry.

The Broadmoor’s zip lining course has been acclaimed by social media reviewers as thrilling beautiful, even “dope.” Last summer, the Fins Course opened. An extension of the Woods Course that opened in 2015, it has three new lines that represent a remarkable feat of engineering. You cross two suspension bridges to reach a 1,800 foot span of cable, then fly down at 45 miles an hour 449 feet above the canyon floor. The bird’s-eye views of the gorges, mountains and Seven Falls, including two rock formations that look like fins (hence the name), will blow you away.

The falconry program is another very special experience. You walk with the falconer and one of his birds of prey—a Harris hawk or falcon—around a field as the bird casts off and returns from his arm as he explains the “sport of kings.” In the field or at the falconry center, you will meet the other birds (Alice the owl, with her big orange eyes, is a magnificent creature), and have the opportunity to put on a falconry glove so a bird can perch safely on your arm. Quite the photo op.

Penrose also loved food. He was a member of the “Rabbit Club” in Philadelphia, a gourmet social club for gentlemen, which he re-created as The Cooking Club in Colorado. The Broadmoor’s new executive chef, David Patterson, who developed the luxury dining menus at its Wilderness Experience and Restaurant 1858, resurrected the club for guests at Cloud Camp.

Chef Patterson, who spent five years with the acclaimed chef Alain Ducasse, is only the sixth executive chef in the history of the resort. He traces his love of food to his Southern upbringing and helping his grandmother in her garden. “We canned tomatoes, shucked corn and pulled the strings off beans,” Patterson says. “I learned the importance of the focus on ingredients. Alain had been doing it for 30 years. In Monaco, a farmer grew artichokes just for him.”

Ristorante del Lago, where everything is made in-house, including the pasta, is a good example of how Patterson has incorporated ingredient-driven cuisine at The Broadmoor. “If you don’t have good potatoes, you don’t have good gnocchi,” he says. He was one of three chefs that spent a month in Italy sourcing olive oils and cheeses and learning authentic dishes for the restaurant. He is now overseeing 20 kitchens and 250 “white coats,” and is focused on cultivating the talent of the culinary team. “We are developing the balance of homegrown talent with new talent from the outside. It’s a big operation and we need experienced people, but we also need fresh ideas.”

The new talent includes two alumni of The French Laundry, chef Thomas Keller’s iconic restaurant in Napa. Maxwell Robbins, the new chef de cuisine at The Penrose Room, is already incorporating his dishes into the menu, including an exquisite morel mushroom porridge with pan-roasted sweetbreads. Luis Young, the new chef de cuisine at Summit, is expected to make big changes.

As for homegrown talent, Justin Miller, the former chef de cuisine at Ristorante del Lago, is now in charge of groups, where he is positioned to integrate this ingredient-driven philosophy into the banquet program.

“Ultimately, I want to be a part of redefining what five-star is in a resort setting,” says Patterson.

To find out what else is new at The Broadmoor, click here.

You’re very devoted to Mount Vernon, New York, where you grew up. Tell me about Mount Vernon.
It’s a tough town, a tough environment. Just north of the Bronx. I went to Mount Vernon High School, which was somewhat unusual, as many of my friends went to private school or moved out of town. I am very proud of my roots and love that city. My way of giving back is being a board member of the local Boys and Girls Club, as it is a safe haven and shining light in town.

Who were your childhood heroes?
Roberto Clemente, Mickey Mantle and Gus Williams. The first two passed away before I got a chance to meet them. I am very proud that Gus has become a friend.

Mets or Yankees?
Easy. Yankees.

You’re a big golfer, and you just shot your first hole in one. What’s your home course? 
Fenway Golf Club in Scarsdale, New York. I’ve played most of the top 100 courses, including Pebble Beach, Pine Valley, and the Old Course at St. Andrews. There are still a few open pegs on the board, and I’m ready and able to go at any time. I’m also a new member of Hudson National, in Croton-on-Hudson, in New York, a top-100 course. I pinch myself every time I tee it up there.

You’re a big fan of Jim Valvano, the former North Carolina State basketball coach. Why Jimmy V?
I’m proud to be a significant contributor to the Jimmy V Foundation for Cancer Research. I still listen to Jimmy V speeches all the time. Very inspiring.

And you’re a Howard Stern fan. Why Howard?
He’s tremendous the best entertainer there is. I listen and laugh every day. And he’s the best interviewer. When I’m giving a speech, I’ll often start with, “Hey, now,” as a shout out to Howard.

Your father and grandfather both worked in the insurance industry. Did you expect to join them?
My father worked with his father—the agency was called Hamlin and Co. They sold it to Alexander & Alexander when I was in middle school, so there was no business for me to go into. My grandfather retired that day, and my father became an executive at Alexander & Alexander for many years.

So how’d you get into the business? I went to American University in Washington, D.C. My senior year, I interviewed with a few insurance companies that my dad helped set me up with. I started three days after graduation in downtown Manhattan as an underwriter at Commercial Union. After a few years, I joined Alexander & Alexander as a casualty broker and was there for 15 years before joining York International.

And how’d you come to York International?
I knew one of the partners and was in the process of moving to Westchester with my family. I met the key people and liked what I saw. My main goal was to control my destiny. At the time, we had 18 employees, and I was the third partner. Today, we have 50 employees and 11 shareholders.

Did you have your sights set on becoming CEO?
Those who know me would say, “Of course you did.” But in my mind, I just wanted to be a partner in the business. Around 10 years ago, we grew to a point where it became necessary to have titles and reporting lines. I became the CEO at that time.

You’ve described your dad as your most influential mentor.
My dad believes in me. He’s very optimistic. He’s a great listener and gives pointed advice. Once he gives advice, it is upon you to go out and do it.

What lessons did you learn from your dad? My dad was a worker. That’s the best way to say it. He never missed a day of work. He was up early, shoes shined. He’s very straightforward. He believed in his people and they believed in him. He also knows how to have a good time.

What gives you your leader’s edge?
I have great passion for the industry, York International, our clients and underwriters. I believe I have a good eye for talent in a team environment. 



Scarsdale, N.Y.

Wife, Helen (married for 22 years); sons Daniel, 20, and Curtis, 18

Tesla model X

Favorite quote:
“We didn’t come this far to only go this far.”  

Favorite restaurant:
Douro in Greenwich, Conn.

Favorite dish at Douro:
Chicken Frango (“So good!”)

Favorite book:
The Open Man, by Dave DeBusschere

Favorite movies:
The Godfather, Jerry McGuire and Diner

Favorite Entertainer:
Howard Stern

“Across the insurance industry, brokers and agents have experienced a shift in the ways that customers are seeking out business relationships,” says Mark Berven, president and COO for Nationwide Property & Casualty. “There is a demonstrated increase in demand for reliable partners that customers trust to deliver the right products and services to protect their business, which is often a customer’s largest and most significant asset. Nationwide recognizes these challenges, and we have a shared mission to partner with brokers to provide consistent service and quality products that support their customers and their businesses.”

Gary Douglas, president of Nationwide National Partners, says the company’s other differentiators include expanding its commercial offerings and the national scope of its distribution relationships.

“I encourage all brokers to consider Nationwide because of our strength and stability as an organization,” Douglas says. “In addition to our unquestioned strength in personal lines, Nationwide also is the number one writer of small commercial in the country, the number one writer of farms and consistently ranks in the top three for excess and surplus—all while growing our capability in the middle market.”

Most carriers that brokers deal with typically specialize in either property and casualty or financial services. Nationwide stands out because it does both equally well, providing a true one-stop shop across a national footprint.

“Our partners value the breadth of products and solutions we can provide, and some are surprised to learn about the full range of the business we write. We encourage brokers to talk to us so we can work together to identify what opportunities there might be to solve their clients’ needs.”
J. Powell Brown, president and CEO of Brown & Brown, has used Nationwide for years and considers it one of his top 10 carriers.

“We do a lot of business with their wholesale arm, Nationwide Excess & Surplus, (previously Scottsdale),” Brown says. “We’ve developed a high degree of trust with the people we work with, and there is a compatibility there. They like middle-market business, and we write a lot of it. They are one of our top 10 partners, and we have a very good working relationship with all levels of their organization in both retail and wholesale.”

Brown says he appreciates Nationwide’s creativity and commitment when working on complex cases.

“I appreciate Nationwide’s flexibility and timeliness,” Brown says. “That doesn’t mean that we expect them to say yes on every account—no one does—but even if the answer is no, it’s a quick no, and that’s critically important. Conversely, if they say, ‘Yes, I think we can do that,’ they go off and figure out a way to get it done. As a broker, we don’t want somebody saying, ‘Yes, let me think about that’ and then hope we might get a quote back. We value clarity, and Nationwide gives it to us.

“They do an exceptional job on both wholesale binding authority and retail. When we bring them a challenge, they’re able to collaborate with us and come up with a wide range of solutions. That’s what we’re looking for in a carrier—someone who will roll up their sleeves and focus on wins for all involved.”

Douglas says those kinds of meetings are commonplace at Nationwide.

“Nationwide has long been committed to our relationships with independent agents and brokers, and we remain committed to their continued success,” says Douglas. “We value the ability to work closely with those agents and brokers to find new ways to collaborate.”

Nationwide’s unique depth and breadth of products and services comes with deep industry knowledge and broad expertise.

“Nationwide is a recognized industry thought leader, and we’re always looking for new ways to learn and grow. We intentionally seek out industry experts and invest in their continued growth and development so they stay current in a rapidly changing environment,” Douglas says. “Our team has deep knowledge and experience across industries. For example, we have underwriters that grew up on farms and still hold active roles on the farm. The diverse experience across our leaders and associates allows us to better understand the diverse and complicated issues that business owners and farmers are facing and the unique protection needs that they have.”

Based in Columbus, Ohio, Nationwide has $209.8 billion in total assets and ranks No. 68 on the Fortune 500. The company has nearly 34,000 employees and does business in all 50 states. Nationwide holds a number of significant rankings including:

  • No. 1 total small business insurer
  • No. 1 farm insurer, based on premiums written
  • No. 1 pet insurer
  • No. 3 excess and surplus lines insurer
  • No. 6 provider of variable life insurance
  • No. 7 homeowner insurer, based on premiums written
  • No. 7 commercial insurer
  • No. 8 auto insurer, based on premiums written
  • No. 8 total property and casualty insurer
  • No. 8 provider of defined contribution plans
  • 8th largest life insurer, based on total premiums
  • 9th largest writer of variable annuities.

There is a demonstrated increase in demand for reliable partners that customers trust to deliver the right products and services to protect their business...Nationwide recognizes these challenges, and we have a shared mission to partner with brokers to provide consistent service and quality products that support their customers and their businesses.

Mark Berven, president and COO for Nationwide Property & Casualty

“Across the company, we continually refine and develop our areas of expertise, which has led to tremendous success over our 90 years of doing business,” Douglas says. “As a company now going to market as one brand, Nationwide, we’re able to fully leverage our expertise and deep relationships to serve our brokers’ diverse needs across all sectors.”

So, what else are brokers looking for from Nationwide?

“Brokers expect us to be on top of market trends and to be prepared to respond accordingly,” Douglas says. “Our insight and expertise can help prepare brokers as they interact with clients who are more informed than ever before.”

Industry consolidation also weighs heavily on brokers, he says. “One of the big topics of conversation and concerns across the industry is the pace of consolidation that’s come to the market in the last seven to 10 years.” says Douglas. “Consolidation presents agents and brokers with a new challenge in determining the right carriers with which to do business. And when they ask, ‘Is Nationwide one of those companies that will be here in the long term?’ the answer clearly is yes.”

Given Nationwide’s more than 90 years in business, there is no doubt that the answer is yes.

Our team has deep knowledge and experience across industries. For example, we have underwriters that grew up on farms and still hold active roles on the farm.

Gary Douglas, president of Nationwide National Partners

The first signs are already here. The tidal wave is the confluence of two key developments: (1) the emergence of technology as the defining driver of the future and (2) the arrival of the millennial generation as the group that will chart the course over the next decades. Rather than fear this change, we must embrace it for all of the benefits it will bring.

The numbers are startling. As the insurance industry evolves due to technological advancements and as the baby boomer generation hits retirement age, there’s a need to fill 400,000 positions within the next three years, according to The Institutes. These positions run the gamut from underwriters and claims adjusters to data scientists and technologists.

My challenge to all of us who have spent our lifetime in this business is this: we must make insurance a career of choice for the best and brightest who graduate from our colleges and universities. We must adapt to the new order and be flexible in our thinking. Our future depends on it.

We know our industry has an image problem, especially in terms of recruitment. We are seen in some quarters as boring, slow-moving and the definition of old school. Those of us on the inside know this is not true, especially as we adapt to the two-pronged wave of change hitting the insurance world.

The good news is that the new generation of insurance professionals already likes what it sees. The insurance technology provider Vertafore surveyed 4,000 19- to 35-year-olds already on the job. More than 80% say they plan to remain in the industry for as long as possible. And the way they operate is vastly different from previous generations.

When I started in the insurance industry 31 years ago, success was often measured by the knowledge someone possessed—or hoarded. This was the currency a person used to prove value. The ones who had the answers were the ones who got ahead. Today, that notion has been turned on its head.

Sharing and collaboration are now fundamental to any successful organization. The new generation has grown up in a digitally connected social media world that defines both the personal and professional. The insurance industry is perfectly positioned to leverage this new spirit. It makes us more efficient, and it makes us more attractive as a career. But we need to make certain that collaboration is truly rewarded and built into our business practices.

The new generation also gives me great hope for our industry because of their commitment to the greater good and to a purpose-driven life. The insurance industry is a natural place for those seeking such fulfillment, but we need to tell our story in stronger terms. We are the industry that puts lives back together when disaster strikes. We rebuild local businesses and get people back on the job. We are the glue that makes the economy possible in the first place.

One lesson we can all learn from this new generation of professionals is how to navigate work life and personal life. The common term is balance, but that’s always been difficult to attain, and one part usually suffers at the expense of the other. I fundamentally believe that work/life fusion is more attainable than work/life balance.

There’s something to be learned from the way millennials do this. New professionals are much more comfortable in communal workplaces, with flexible hours, and working to accomplish a task wherever that takes place. In many ways, they bring their life to work and work to home. We must adapt to this changing nature of the workplace environment.

There is real value in this work/life fusion. It is common for the new generation to be described as lacking certain social skills, as they often communicate via devices and screens. I could not disagree more, based on what I witness across CNA. Their ability to quickly make connections with people across the globe and to work together in real time is something of a marvel. The new generation is constantly and effectively collaborating, easily providing real-time feedback to peers and business partners. We all can learn this social skill.

The speed of change will have no limits, nor will the opportunities in the insurance industry. The impact of data-driven business models and technological advancements will continue to redefine how we operate and whom we need in our companies. Rather than fear this future, I see it as perfectly aligned with who is walking through our doors.

In my vision of the future, insurance is not just a noble profession, it’s a career of first choice. In many regards, we are there already—a place where trust, sharing and giving back to society defines our nature. Because technology and collaboration are ingrained in millennials’ DNA and what will drive our success, it’s a match made in heaven. We just need to recognize the advantages millennials inherently bring, tell our story and embrace the waves of change.

Dino Robusto is chairman and CEO of CNA Financial Corp.

Sponsored content from CNA, a Council Partner in Excellence

The insurance industry has historically been the techno-laggard of the financial services world. Nonetheless, when an insurance organization invests in new technology early on, it can experience a slew of benefits, gaining significant advantage over other players in the field.

Recently, there have been several new technologies emerging through insurtech investments that can bring radical change to the industry and a competitive advantage to early adopters. However, as I’ve seen as an intern at The Council, there has specifically been a lot of excitement surrounding blockchain use cases in and outside of the insurance industry.

You’ve certainly heard of blockchain, cryptocurrencies and smart contracts, but you may have gotten bogged down in the technical definitions of each, the consensus algorithms behind them, and the “mining” that allows it all to function. If so, you probably just threw in the towel because you saw no correlation to the insurance industry, rightly identified the technology’s immaturity, and were confident it wouldn’t take effect any time soon.

Frankly, I don’t blame you. To start, cryptocurrency is a limiting term that has little relation to the insurance industry, and it’s outdated for the technology it runs on—blockchain. Bitcoin, the first token to emerge in 2009, was and still is a cryptocurrency in its purest form (a digital currency). Since then, we’ve seen the emergence of many other players in the space, one of which is synonymous with smart contracts: Ethereum.

Ethereum, which is Bitcoin’s biggest competitor and is frequently cited as the future of blockchain and smart contracts, has completely revolutionized the blockchain ecosystem. Ethereum has produced so much change with smart contracts and dapps (decentralized applications) that there are calls for ditching the term cryptocurrency altogether and replacing it with cryptoasset. The revised term encompasses so much more than strictly digital currencies or tokens, reflecting the capabilities of Ethereum, blockchain and the like.

For those in the insurance industry, a blockchain, also referred to as distributed ledger technology, should simply be thought of as a synchronized, append-only database of contract, claims and policyholder information that is not centralized in any contributing party, allowing for standardized recordkeeping as well as increased security and transparency.

There are three types of blockchains: public, private and consortium. Consortium blockchains will likely be the direction the insurance industry takes. This is especially evident in the emergence of the Blockchain Insurance Industry Initiative (B3i), a consortium of 15 insurers that are testing blockchain use cases for the industry.

But to understand a consortium chain, you must first understand public and private ones. In a public chain, such as Bitcoin or Ethereum, anyone can access and make transactions on it. Those transactions must be validated and organized into blocks by miners. The first miner to create a block submits it for validation to the general mining community. Once the mining community validates the specific block and consensus is established, it’s appended to the blockchain, which every node in the network (users and miners) can see.

The miner that successfully submits the block that is appended to the chain receives newly “mined” tokens for the work. Tokens are not mined on private or consortium chains; therefore, those responsible for validation and consensus building are referred to as nodes.

In a private chain, parties need permission (which is why they are also referred to as permissioned chains) to access, view and transact on them. There is one predetermined node, typically the organization managing the chain, responsible for validation and consensus building. As a result, private chains are more centralized than public ones, since one node is validating and building consensus compared to a vast community of miners on a public chain.

Consortium blockchains are a hybrid of public and private chains. Since they have multiple validating and consensus-building nodes, like a public chain, they can be considered decentralized. Despite the multiplicity, they are predetermined and consist of the organizations managing the chain (e.g., the 15 members of B3i), similar to a private chain. Furthermore, on a consortium blockchain, only permissioned transactions are being facilitated, hence increased efficiency and privacy, also like private chains.

Now that we’ve established the blockchain basics, let’s add in smart contracts and see how the combination can help decrease fraud, increase efficiency, and mitigate legal disputes in the insurance industry, as some experts are claiming.

A smart contract is a digitized contract (literally code built into the blockchain) that automatically processes claims by validating and executing payments when predetermined conditions are met, and it cannot be altered unless all stakeholders come to a consensus. So, in regards to fraud, one claim couldn’t be submitted multiple times; in fact, no claim would be submitted at all. The smart contract codifying a policyholder’s insurance contract would only execute payment if predetermined conditions specified in the contract were met.

The smart contract is triggered soon after the event occurs, shortening what could be a month-long process to a matter of minutes. A claims adjuster, plenty of paperwork, and back-and-forth communication are no longer needed to finalize the claim, saving plenty of processing fees. 

The smart contract codifies the intent of the two parties who created the contract or policy. There is no textual ambiguity in code; it does exactly what it’s designed to do. Therefore, a policyholder has no grounds to sue the insurer, because coverable conditions were specified in the contract and coded onto the blockchain.

Blockchain in insurance is still in a proof-of-concept stage. Scalability is a major dilemma for all of the major players. Some things hindering full implementation are insufficient blockchain network infrastructure, consensus architecture, characteristics (such as scaling without centralizing the network) and threats to integral blockchain principles. But consortiums, such as B3i, and independent companies, such as AIG and Standard Chartered bank, are constantly testing different use cases.

With every successful proof of concept, blockchain and smart contracts’ potential to revolutionize the insurance industry grows. Your firm should be proactive, get involved in proofs of concept and test out possible use cases for blockchain in the industry. The question is no longer how or to what degree blockchain will change the insurance industry; it’s when. 

Daboul, a senior at Ithaca College’s Park School of Communications, was a summer intern at The Council.

We’ve seen trust erode and deals fail because an executive sponsor for the buyer fails to stay engaged. We’ve watched owners disclose too much information to their employees before a deal is actually complete, causing uneasy feelings that lead to lost talent, trust and leverage. And we never underestimate the importance of releasing communiqués to the marketplace in a way that benefits all parties.

Communication can be a complicated web during an M&A transaction, but by strategically thinking about what, when, where, why and how communication happens and who releases information to whom, you can actually strengthen relationships and help create a smoother transaction.

Communicate Consistently

Communication involves a vast range of nuances and details—critical information that is being discovered and shared during the M&A process. Initially, there’s a courting aspect to the exchange, when a buyer, and more specifically the executive sponsor, is getting to know a potential company to acquire. As the M&A process unfolds, the relationship goes deeper.

Sometimes communication can fade out as a buyer and seller manage day-to-day business. Other times, once the deal is progressing and due diligence is under way, the buyer’s representative might detach and move on to the next deal, allowing that one to work itself to the close. This can make a seller feel jilted, after all of the attention and focus up front, only to be shifted to the perceived back burner. It’s important to stay engaged through the close of the deal.

When there’s strong communication during the entire M&A process, from the initial engagement to close, it typically results in a high level of trust that can help prevent insecurity or irrational fears from derailing a deal. When the executive sponsor is engaged throughout the process, steering the way when buyer and seller are immersed in everyday business, the M&A process is more likely to continue on a smooth track versus stalling—which then can result in second-guessing and unnecessary stress during due diligence and other key aspects of completing the deal.

Communicate with Purpose

Communication within the selling organization during an M&A transaction can be a complex situation for owners to manage. We see this all the time, where a dedicated owner is dealing with internal turmoil—feeling an obligation to be overly transparent with employees and share information about the deal before the transaction is completed. Many owners feel dishonest about not disclosing the fact that a deal is in progress. They feel like they owe it to the team that is so committed to the company to let them know that change is coming. The problem is, there’s no solid idea of what that change means for employees until the deal is much closer to close.

When an owner discloses information to staff, there can be a loss of confidentiality or ability to manage and direct how the message is communicated to the marketplace. Firms that tell their staff about M&A transactions before they are close to completion typically deal with more challenges during the process. They might lose staff. They