The Wild West

Self-driving car accidents are making headlines. What does it mean for the industry’s future?

About 100 years ago, the last of the 48 contiguous American states were admitted to the Union, reaching from the Atlantic to the Pacific Ocean, and Henry Ford’s Motor Company soon began to pump out automobiles that drastically cut down travel through the country.

Porto, Portugal

José Manuel Fonseca, MDS Group CEO and Brokerslink Founder, talks charm and ease in Porto.

Chilling by the River

The newly finished Chicago Riverwalk is part of a 15-year project that has turned an open sewer into a unique urban asset.

From Abstract to Action

Diversity and inclusion initiatives are not the same thing.

Last month, I wrote about the importance—and benefits—of a diverse workforce. That elevating women, people of different ethnicities and abilities, and LGBT individuals, helps deliver a competitive edge when selling products and services to diverse end users. 

Come out and Play

State regulators say they are all for Insurtech regulatory sandboxes to spur growth.

What’s so hard about building a sandbox? After all, what do you need other than some planks and sand? 


Read the Sidebars

Regulators Not So Tech Savvy

Hawaii Commissioner Says We Will Innovate

Hawaii Commissioner Says We Will Innovate

Hawaii Insurance Commissioner Gordon Ito has seen the future, and it includes insurtech sandboxes in the Aloha State.

Regulators Not So Tech Savvy

Ultimately, lack of knowledge and budgets slow insurtech progress.

When it comes to technology, state insurance regulators are definitely of two minds, depending on who’s implementing it.

Blockchain Changes

Q&A with Pavel Bains, CEO of Singapore-based Bluzelle

Are ICOs the New IPOs?

A hot initial public offering was the dream for the first generation of internet companies, but today many startups are looking to initial coin offerings.

Cutting Drug Prices—German Style

Q&A with Elizabeth Seeley, adjunct lecturer on health policy and management at the Harvard T.H. Chan School of Public Health

The German prescription drug system known as AMNOG, the Act to Reorganize Pharmaceuticals Market in the Statutory Health Insurance System, is the country’s program for evaluating and pricing new medications entering the market.

Congressman Tom MacArthur

He conquered insurance. Then, he set out to legislate it.

What would happen to healthcare legislation if there were an insurance CEO in charge? U.S. Representative Tom MacArthur, R-N.J., is not quite in charge, but he’s trying hard to make waves in insurance legislation.

What Disruption?

Plenty have claimed it. One might do it. Meet Samir Shah.

A lot has been said about disruption in the insurance industry, but to date, there has been very little in the retail market. Editor in chief Rick Pullen recently sat down with Samir Shah, CEO of Ledger Investing, to talk about the future disruptive nature of insurance-linked securities.

Streamlining Drugs

How You Can Cut the Cost of Prescription Meds

When Michael Rea worked as a Walgreens pharmacist, patients always asked him why their prescription medication costs were always rising. So many asked, in fact, that Rea created a canned response for their queries.


Prescription drug spending in 2016 accounted for about $330 billion, or 10% of the nation’s total healthcare costs.

Prices for common medications are as much as 117% higher in the United States than in other nations.

A U.S. company with 1,200 employees sent employees for treatment abroad and saved $1 million in a year.

Elizabeth Krystyn

Founding Partner, BKS

We have made a conscious effort to recruit the best person for the job, and that is often a woman.

The I’s Have It

Inclusion and innovation are inextricably linked and immensely powerful.

If you have not yet embraced the ideas of diversity and inclusion in your workforce, here is another reason: boosting your current financial performance. Surprised? 

Losing Face

Facebook’s lack of governance may cost more than a mere breach would.

Facebook may become the textbook case on how a company’s poor governance and weak privacy practices cost it more than any breach in history. Congress, regulators (U.S. and international), state attorneys general, plaintiffs lawyers and the public at large have put Facebook in the crosshairs.

Buyers Don’t Know It All

Sellers who focus on driving value can leverage their skill sets and realize more opportunity than they imagined.

A midsize insurance firm sells to a private-equity backed company that is 50 times its size. At the deal table, there is an independent owner—an entrepreneur who worked hard at growing her business and team for a couple decades.

Affairs of Estate

Tax reform may make you rethink your perpetuation plan.

As the reality sets in of all that was and was not included in the generational tax reform legislation that was signed in December, one thing is clear: this is a terrific time to reconsider your agency perpetuation and estate plans.

Take Five

Knowledge converts into the kind of things money can’t buy.

We have all heard it said: money is king. There’s a song about it, a miniseries about it and even its own Facebook page. But no more. Move over money; there’s a new kid in town: knowledge. 

Ben Stiller

Somehow Gets It Right

In spite of a piddling 25 out of 100 review from Rotten Tomatoes and a Golden Raspberry “Worst Actor” nomination for its star, Ben Stiller, the 2004 film Along Came Polly was an audience fave. 

M&A 2018 As Printed

See the full supplement in PDF format.

Going My Way?

New relationships, same old economy... for now.

Private capital is more diverse, more long-term and more interested in the insurance industry than ever before.

Insurtech Number Cruncher

Regulating Across Industries

A Flexible Framework

Is Your Client Covered?

Here’s what a typical EPLI policy covers.

Which Businesses Have the Most Complaints?

Four industries account for more than half of all EEOC sexual harassment complaints.

Numbers Cruncher

‘Same Old’ Economy?

M&A continues to heat up, but the long-term outlook throws some headwinds in the face of this continued pace.

Whether we are headed into a hardening market in 2018 remains an open question to MarshBerry for a number of reasons. Overall, the p-c insurance industry remains very strong on a relative basis, with all-time highs for policyholders surplus, which stands at $719.4 billion, and ratio of net premiums written to surplus, which was 0.76 as of September 2017. 

Behind the Curtain

The top 10 buyers offer a peek into their strategies.

The March to 2022

No slowdown yet, but buyers can’t escape the long-term effects of the new tax code.

When will the merger and acquisition bubble burst? This question has been looming over the rush of activity for the past couple of years—and 2017 showed no slowdown after a record number of deals and growing interest from new private capital players who are entering the insurance brokerage space as investors.

Los Angeles, California

Jerry Sullivan, Chairman, The Sullivan Group, shares his hometown highlights.


April 4, 2018, marks 50 years since Martin Luther King Jr. was assassinated in Memphis, Tennessee.

Decent Fighting Form

P-C and health insurers were tested in 2017 but remain strong.

There was no shortage of excitement in the U.S. property-casualty and health insurance markets in 2017. Like seasoned boxers, the p-c markets were tested by several roundhouse punches in the form of large catastrophes in the third and fourth quarters, while health insurance markets continue to weave and bob with every new jab at the Affordable Care Act. 

Integration: A ‘Dirty’ Word?

The many ways buyers approach integration can make the process feel like a great unknown to sellers.

Integration—what does it really mean? This critical merger and acquisition transition process can feel like diving into murky waters for sellers, who often aren’t sure what to expect. 

New PE Players

Private capital is more diverse, more long-term and more interested in the insurance industry than ever before.

For those of you who have not been paying attention, private-equity backed brokerages have taken over the M&A world. They completed 316 announced transactions in 2017, which represented 57% of the total announced deal activity for the year. 

The Call to Insure

Upswings in religious violence bring coverage needs for places of worship.

The immediate aftermath of a mass shooting often leaves citizens and politicians in a mass gridlock of gun control versus the Second Amendment.

Insurtech Charges, Cyber Lags

The most successful insurance companies are those leading the insurtech charge, IBM finds in a survey of 1,200 insurer, insurtech and venture capital firm executives. IBM found 81% of outperforming insurance businesses either have invested in or are working with insurtech businesses. 

Machines Learn Policy Review

Chris Cheatham, Co-founder and CEO, RiskGenius

As he pored over millions of documents, Chris Cheatham decided there had to be a better way. His startup, RiskGenius, applies machine learning to speed policy review. 


Insurtech Number Cruncher

Click. Bind. Repeat.

London portals make placing small business for U.S. brokers easy and profitable.

High-tech wizardry is revolutionizing our world. When insurers began selling auto and homeowners cover directly to clients over the internet long ago, thousands of agents were thrust out of work over a few short years. 


New websites enable brokers to buy cover without sending a fax, opening an envelope or picking up the phone.

Ascent Underwriting of London receives tens of thousands of online inquiries each year from 90 brokers.

A process that has taken days or weeks using traditional channels can now be completed within minutes.

Digital Therapy

Q&A with Rob Guigley, VP of Sales and Health Plans, Omada Health

Omada Health has developed a 16-week digital behavioral-change program meant to help participants lose weight and reduce healthcare costs. Leader’s Edge sat down with Omada Health’s Rob Guigley to discuss the potential of digital wellness programs for combating obesity and its related health conditions. 


#MeToo means more coverage needs for your clients.

It started with Harvey Weinstein. When The New York Times and The New Yorker magazine broke their explosive stories that dozens of women reported incidents of sexual harassment, abuse and even rape by the Hollywood film producer, the revelations lit a fuse that had clearly been waiting for this breath of oxygen to spark.


The business community is suddenly focused on its exposure for managers’ and employees’ atrocious behavior.

Since 1991, the year of the Clarence Thomas hearings, the number of carriers offering EPLI coverage has risen to more than 50 from five.

When cases result in defense and settlement costs, the average bill is $160,000. Jury awards often go much higher.


Read the Sidebars

Which Businesses Have the Most Complaints?

Is Your Client Covered?

Bon Appétit!

Cyber regs are a mouthful.

Business and trade associations have long argued that companies can manage their cyber-security programs without government interference. Those groups seem perilously close to losing the argument.


While business has avoided government regulation of cyber security, U.S. and European authorities appear ready to prescribe controls.

Last year’s cyber attacks caused unprecedented disruptions and soaring losses.

The NotPetya malware, begun in Ukraine, crippled global organizations, including Maersk, Federal Express and Merck.


Read the Sidebars

A Flexible Framework

Regulating Across Industries

Ross Buchmueller

President & CEO, PURE Insurance

This business is a journey without a destination.

When a Deal Goes South

You’ve done the deal and find all is not as it seemed. How could you have avoided this?

It’s called reps and warranties insurance, and it once was used primarily in mergers and acquisitions between private equity funds. Today, it shows up in all segments of the M&A market, including insurance brokerage M&A deals. 

Read the Numbers

Understanding financial concepts is crucial for managers and sales professionals.

What do an English major, a history major and a biology major all have in common? They can all end up working for an insurance agency. 

Thinking Outside the Sandbox

Insurtech experimentation is proliferating in sandboxes across the globe.

For children, it’s a chance to explore and create within a confined space. Adults need a similar opportunity—including those in the no-child’s-play, multibillion-dollar insurance sector. 

Who’s Buying?

Following another record M&A year, we are seeing a plot twist with new private capital entering the marketplace.

Are you a potential seller in today’s overcrowded M&A marketplace? If so, it is important to understand the market you are entering.

Medicare for All?

This train is gaining steam, especially if the Democrats take back Congress.

I think one of the fundamental, but not expressly discussed, debates driving our health policy discussions in the United States is this: should the objective be that everyone has access to the same healthcare, or should it be to ensure everyone has access to a minimum necessary level of care? 


Numbers Cruncher

The Uphill Battle

We’re past due on moving diversity and inclusion initiatives forward.

We find ourselves in a unique time. It’s clearer by the day that the pace of social change in our country is simply not fast enough, and the resulting effects are being underscored in the business world.

Peter Ustinov

Hercule Poirot, Insurance Investigator

Hercule Poirot, Agatha Christie’s brilliant Belgian detective, made a bit of a comeback last winter when yet another version of Murder on the Orient Express hit the big screen, with a deadpan Kenneth Branagh as the detective.

Playing Favorites

The dismantling of net neutrality could undermine telehealth.

The dismantling of so-called Net Neutrality rules regulating service providers that connect consumers to the internet may have unintended consequences for the rapidly growing telehealth industry.

Surprising Growth

Central and Eastern Europe’s growth is outpacing that of its western neighbors.

In two years, Central and Eastern Europe (CEE) will celebrate the 30th anniversary of the fall of the Iron Curtain and the restoration of the market economy. The region has seen great change over the past 80-plus years.

Virtual Class on Company Culture

“A Company Culture for Today’s New World”

15 Steps to Safer Cyber Security

Data-Driven Care

Q&A with Jim Meadows, M.D., Chief Medical Officer at Narus Health

Finding the Right Partner

The Questions Brokers Should Ask

Who Are Some of the Providers?

Their fees and methods vary.

Virtual House Calls

Telemed saves money and means the doctor is always in.

Time is of the essence in the agricultural industry, given the short window of opportunity to harvest fruits and vegetables in their peak condition. When workers feel under the weather from a cold or stomach virus, they typically have to drive a long distance to a medical clinic or hospital emergency room for treatment. Time is spent waiting in the facility. An entire day’s work can be squandered.


Telemedicine is on-demand healthcare provided remotely by a doctor or other medical specialist.

Employees with non-life-threatening illnesses communicate their concerns to a medical specialist, who prescribes treatment.

The online consultation may involve video, phone, photos, a written exchange—or all of the above.


Read the Sidebars

Who Are Some of the Providers?

Finding the Right Partner

Traveler’s Briefcase

Mark & Graham pouches, Audi Q5s, and a luxury retreat in China

From Trading Floor to Keyboard

The Empire is over. Wooden ships sunk. Bringing risk to a pinstriped man in London is no longer the only option.

To reach the office of the chairman of Lloyd’s of London, you must cross the cathedral-like room known as the Lloyd’s trading floor. It’s early afternoon when I pass through, so the usual buzz is absent. Only a few juniors with gourmet takeout sandwiches are on the box (in the underwriting booths). 


In 2003, Carnegie-Brown said the future of London wholesale broking rested on its ability to embrace technology. Today, the same market faces the same challenge.

The goal isn’t new for Lloyd’s, but so far every comprehensive attempt to modernize the placement process has failed.

Under the plodding old ways of Lloyd’s, brokers still wait in queue to make their pitch to underwriters.

Incubating Healthcare Tech

Think Tank

Accelerator programs offer access to innovation.

Paul Tyler moved to Hartford, Conn., in 2016 as chief marketing officer for Phoenix Life Insurance. Hartford has long been an insurance hub, and Tyler was eager to learn how the industry was responding to changes in consumers’ buying habits.


Accelerators have shown they can provide a range of benefits—jump-starting a local economy among them.

In addition to giving industry stakeholders in-person access to insurtech technologies, accelerators can help these stakeholders keep tabs on what competitors are doing or identify rising talent.

Startups that participate with an accelerator can gain valuable insight into what their products need to be a viable investment.


Read the Sidebars

Incubating Healthcare Tech


This insurtech startup sees brokers as essential.

When it came time to name his new startup, brokerage industry veteran Phil Edmundson thought of crows and their cousins among the birds.

Kate Armfield

COO, AHT Insurance, Leesburg, Virginia

I didn't want to be just the boss's daughter.

Culture Is Your Business

Reduce turnover by engaging employees with a refined company culture.

We know Peter Drucker’s line: “Culture eats strategy for breakfast.” But do we take it to heart? 

Global Budgets: Testing Ground

Q&A with Jesse Pines, M.D., GW Center for Healthcare Innovation and Policy Research, and Jessica Galarraga, M.D., MedStar Health Research Institute

Father Time Will Prevail

A staggering amount of supply was evident in 2017.

You have heard the saying before, right? It typically is used in relation to aging athletes as they attempt to hang on and extend their careers. 

Little Rock, Arkansas

Martin Rhodes, President & CEO of Stephens Insurance, shares his hometown highlights.

2018’s “It” City

The city is celebrating its 300th anniversary, right in time for RIMs!

Cybering Up for Your Safety

This 15-step program will help you recover from unsafe practices.

After a number of significant cyber attacks last year, many organizations are looking for ways to make 2018 a “cyber secure” year. But coming up with a list of solutions to improve an organization’s security posture is no easy task. 

The Devil in the Details

Can Amazon, Berkshire and JPMorgan Chase Forge a New Healthcare Frontier?

Three of America’s most admired companies—Amazon, Berkshire Hathaway and JPMorgan Chase—representing close to two million employees, recently announced the formation of a company to tackle the unsustainable and surging costs of healthcare plaguing their businesses.

Your Customer Consort

Client demands are changing the reigning delivery model.

At the front end of our Legislative & Working Groups Summit last month was an attention-grabbing session on the customer experience, facilitated by Wharton Executive Education. Customer experience is something you’ve heard me talk about ad nauseam, but it really is that important. Customer demands are changing the way business is delivered.

The Magic Bullet?

Feds expand use of association health plans in hopes of combating rising costs.

Since at least the second Bush administration, association health plans (AHPs) have been touted as a magic bullet to combat rising healthcare costs and dwindling coverage options in individual and small-group markets. 

Talking Pot

The marijuana market is booming.

In a follow-up to our recent feature, Council Chief Legal Officer Scott Sinder gives us the latest on this booming business.

Traveler’s Briefcase

Scandinavian hot spots, breakfast at Tiffany’s and Priority Pass

Model Law Moving

The NAIC data security model law moves to the states.

The insurance data security model law adopted in October by the National Association of Insurance Commissioners moves to the states in 2018, and South Carolina is likely to be among the first to take it up, says South Carolina insurance director Raymond Farmer, chair of the NAIC’s Cybersecurity (EX) Working Group.

Linda Fiorentino

It’s the women you have to watch out for.

And now for something completely different: an insurance movie where the female lead is evil, promiscuous, snarky and vicious and stays that way throughout, without reform. (This role is usually given to the male CEO; see The Rainmaker.)

Andy Vetor

Executive Vice President, Employee Benefits, MJ Insurance, Indianapolis

I tell people in some ways cancer is the best thing that ever happened to me. It gave me a perspective I could never otherwise get.

Savannah, Georgia

David Paddison, President of Sterling Seacrest Partners, shares Savannah’s secrets.

What’s Old Is New Again

Baltimore balances its rich history with modern sensibilities.

Inside ACOs

Q&A with The Leavitt Partners’ chief development officer, David Smith, on accountable care organizations.

Accountable care organizations (ACOs) are a payment arrangement made between healthcare payers and providers to assume responsibility for the care of a particular patient group. To date, there are more than 930 ACOs across the country covering 32 million lives. 

Technology Driven

Q&A with Ted Devine, CEO of Insureon

Making Sense of Something

Crazed Washington will keep us both jumping in 2018.

Each year we ask our intrepid lobbyists, Joel and Joel (that’s Wood and Kopperud to most of you), to take up their partisan cudgels and defend their passions, explain their political visions and give us some clarity about our industry’s political future (i.e., what the hell is Washington doing to us now). This is their latest salvo, via traceable emails, of course (this is Washington, after all). —Editor 

Don’t Tell, Don’t Ask

Can genetic testing give consumers the edge in long-term care?

A simple test can now tell consumers if they have an increased tendency to develop chronic diseases such as Alzheimer’s disease. For carriers, is it an opportunity in disguise or a threat to their risk pools?


Increases in cognitive dementia and Alzheimer’s disease are looming pitfalls for Americans and for the long-term care industry.

Since 2010, most major carriers have left the long-term care market.

From age 65, men will be chronically disabled for an average of 20% of their future life expectancy.

Undergrads Launch Bermuda Captive

Butler University’s program may just be the answer industry talent scouts have coveted.

On the first day of Michaela Neal’s Special Topics in Risk Management course at Butler University, Professor Zach Finn welcomed the class with the news they’d be creating a student-run insurance captive.


Fewer than 100 risk management and insurance degree programs at American colleges produce about 4,000 graduates each year.

Filling the jobs being left by retiring baby boomers will require 500,000 new hires.

Once students learn of the vast opportunities the industry presents, it’s not such a tough sell.

Broker ACO Checklist

Critical Mass

Are ACOs an option for small and midsize employers?

The very definition of an ACO is a group of providers that assume responsibility for the care and quality of a defined population of patients. And, as in most healthcare spaces, the more lives covered the better. 

Double Vision

In theory, ACOs promise great value, but how do they fare in practice?

In theory, everyone wins when you create an accountable care organization. Providers earn financial incentives for providing higher-quality, more coordinated care while avoiding wasteful spending, and insurers spend less on a system that’s better tailored to patients’ needs. That’s the theory, anyway.


ACO providers agree to financial rewards or penalties based on their ability to meet benchmarks.

Since their creation in 2010, ACOs have delivered mixed results.

One expert says the most successful ACOs are those that have been at it the longest.


Read the Sidebars

Critical Mass

Broker ACO Checklist

Hungry for a Challenge

Are your millennials lazy or just bored?

When my children were little, they would often come to me and say, “Mommy, I’m hungry.” If this was not around traditional mealtimes, my first response was always, “Think for a minute. 


Carriers wallow in inertia and impede innovative program administrators’ progress.

Many carriers struggle to meet the needs of program administrators. What gives? Program carriers are not keeping up with the demands of administrators and, in fact, are making it more difficult to innovate. 

Family Time

States and employers are stepping up to implement PFL benefits.

What do New Jersey, Rhode Island, California, Facebook, Deloitte and Nordstrom have in common? They are leading the way in implementing proactive paid family leave (PFL) benefits.

A Reboot

Leader’s Edge will be transitioning this year in a new direction.

It’s hard to believe it was 2003 when Ken Crerar and I sat down to map out a plan to launch a new magazine for commercial insurance brokers. It was an audacious idea, what with so many insurance business magazines in the market, yet it was difficult to believe there wasn’t one targeted exclusively toward commercial brokers. 

The Onus Is on Us

We are an old industry that needs new blood, and we need to invest in that talent now.

I’m passionate about a lot of things, but topping the list these days is a desire to change the story of what a career looks like in the insurance industry. As this year’s Council chairman, I plan to drive this passion.

Beware IRS Letter 226J

Clients face stiff fines if they don’t respond within 30 days.

Your clients are starting to get the letters.

When Will the Madness End?

Deal count and price continued to rise in 2017.

Here we are again. I honestly feel like a broken record. It has been at least three years of the same commentary. 

Making Sense of Something

Crazed Washington will keep us both jumping in 2018.

Each year we ask our intrepid lobbyists, Joel and Joel (that’s Wood and Kopperud to most of you), to take up their partisan cudgels and defend their passions, explain their political visions and give us some clarity about our industry’s political future (i.e., what the hell is Washington doing to us now). This is their latest salvo, via traceable emails, of course (this is Washington, after all). — Editor

New Health Benefit Option for Small Employers

Agencies issue guidance on QSEHRAS. Here’s what you need to know.

A somewhat overlooked provision in the 21st Century Cures Act allows some employers to offer a new kind of tax-preferred arrangement—qualified small employer health reimbursement arrangements (QSEHRAs)—to their eligible employees.

Bob Hope

A life insurance policy for a gunslinger? That’s the premise of Alias Jesse James.

“BOB HOPE as the Most Wanted TRIGGER in the West!
RHONDA FLEMING as the Most Wanted FIGGER in the West!”

Don’t Just Change in 2018. Improve.

We began the year with uncertainty, we wanted to end it with purpose.

One of the most creative and, quite honestly, fun parts of working on Leader’s Edge is the art process. We want our content to keep you engaged and interested over the long term, but we also want our art to delight and inspire you immediately. We want it to draw you in. And that’s no small task. 

Today, a similar industrial revolution is taking place, with more than 18 auto manufacturers and tech companies racing to push their self-driving vehicles out onto the road.

Early this year, however, two incidents involving automated cars raised questions about the self-driving revolution and whether it’s time to pump the brakes…or at least lighten up on the accelerator. In March, automated cars caused two deaths: one pedestrian hit in Arizona by an Uber automated Volvo and another car accident involving a person sitting in the driver’s seat of a self-driving Tesla in California. Both accidents involved cars that, while having automated features, still require a passenger in the driver’s seat to take control of the vehicle if something goes wrong.

According to Thom Rickert, vice president for Trident Public Risk Solutions, a large misconception people have about self-driving cars is they don’t need a fully present driver. He explains the difference between automated vehicles with self-driving features and fully autonomous cars that don’t rely on a passenger for assistance. “They have these automated features, whether it’s braking, lane controls, et cetera, and there always has to be a driver ready to take over,” Rickert says. “With the Tesla accident, it was reported that the indication was that the extreme sunlight in front of the vehicle kept it from recognizing the tractor trailer rig…. An autonomous vehicle would allow a vehicle to drive without a driver and to do that in all conditions—i.e., all weather conditions, types of roads, rural roads, freeways, downtown surface streets.”

A minor investigation into the Uber accident found there weren’t enough sensors on the company’s Volvo SUV, which recently replaced Ford Fusion automobiles in Uber’s self-driving fleet. While transferring sensors, Uber failed to take into account the SUV’s higher off-the-ground elevation, which led to more blind spots and the need for more sensors. That said, footage from inside the car shows the driver not paying attention and looking downward as opposed to in front of her.

Martial Hebert, director of the Robotics Institute at Carnegie Mellon University in Pittsburgh, believes these accidents are inevitable but could provide valuable information for the industry’s future. “There are certain things that can happen that cannot be prevented, no matter how precise the system is,” Hebert says. “What we need to have, and what I believe is happening, is complete analyses of those accidents and full transparency. A little like the airplane industry. When there’s an accident, you know there is an investigation and a full disclosure of all the data and the circumstances and the amenities.”

Although both self-driving car accidents have set back the industry temporarily—Arizona took away Uber’s license to test self-driving cars in that state, for example—Ryan Harding of the Arizona Department of Transportation believes this new technology could save lives. “With public safety ADOT’s top priority, we are advancing efforts that can reduce crashes and deaths on our roads,” Harding said. “In 2016, there were more than 37,000 fatalities on U.S. roads, with nearly all being the result of human error…. Arizona recognizes that, and our approach to self-driving technology is one of cooperation, common sense and embracing innovation.”

Insurance Evolution

The mass integration of self-driving cars could ultimately lead to market disruption for the insurance industry. “If you reduce the frequency of accidents and pay fewer claims for bodily injury and property damage, the rates over time will begin to decline,” Rickert says. “Automated vehicles will begin to reduce the frequency of accidents by notifying the driver, ‘You’re approaching this car, I’m going to hit the brakes; you’re weaving out of your lane, get back in your lane.’ That type of thing will begin to reduce auto accidents over time. If you do reduce accidents by 20%, you should see a commensurate over-time reduction of rates.”

“There are also the insurance considerations for the manufacturers, because there is an expectation that these systems are safer—when there’s an accident, it’s the software’s fault; it’s the hardware’s fault,” Rickert says. “So those types of product liability suits could increase…. [There’s] the potential for cyber hacking, blocking a vehicle’s connection to the stop light. That liability and how the insurance industry reacts to it will drive the availability and development of that equipment.”

Ian Sweeney, general manager of mobility for the insurtech startup Trov, agrees that insurance liability will switch from current drivers to auto manufacturers or self-driving fleet operators. Trov currently works with Waymo to insure its self-driving car passengers in case of harm. Waymo, which began in 2009 as Google’s self-driving car project, became an independent self-driving technology company in 2016. “Our ability to offer comprehensive protections comes from innovative partnerships, technologies and the points at which they converge,” Sweeney says. “Trov’s platform uses signals of ‘state change’ that come from any source (smart phone, vehicle state, beacon, etc.) to trigger the best-fit coverage for that context in real time. Next to this technology are Trov’s insurance wizards and partners, whose collaboration gives birth to new services, policies and value for both consumers and companies alike.”

Rickert believes that we are still three decades away from having a driverless car show up to our house to take us to our destination; however, it is important for the insurance industry to prepare for the mass integration of automated vehicles as this wild and promising market matures in years to come.

What’s to love
Porto is a charming, small city, where life is very easy. We have great food, nice restaurants, a vibrant cultural life, and temperate weather. It is a very historic city, where everything is close together, but it is also modern and trendy. We have both a mighty river and a coastline running along the Atlantic Ocean, which is quite unique.

The food
Portuguese cuisine, especially fish and seafood, dominates the culinary scene. But new restaurants are creating diversity. Italian and Japanese restaurants are popular, and we now have some great “Author’s Cuisine” restaurants, where chefs incorporate unusual textures, aromas and flavors in innovative ways.

Favorite new restaurant
Euskalduna Studio is an intimate and very sophisticated place. Chef Vasco Coelho Santos serves creative Asian and Portuguese dishes.

Favorite classic restaurant
DOP, definitely. It is a handsome restaurant in the heart of the city. I love the consistency and innovation of Chef Rui Paula’s food (he is a Michelin star chef), and they have a great wine service. My favorite dish is lobster rice with fish.

Seaside dining
Casa de Chá da Boa Nova, one of the most beautiful restaurants you will ever find in your life. It is another of Paula’s restaurants, and here he offers tasting menus. Designed by the famous architect Álvaro Siza and situated “on” the rocks, facing the Atlantic and the waves, it is FABULOUS.

Casa Vasco is a very nice bar to have a cocktail or glass of wine or Port. It is located in a chic area of town called Foz. There are lots of beautiful people.

InterContinental Porto – Palacio das Cardosas is a new hotel housed in a historic building that has been restored. It overlooks the Liberdade Square, a great location in the main historic zone.

Porto is a city of modern architecture, kind of the Chicago of Portugal. Taking a tour of some of our iconic buildings is highly suggested.

The beach is wonderful in the summer, but we sail and surf, run and bike the whole year.

The Broker Smackdown Midwest 2018 will be held in Chicago from July 10 to July 12, the perfect time to explore the city’s newest attraction, the Chicago Riverwalk. Stretching 1.25 miles from Lake Street to Lake Michigan along the south side of the Chicago River, the third and final phase of construction on this riverfront park was wrapped up at the end of 2016. Among the many honors it has received are two from the American Institute of Architects (AIA), one for Architecture and the other for Regional & Urban Design. AIA was effusive in its praise: “This is an exemplary urban intervention; the design and execution are perfect. The impact on the community is transformative.”

This is no small feat. The river used to be an open sewer. In 2002, the city started working to clean it up, and in 2015, it opened a new water treatment plant, improving the quality of the water significantly. It is now extremely popular with a variety of birds and locals. One of those locals, Carol Ross Barney, is the architect behind the 15-year waterfront project. As she said in an interview in the “2017 Chicagoans of the Year” issue of Chicago magazine, “The big success of the Riverwalk is it has repurposed this really important urban asset and basically returned it to the people.”

You can stroll unimpeded for the six blocks of coves, or “rooms” as they are called, which are found in between the bridges that cross the river. Under the bridges, curved panels of polished steel buffer the street noise and reflect the water. Each of the rooms has a distinctive design and purpose. The Marina connects the Vietnam Veterans Memorial to the new portion of the Riverwalk. You can dock a boat here and enjoy the view from the upper dining terrace and built-in bar. At The Cove, you can stop for a snack or rent a kayak. Concerts are held at The River Theater, where a slope of trees, steps and seating leads down to the river. The Water Plaza is a sunny cove where children can play in the fountain. The Jetty has floating wetlands gardens and seven piers where people can fish, bird watch and learn about the river’s ecology and canals. Finally, at The Riverbank, floating gardens meet the confluence of the three branches of the Chicago River.

There are many places to eat and drink along the Riverwalk. You can grab a hot dog from Lillie’s Park Grill to enjoy while sitting on a bench by the water or sit on the patio at City Winery for a glass of wine and some charcuterie. Keep in mind that all the chefs nominated in the Great Lakes region for the 2018 James Beard Awards for best chef are from Chicago. Their restaurants include Boka, Elske, Fat Rice, Parachute and Roister (the first three are included below). That’s five good reasons to venture further afield.

All of that is true, but it’s not as simple as making good hires.

You may boast a diverse workforce with all the talent in the world but that doesn’t necessarily mean it’s a booming environment. Diversity and inclusion, while often used interchangeably, are not the same thing. The first step toward implementing successful D&I initiatives in your organization is understanding the difference between the two.

Diversity equals representation and that’s pretty straightforward to measure by analyzing HR and recruiting data. Defining and quantifying inclusion on the hand, is a bit more complex. First, you have to identify where barriers are emerging in your systems, then you have to bust them up from the inside out. That brings into center focus the hard challenges that come with change management.

Inclusion is the only scalable way to build diversity within an organization. Numerous studies show, in fact, that without inclusion there’s often a diversity backlash.

What that means to us as leaders is that recruiting and hiring a diverse pool of employees is just the beginning of a continuous journey that requires support from the top. Leaders can begin a top down revolution on the way and sequence in which critical matters are discussed by putting talent and finance on equal footing.

Leaders of companies have long recognized that it’s easy to talk about D&I in abstract terms but it’s really difficult to take that talk and turn it into action. And without practicing the active efforts of inclusion—such as making people feel welcome and involved; celebrating their differences, ideas and experiences; and elevating different people for key opportunities and high-profile assignments—energy, productivity and dollars will be wasted, and innovation and growth will stall.

Harvard Business Review research finds that employees with inclusive managers are 1.3 times more likely to feel their innovative potential is unlocked; employees who are able to bring their whole selves to work are 42% less likely to leave their job within a year; employees with mentors are 62% more likely to have asked for and have received a promotion; and nearly 70% of female employees say they would have stayed at their company if they’d had flexible work options.

Keeping diversity and inclusivity a consistent part of the conversation is important for your culture because it’s the right thing to do, but it also drives business results. There is a huge opportunity to boost your firm by leading a culture change that brings in all kinds of very talented people who ultimately will reflect the changing patterns of customers going forward. As you’ll read in this issue (flip to The I’s Have It), diversity and inclusion done right (or wrong, I suppose) is linked to your current financial performance. Companies with high D&I rankings had 2.3 times higher cash flow per employee, were 2.9 times more likely to identify and build leaders, and were 1.7 times more likely to be innovation leaders in their market.

The visible backing of leadership coupled with more awareness and competency around D&I is necessary to create and sustain a truly diverse and inclusive workplace. Don’t let your time, money and talented people go to waste because of the nuances between the two. With better understanding comes better results and stronger organizations.

Well, if the sandbox in question happens to be an insurtech regulatory sandbox, the process can be difficult indeed.

A regulatory sandbox is a method to give flexibility to companies to develop a product and to determine whether the product has any market legs, says Patrick McPharlin, director of Michigan’s Department of Insurance and Financial Services and head of the National Association of Insurance Commissioners’ Innovation and Technology Task Force. For example, sandboxes might tackle such issues as how coverage reduction/cancellation notices would apply to on-demand insurance.

But there’s not a single one in the United States. In fact, across the country, there’s not even agreement as to what an insurtech sandbox looks like. The issue is critical because Insurtech has become a more important part of the insurance landscape, and with the potential to touch virtually every nook and cranny of the business, it will only become more important.

“Our definition of insurtech is technology-fueled innovation anywhere within the insurance ecosystem,” says Jennifer Urso, vice president of market intelligence and insights at The Council. “Our stance on this is the innovation and evolution that technology is bringing to the table is helping the industry align with consumer expectations and preferences that have been shaped by other industries.”

The American Insurance Association has drafted a proposal calling on the NAIC and state legislatures to actively encourage the pilot-testing and implementation of innovative new insurance technologies, products and services. The AIA is asking the NAIC to consider authorizing insurance regulators to grant targeted relief giving state regulators broad discretion to attach consumer protections and other conditions to any grant of relief and to adopt clear protections for trade secrets while including measures to maintain a level playing field.

But Jillian Froment, director of the Ohio Department of Insurance, says she isn’t sure how a sandbox would differ from Ohio’s approach of actively encouraging innovation. She says Ohio already promotes Insurtech innovation without having to construct a regulatory sandbox.

McPharlin takes a similar stance in Michigan. “We’ve had a handful of people come and talk to us, those who have real questions about a product they wanted to innovate. We were able to tell them there was no problem.” They hadn’t asked before, he says, because they thought they’d be turned down.

But because these conversations are happening in some states, that doesn’t mean they’re happening in all. “At this point, this is a state-by-state approach,” says John Fielding, general counsel for The Council.

“There’s no uniformity in the way states are coming at this.”

While this reflects how insurance is regulated in the U.S., some say such an approach might hinder sandbox progress.


While the United States continues its individualized approach to sandboxes, several jurisdictions outside the United States have created them with shared characteristics. According to the AIA, those in the United Kingdom, Australia and elsewhere all provide a supervised process for experimentation with insurance innovation. And under some circumstances, they offer relaxed legal and regulatory requirements that otherwise might be hurdles to forward motion.

Some observers fear the United States will fall behind its competitors if regulation does not catch up with digital reality. “We currently see on the global level competition for investment and talent,” says Vladimir Gololobov, The Council’s international director. “It’s all about pairing innovation with insurance services, an opportunity for countries to claim their leadership in the financial segment they want.”

Things have gone “a lot farther overseas than here in the U.S.,” says Mike O’Malley, senior vice president for public policy at AIA. He notes the United Kingdom established its sandboxes in 2016 and has already had more than 150 applications. “They’ve been very active,” O’Malley says.

“It’s about trying to support industry and their use of innovation while balancing that with consumer protection. That’s not easy, but it’s not impossible.

Jillian Froment, director, Ohio Department of Insurance

And despite the experimentation happening in some states, some sandbox proponents believe the state-based insurance regulatory system doesn’t give room for enough meaningful innovation to allow the United States to follow international competitors’ lead in creating sandboxes. One main roadblock “is that basically you can’t have a national sandbox,” says Vikram Sidhu, a partner at law firm Clyde &Co. in New York. “Any sandbox that is created would have to be in a state. But states don’t have meaningful flexibility in being able to give exemptions to startups from the various insurance laws that exist.”

The fragmented nature of U.S. insurance regulation is an impediment to creating sandboxes, Gololobov says.

“Regulators historically are worried about their turf,” he says. “Fragmented regulatory structure takes away from the whole idea of insurtech globally, which is all about scale and breaking down barriers.”

However, some regulators say it’s easier for innovators to deal with a single state than to try coordinating efforts nationally. McPharlin says it’s easier to innovate on a one-state basis because innovators and state regulator scan meet one-on-one and get to know each other. “With a federal agency, I’m not sure you’re going to get that same level of personal service,” he says. “I think the state format is an advantage. We’re talking about having some sort of coordination among the states. We’re not at any decision yet.”


Many regulators say they have nothing against innovation, provided it affords consumers adequate protection. In fact, over the past few years, regulators have begun to agree a regulatory sandbox isan important and effective tool, says Andy Mais of Deloitte’s Center for Financial Services.

“It’s important to allow testing of innovative ideas but in a supervised environment,” O’Malley says. “For example, you don’t want someone to sell policies in a sandbox who can’t cover claims.”

“We also want to make sure that we don’t inadvertently create an unlevel playing field,” says Dave Snyder, vice president at the Property Casualty Insurers Association of America.

“Most commissioners are very positive on innovation,” McPharlin says.“ But if someone comes in and wants to be free of paying taxes during the development process, no legislature will allow that.” He also raises concerns about consumer protections regarding personal data. “Who owns information and profits from it?” he asks.

“It’s about trying to support industry and their use of innovation while balancing that with consumer protection,” says Ohio’s Froment. “That’s not easy, but it’s not impossible.”

Sandbox proponents have an educational job ahead of them, Fielding says. “It’s a quickly evolving area. It’s a big task for insurance regulators to getup to speed on the constant change and regulate it very quickly. Education and understanding are the biggest parts.”

“The general feeling on the part of state regulators is they will not fall behind the curve,” Mais says. “I think there is openness despite what some regard as a fragmented system.”

And regulators have a stake in encouraging innovation, notes Scott Sinder, The Council’s chief legal officer and a partner at Steptoe & Johnson.“ The big threat to state regulation is, if they’re not able to keep up with the innovators, then as an innovator, you say, ‘Maybe I need to rethink this,’ and come up with something that allows the transfer of risk but is not an insurance product.”

That insurance is governed by decades-old regulatory approaches is another obstacle. “When I talk to regulators, they think they’re doing a lot,” Sidhu says. “They are really trying, but our system of insurance laws and regulations grew up over 150 years. It’s trying to address issues that arose a long time ago, but how we do business has changed dramatically. The issues arising from the 19th- or 20th-century approach to regulating the insurance business clash with the 21st-century ways of doing the business and are only going to get bigger.”


With a federal agency, I’m not sure you’re going to get that same level of personal service. I think the state format is an advantage.

Patrick McPharlin, director, Michigan Department of Insurance and Financial Services

One factor that could give the U.S. some breathing room in the race for Insurtech expansion is the size of the nation’s insurance market. “When you’re comparing us to other countries, we have by far the largest insurance market in the world,” PCI’s Snyder says. “We’re going about this in a careful way, and we’re convinced that in the end we’ll be up to the challenges as we have been in the past.”

“You can prove a concept in Hong Kong, you can go to Australia and develop an interesting product—but America is still the largest insurance market,” Sidhu says. “Insurtech will still come to these shores.”

While the U.S. is still the leader in technology, O’Malley says, the country needs to take action to remain ahead. “I worry if we in the U.S. don’t get on the sandbox bandwagon soon, we are going to fall behind,” he says. But he adds that AIA “is very confident we’ll get to the point where we have sandboxes in the U.S.”

In fact, legislation that would create insurance-specific sandboxes has been introduced in Hawaii and Illinois, while less-targeted but applicable bills have been introduced in Arizona and Massachusetts. “We’re not going backward,” Fielding says. “You’re going to see more and more talk at the state level and more and more talk at the NAIC. I think it will move from education to actually doing something. The market’s just going there. They’re going to have to figure it out.”

Hofmann is a contributing

You’re going to see more and more talk We Will Innovate at the state level the NAIC.

John Fielding, general counsel, The Council

Ito, who has testified before state legislative committees in favor of bills that would create a sandbox, says realizing the sandbox concept would bring economic benefits to the state.

“It could create growth in our tech sector by attracting innovators to work with insurance companies in Hawaii,” Ito says, “as well as encourage insurers outside of the state to use Hawaii’s sandbox to test innovations for use in the United States or Asia.”

He says technological advancements in mobile platforms, artificial intelligence, data collection, storage and the “continuing transformation in our economy are factors that attracted our interest in creating a sandbox in Hawaii to encourage innovation in the insurance sector. Hawaii’s unique location could result in the state becoming an insurtech center that facilitates collaboration between tech innovators, insurers and even other insurtech countries that are already fostering innovation.”

Ito points out that Hawaii has built a reputation as an insurance regulatory innovator. “Back in 1986, Hawaii was one of the first states to adopt captive laws, resulting in the state’s becoming one of the premier captive domiciles in the world,” he says. If the current legislation becomes law, “Hawaii would be the first state to pass a law specifically dedicated to creating an insurtech environment.”

Not surprisingly, Ito does not share the concern of some sandbox supporters that state-based regulation stifles innovation such as sandboxes. “The state-based system does encourage innovation,” he says.

He says states will either pass insurtech laws or will work within their own frameworks and provide flexibility by granting exceptions. He believes the insurance and technology sectors will work together to create efficiencies and new products, underwriting processes, and sales and payment methods. The blending of insurance, technology and other sectors will also occur.

“Insurtech or regulatory flexibility will be the rule and adopted in many states rather than the exception,” Ito says.

Carrier legacy systems, he says, need to be replaced. “Attracting tech companies to work with insurers in not only upgrading existing systems but implementing entirely new processes is an example of the talent and technology that could bolster the insurance sector,” Ito says.

“There is an infinite number of possibilities, which could benefit consumers by creating more choices and improving efficiencies in the insurance area,” Ito says. “They are already evident in other sectors of the economy. The U.S. is a technology leader and has the largest insurance market in the world. Changes are constantly happening in both worlds. It’s exciting times in the insurance and technology areas."

Regulators willingly embrace technology to enhance their own operations, according to the Deloitte Center for Financial Services. But the regulators remain guarded about how carriers employ new technology.

“In a time of rapidly increasing technology adoption, a growing number of regulators are likely to use the latest technology to enable the kind of deep, broad, and real-time oversight of the insurance market that could not have been dreamt of even a decade or two ago,” says the 2017 Insurance Regulator Technology Adoption Survey. However despite those predictions, the survey found regulators are implementing new technologies in their departments mainly to automate manual processes and replace or integrate legacy systems. The fact that 69% of them cited legacy systems as a driver could indicate they still need to modernize current systems before considering more advanced technology. Not surprisingly, nearly three quarters of the respondents cited budgetary constraints as the main roadblock to adopting technology.

“Generally speaking, everybody sees technology will change the interaction between the regulators and the industry,” says Rich Godfrey, principal and U.S. insurance advisory leader at Deloitte & Touche.

But the survey also found regulators "seem unlikely to give insurers the benefit of the doubt regarding new technology uses, so insurers would need to display greater transparency in their relationships with bold customers and regulators.”

Nearly half the respondents said new technologies create more need for regulatory oversight. Among the chief concerns are data security and fair market conduct. Regulators also seemed somewhat cool to the idea of insurtech sandboxes.

“While most agree engaging with different stakeholders—insurtech start- ups, insurers, consumer-protection groups, and other regulators—to pursue innovation would be a positive step, more than four in 10 only somewhat agree,” the survey says. “So if sandboxes are to be a useful tool, state insurance regulatory leaders may need to educate their colleagues on their potential.”

Can you tell us about Bluzelle and its mission?
We are a technology company, and our mission is to use blockchain technology to basically allow a new set of people to use financial products by lowering the cost of entry. In terms of insurance, what we believe is that blockchain can bring new insurance models. Theoretically, you have a generation that’s going to grow up not owning the same type of insurance that I did. My kids are probably never going to buy car insurance. They’ll live in a city like Singapore or New York, a major metropolis, where they’ll just use Uber or public transit. For an insurance company, that’s a major problem of how to get this person to buy insurance. With blockchain, you can start doing pay-per-use, short-term insurance and small insurance products that, before, might not have made a profit margin for them. Now, if you do daily insurance or pay-per-use insurance, blockchain takes a lot of the operational cost away so they can still make money on it.

For developing markets, you have this untapped world of people who want to use insurance, but previously it was way too expensive, and the cost of entry was too high. Blockchain can reduce those costs. Bluzelle provides the infrastructure technology to allow for that to happen. We work with insurance companies, and we built a middleware technology that allows us to build those use cases or products better. For insurance, we can do smart contracts, which allows them to issue insurance policies onto the blockchain and then do real-time claims management. With that type of model, you can apply it to several different use cases, whether it’s personal injury insurance, travel insurance or short-term bike insurance.

Are we on the verge of a major shift to blockchain technology?
Initially, everybody was aiming at enterprises and saying let’s get going, but the big companies have been pretty slow to adopt. That’s just the nature of being a big company. I think the major shift that’s happening now is companies are getting funded faster through token sales and ICOs [initial coin offerings] and now they can experiment and go direct to the customer for a lot of these financial technologies or applications that use blockchain. That should be a catalyst for the bigger enterprises to say we have to catch up now because these guys are actually moving ahead without us. Before, a lot of the companies that wanted to do these products were underfunded and had to rely on the banks and insurance companies to get the customers. Now it’s kind of the other way around.

How does Bluzelle use blockchain technology?
We do it in two ways. One is we built our own infrastructure, our middleware, a platform that allows big banks and insurers to get some of these customers or build these products. The other way is we are building a new decentralized database that is needed by all blockchain companies to store their data, instead of using a company like Oracle. What we’re saying is a decentralized database from us is going to be more secure, safer and far more reliable.

Can you explain how a decentralized database works?
For a traditional database—let’s say a centralized cloud—all your customer data is stored in one cloud. If any part of that cloud goes down or part of the network goes down, you have limited access to your data and you have to wait around. If somebody breaks in and steals all that customer data, that’s going to lead to data breaches and leaks.

In a decentralized manner, we’re taking that data and spreading it to hundreds of thousands of servers or nodes out there and only storing bits of data on all those networks. Even if a node or one server goes down, all the data is still present and alive, and you have access to it. You can’t steal any of it because you’d have to take over the entire network to put all the pieces of that data together. It’s similar to the way bitcoin, ethereum and blockchain technologies work. It’s decentralized and in multiple places and has encryption on each level.

In our situation, let’s say you have insurance customer data sitting there; it’s basically like Airbnb. What we’ve done is empowered hundreds of thousands of consumers to download our protocol, put their computer storage space up, and an insurance company can pay with a token to have all their data spread out on these hundreds of thousands of computers everywhere.

How secure is a system using individual computers?
We have confidence that once we deploy our protocol, it has the necessary security. The protocol itself has encryption built into it. We have encryption advisors. Once our consumer downloads it and they put the Bluzelle protocol onto their computer, it comes with that encryption built in. It would be the same as downloading the Bitcoin protocol and turning my computer into a mining space. The Bitcoin protocol itself has all the security built in.

How scalable is this kind of system?
Before, people used to look at it as, say, let’s take one of the blockchains—ethereum—and build it on there and put all the data on there. That isn’t scalable, because ethereum is good for smart contracts and validations of transactions but it can’t store large amounts of data, because the cost is too high to retrieve it. Now with products like ours, we’ll build up the database that’s needed by all these products. Now you can have that scalability and a more fluid system. You’re basically breaking it up and not having everything sit on one blockchain. You’re breaking all the technology components into different layers.

How is decentralized database storage going to change how companies operate, and will it have an impact on insurers and brokers?
It’s going to be a big change in the sense that consumers are almost going to demand it: Equifax gets hacked and a bunch of records are stolen; Uber the same thing. It’s just going to be a necessary response. Data breaches are getting worse and worse; the current centralized infrastructure isn’t working. Consumers are going to want their data in safer places, and they’re going to demand that. I think it will be a fundamental thing. As companies like us get out there and more blockchain projects are built on a decentralized database, companies may decide a decentralized system is better to store their data on.

Tell us about Bluzelle’s history.
We were founded in Vancouver and started in August 2014 to get going on blockchain projects. In February 2016, we moved to Singapore to focus on enterprises, like banks and insurers, and to get them to understand what this technology is. We did a bunch of projects for them, like payments on the blockchain, insurance on the blockchain, digital identity on the blockchain. Doing those projects, we realized there is a core database system missing in a decentralized internet, or the blockchain. We ran into this problem while doing these projects. We realized that, if we’re having that problem, other people are going to have that problem, so why don’t we just create the solution for it.

Why Singapore?
It was really because we looked at where we were in Vancouver and said if enterprises and financial enterprises are the early adopters for blockchain, we didn’t see enough customers in Canada and we realized Asia would probably adopt this faster. Singapore is a financial hub, so we’ll have more customers in a centralized area. From there, we could prove ourselves there and move into the rest of Asia. It’s really a matter of where those customers are in a smaller area that we can get to in a concentrated way.

Being in Asia and Singapore for the past two years, we realized a lot of the adoption of blockchain applications will come from Asia and Southeast Asia because there are a lot of developing markets there. They can skip technology generations, and they’re really understanding this much faster. You have this huge market. In Indonesia, you have almost 300 million people, and fewer than 5% have insurance. India, the same. Vietnam, the same. Insurance companies can really try out these lower-priced products and have a consumer base to test them on.

Initial coin offerings, or token sales, raised some $5.6 billion in 2017—more than 20 times the $240 million raised in such sales in 2016, says Fabric Ventures and TokenData. Unlike in an IPO, investors don’t buy shares of the company but, rather, purchase cryptocurrency “tokens” that provide access to the firm’s goods or services or its network of users.

ICOs take a crowdfunding approach that stands in contrast to the more traditional process of convincing venture capitalists to fund a startup, developing the company through early stages and later going public or being bought by a larger, more established company.

“A good way to look at it is cryptocurrency meets Kickstarter,” says Pavel Bains, CEO of Bluzelle, which works on blockchain projects with insurers and is developing a decentralized data storage system. The Singapore-based startup raised $19.5 million in a January ICO. “It’s a way for companies like ourselves to raise the capital that we need to build out our product. To do so, what we’re saying is we’re going to give you a coin or a token that you need to pay for the service or the product. We’re creating our ecosystem around that.” (See Tech-No-Savvy’s Q&A.)

While the coin or token doesn’t represent a share of the company, investors may still be hoping for a profit as the company’s service gains traction and its tokens appreciate.

“What a lot of buyers will do is that, as this product gets used more, the price of that token or currency will go up and they can keep it as an asset,” Bains says.

That’s an aspect of ICOs that’s attracted attention from the U.S. Securities and Exchange Commission, which takes the view that, whether investors are buying a “utility” token or a share of stock, an instrument that offers the promise of future profit is a security. It was widely reported earlier this year that the SEC had issued subpoenas in connection with some ICOs.

“It seems that regulators—the SEC in particular—have taken note of ICOs,” says Caribou Honig, CEO of 3rd Act Ventures and co-founder and chairman of InsureTech Connect. “It’s hard to say whether their intent is to put a mild chill on ICOs or a deep freeze, but either way, I won’t be surprised if we’ve already seen ‘peak ICO.’”

While ICOs enjoyed explosive growth last year, longer-term they may represent more of a niche rather than a broader market transformation. And they don’t likely herald a disruption of the venture capital industry.

“There are a number of legitimate challenges for VC firms over the next decade, but ICOs would be low on my list,” Honig writes in an email interview. “While ICOs might be an extraordinary opportunity to raise capital for a handful of companies, I think they will be the exception and not the rule.”

Venture capital firms don’t just write checks, Honig notes, but also nurture startups with critical expertise.

“Many of the best entrepreneurs will welcome what VCs can bring to the table—fresh eyes, industry or operational experience, a network, and more—that makes VC money more than just money,” Honig says.

ICOs, however, seem to be a natural fit with some blockchain-focused startups.

“Stepping back a bit,” Honig says, “ICOs ought to be most interesting where a company wants the users, or customers, themselves to have a stake in the whole business succeeding, particularly network-effect businesses. Communication platforms expanding functionality beyond messaging, for instance, are one of the areas looking at ICOs.”

For blockchain startups, it can be difficult to raise money from traditional venture capital firms, Bluzelle’s Bains says.

“It requires a lot of education for them [VC firms] to understand,” Bains says. “There is a cryptocurrency world of enthusiasts who understand the technology and understand the risks, and they’re more open to supporting companies like ourselves that might be the next big thing in the decentralized world that they are envisioning.”

While investors are always looking for the next big thing, caveat emptor remains the rule.

“The biggest concern is about scams and false products,” Bains says. “Just like in any asset class that arises, people come in and have not done their homework—do not understand the technology and what’s behind it—and just get in because of fear of missing out. It’s really important for any token buyer to educate themselves on the fundamentals of blockchain technology, the company whose token they’re buying, what is the technology and is the team credible.”

For its part, the SEC acknowledges that, although ICOs can provide needed capital for startups, investors should proceed with caution because they offer substantially less protection than traditional securities markets, SEC Chairman Jay Clayton said in December.

“At best, investors need to be very diligent to assess what they are actually buying when they participate in an ICO,” Honig says. “At worst, it’s the Wild West, and investors need to be mindful of the risk of outright fraud.”


What is AMNOG?
It’s regulations crafted in response to Germany’s historical high drug prices. It was very similar to the United States; Germany’s drug prices were historically, on average, 26% above the rest of Europe’s.

Germany passed legislation in 2011 with the intention of improving the value of pharmaceutical spending. They were facing a lot of pressures similar to many other countries—healthcare costs that were increasing, in particular pharmaceuticals.

How does the AMNOG system work?
All new drugs in Germany have to go through an assessment process to determine how their benefit compares to the other drugs on the market. The thing that is groundbreaking about AMNOG is it requires first an assessment of the clinical benefit of new drugs and then a determination of what that means in terms of prices and reimbursement.

When a new drug hits the market, it can be introduced at any price and is reimbursed by all insurance plans at that rate for the first year. During that time, the Institute of Quality and Efficiency in Healthcare (IQWiG), compiles data and analyzes dossiers created by the drug manufacturers.

Once IQWiG has assessed the dossier, it makes a recommendation to the private Federal Joint Committee (made of payer, provider and patient representatives). IQWiG makes a recommendation on whether the drug is therapeutically superior to what’s already on the market. If it isn’t, it goes into the country’s reference pricing system to be reimbursed like other generics in its class. If it does get a superiority ranking, that information is used to negotiate between drug makers and an organization representing Germany’s insurance providers. The agreed-upon price is what payers pay for the new drug.

Since the new system began, how many drugs have gained the superior ranking?
About 63% were determined to have additional benefits (to those already on the market) between 2011 and 2016. But that means more than a third of drugs didn’t.

There are a variety of reasons why an additional benefit is not always proven. Sometimes there is not enough data, and the drug industry has the option of resubmitting down the road. Sometimes there is just not enough benefit. There are a number of reasons, but a meaningful number of new drugs have been deemed not to be therapeutically superior.

Is that an indication of what would happen in the United States under a similar system?
There are a lot of innovative drugs here. But there is absolutely good reason to believe a number of the new drugs in the United States aren’t cost effective. And what I mean by that is the prices they set aren’t worth the additional benefit those drugs offer over others on the market.

It’s complicated, and this is where the science needs to come in and do rigorous evaluations that the current system in the United States doesn’t have. We need to have a systematic approach to looking at these new drugs and what their benefits are relative to their new price across different patient populations.

What kind of undertaking was it to create the AMNOG program?
Legislation started around the turn of the century in Germany, and there were a few waves aimed at pharmaceutical cost control that ultimately led to AMNOG. For certain aspects of it, the building blocks were there before. They had a system of referenced pricing for some drugs, and IQWiG was already there.

The big move that made this possible is the legislation that put the cost of compiling these dossiers on the manufacturers. It’s the drug companies that have to submit these dossiers and conduct these studies and gather data on whether new drugs are therapeutically superior. To evaluate every new drug is very challenging from a resource perspective. Putting that task on the industry in Germany is what allowed it to go into effect right away.

If we were going to have something similar, we would have to think about where those resources would come from. Right now, the FDA approval process focuses on safety and a drug’s effect compared to placebos. Comparing them to the next best drugs is a whole different study.

How has AMNOG affected the price of new drugs?
In 2015, Germany saw savings of $1 billion in new drug spending. There is an average of a 21% discount off the price of new drugs.

Under AMNOG, if insurers don’t agree with the price and rebate of manufacturers, there is an arbitration panel that can set that price. It’s typically a cap compared to what the price is in a basket of European countries. They have a nuclear option when there is disagreement on pricing, but it rarely gets to that point.

Legally, manufacturers can set whatever price they want. If they want to bypass AMNOG, technically they can set the price above other referenced prices. But then the patient has to pay the difference, and historically where drug companies have done this, there is a complete collapse in market share because patients aren’t willing to pay the difference.

We often hear this kind of system would stifle innovation. Have you seen that in Germany?
Pharmaceutical companies pour a lot of money into all of their drugs, and they don’t always know ahead of time which will be superior. They are in a race with other pharmaceutical companies to come out as quickly as possible. They could come out with a drug and two months later another comes out and they don’t get a superiority designation. They argued that would stifle innovation. Whether it actually does, we haven’t seen any clear evidence. From its launch in 2011 to August of 2016, 146 new drugs were assessed.

The whole notion of innovation and incentives for them and what drives that becomes an international discussion. There is some fear our system would be such a large part of the pharmaceutical market that it could be the straw that breaks the camel’s back if we implemented something like AMNOG.

But some think it would be a good thing and encourage companies to invest specifically in the really innovative drugs we want rather than investing in some that aren’t as innovative. That it would force them to allocate their resources more efficiently.

What did the German pharmaceutical industry think about the program initially?
The pharmaceutical industry feels compiling these dossiers is very burdensome, and they really fought against this in Germany.

But Germany had some strong-willed politicians who really pushed this legislation through. The tide had shifted there. The situation was different there than it is in the United States now. Lots of states have proposed legislation, and a small number are doing things. But federally, the political will is a different issue when it comes to lobbying and the pharmaceutical industry.

How did they go about choosing the committee to evaluate the drugs? Did they have a lot of buy-in from different areas of the industry?
Germany has something called corporatism, where they have associations that represent hospitals, physicians, insurers and patients. They have a lot of experience coming to the table together and working things out in a consensual process.

Any other differences in our system that might make implementation here challenging?
Structurally, the German system is very similar to ours. IQWiG and the joint committee are private institutions. That’s similar to what the United States would do.

With the price negotiations between the manufacturers and insurers, it’s pretty similar to our price negotiation and rebates. But the drug prices of superior drugs aren’t linked to their efficacy. It is based on complicated market factors.

We also don’t have reference pricing. In the 30% of cases where drugs aren’t deemed superior, they get classified with others in their therapeutic class. If they aren’t deemed superior here, how would you get those prices? Saying they have to be the same as others in their class would be a big political change here.

Something like AMNOG would be possible in the United States. We would just have to look at things differently on reimbursement and pricing to reflect the nature of our healthcare system.
It wouldn’t be difficult to sit down and come up with a beautiful piece of policy that could accomplish these goals and adapt AMNOG to the United States in a way that is fitting for us. I have yet to see any real piece of legislation in Congress that has a realistic sense of passing. I’ve been tracking this lately, and I haven’t seen anything big on a federal level that is meaningful and close.


An atypical congressional newbie, MacArthur, 57, came to Washington in 2014 after 11 years as chairman and CEO of York Risk Services Group. His reported assets come to some $31.8 million, and he is the wealthiest member of the New Jersey delegation. He and his wife have three homes, all in New Jersey. His transition from mayor of Randolph to congressman involved $5 million of his own money.

Starting fresh out of Hofstra University as a $13,000-a-year insurance adjuster, he spent 30 years in the industry. Under his leadership, York grew from a small local firm to an international leviathan with thousands of employees.

It didn’t take long for MacArthur to put his leadership to work in Congress. He voted against repeal and replace because the replacement wasn’t ready. Then, last April, he proposed the MacArthur amendment to that month’s version of the Republican healthcare bill. It includes provisions that would unravel some core components of the ACA by allowing states to waive essential health benefits and ending the prohibition on charging different premiums to people in the same area.

“It’s a high-risk game,” Ross Baker, a Rutgers University political science professor told “He’s willing to take the risk that his stands will not alienate his constituents.”

MacArthur says he’s in Congress to do more than repeal the ACA. “That to me is not helpful. To boast about inaction is a very, very poor substitute for solving problems.”

How did you get here in the first place?
It wasn’t a straight line. I became a pension actuary by accident and then moved into general management consulting. I’m probably one of the few people who worked across HR and risk management, across pension, life and p-c insurance and banking. I became chief risk officer for Scottish Re, at the time a global life reinsurer, and it was an interesting business model. They essentially wanted to be the Fannie Mae of the life insurance industry, buying huge blocks of life insurance and then securitizing them. Unfortunately, they were doing this right in the middle of the crisis and a lot of their securitization structures had collateral that was with Lehman Brothers. So they got caught up in the subprime crisis just as I was joining them in 2008. I learned a lot.

Then, I became chief risk officer for Validus, a global property cat reinsurer soon to be part of AIG. I left Validus and joined AIG in 2010, initially as the first chief risk officer of their global p-c business. I built the risk management function at AIG p-c and did the first allocation of the cost of capital. I then became chief reinsurance officer and the head of insurance capital markets. I started observing a lot of things that were happening in the capital markets, which led to a lot of the ideas underpinning what we’re doing now with Ledger Investing in leveraging capital markets.

Why Ledger Investing?
When I took the reinsurance role in late 2011, there was a fundamental shift in the investor base in the insurance-linked securities (ILS) market—from sort of opportunistic investors, like hedge funds, who were seeking reinsurer type returns to more stable long-term investors, like pension plans and endowments, who were seeking some relative value compared to other fixed-income investments. Interest rates had been low, and they were expected to stay there. So they were seeking some yield.

As they started coming into the market, they observed the performance of the securities was not correlated with the rest of the markets. In distressed markets, everything becomes correlated. And yet, even during the crisis—you can see statistics on this thing—insurance-linked securities were not correlated.

We started tapping that market and noticed its cost to capital was much lower than reinsurance. I started examining why. I wanted to know whether that was simply opportunistic, cyclical or something fundamental. I realized what was happening was that ILS investors were pricing in the diversification benefits of risks, which are completely uncorrelated to the traditional asset classes. So they were OK with lower returns instead of the returns insurance stock investors needed.

For example, insurers’ cost of capital is around 10%, but ILS investors don’t need 10%—instead needing only 3% to 6% to create relative value compared to their fixed-income investments.

Especially when interest rates hover around 1%.
Exactly. Insurance risk should naturally have a much lower cost of capital because of diversification, but when you put it on an insurance company balance sheet, two things happen: first, it is mixed with all the other risks and becomes opaque. As a chief risk officer, it was hard enough for me to understand all the risk in the insurance company much less being able to convey that to the management team and then to the board. Investors are so far removed they really have no clue. That opacity has a cost.

Second, for large p-c companies, you know, it’s not unusual to have maybe 30% to 50% of capital there simply for investment risk that by definition is fully correlated to the capital markets. So if you’re an investor and you buy insurance company stock, you need a 10%+ return. But if you invest directly in cat risk, you may need only a 5%-6% return.

Also, when you hold risks on a balance sheet, even though the entire insurance industry or reinsurance industry in total has $2 trillion, let’s say, it’s still concentrated, and there’s a cost of that concentration. When you place this concentration into the deep pool of the capital markets, it diversifies, and the cost goes down. So that’s another reason why the cost of capital on an insurer’s balance sheet is artificially high.

In 2012, I saw this as fundamental. It was not cyclical. This was an enduring trend. I thought, in fact, the prices should go down even more until they converged to equivalent rated risk in the traditional asset classes, like high yield, fixed income. And that’s what happened over the next four years. And every year in Monte Carlo the reinsurers would say, “Oh, I think it’s at its bottom and it’ll go back up.” They were treating it like a cycle because historically that’s what’s happened in the markets. Capital flows and prices have been cyclical.

I observed this fundamental shift and realized it’s not just for cat risk. In fact, all insurance risk is uncorrelated. Over the long term of the business cycle, things can get highly correlated. But from an investor perspective, correlation has a different time frame. Investors are really focused on short-term volatility—daily, weekly, monthly, annual. And from that perspective, almost all insurance risks—loss ratios—don’t bounce up and down like stocks and bonds do.

I saw an opportunity to source capital for all the insurance risk and try to make the case to do that within AIG. But that is difficult to embrace in an industry that for a couple hundred years has thought of itself as a warehouser of risk, where it’s gone to market by saying, “I have the biggest balance sheet.”

Insurance companies used to leverage that, and to all of a sudden tell them “you shouldn’t be a warehouser of risk” is very difficult. But that’s the opportunity I wanted to chase. So I started recruiting big investors. There’s already a market of insurance-linked securities funds. There are maybe 50 or so in the market, and they’ve grown. But it’s still a niche asset class.

I went to big investors and said, “Why don’t you come into the market? We can issue securities.” And they replied, “We understand this whole premise. The thesis is sound. However, you guys understand your risk better than we do. So you could pick us off.”

So I focused on that. I saw how to make risk more transparent and reliable for investors and how to standardize the structures by focusing on using this for capital management rather than risk management. The industry still thinks of all this in terms of reinsurance. And reinsurance is thought of as a risk management tool.

But here’s the capital management perspective: you need 100 units of capital to take on 100 units of risk. You have to figure out what’s the cheapest capital. Is it your balance sheet, the reinsurer balance sheet, or the capital markets? And that’s the game. It has nothing to do with risk management, which is a separate objective; you need reinsurance for that.

You have to keep this independent of an insurer; otherwise, investors will say, “You’re going to keep the best risks.”
Exactly. So the risk analysis has to be reliable and transparent. What’s happening around the same time is the use of technology that has improved data, analytics and predictive modeling. I saw an opportunity to leverage that to improve transparency.

Ledger Investing creates a platform that allows insurers to securitize all of their risk classes—life insurance, health insurance, property-casualty insurance, short tail, long tail—by applying analytics that are much more transparent. Portfolio analytics are much more transparent and reliable. Their reliability can be gauged by investors without them having to become underwriters, and the structures are standardized for capital management purposes.

Every insurer, for reinsurance purposes, wants to negotiate their terms because what they’re saying is, “I want these risks, and I don’t want those risks.” But capital is fungible across all risks, so you don’t need the reinsurance kind of complexity. There’s an opportunity to standardize from a capital management perspective.

And the risk is spread among many investors.
Yes, the more reliable and transparent the risk analysis and the more standardized the structures, the greater the number of investors who would be interested in investing in ILS. This is key to commoditizing insurance capital to achieve lower costs while increasing capacity.

We’re not creating a brand-new product. We’re taking an existing product that’s a niche market that was focused on reinsurance and expanding it to all of insurance by standardizing, making things more transparent, and making it efficient and positioning it as capital management.

So instead of going to their balance sheet to cover risk, carriers would be going out to the markets.
Yeah. So, the opportunity is that, if an insurance company securitizes its risk, it has a bunch of different benefits. First, it has a smaller balance sheet. By the way, I’m not suggesting they securitize everything. I think 25% to 35% of the capital should be securitized.

Why not more?
Because there is a downside. Let’s say you have $1 billion of capital and 10 product lines, and let’s say $100 million in capital is attributed to each product line. And I take one of the product lines and I securitize that $100 million. Well, now, that $100 million is available for only that product. If I had kept it on the balance sheet, that $100 million would have been available for all products. So if you securitize too much, you lose fungibility—essentially the diversification benefit of your portfolio.

The good thing, however, is you have less on your balance sheet so you get a higher return on equity. The stuff you are writing that goes off balance sheet, you’re earning a spread on that. You’re earning some profit commensurate with the value you created originating and underwriting it and servicing that risk. You’re just not holding it.

You do need to get paid something, and that’s essentially what that spread represents. And so it’s essentially a fee business. Insurers have tried to grow their fee business. It’s extremely difficult. This is the easiest way to get fee business for a huge portion of your portfolio. That would give you a much higher return on equity.

Also earnings become more stable when you have less risk on your balance sheet. And most importantly you can write far beyond the limits of your balance sheet. This is one of the biggest problems in our industry. The industry says it has a lot of excess capital, but at the same time there’s a huge insurance gap—the difference between economic losses and insured losses. The difference is because of the cost of that capital.

People don’t talk about this. A couple of years ago, I was at a Bermuda conference where some very prominent CEOs were saying, “We have excess capital. You brokers should go out and write more business.” But they failed to touch on the fact their capital was very expensive.

There’s opportunity for the industry to organically grow instead of just stealing from each other by leveraging cheaper off-balance-sheet capital through securitization. The higher ROE, more stable earnings and ability to grow increase the valuation of the company.

You say carriers are reluctant to change their business model.
There is a significant cultural constraint there, even though there is a meaningful percentage that really believe in the capital markets as opportunities. I found brokers are one step ahead of carriers. They don’t have the same constraints, because they have always been looking for the cheapest capacity. They were never warehousers of risk.

Are you going to disintermediate insurers?
That’s not my objective. The insurance industry is huge. We’re a tiny little blip. We’re not going to disintermediate the insurance industry. I am suggesting that only 25% to 35% of capital should be securitized, because if you securitize too much, then you suffer the loss in fungibility of capital. So we will always need rated balance sheets that insurers provide.

However, sourcing capital and regulated entity/issuing paper will become a commodity. It’s just a question of how quickly. Capital has become a commodity in every other major industry, and the only reason it hasn’t in insurance is because risk is opaque. If we can break through that, capital becomes a commodity. It already is in cat. So it will happen.

Pension plan consultants are advising clients to put 1% to 3% of their assets into this class because of the lack correlation. Fixed-income investments in the world account for $80 trillion. So, that’s easily $1 trillion to $2 trillion in new capital for insurance. Compare that to all the capital in the insurance industry, now. Property-casualty insurance is less than $1.5 trillion, and the reinsurance industry has about $500 billion. So the potential is huge. I think of this as a tsunami of capital.

People talk about the disruption of technology, but the capital has already created new business models, whereas technology has not—yet. Technology has made things efficient. But all the major reinsurers are now asset managers investing for third-party capital for a fee. It’s clear this is a business that their shareholders had, and now third-party capital has it. So it’s already disrupted.

There are brokers who have arranged private deals directly into the capital markets. The NY MTA, Amtrak, Kaiser Permanente and many Caribbean countries have bought insurance directly from the capital markets. They skipped the entire value chain. So this is hugely disruptive. And we don’t have to create this. We just ride it and position it to channel to the insurance industry.

Then the question for all players is if you’re an insurance company, what are you going to do. There’s an opportunity for insurers to become what Scottish Re was, essentially the facilitator to the capital markets. But we can’t do 100% into the capital markets. There always needs to be risk on a balance sheet.

Since 1997, there have been cat bonds. So the regulatory and rating agency treatment already exists. Life insurance risks have been securitized, as well. So we’re not creating a brand-new product. We’re taking an existing product that’s a niche market that was focused on reinsurance and expanding it to all of insurance by standardizing, making things more transparent, and making it efficient and positioning it as capital management. In fact, by collateralizing more of the risk and making insurance more accessible and perhaps cheaper, regulators may look favorably at securitization.

How can brokers ride this wave, and what does that mean to carriers if they do?
You have to decide which part of the value chain you want to play on. Brokers need to invest in technology and compete on the basis of the connectivity with the customer. One thing they need to do that’s been missing is to gather data. They handle clients, but they’re missing the loss and exposure data. And when I talk to brokers, I ask, “Do you have any data?” They say, “No, we don’t. The insurance company has it.”

So this is going to be a fight. Who’s going to be able to keep the data? That data is gold. Not only account-level data, but given the state of analytics today, there’s lots of third-party data that could be brought to bear. Brokers have the opportunity to maintain control and service the policy with claims. If they can do that, then it’s easy to connect up to somebody like us or anybody else who furnishes them the pipeline to capital.

Historically, tech has disrupted other industries by getting control of the customer. The number of startups that are focused on that connectivity in insurance is huge. And that means brokers are under attack from both sides. They’re squeezed by insurers and also getting competition from this new source.

They can defend themselves against insurers by pursuing this kind of a new, more efficient channel. Yet insurers have a decision to make as well. They can either continue what they’re doing and try to be that big balance sheet and hold on to some of the flow, or they can facilitate this flow into capital markets and make money because, as I said, not all the risk can go into capital markets.

Insurers who facilitate the flow into the capital markets rather than fighting it are in a position to control much more business than the size of their balance sheet currently can. So, whether you’re a $10 billion company or a $1 billion company, it’s conceivable you can have 30%, 40%, 50% of a market. That was previously impossible to fathom given the fragmentation of the industry. There’s nothing that stops you if you’re efficient at this value chain.

If you’re an insurer, if you buy into this proposition, you can control a huge portion of the market. Very much like how other tech companies have suddenly dominated their markets, there’s an opportunity for insurance companies to do the same.

Brokers can do this too by getting the connectivity of the customer and the data. Then, they can attach to this pipeline.

So what you’re telling me is that brokers could disintermediate 25% to 30% of insurers?
I’m talking about over a 10-year time frame. I mean, the pace is the only thing that’s uncertain. There’s no limitation, there.

Insurers who facilitate the flow into the capital markets rather than fighting it are in a position to control much more business than the size of their balance sheet currently can.

What does this do to premiums?
Pricing, naturally, is a market phenomenon. You go to a market, people buy and sell from each other, and you get a price. So price is something that you observe. It should not come out of a model, yet in the insurance industry, that’s what happens. That’s because those who actually hold this risk—the investors—don’t know anything about it. Because the risks are opaque, they generally say, “I want 10%+ return.” Yet, they can’t tell you how much return they want on workers comp, homeowners, commercial property or aviation. They don’t know the risks.

But if you securitize the major risk classes and create transparency, then investors, through their actions, price those securities—different prices for different risk classes based on their risk profile.

You see this in cat bonds. You see curves where the cat bond price will go up and down. An insurer can take those prices and transfer them to insurance buyers directly, so pricing no longer comes from a model but instead from interactions between investors on the one hand pricing securities and consumers on the other hand buying insurance based on those prices.

There’s a reason why when you want to get a good mortgage, every day the price changes, because that risk ends up in the capital markets where prices move every day. So why can’t we envision insurance pricing working the same way? Can’t you imagine in 10 to 20 years you go to some website—to the originator—and you get prices for a bunch of insurance policies based on capital market prices?

So if you’ve reduced pricing—
When cost of capital decreases, capacity increases significantly. Even now, there isn’t sufficient capacity. I saw commercial accounts where they wanted $500 million in peak cat coverage and they could only get $100 million. The industry was only willing to give them $100 million. There’s a reason why New York’s MTA [Mass Transit Authority] went to the capital markets. They couldn’t get capacity that they wanted at a reasonable price.

My point is that not only does the price go down to its naturally occurring and most efficient level but the capacity increases incredibly. If you have a limited amount of capital, you focus on risk selection; when you have unlimited capacity, you focus on pricing all risks.

Does this mean lower premiums and smaller commissions for brokers?
No, no. Rates go down, but the volume increases, which means bigger commissions. There’s a subtlety here that needs to be understood. I think everybody acknowledges there isn’t sufficient coverage. I mean, you see this all the time. Only a fraction of the economic loss is insured. Why is that we say that we have a lot of excess capital?

How will rising interest rates affect the capital that’s going to flood into insurance?
That’s a good question. So, first of all, let’s break up interest rates generally into two parts. One is the risk-free rate. It’s Treasuries. And the other one is the spread on corporate fixed income.

When Treasurys fluctuate, it doesn’t affect insurance-linked securities’ pricing, because these notes are actually not fixed interest rate notes but variable. The capital that’s raised to cover the risk sits in a fund earning the risk-free rate. So if the risk-free rates go up, the investors get whatever the returns are in that risk-free account. Plus, they get the risk spread on the notes—that’s the reinsurance premium.

Risk-free interest rates going up doesn’t affect this. It’s when spreads of comparable risk, securities and other asset classes widen. Pricing will still go up and down, except it will go up and down with the capital markets, not with insurance markets.

We will no longer have the insurance cycle?
Exactly. Part of the logic in the insurance and reinsurance industry is if you have a loss, I’m going to raise your price. Not because I think there’s more risk next year. Not because exposure has changed but because you have a loss, so I’m entitled to charge you more. That’s not risk management. That is not really insurance. That’s like financing your loss.

You are starting to see in the market now that when you have big losses prices don’t go up much. That’s because the capital markets have come in and put pressure on this dynamic. So they will not follow the underwriting cycle, which, quite frankly, I don’t think was a real cycle.

When you have a lot of permanent capital, you have no choice but to deploy it. So if I’m an insurer, I have permanent capital, and I want a return of 10%. That’s what my investors want. So I price my policies to meet that goal.

For whatever reason, let’s say that you, a competing insurer, have a lower assessment of the risk and your price is lower than mine. So I’m going to lose some business to you. Now, if I lose business to you and if I can’t replace it, because it’s a zero-sum game in the industry, I have to lower my price. I can’t just sit and not change my price because otherwise I’ll have capital that will get zero return. And so I lower mine. And the next guy then lowers his. That’s what drives the soft market.

It’s not really a cycle. There’s a permanent dynamic that softens prices, and this is a huge problem. But if you had securitization, you could write a little bit less and securitize less. You can flex the capital, and you’re in a better position to protect against a soft market and manage to get the returns for your investors that they really want.

There’s also double taxation that securitization avoids. As you know, the insurance company gets taxed, and then the investor gets taxed on dividends. But if you securitize this risk and you give it directly to the investor, the profits were never in the insurance company. They go to that investor instead. It gets taxed once.

And the insurance company gets a fee for making it happen.
They get a fee for the value they create. They’ve originated the business, they service the business, they gather data, they do analysis and they make risk transparent. They’re entitled to make money on that. In fact, there’s an opportunity for insurance companies to be like tech companies. If you can imagine this going to the extreme, you have less and less capital. You have less and less risk. Most of your focus is on origination and gathering data and analyzing risk. That’s all tech activity.

You become more like a tech company. So you can get a tech multiple valuation rather than an insurance company valuation. Instead of being a highly regulated, very opaque, capital-intensive company, you’re now capital lite, very tech oriented, a fee-based business that makes multiples.

Does this mean you could finally get larger limits on something like cyber insurance?
No, not yet. Remember, the constraint here is that the risk must be transparent and the risk assessment has to be reliable.

Because we don’t understand cyber yet?
That’s right—from everything I’ve known in cyber, and I certainly understood the need for capacity. The issue with cyber is there are people who will say we know how to model cyber. But I don’t think there are investors who will buy that kind of modeling and say it’s objective, back-tested and reliable. Until you achieve that, I think it will be difficult. Remember, you need standardization, transparency and a reliable risk.

I can see our top brokers can easily step into this and work with somebody like you. Would it be more difficult for our regional and smaller brokers?

Well, if they don’t have the staff to do the data gathering and analytics.
They don’t have to do that. That’s my point. We have been spending a lot of time and effort on analytics. This is my background: modeling risk. We don’t need brokers to do the analysis.

Our analysts can deliver account-level underwriting pricing models to brokers. Data science, quite frankly, is becoming commoditized. All the brokers we work with just need to have strong connectivity with the customer and get historical exposure and loss data.

You take the data and put it into your model and then price the securities?
On the investor side, we would do it as a portfolio. We don’t give investors detailed, account-level information. We give them portfolio analytics. We can back-test it. For example, we now have a client portfolio for which we have data for the last 10 years. We can back-test our risk models on this in many different ways. The investors will see the strengths and weaknesses of different models, just like they do now for cat, and they will price it.

On the other end, for the brokers, we take that portfolio price and convert into account-level prices so that they can price the individual policies. And what they essentially need to do is control the customer. By controlling the customer you should be able to get all the data.

So, predict the future. How are brokers and carriers going to react to this?
It’s soon going to become a free-for-all. In the very near term—I’ve already seen this. Until now, everybody respected their position in the value chain. You’re my client. I don’t go around you. Reinsurance doesn’t go around. But soon, everybody will be going around everybody.

I think capital and operating licenses are increasingly going to become commoditized. It’s a question of pace. I can imagine 10 years from now you will have some people who have large market shares in certain product lines. They will grow the market by writing new business, not just taking it away from others. So there will be natural growth.

The front end is entirely tech activity. All risks are priced rather than focusing on risk selection. The idea that I have to choose between higher risk and lower risk is a little bit frustrating for people outside the insurance industry. Let the investor price both. The higher risk actually may be more profitable because it also has the higher premium. Only when you have finite capital and you are a price taker, then you have to choose, and you would likely choose the lower risk.

It’s like investing in fixed investments. The risk and return of Treasurys versus corporate bonds.
It’s exactly the same thing. That’s what happens in credit, right? You have a credit score.

What about carriers? Sooner or later they’re going to have to do something about their business model. They can’t just ignore this.
I think the carriers are focused on predictive modeling on the origination side. They have not embraced the capital side. I think they’re going to be caught off guard because reinsurers were caught off-guard. They thought this was cyclical and then they all immediately turned. Within a few years, they all became asset managers. I think this will quickly become an issue. Because all these ILS funds are starting to go around insurance companies.

Are you talking about pension funds?
Pension funds invest through specialist ILS funds. Those funds are starting to have a lot of capital that must be deployed. So they have connected with fronting carriers that are essentially pipelines from MGAs directly into the capital markets. It’s small. It’s a niche. It’s going to grow exponentially. And the way it will grow exponentially is once they break into a new product line and set a precedent, the trajectories will be exponential, just like it has been over the last five years for cat.

The defining characteristic of the insurance industry is that it is not great at leading innovation but it is a very good follower.

Most technology is just making something more efficient. It’s not a disruptor. This idea, what you’re doing with the capital markets, it appears to actually be disruptive.
Yeah, exactly.

The business model hasn’t changed. This changes the business model from the carrier side or from the broker side. It defines the insurance 2.0 value chain. Insurance 1.0 has been very efficient for a couple hundred years. I agree with you that a lot of the technological improvements are simply things that were due. They should have happened 20 years ago when all other industries did this, and so now they’re due. All the hype about technology and insurtech, they have not actually changed business models. And the insurance company corporate venture capitalists—for the most part—who support this and finance this are doing so for ones that will make their current business model more efficient, not blow it up.

I think securitization is disruptive. It’s already disrupted reinsurers. Go and talk to reinsurers and ask how many of them are asset managers now. Three years ago, this did not happen, right? This is a tsunami, and it’s going to continue.

Disruption doesn’t come from within. That is one reason we went to Silicon Valley. We wanted to learn from them how they built marketplaces in other areas. We don’t think we can learn from the insurance industry.

So, I think the disruption will come from the outside and it’s a question of who will embrace it. It’s a free-for-all. These next five years are going to be interesting. And because it’s a free-for-all, it also, I think, creates a lot of opportunities in terms of business models, which could emerge in many different ways.

“I would refer them back to their insurance partner or PBM or HR department,” Rea says. “That was the extent of the input or help I could give them in the few seconds I had to talk in a busy pharmacy.”

But in 2008, one patient stopped his hamster wheel. The woman asked him which of her eight medications she should skip that month. She was living paycheck to paycheck and had an unforeseen expense, prohibiting her from buying them all. But she was diabetic, she had high blood pressure and cholesterol, and there wasn’t a lot of give.

Rea decided to see what he could do for her. He went home that night and spent the evening calling pharmacies to find out the cash prices of her medications. He analyzed her insurance and drug plans, seeking alternative ways to accomplish the same goals as her current medications did but in a more cost-effective way.

The next day, Rea gave her the information. She took it to her physician and was able to change medications and doses and include other health treatments. After this medication review, the woman was able to save $3,000 on prescriptions over the next year.

Rea decided he might have identified a need in the market and created Rx Savings Solutions, based in Overland Park, Kansas, to meet it. He’s now the CEO. Rea has created a patented algorithm that evaluates patients’ demographic and clinical information and then provides an individualized road map for the most clinically sound, cost-efficient prescriptions for each person.

Rea isn’t the only one out there looking to lower prescription drug costs. Employers, consultants, nonprofits and think tanks alike are trying to figure out how to manage the ever-increasing cost of prescription drugs in the United States. Greater cost-effectiveness analysis and drug importation are just two of a wide range of options being used to reduce spending for individuals and businesses.

Lost Control

According to the Centers for Medicare & Medicaid Services, prescription drug spending accounted for about 10% of the $3.3 trillion in total healthcare costs in the United States in 2016. The percentage of healthcare costs spent on medication is even higher for employers, with experts estimating prescriptions make up at least 30% of their health expenditures.

And there doesn’t appear to be an end in sight. A 2017 report by healthcare information and research firm QuintilesIMS estimates prescription costs will increase by up to 5% annually through 2021, to $405 billion.

And Americans are singular in their healthcare spending. A 2017 report by the Commonwealth Fund found Americans spend 30% to 190% more on prescription drugs annually than nine other high-income nations, including Australia, the United Kingdom, Germany and France. The study’s authors compared four main factors to determine a nation’s medication costs: population, per-person usage, type of medication and cost.

While the United States has a large population, we use about the same number of drugs per person as the other countries. And 84% of medications prescribed in the United States are generic—more than any country except the United Kingdom.

So where is the outlier in the U.S. market? Cost.

Prices for common medications are 5% to 117% higher in the United States than in other nations. Blockbuster and specialty medications are the main culprits for our extensive spending. The Commonwealth report highlighted six popular brand-name medications and found Lantus, an insulin injection for diabetics, costs up to $67 per month in other countries and $372 in the United States. Advair, an inhaler used to prevent asthma attacks and treat chronic obstructive pulmonary disease, costs as much as $74 elsewhere but rings in here at $309. And the controversial hepatitis C drug Sovaldi tops out at about $17,000 in Germany, yet it costs $30,000 in the United States.

The report’s authors attribute the lower prices in other countries to their use of tactics like centralized price negotiations, the creation of national drug formularies and drug pricing based on comparative effectiveness research.

But the U.S. market is more complicated, and many groups—manufacturers, distributors, insurers, pharmacy benefit managers—have their hands in the cookie jar. So it’s difficult to pinpoint how the industry has been able to increase prices, essentially unchecked, for years.

“Fundamentally, drugs are expensive because they can be,” says Ronny Gal, a senior research analyst covering the specialty pharmaceutical industry at New York-based Sanford C. Bernstein & Co. “It is a superior good—people don’t have a lot of choice.”

Gal says he rejects a lot of assumptions made in the debate over why prescription medications are so costly. Intermediaries like PBMs and wholesale distributors, he says, aren’t responsible for the high prices. Nor are drug manufacturers barely scraping by as they claim, trying to recoup massive costs of research and development.

Between 2006 and 2015, about 67% of the largest drug companies’ profit margins increased 15% to 20%, while profits among large non-drug companies worldwide increased 4% to 9%, according to the Government Accountability Office. Yet between 2008 and 2014, spending for drug research and development increased from $82 billion to just $89 billion. At the same time, federal spending was stable, but other incentives, like the orphan drug credit for medications that treat rare diseases, increased more than fivefold from 2005 to 2014.

Gal also says it’s not necessarily the pharmacy benefit managers, pharmacies and others in the distribution chain that are at fault for rising prices. They are trying to maximize their profits and get their piece of the pie. But their take is based on the original high price.

Fundamentally, drugs are expensive because they can be.” —Ronny Gal, senior research analyst, Sanford C. Bernstein & Co.

As the Commonwealth report notes, generic drugs are relatively well utilized and are often (not always) a less expensive alternative to name brands. But it’s the new, specialty medications—which have little to no competition and lots of marketing clout—that are breaking the bank.

“As old drugs become generic and new ones come in, those newer ones are being priced 10 times more than the old drugs,” Gal says. Often, there isn’t much patients can do about prices. “If you are in anaphylactic shock and I’m holding an EpiPen in my hand that can save your life, how much is that worth?”

The cost of medications used to treat such maladies as cancer, rheumatoid arthritis, asthma and diabetes have risen in the past five years “more than anyone could have expected or some think is warranted,” says Shawn Bishop, vice president for the Controlling Health Care Costs program at the Commonwealth Fund in New York.

Specialty drugs have boomed in the past couple of decades. In 1990, there were only 10 on the market, says the Pew Charitable Trust. Now there are more than 300, with nearly another 700 in development. More than 500,000 Americans are plagued by annual drug costs greater than $50,000, an increase of 63% since 2014.

And employers are paying the lion’s share of those expenses. It has been estimated that about a third of total healthcare spending is attributable to drug costs. And Chris Labrecque, president of the employee benefits group at Insurance Office of America, says about 85% of those costs can be traced to the specialty market.

Part of the issue is groundbreaking new drugs like Kymriah, approved by the Food and Drug Administration in 2017 for the treatment of childhood leukemia. It has been shown to be highly effective for about 20% of patients who don’t responded to other treatments. The manufacturer, Novartis, set the cost for the treatment at $475,000. Manufacturers set prices by amortizing the lifetime value of a cure, which is something not seen in other areas of medicine, Labrecque says.

“I broke my leg when I was six, and the doctor reset it,” he says. “Should I have paid him for the lifetime value of not limping? I think it’s price gouging and they have positioned themselves financially to defend it.”

Managing these costs is increasingly challenging for employers because they don’t want to employ cost controls. They worry it will look like rationing or cost-shifting to employees. But rationing is already occurring naturally when people like Rea’s customers are forced to forego needed medications because of the costs.

Though businesses are typically conservative when it comes to making changes in healthcare, Bishop says enthusiasm for change has increased as costs continue to rise. Employers are in a good place to affect the market because not only do they pay the bill, they also have a vested interest in keeping costs down. They may want to retain good benefits for their workforce, but Bishop says employers understand that raising deductibles and increasing co-pays on medications (enabling them to keep rich benefit plans) result only in employees paying more for drugs and other healthcare services.

“We are on the precipice of getting some more expensive drugs into the system, and how are we going to manage it?” he says. “We are already starting from a pretty high base if you are looking at employers’ spend.

They want broad access to care, but at the current price points, they just aren’t sure they are paying for it correctly.”

Border Wall

One way to cut costs is through state and federal legislation. To date, the federal government has done little to sway the prescription drug market with the exception of some movement in Medicare. States, on the other hand, have taken up the torch.

Some are doing simple things that don’t require legislation, like pooling public employees with prisoners to leverage a greater number of covered lives for negotiations with pharmaceutical companies. Some are joining purchasing pools to get the same result.

But Jane Horvath, a senior policy fellow at the National Academy for State Health Policy, says these are short-term measures. “Those net some discounts but not enough to change the trajectory of what is going on,” Horvath says. “They are staying one step behind the band. When prices go up, they are still just getting a 10% discount on those higher prices.”

Some states have taken the legislative route. Horvath says more than 100 bills were introduced in 2017 and nearly as many already have been in 2018. Some are focused on curbing high prices—New York passed a law to cap Medicaid drug spending. Maryland, known for its progressive healthcare market, is considering creating a commission to set ceiling rates for high-priced drugs. States are also focusing on increasing transparency, requiring pharmacy benefit managers to disclose their manufacturer rebates and forcing manufacturers to justify prices that seem unusually high.

Other states save money by importing drugs from countries such as Canada and Australia. Unlike busloads of seniors crossing the border to Canada to buy their prescriptions before Medicare Part D was enacted, passing important legislation would allow states to do it on a wholesale basis.

The cost savings of looking to other nations can be substantial. In 2016, Kaiser Health News compared the cost of some popular brand-name drugs in Canada and Brooklyn. Most drugs in Canada were 50% to 75% cheaper than the same drugs in the United States. This savings can be small, as in the price of the generic version of the cholesterol drug Crestor, costing $6.82 here for a 30-day supply (the same amount in the name brand is around $175) and $2.58 in Canada. It can also be more significant, as with the leukemia treatment Gleevec, where the name brand runs around $336.33 per 400-mg. pill in New York and $48.77 in Canada (the generic is closer to $125 per pill).

Horvath says importation is not the ultimate solution but state legislation pushing it does place pressure on the industry and federal government to do something. The National Academy for State Health Policy has its own model drug importation program to guide states and smaller groups or just for certain medications, such as those in the expensive specialty market. To cut costs, employers are using this option more frequently.

Gary Becker, founder and CEO of Baltimore-based ScriptSourcing, has spent 33 years learning how to help businesses mitigate risk and cut spending. Three years ago, he added international health tourism and mail-order programs to his other offerings and has written more business than in his three previous decades in the industry.

The things we are doing are not status quo, but we have had a tremendous amount of success.

Gary Becker, founder and CEO, ScriptSourcing

“There is a huge appetite for savings and helping employees better adhere to their medications by cutting the high cost of prescription drugs,” Becker says. “The things we are doing are not status quo, but we have had a tremendous amount of success.”

ScriptSourcing comes into an organization and gets a detailed PBM report so it knows which medications each employee is taking as well as the dosage and cost. Then, the company identifies drugs that are eligible for its solutions and works with employers to encourage employees to take part in a voluntary plan.

Its mail order option (in which the company sources medications from “tier-one” countries Australia, New Zealand, Canada and the United Kingdom) reduces the cost of brand-name drugs such as Wellbutrin by an average of 70%, Becker says.

ScriptSourcing also works with a network of healthcare centers around the world where it sends people for treatment and medication. Because of the high cost of some specialty drugs, employers can save thousands by flying people elsewhere for treatment.

For example, a patient in Becker’s program went to San Diego, traveled an hour south to Mexico two days in a row and received the chemotherapy treatment Revlimid. Each day, he returned with a six-month supply of the brand name medication for around $100,000. In the United States it costs $160,000. Another of his employers saved more than $30,000 by sending an employee to Mexico for injections of the immunosuppressant Humira. In the Cayman Islands, patients can save $60,000 for a 90-day supply of Harvoni, the hepatitis C drug.

Not all specialty medications are available internationally, but for those that are, he says, pharmaceutical tourism saves 25% to 75% of the cost of U.S. medications. One client with 1,200 employees recently saved $1 million in its first year. Another, with 65 employees, saved $2.1 million in seven years.

Not everyone is sold on traveling to receive medications. According to the Centers for Disease Control and Prevention, patients have to be aware of some issues that include errors that can occur when dealing with healthcare providers and pharmacists that aren’t native English speakers and the potential that medication could be poor quality or counterfeit. Also, according to the U.S. Food and Drug Administration, it’s technically illegal to import medications that aren’t approved by the FDA. The organization concedes, however, it does not enforce the policy as long as the drug is considered safe, it’s for the patient’s use and not for commercialization, and an individual brings in less than a three-month supply.

“About 80% of workers live paycheck to paycheck, and 70% of families have $1,000 in savings or less,” Becker says. “There are people out there making a choice between food and other expenses or medication.”

Employers don’t want to see their workforce making these kinds of choices. And they know reducing healthcare spending can make them more competitive.

“People value that pharmaceutical companies are curing diseases and prolonging life,” Becker says. “But it doesn’t quite sit well with an employer whose spending is so out of control and across the border medications are one third of the cost.”

Waste Management

Not everyone has to shop in Canada to save money on prescription drugs. Consultants and other organizations are working to cut spending in different ways. The term “value-based” is the current darling in healthcare. In the prescription drug realm, it can mean a few things. One is value-based contracting, where drugs aren’t paid for if they don’t meet the outcomes promised by their manufacturers. Another is value-based benefit design, in which patients pay lower co-pays for medications perceived to have a high value and keep costs lower by reducing hospitalizations and complications down the line.

The San Francisco-based Pacific Business Group on Health (PBGH) is piloting its own value-based option, the waste-free formulary. According to Lauren Vela, the organization’s senior director of member value, most formularies created through PBMs get value by optimizing rebates, which is different from actually creating value.

“If a drug is $100 and you are getting a $50 rebate, that’s great…unless there is an equivalent $7 drug out there that is just as good,” Vela says. “That is what is going on in the system, and it’s happening a lot.

Employers are getting a bigger rebate, but they are actually paying more to get the drug.”

The PBGH definition of value for this project includes finding drugs that are the same clinically, then putting the ones in the formulary that are the least expensive, minus rebates. Their goal is to get waste out of the formularies by subtracting high-cost drugs that don’t add value. Most of the culprits in the system fall under a couple of categories: combination drugs that are cheaper if taken separately; “me-too” medications, which are chemically similar to a drug already on the market but tweaked slightly; and drugs that have less expensive, over-the-counter equivalents.

The challenge with many of these, Vela says, is patients are paying the price for a new drug when less-expensive generics, or even name brands, are available. A 2008 analysis of 42 new drugs approved over 18 months found nearly three quarters offered no new treatment advantage over options already on the market. Some were more convenient to use, but only 13% addressed an unmet need or were more effective than existing medications.

“That is part of why drug prices are trending upward,” Vela says. “Employers just pay whatever they think they need to pay. They need to just get rid of drugs on their formularies that add no value and are high cost. It’s simple math.”

Consultants in the industry work with employers to comb through data, track drug use and spending, and search for waste or areas where they can save on particular medications. If consultants have been successful in doing this with individual businesses, Vela questions why it couldn’t be done en masse.

PBGH is currently piloting its waste-free programs in California, looking at data from a range of employers to get a sense of whether the process would work across larger groups with different pharmacy benefit managers and formularies. Vela says they start by reducing the drugs on a lot of formularies that shouldn’t be there—culprits like the combinations and me-toos. Those are easy to find and remove. Then, they analyze spending more closely to see what other medications are covered that shouldn’t be. The template for most would look very similar, with some slight differences depending on the workforce makeup.

If a drug is $100 and you are getting a $50 rebate, that’s great…unless there is an equivalent $7 drug out there that is just as good.

Lauren Vela, senior director of member value, PBGH

“Ultimately there would be one formulary with the highest-value drugs available,” Vela says. “They would look much the same, but if one organization has a bunch of diabetics, their insulin benefit might look a little different.”

PBGH would create this formulary and offer it across employer groups. And a key to its success will be its use by physicians—getting doctors to prescribe the most high-value drugs at the beginning. Vela says physicians appear to like the idea but need to have the information at their fingertips or it won’t be used. She is working with groups to create a point-of-care decision-making tool to help providers with this task.

It’s too early to have a lot of data on the PBGH program, but Vela says the first few case studies they have done have been highly successful at cutting employers’ costs.

Rea says the algorithm his company created has also helped reduce prices for a lot of employers. The company takes claims information for an organization, puts it into the system and considers local pharmacy costs and other therapies to find the best therapies for the lowest cost. Then, the company sends employees a link that explains how to get those savings. Rea says the company tends to find savings in areas similar to those in the PBGH program—substituting a pill for a capsule to save 40% or using two medications instead of combination drugs.

During his time analyzing medications, Rea says he’s learned saving money is about breaking down preconceived notions about what drugs cost and why. He also stresses more knowledge is always better. “The chance consumers can be taken advantage of is high,” Rea says. “The less information they have, the less chance they are going to find the route to the lowest-cost medications.”

Absent using his software or a program like PBGH’s, he says insurance brokers need to look not only at the sticker price but also at where the variances are in cost and at the use of generics. He says there are tremendous savings to be had if purchasers look deeper into the system.

IOA’s Labrecque agrees with this assessment. He has spent time talking with frustrated clients, brokers and employers large and small all seeking greater transparency. “Warren Buffett said it’s not until the tide goes out that you see who’s swimming naked,” he says. “We need to make the tide go out. It’s on us to develop solutions out there instead of just pointing to the side of the road and saying, ‘Look, there’s a car wreck.’”

Worth is a contributing writer.

Your company is based in Tampa. What would non-Floridians be surprised to learn about your state?
For the 40% of Americans who haven’t been to Florida, they may be surprised to learn we don’t really have Southern accents. We mostly sound like Midwesterners, except for our incessant use of the term “y’all.”

You’ve been in Florida most of your life. What’s been your scariest hurricane experience?
Irma, without a doubt. We dodged a cannon, but it gave us the opportunity to test our preparations as an agency, proactively supporting our thousands of Florida-based clients, and as an employer, caring for and keeping track of our 175-plus colleagues.

Two of your firm’s three principals are women. Do you think that affects the way BKS conducts its business?
Yes. Laura Sherman, a co-founding partner, and I have a shared mindset of bringing our whole selves to everything we do. To support this, we are launching the BKS Passion Project, which financially supports colleagues to pursue their non-insurance-related interests, whatever they may be.

Have you made a conscious effort to recruit and advance women?
We have made a conscious effort to recruit the best person for the job, and that is often a woman. Attributes often associated with women, such as being community-minded, nurturing and encouraging, are often the same attributes that help forge a strong sense of esprit de corps in the workplace.

What did your parents do?
My parents owned a nuts-and-bolts distributorship. It taught me a lot about fasteners as well as a lot about business, which at its cornerstone is about relationships. We’re fortunate to have clients in manufacturing, so the smell of a production floor is just like home to me.

BKS also has colleagues spend a day in the workplaces of new key clients. Is that a common practice?
It may be unique to us. We started doing this years ago with large restaurant groups. We would work in their kitchens as they prepped for the day—carefully cutting vegetables, measuring servings, understanding how the kitchen was organized. When you work in a business, even for just a few hours, you realize their challenges.

Last year, you took a month to travel with your husband. Where did you go?
We took our two sons out west for a few weeks, then dropped them off at camp. We then went to Germany, Austria, the Czech Republic and Hungary. It was a little overscheduled, which is kind of the story of my life. We were away 31 days. My husband and I have been together for 31 years, so it seemed like the right number.

How did the firm manage without you?
Very well, actually! The firm cut me off of technology, which made it delightfully difficult to stay engaged with the day to day. The highlight of the trip was realizing I enjoyed unplugging. I never doubted that everything was taken care of.

I don’t imagine a lot of firms would accommodate a 30-day absence.
We had planned it for seven or eight months. Planning put deadlines in place and allowed us to get things done faster. When I came back, people were more excited to hear about the trip than lament my absence.

BKS has won several “Best Places to Work” awards, including one focused on millennials. How do you attract young people to your firm?
They are attracted to the new challenges available to them as a result of our high growth, our understanding that a new way might actually be the best way and, of course, because they can wear jeans and sneakers every day.

Who was your most influential business mentor?
Lowry Baldwin, one of our co-founding partners. He is a phenomenal listener, and he’s not judgmental. We’ve worked together since 1988. He always thought I could be more than I thought I could be. And I hope I’m doing the same for other people.

What’s the best advice he ever gave you?
“No one knows how good you are until things go bad.”

If you could change one thing about the insurance industry, what would it be?
The mentality that some people have that this is just the way it’s always been done. The industry is continually evolving.

What gives you your leader’s edge?
Living the Azimuth, which is our core set of values. I’m inspired by how fiercely protective our colleagues are in keeping it in the forefront of everything we do. We give and, more importantly, we receive continual feedback from one another on how to improve.



The Krystyn File

Favorite Vacation Spot: “My next, wherever it is, will be my favorite.”

Favorite Movie: Shawshank Redemption

Favorite Actor: “I’m a big Denzel Washington fan. I like chase scenes and all the James Bond movies. I’m kind of low-brow that way.”

Favorite Musician: “My favorite band is a punk band called X. I also like Patsy Cline, and I listen to contemporary Christian music—just to keep things interesting.”

Favorite Book: The World According to Garp and anything by John Irving

Wheels: Lexus SUV

According to a study by Deloitte, “Companies that embrace diversity and inclusion in all aspects of their business statistically outperform their peers.” In fact, multiple studies conducted across different organizations all came to the same conclusion. Global research analyst Josh Bersin reports that companies with high inclusion and diversity rankings reap the rewards. They saw 2.3 times higher cash flow per employee (over three years) and were 2.9 times more likely to identify and build leaders, 1.8 times more likely to be change-ready and 1.7 times more likely to be innovation leaders in their market.

Why is this? I believe it has to do with the intersection of diversity, inclusion and innovation.

Many often think of inclusion and innovation as two separate initiatives. However, after working on inclusion and innovation concurrently over the past year, one thing has become evident to me: the overlap and connectedness between these two areas is not only important, it is necessary.

Innovation requires a culture of openness that fosters dialog across various experiences and backgrounds. That same foundation of openness helps create an inclusive environment for diverse hiring. This is the intersection of inclusion and innovation and the very reason that the two must be combined. Together, they can bring a diverse group together and foster open collaboration and critical thinking for robust problem solving.

Inclusive Hiring

So how do you build a more diverse and inclusive workforce? One way is to look at your recruiting practices and consider widening the net. Look at which organizations you connect with at a given college and rethink your requirements for that list. Recruit with innovation in mind, looking for skill sets like curiosity, creativity and a history of “innovative successes,” says William Craig, who writes about company culture in Forbes. In addition to considering a candidate’s educational background and work experience, know what you can teach versus what skill sets are required (e.g., detail-oriented) from the beginning.

Review your job postings to ensure they reflect only the necessary skill sets. Be careful not to over articulate what the job requires. You might think you are doing potential candidates a favor. However, studies have shown that some candidates will opt out of applying when they do not meet all the listed requirements and word choice. Lean In, an organization that works to empower women, cites that men apply for a job when they meet 60% of the qualifications whereas women apply only if they meet 100% of them. Textio, a software company that uses analytics to optimize job descriptions, has found that word choice can be gender biased, limiting the audience it reaches. To address this problem, Textio assesses job postings and offers feedback on layout and language for optimal performance.

It’s no secret that recruiting in the insurance industry is challenging, and many admit they came to the industry by accident. But we can speed up the crossover into insurance by reaching out to a wide market early on. I discovered this accidentally when I created a Girls in IT program (GET IT: Girls Educating Themselves about Information Technology) to educate middle-school aged girls about IT careers. In addition to starting early, I found that describing the career in a simple and relatable way and focusing on the skill sets involved were also helpful. For example, by having a one-hour conversation about all possible IT careers, we increased interest in the field by a whopping 75%. By focusing on skill sets, you will connect with your candidates and help them find a path that is successful for both themselves and the agency. Focusing too heavily on job descriptions can result in candidates self-selecting out of a given role or industry for a lack of connection.

But a company can only truly be inclusive and diverse over time if it creates a culture of awareness, understanding and openness. You may be able to hire diverse talent, but in order to keep those hires, you have to foster a culture of inclusion. Upper management support, employee resources groups (voluntary, employee-led groups to foster diversity and inclusion, like Women’s BRGs [business resource groups], LGBTQ BRGs), and diversity training programs are just a few examples of what is necessary to create a foundation of inclusion. It should be noted that the effectiveness of diversity training programs is the subject of much debate.

However, I believe the key is finding the right training that focuses on unconscious bias, cultural sensitivity, appreciating individuality, and ways to communicate about diversity-related topics.

Inclusion Brings Innovation

To innovate, a culture of inclusion is necessary. According to research done by The Conference Board, “Inclusive cultures are four times more likely to be innovative.” But how do you create a corporate culture of innovation in an industry founded on risk mitigation? That is a common question and a common myth. Innovation is not the result of taking risks but, rather, in mitigating risks.

Here is where the IT industry can be helpful. Iterative development, known by its several variations of Agile, Lean Startup, or Scrum to name a few, is a concept the insurance industry can borrow that the IT industry has been laying out and perfecting over the past two decades. These methodologies all share the same core concepts. Work is done in short segments with end deliverables shared and tested along the way.

Feedback is expected, and a high degree of open communication is necessary for success. Being active in the build process makes it easy (and less expensive) to incorporate changes along the way rather than waiting until a project is fully complete. 

The days of “build it and then they will come” are over. The new normal of instituting change includes constant collaboration, sharing and feedback—including from your end users. This approach will not only validate if a change is beneficial but also provide further insight into the needs and other considerations for your work. Ultimately, this approach creates a new closeness between parties and fosters a strong connection with your end users, who will feel connected to the product because you incorporated their feedback. Additionally, bringing them into the process highlights all the work that goes into building a product or service, creating a mutual understanding and appreciation.

When forging ahead, recognize that a single person alone cannot cultivate change in an organization. Indeed, there must be a leader to head up communications, oversee the governance of projects, and manage the budget. However, building a corporate culture of innovation is the cumulative result of working with a diverse group within your organization, which starts with establishing an inclusive workplace. In fact, a study done by decision-making platform Cloverpop shows that inclusive teams make 87% better decisions two times faster with half the meetings.

When looking to build your innovation team and change agents, there is a community right within your organization that can help. Enter the “intrapreneur.” The term—launched back in 1987 by an economist—is largely new to the insurance world but is now experiencing newfound interest as a recruiting tactic. An intrapreneur is a person who behaves like an entrepreneur within an organization, typically characterized by taking risks and innovating to solve problems. To cultivate innovation in your organization, locate those intrapreneurs who thrive on change, are curious and think creatively to establish a foundation of innovation. Not only does this serve as an inclusive practice by giving a non-traditional group the opportunity to drive change, but it also gives your employees the ownership and autonomy to create and experiment, offering new meaning to their job. Utilize this movement within your organization to help with your recruiting efforts. New hires to your organization will see this as a differentiator and a draw.

With matters of inclusion and innovation, it is all about striving for progress, not perfection, because with continued and consistent progress, we will have the most impact.

Conroy is IT manager at M3 Insurance and Inclusion and Diversity Committee chair.

On March 17, The New York Times and The London Observer reported data on 50 million Facebook users was impermissibly shared with Cambridge Analytica, which used it to help Donald Trump shape campaign messages and win the presidency. Unlike earlier reports, which surfaced in 2015 and 2017, the articles provided information from a former Cambridge Analytica employee, Christopher Wylie, who blew the whistle on how the Facebook data were used.

“We exploited Facebook to harvest millions of people’s profiles. And built models to exploit what we knew about them and target their inner demons. That was the basis the entire company was built on,” he said.

Within days, a former Facebook employee, Sandy Parakilas, followed suit and regaled U.K. members of Parliament about Facebook’s refusal to heed his warnings of lax data protection policies. The whistleblowers added credibility to the stories and blunted Facebook’s ability to respond using its usual statements about taking privacy seriously and investigating any allegations. 

Path to a Crisis

By way of background, from 2007 to mid-2014, Facebook routinely allowed application developers to scrape the data of Facebook users who used their apps, as well as data about all of their friends. This “friends permission” policy attracted developers to the Facebook platform because they were enticed and rewarded by access to a rich mine of data. Parakilas estimated the feature was used by developers to gather data on “hundreds of millions” of Facebook users. 

Parakilas, who was responsible for enforcing violations of Facebook policies by third-party application developers in 2011-2012, detailed how the company never monitored, audited or investigated how any developer was using Facebook data. “They felt that it was better not to know. I found that utterly shocking and horrifying,” he explained.

During the period “friends permission” was allowed, a U.K. company called Global Science Research (GSR), developed a personality application that was used by 270,000 Facebook users. In return, GSR was able to scoop up data on the users and all of their friends, resulting in a database full of personal details on 30 million to 50 million Facebook users (original estimates were 30 million, later ones are 50 million). In 2015, GSR’s founder violated Facebook’s terms and conditions and gave the data to Cambridge Analytica to use for data analytics and targeted campaign messaging. 

All Hell Breaks Loose

The New York Times and The London Observer reports in March created a firestorm. The news came in the midst of a broad recognition that Russia really had meddled in the 2016 elections and this had occurred—in large part—through fake Facebook pages, ads, and deceptive and manipulative messaging that reached 126 million Americans. Through the press, people were beginning to understand the enormity of the privacy violations that had occurred and the power of big data. 

Around the same time, The New York Times reported Alex Stamos, Facebook’s chief information security officer, was being pushed out of his job because he had compiled massive amounts of data about Russia’s misuse of the platform during the elections and had repeatedly urged Facebook to be transparent about what it had discovered. Stamos reportedly put together a team of engineers in June 2016—the same month the Democratic National Committee announced it had been hacked—and by November 2016, he had uncovered evidence that the Russians had “pushed DNC leaks and propaganda on Facebook.” 

The Times article details the increasing amount of evidence uncovered by Stamos, his drafting a memo that was subsequently scrubbed, and his futile but continuing entreaties to Facebook’s management to disclose the findings. Parakilas said, “The people whose job is to protect the user always are fighting an uphill battle against the people whose job it is to make money for the company.” Others interviewed by the Times noted senior management’s desire to protect their legacies and reputation.

Facebook tried to cut off the head of the snake by reassigning Stamos’s 120-member team to two divisions—product and infrastructure (not, by the way, where information security should be located within an organizational structure). Stamos reportedly was asked to stay until August because Facebook’s senior executives were concerned his leaving would look bad.

Here Comes the Hammer

Facebook’s lack of governance of its own corporate practices, its blatant attempt to sideline an officer of the company to avoid disclosing evidence its users had been manipulated, and its mismanagement of the public relations crisis created by the news reports has been stunning. In less than two weeks, Facebook found itself under siege, not only in the United States but also around the globe. The Federal Trade Commission confirmed it was investigating Facebook’s privacy practices and whether it violated a 2011 FTC consent decree. A group of 37 state attorneys general sent Facebook a letter “demanding answers…about the company’s business practices and privacy protections.”  The Senate Judiciary Committee, the Senate Committee on Commerce, Science, and Transportation, and the House Energy and Commerce Committees asked Mark Zuckerberg to testify on Facebook’s data privacy and data use standards. (Hint to the Hill: You need to ask Alex Stamos to testify.)

Canada’s privacy commissioner launched an investigation into whether Facebook mishandled Canadians’ personal information and announced that Britain’s privacy office had begun a similar investigation and the two offices would be coordinating. On the same day, the EU’s data protection chief called the allegations against Facebook the “scandal of the century” and called for EU data protection authorities to join together in a task force to investigate Facebook’s activities.

In just six days, Facebook lost $75 billion in market capitalization, and before it could even blink, a federal class action securities lawsuit against Facebook, Zuckerberg and CFO David Wehner was filed alleging:

[Facebook] made false and/or misleading statements and/or failed to disclose that: (i) Facebook violated its own purported data privacy policies by allowing third parties to access the personal data of millions of Facebook users without the users’ consent; (ii) discovery of the foregoing conduct would foreseeably subject the company to heightened regulatory scrutiny; and (iii) as a result, Facebook’s public statements were materially false and misleading at all relevant times.

Securities suits are a new tactic taken by plaintiffs attorneys in response to cyber incidents. In the past year, securities class action suits have been filed against Equifax, Yahoo and PayPal following highly visible breaches, exposing directors and officers to substantial liability.

The Facebook debacle does present opportunities for agents and brokers. The sting from Facebook will raise the bar for privacy protections and good corporate governance. Insurance professionals should reach out to clients and help them evaluate their current D&O coverage. Also, encourage them to review their privacy policies and develop compliance procedures to ensure their privacy obligations are upheld.

Westby is CEO of Global Cyber Risk. westby@globalcyberrisk

And there is a goliath, a big-guy buyer whose assertive merger and acquisition strategy is known.
After the ink dries, the seller, reflecting on the deal, says she assumed the buyer would implement its own systems, do everything its own way. But there was a conversation—and the buyer wanted to hear the seller’s ideas. The goliath was interested in how the hard-driving owner of this small firm had honed a certain niche and how the combined organization could grow it.
The seller figured the much larger buyer would have it all figured out. But actually, the buyer was interested in the owner because of her expertise, talent and experience. The seller was surprised—shocked, actually. She just assumed the buyer knew it all.
What did this scenario mean for the seller?
Well, there was a welcome seat for her in leadership at the large firm if she wanted it. Her intellectual capital was more valuable than she ever realized and something the buyer identified and wanted. There was a balance: the seller fulfilled the buyer’s desire to move the business to the next level, and the buyer brought a specialty and entrepreneurial spirit—a growth mentality—to the leadership team that the seller saw as a huge asset.
This situation is not unusual. It’s not an anomaly that the seller finds the buyer does not have it all figured out. We see this all the time, which is why we emphasize that high-performing firms help drive value, no matter their size. When a firm operates efficiently and profitably, when it grows a great culture and talent, it is seen as much more valuable at the time of sale. And there is more opportunity for the seller, because it is entering an organization that wants to leverage its skill set and put the sellers in a position to grow their careers, if they choose that route.
So, as a seller, what are you bringing to the table?
We know that high-performing firms experience double-digit organic growth—based on our proprietary database, that growth averages 10% to 15% annually. They operate at a 25% or higher EBITDA (earnings before interest, taxes, depreciation and amortization) margin. Specifically, in 2017, according to our proprietary financial and productivity benchmarking system, high-performing firms grew an average 14.9% organically and had an average EBITDA margin of 28.5%.

Where do you stand?

Sellers often get more value for their firms if they are operating like well oiled machines. Buyers have their eyes on “assets”—they are looking for expertise, talent, knowledge and systems they can adopt to make their organizations run more profitability. They’re looking for great people. In turn, sellers can find leadership opportunity and career growth for their teams. We have seen balance in the most successful deals, with both sides giving and taking.

And sellers are looking for value beyond the numbers. To position your firm to gain the most value, whether or not you decide to sell down the road, stay focused on creating value in your firm. Your organic growth matters. Your profitability and EBITDA are critical. Your people are the key to success. Your culture as a forward-thinking, growth-minded organization will help set you apart from peers.

Buyers don’t know it all. That’s why they look for savvy sellers of all sizes.

Any seller can be in the position that our example was—sitting at the table with new leadership, adding value to an organization many times the seller’s size. What our hypothetical seller did right was treat her business as if it were on the market well before it ever was. She focused on building value and organic growth. She concentrated on developing producers and leadership. She was operating a firm with a plan and the ability to execute. And now, she’s helping lead a goliath.

By operating with a value-driving mentality, you could do the exact same thing.

Market Update

The first quarter of 2018 is showing signs of a slowdown in deal count, but we believe it is just a matter of slow announcements. The 23 announced deals in March bring the three-month total to 92 transactions. This is in line with totals in 2014 but well behind 2015-2017 numbers, which ranged from 120 to 145 deals in the first quarter. If you talk to most buyers, however, they will tell you that they are as active as ever.

Alera Group is leading the charge with eight announced acquisitions year to date. It is followed closely by BroadStreet Partners and Hub International, both tied at seven announced domestic deals through March.

The big news on the street currently is the announcement that USI Insurance Services is in line to buy the insurance operation of KeyBank (Key Insurance & Benefits Services). This is a top-100 brokerage and formerly the insurance operation of First Niagara Risk Management prior to the bank’s being acquired by KeyBank in July 2016. There are currently rumors of at least one other top-100 bank-owned agency on the market. If both of these deals go through, that would be three top-100 bank-owned agencies sold in the last 12 months—Wells Fargo Insurance Services USA being the other when it was sold to USI in 2017.

While banks dominated the M&A space in the mid-2000s, they have been relatively quiet since coming out of the Great Recession. Bank-owned agencies completed 22 deals in 2017, which was roughly 4% of all announced deal flow. Year to date, there have been five acquisitions by five different bank-owned agencies. We believe that bank-owned brokerages are still a very viable buyer segment; there are just fewer dominant acquirers than a decade ago.

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

As you are probably aware, the legislation doubled the lifetime exemption from gift or estate tax to $11.18 million per person or $22.36 million per couple. What you may not know is this is a “use it or lose it” benefit, as the exemption is slated to decrease back to the pre-2018 level ($5 million per person or $10 million per married couple) in 2026. So what can you do to take advantage of this windfall?

First, dust off your business succession plans, which may be sitting on your shelf, because, well, let’s face it, no one likes to think about winding down or dying. And you should be considering whether this might be the right time to gift some of your ownership interests (or other assets) to the next generation. Failing to take advantage of this tax-advantaged window would be a lost opportunity, especially when planning sooner generates significant additional tax benefits by removing both assets and their appreciation from your estate.

For those who take full advantage of the increased cap before 2026, you need to prepare to navigate the potential uncertainty should the exemption cap revert to 2017 levels. Worst case: the estate tax ultimately would be calculated on the remaining estate plus the extra amount gifted during this window. Proper planning can minimize or eliminate this potential consequence.

For those implementing a gifting strategy now, this allows you to make gifts as tax efficient as possible. A number of techniques allow discounting of the transferred assets so you can “stuff” the $11.8 million or $22.36 million (or some lesser amount) with the most value possible. To take advantage of these discounting opportunities, you should look for assets you own that are ideal for discounting. One of the most ideal is interest in closely held businesses, such as privately owned insurance brokerages.

If you have children or other potential heirs who have joined the firm and you transfer minority interests in the firm to them, those interests can—if properly structured—qualify for a minority discount as well as a lack of liquidity discount. These combined discounts can be as high as 40%-45% of the current fair market value. A $1 million interest transfer could be valued at as low as $550,000 for calculating the gift tax exemption. Use of such discounting strategies allows you to get the most bang for your buck from your tax exemptions, and interests can be transferred outright or in trust.

There are many advantages to using trusts to hold business interests and other assets, including asset protection and centralized management. Many do not want their children to receive assets outright immediately, or sometimes ever, because they are worried the child will not know how to manage them or may lose them for some reason. Keeping the assets in the family line is another common concern. Trusts address all of those issues and can be tailored with great specificity to suit each person’s concerns and personal situation.

In addition to these benefits, some jurisdictions—Delaware, South Dakota, Nevada and Florida, for example—allow the trust settlor or others selected by the settlor to retain certain powers over trusts created there and can also be structured to avoid state income tax, which is a significant benefit.

Because the current 40% estate and gift tax rate is now not significantly higher than the maximum combined federal and state income tax rates, you must do proper income tax planning at the same time as your estate planning. Assets held by you at your death will receive a “step-up” in value to the property’s value at your date of death. So if your children or other recipients of assets at your death want to sell the assets they receive from you soon after receipt, there will be little to no income tax on those assets. In deciding what to transfer and what to give away, it may make sense to hold on to highly appreciated assets so they receive a basis of their fair market value at your death.

The recent changes to the individual income tax laws are also important elements of current estate planning. There are certain planning techniques that can be considered to offset the loss of the state and local tax (SALT) deduction for individuals. In high-tax jurisdictions, the loss of the SALT deduction can lead to significant increases in personal income tax. The use of multiple trusts to hold real property and increased charitable gifting can help to mitigate additional income tax liability.

One technique that combines estate and income tax planning is “upstream planning,” which involves using your extra gift exemption to create a structure that will benefit your children and future generations but will be included in a senior generation family member’s (say, your father’s) estate. If your father’s assets are minimal, the inclusion in his estate of the value of your gift will not cause any estate tax liability for him. But the inclusion will allow the tax basis of the assets to be stepped up to the fair market value at the time of your father’s death.

The bottom line is that there are many unique planning opportunities out there now to use in planning for the transfer of your assets and succession of your business interests. Now is the time to jump on this!

Sinder is The Council’s chief legal officer and Steptoe & Johnson partner.
Tractenberg chairs Steptoe’s Private Client Practice.

Back in 1970, Alvin Toffler foretold that the ability to acquire knowledge would be a key differentiator. “The illiterate of the 21st century will not be those who cannot read and write but those who cannot learn, unlearn and relearn.”

Michael Simmons, in a story on titled “5-Hour Rule,” calls knowledge the new money. He says we are beginning a period of rapid demonetization, a term coined by futurist Peter Diamandis.

“Technology,” he says, “is rendering previously expensive products or services much cheaper or even free.”

A device for video conferencing in 1982 cost $586,904. Today, we video conference for free. A video camera cost $2,600 in 1981, and today it comes free with your phone. The encyclopedia cost $1,300 in 1989, but today it is free online.

“While goods and services are becoming demonetized, knowledge is becoming increasingly valuable,” according to Simmons. The great part about knowledge is that, unlike money, when you use it, you don’t lose it! Moreover, it could convert into things like authentic relationships and a feeling of well-being, the kinds of things money can’t buy.

There are some great side effects to acquiring knowledge. It helps you think bigger and better as your brain works more effectively. It expands your vocabulary, making you a better communicator. You could become more interesting and charismatic and possibly even more independent and handy, depending on what you decide to learn.

So how can you cash in on this knowledge economy? Apparently, Bill Gates, Warren Buffett, Oprah Winfrey and Barack Obama know the secret. It’s called the “5-Hour Rule,” devoting five hours a week to learning and increasing your knowledge. Warren Buffett spent 80% of his time reading and thinking. Bill Gates reads a book a week and takes a two-week reading vacation each year. When he was president, Barack Obama spent one hour a day reading. Simmons says if you are not spending at least five hours a week learning something new, you are being irresponsible. Even if you work hard, if you don’t take the time to constantly and deliberately learn, you will be part of a new “at-risk” group simply because it’s hard to keep up in our rapidly changing world. Simmons is so serious about this he has created a webinar to help you, called “Learning How to Learn.” There is also a “Learning How to Learn” course on Coursera taught by Barbara Oakley, from the University of California San Diego, and Terrence Sejnowski, from the Salk Institute.

If the busiest people in the world find one hour a day to learn, shouldn’t you? As motivational speaker Simon Sinek says, “The hardest part is starting. Once we get that out of the way the rest of the journey is much easier.”

Simmons explains starting your learning ritual begins with three easy steps:

  • Make time to read even when you are overwhelmed and too busy
  • Stay true to your learning time—don’t procrastinate or get distracted
  • Apply the learning right away to help you remember what you learn.

In “Why the Best Leaders Are Full-Time Learners,” in Forbes, Kelsey Meyer, president and co-founder of Influence and Company, suggests:

  • Plan out your learning and have goals for what you want to learn.
  • Set aside time each day just for learning.
  • Read, read, read—including publications in your field as well as topics outside your area of expertise.
  • Reflect on your day—this is an important part of learning.
  • Listen to podcasts or books on tape. (Go to The Council’s Resource Center and watch a micro learning at

Simmons likens continuous learning to the habits we form for our physical health. “Just as we have minimum recommended dosages of vitamins and steps per day and of aerobic exercise for leading a healthy life physically, we should be more rigorous about how we, as an information society, think about the minimum doses of deliberate learning for leading a healthy life economically.”

Knowledge is more important than ever, but lifelong learning is not a new idea. In a recent biography of Leonardo Da Vinci, his passion and commitment to lifelong learning is always apparent. He never considered his paintings finished, and he never saw an end to acquiring new knowledge. For him, the biography says, “Learning is the only thing the mind never exhausts, never fears and never regrets.”

We may feel we can’t afford to take the time to learn new things, but the truth is we can’t afford not to! So take five!

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

Playing senior risk analyst Reuben Feffer, Stiller knows that an average of 39 people have put their filthy hands in the nut bowl on the bar and that only one in six washed those hands before that.

“I’m a risk analyst,” he says. “It’s my job to worry.”

Poor, exacting Reuben. Even without his beloved risk/reward software, he can spot a bad idea—except in love. His wife runs off with a French scuba instructor on their honeymoon, and Reuben soon takes up with Polly Prince (Jennifer Aniston), an itinerant waitress who lives in a bad neighborhood, drags him to iffy ethnic restaurants, and dances at dodgy salsa clubs.

She slashes open his throw pillows when Reuben notes that removing and replacing the pillows on his bed costs him 56 minutes per week. The spicy foods at her favorite spots make him desperately ill. Can this work?

When Reuben’s wife returns to him, he runs the risk/reward software on both women. In the end, of course, he ditches the math and goes with his gut. He even agrees to insure Leland van Lew, a young zillionaire with a penchant for very dangerous sports, on the grounds that the man has cheated death a thousand times.

Whoever ran the risk/reward software on financing Along Came Polly perhaps knew that the flimsy romcom would be roundly booed but the megawatt stars would be a draw. Made on a $42 million budget, it grossed more than $173 million. But it is charming, and part of that charm is Reuben’s endless recitation of the odds. Who knew insurance could be this much fun?

—Louise Lague

Click here to view the supplement in full.

For those of you who have not been paying attention, private-equity backed brokerages have taken over the M&A world. They completed 316 announced transactions in 2017, which represented 57% of the total announced deal activity for the year. The demand that continues to drive activity within the industry seems to be endless. And it has led to more investor diversification, creating a new category of investor—private capital.

Download the full Publication here.

$697 million
Insurtech funding in Q4 2017

Increase in funding from $271 million in Q4 2016

Total Q4 2017 transactions, second-highest quarter on record

U.S. share of Q4 transactions, compared with an average of 62% since 2012

U.K. share of transactions

Share of Q4 investment rounds focused on front-end processes (product and distribution)

Share of Q4 investment rounds focused on back-end processes

$30 million-plus funding rounds in Q4 2017

Half the top 10 Q4 funding rounds went to companies outside the United States

Source: Quarterly InsurTech Briefing from Willis Towers Watson and CB Insights

Although most cyber-security regulation has been targeted at specific data or industry sectors, one of the most effective ways to push requirements out to all businesses is to impose regulations, or “guidance,” on government contractors and public companies. The Securities and Exchange Commission and federal procurement regulators have chosen this path and have become increasingly specific with respect to cyber-security requirements.

The Federal Information Security Management Act (FISMA), enacted in 2002, imposed cyber-security requirements on agency and contractor systems and compliance with certain Federal Information Processing Standards. It requires risk-based information-security measures and applies to data and systems operated by a contractor on behalf of an agency.

In 2016, the Federal Acquisition Regulations (FAR) on Basic Safeguarding of Contractor Information Systems was implemented, which requires 15 security controls. The regulation applies to all government contractors and is effective when included in contracts.

Following a series of breaches at agencies and defense contractors, the Department of Defense, in 2013, created its own cyber-security procurement regulations, which require contractors and subcontractors to safeguard computer systems and report data breaches within 72 hours. The rule does not apply to contracts for commercial off-the-shelf technology. The Defense Federal Acquisition Regulation Supplement (DFARS) now requires defense contractors to comply with NIST guidance on protecting controlled unclassified information, notify the Defense Department of incidents within 72 hours, save all data associated with an incident for 90 days to enable the Defense Department to review or inspect the system, and notify the department if a cloud provider will be used.

“Concern grew exponentially as the end of 2017 approached and contractors realized they were not in compliance with DFARS requirements, particularly NIST 800-171,” says David Bodenheimer, a public contracts partner at Crowell & Moring. Bodenheimer points out that the Defense Department has several avenues to enforce its cyber-security requirements, including refusing to do business with the contractor or disqualifying it; giving the contractor a negative past performance review, thereby reducing its opportunities for future awards; suing the contractor for breach of the cyber-security safeguards clause in the contract; blacklisting or debarring the contractor; and bringing a False Claims Act suit against the contractor if it falsely implied in its proposal that it was in compliance with 800-171.

“Subcontractors are particularly vulnerable, as their prime contractors may cut them from contracts if they are not in compliance with 800-171,” Bodenheimer says.

The SEC formally entered the cyber-security regulatory realm in 2011 with its “Corporate Finance Disclosure Guidance: Topic No. 2,” which guides public companies on disclosure of cyber-security risks and cyber incidents. The SEC advised companies to disclose cyber-security risks if these risks are among the most significant factors that make an investment in the company speculative or risky. In February, the SEC issued “interpretive guidance” to assist companies in preparing disclosures about material cyber-security risks and incidents. The guidance expands on what cyber risks may be material and puts more responsibility on directors and officers for managing cyber risks.

In 2014, the SEC conducted a series of examinations of the cyber-security programs of registered broker-dealers and investment advisors to identify cyber-security risks and assess cyber-security preparedness in the asset management industry. The following year, the commission issued “Guidance to Registered Investment Funds & Advisers on Cyber Security,” which discusses a number of measures funds and advisors may wish to consider when addressing cyber-security risks, including risk assessments, cyber-security strategies, and policies and procedures.

In 2017, the SEC established a cyber unit in its Enforcement Division to focus on targeting cyber-related misconduct. The unit wasted no time. Last December, it obtained an emergency asset freeze to stop an initial coin-offering fraud that had raised $15 million from thousands of investors.

The SEC means business (even though it took until September 2017 to disclose its own breach, which took place and was detected in October 2016). “Businesses should take seriously the SEC guidance on cyber security and the need for well tailored and consistently implemented policies and procedures around data, vendor and network risk management,” says Gwendolyn Williamson, a partner with Perkins Coie who represents investment and business development companies.


While the financial services sector has seen heavier cyber regulation than other industries, the federal government has acknowledged the importance of cyber security across industries. In 2013, President Obama issued an executive order calling for the National Institute of Standards and Technology (NIST) to lead the development of a framework to reduce cyber risks to critical infrastructure. The NIST Framework, released in 2014, was meant to “provide a prioritized, flexible, repeatable, performance-based, and cost-effective approach,” according to the executive order.

Thomas Finan, client engagement and strategy leader for North America at Willis Towers Watson Cyber Risk Solutions and former senior cybersecurity strategist and counsel for the Department of Homeland Security, credits NIST with helping set in motion a flexible mindset and approach that provides a road map for what industries should think about and prioritize for cyber security. “And what NIST recognized…is that every organization is unique and has a unique cyber-risk profile. But there are shared common approaches and issues.”

Finan believes the NIST Framework provides the backbone an organization of any size and in any industry can use to build on and further develop as needed. And, according to Gartner research, 30% of U.S. organizations had implemented the framework two years after it was released, with 50% predicted to implement it by 2020.

“I think the federal government has spoken through NIST with the cyber-security framework,” Finan says. “And I think what you are likely to see, and what you are seeing, is that industry sectors and associations are responding to the framework with their own interpretations on how best to implement it. That’s what’s getting traction right now.”

  • Sexual harassment
  • Discrimination
  • Wrongful termination
  • Breach of employment contract
  • Negligent evaluation
  • Failure to employ or promote
  • Wrongful discipline
  • Deprivation of career opportunity
  • Wrongful infliction of emotional distress
  • Mismanagement of employee benefit plans

Source: Insurance Information Institute

1. Accommodation and food services            14.23%

2. Retail trade                                                 13.44%

3. Manufacturing                                            11.72%

4. Healthcare and social assistance                11.48%


Source: Center for American Progress

Number of Republicans who sit in districts won by Hillary Clinton in 2016

Average number of seats lost at midterms for the president’s party since the end of World War II

Average number of seats lost at midterms for the president’s party when the president’s job approval is below 50% (Depending on the poll you read/believe, the president’s job approval rating was hovering around 40% on March 1.)

The industry appears to be well capitalized and able to withstand large payouts. The headwinds and potential trends toward a hardening market include: (1) a significant increase in catastrophic claims, (2) larger underwriting losses, and (3) a rise in premium rates, especially for personal lines and commercial auto.

Catastrophe. Although it is too soon to finalize full-year 2017 U.S. catastrophe claims, the impact of hurricanes and California wildfires and mudslides is expected to lead to insured losses in excess of $90 billion. This would represent the highest level in the past 25-year period.

Underwriting. The combined ratio jumped to 104.1 for the first nine months of 2017, up from 100.7 at year-end 2016, according to the Insurance Information Institute. The significant increase in the industry’s underwriting loss is due to high claims and claim-adjustment expenses as a percent of earned premiums. This is not a surprise given the year’s catastrophe claims.

Premium Rates. Compared to prior years, we saw in 2017 a decrease in the positive development of loss and loss-adjustment-expense reserves among U.S. p-c insurers. Higher premium rates and pricing looking forward is supported by a combination of lower reserve levels and higher reinsurance rates based on U.S. natural catastrophes. This is especially the case in certain lines of business such as personal lines and commercial auto, as carriers might be compelled to readjust pricing for risk and exercise greater underwriting discipline. 

Private Equity Continues to Drive M&A

The merger and acquisition space continued to see high levels of deal activity in 2017, resulting in a record year. Within its proprietary tracking deal database, MarshBerry recorded 557 announced brokerage transactions, up 26% year over year and up 22% from the prior record-breaking count in 2015 of 456 deals.

Private-equity backed buyers—including those with private capital backing—continue to be the main driver of deal activity and value, representing 57% of all deals (316 deals) in 2017. Out of the top 21 most active buyers (defined as those completing five or more deals in the year), which represented more than 61% of total deal activity, only six do not have PE or private capital backing.

In fact, again in 2017, nine of the top 10 buyers were PE-backed, including those with private capital backing (read more on that in the “New PE Players” story). There has been a significant increase in PE-backed buyer activity during the past 10-plus years. Private equity represented just 7% of deal activity in 2007.

Interestingly, the number of PE-backed buyers in the marketplace in 2017 was similar to that of 2016, with 26 in 2017 compared to 27 the previous year. However, these buyers were more active in 2017 and completed 316 total deals, up from 242 in 2016—an average of almost one per buyer, per month.


The top 11 PE-backed buyers (including a tie for 10th place) represented 48% of the total 2017 deal activity in the industry and 85% of the total private-equity backed deals. Although there are indications that interest rates are on the rise, the availability and relatively low cost of capital continued to help drive PE-backed buyers to target insurance brokerages at an accelerating rate, driving activity within the industry overall. With investors searching for higher yields in a low interest rate environment, we are seeing that there continues to be heightened interest and demand among private equity in the insurance brokerage space. 

Leading Acquirers

The top five buyers in 2017 included four of the top buyers in the prior year. Of the five top buyers, one does not have private equity backing. The top three buyers are identical to 2016.

The top five most active buyers accounted for 35% of all transactions in 2017 (195 of 557).

Acrisure was the top buyer for the third year in a row with 72 announced deals. Acrisure typically does not announce the target name of any acquisitions, and 2017 was no exception—only a handful of targets were named. It is likely that Acrisure successfully completed more than 72 transactions during the year.

Hub announced 42 U.S. deals and five deals in Canada, bringing its total North American deal count to 47. Its U.S. deal count was up more than 30% from last year’s 31 deals. Almost 17% (7) of its 42 U.S. transactions were managing general agents or non-traditional brokerages, which have made up Hub’s historical acquisition activities. Nearly 25% of its announced U.S. transactions were California-based agencies (10 of 42), but interestingly, the next two most active states were Alaska and Maryland, where Hub completed four acquisitions each.

BroadStreet Partners has been consistent the past few years, with 26 deals announced in 2015, 28 in 2016, and 32 in 2017. BroadStreet has a somewhat unique capital structure with the Ontario Teacher’s Pension Plan as its main source of private equity funding (among other minority investors), although these medium- to long-term investors are becoming more prevalent within the space. The firm has completed approximately 286 transactions including core agencies and tuck-ins since 2001, with a compound annual growth rate since 2010 of 23%. 

Gallagher reported 25 U.S. deals during 2017, tying for the fourth most active buyer in the U.S. market and earning it a place back among the top five most active buyers for the first time since 2014. The agency indicated on earnings calls throughout the year that competition remains high for deals and, through the third quarter 2017, it had paid a blended rate of about 8x EBITDA. 

AssuredPartners also announced 25 U.S. transactions. Completing a reported 190-plus acquisitions since its founding in 2011, AssuredPartners has grown annualized revenue to more than $940 million. The company has 200 offices in 30 states and London.

First-Time Acquisitions

We also saw continued interest from PE firms entering or expanding their portfolios within the insurance distribution space with first-time acquisitions made by the following private-equity backed buyers:

Baldwin Risk Partners (four deals) was founded in 2012 as a holding company above Baldwin Krystyn Sherman Partners, a middle-market multi-line insurance brokerage and consulting firm that was founded in 2006. See “New PE Players” for more on Baldwin Risk Partners and its funding structure.

U.S. Retirement Partners (two deals) is a national financial services company that specializes in employer-sponsored retirement and financial planning needs. It entered into the brokerage acquisition marketplace in 2017. Its private equity sponsor is Centre Partners, which invested in the firm in 2008.

AIMC (one deal) serves the senior market as a national developer and distributor of Medicare Supplement products. It merged with Integrity Group, a broker of L&H insurance products with financial backing from middle-market PE firm HGGC.

DOXA Insurance Holdings
(one deal) is entirely focused on acquiring MGAs with less than $75 million in annual premiums. DOXA Insurance Holdings is backed by private funds and investors.

Gravie (one deal) entered the brokerage M&A market with its acquisition of Breitenfeldt Group in 2017. It received private funding from several sponsors during the year. 

In addition, the following firms changed or added new private equity sponsors during 2017: 

USI Holdings was backed by PE firm Onex Corp, which announced in January 2017 it was exploring the sale of USI. It hoped the deal would value the firm at $4 billion—nearly a 12x multiple based on reported EBITDA of $347 million in the 12 months leading up to the end of the third quarter of 2016.

In May 2017, KKR and Caisse de dépôt et placement du Québec (CDPQ) announced they would acquire USI from Onex, as equal partners, at a $4.3 billion valuation. CDPQ is a long-term institutional investor that manages funds primarily for public pension plans, which indicates there is not likely to be a quick flip of the investment as we typically see with more traditional private equity sponsors. We believe that this may signal an emerging trend of buyers with longer investment time horizons entering the insurance brokerage market. See “New PE Players” for more. 

OneDigital Health and Benefits entered into a new sponsorship with New Mountain Capital, which purchased a majority ownership from Fidelity National Financial Ventures in mid-2017. OneDigital is exclusively focused on employee benefits and support, with more than 9,000 employees and more than 35,000 companies as clients.

 NFP Corp. entered a definitive agreement with HPS Investment Partners to make a substantial minority investment in NFP. Announced in 2016, the deal successfully closed in February 2017. HPS invested $750 million in NFP. Madison Dearborn Partners, NFP’s previous sponsor, maintained its controlling stake in the company. 

First-Time Acquisitions

We also saw continued interest from PE firms entering or expanding their portfolios within the insurance distribution space with first-time acquisitions made by the following private-equity backed buyers: 

Baldwin Risk Partners (four deals) was founded in 2012 as a holding company above Baldwin Krystyn Sherman Partners, a middle-market multi-line insurance brokerage and consulting firm that was founded in 2006. See “New PE Players” for more on Baldwin Risk Partners and its funding structure. 

U.S. Retirement Partners (two deals) is a national financial services company that specializes in employer-sponsored retirement and financial planning needs. It entered into the brokerage acquisition marketplace in 2017. Its private equity sponsor is Centre Partners, which invested in the firm in 2008. 

AIMC (one deal) serves the senior market as a national developer and distributor of Medicare Supplement products. It merged with Integrity Group, a broker of L&H insurance products with financial backing from middle-market PE firm HGGC. 

DOXA Insurance Holdings (one deal) is entirely focused on acquiring MGAs with less than $75 million in annual premiums. DOXA Insurance Holdings is backed by private funds and investors.

Gravie (one deal) entered the brokerage M&A market with its acquisition of Breitenfeldt Group in 2017. It received private funding from several sponsors during the year. 

In addition, the following firms changed or added new private equity sponsors during 2017: 

USI Holdings was backed by PE firm Onex Corp, which announced in January 2017 it was exploring the sale of USI. It hoped the deal would value the firm at $4 billion—nearly a 12x multiple based on reported EBITDA of $347 million in the 12 months leading up to the end of the third quarter of 2016.

In May 2017, KKR and Caisse de dépôt et placement du Québec (CDPQ) announced they would acquire USI from Onex, as equal partners, at a $4.3 billion valuation. CDPQ is a long-term institutional investor that manages funds primarily for public pension plans, which indicates there is not likely to be a quick flip of the investment as we typically see with more traditional private equity sponsors. We believe that this may signal an emerging trend of buyers with longer investment time horizons entering the insurance brokerage market. See “New PE Players” for more. 

OneDigital Health and Benefits entered into a new sponsorship with New Mountain Capital, which purchased a majority ownership from Fidelity National Financial Ventures in mid-2017. OneDigital is exclusively focused on employee benefits and support, with more than 9,000 employees and more than 35,000 companies as clients. 

NFP Corp. entered a definitive agreement with HPS Investment Partners to make a substantial minority investment in NFP. Announced in 2016, the deal successfully closed in February 2017. HPS invested $750 million in NFP. Madison Dearborn Partners, NFP’s previous sponsor, maintained its controlling stake in the company.

Independent Brokerages Edge Up Slightly

Independent agencies and brokerages completed 136 deals, or 24% of all activity, in 2017. It was proportionately the same rate of acquisition as in 2016 (24%) but slightly higher in absolute terms from the 107 deals completed the prior year. There were 106 buyers (up from 83 in 2016), approximately 14% of which completed multiple transactions and 67 that announced their first acquisitions in 2017. 

Cross Insurance, based in Maine, announced five deals in 2017 (one fewer than the previous year)—three located in Massachusetts and one each in Maine and New Hampshire. Cross is family owned and operated and has historically focused on the New England area. Cross has “absorbed” over 120 operations since its founding in 1954. 

World Insurance Associates, based in New Jersey, announced five transactions in 2017 (in line with its five announcements in 2016), continuing its expansion of retail agencies in New Jersey and New York. Four of the five agencies acquired in 2017 were multi-line agencies. World Insurance Associates specializes in transportation, hospitality, coastal properties and high-net-worth individuals. 

Ryan Specialty Group
, based in Illinois, also announced five acquisitions during 2017, up from two in 2016. RSG is a specialty distributor, focused on the wholesale and MGA space. All five of its acquisitions during the year fell into these categories (four MGAs and one wholesaler). 

Leavitt Group Enterprises, based in Utah, announced five acquisitions during the year, which varied across the western states of Washington, Colorado, Texas and California and included p-c firms, employee benefit firms and multi-line agencies. Leavitt is a top 100 p-c agency, with p-c revenues of almost $150 million in 2016.

These independent agencies each announced three transactions in 2017:

  • Florida-based Acentria Insurance completed three deals in Florida.
  • New York-based Evergreen P&C Insurance Agency completed one deal in Florida and two in Nevada.
  • Arizona-based RightSure Insurance Group completed one deal in California and two in Arizona.  

Seven other buyers reported two acquisitions each in 2017, with newcomers including Linnett Group and Hanson Insurance Group, which both announced acquisitions for the first time in 2017. We believe that the increase in the number of buyers in this category indicates that, despite the stiff competition in terms of agency valuations from the private-equity backed buyers, independent agencies are continuing to find ways to convince sellers there is more to life after the deal than purchase price. 

Public Brokerage Share Remains the Same

Public brokerage activity was up 12% in total deal count during 2017 (37 announcements versus 33 in the prior year). However, the overall proportion of deals represented by public brokerages did not change from 7% in 2016. There were four public brokerages in the market during 2017 (unchanged from 2016 and 2015), compared to nine public brokerage buyers in 2005 and more than 100 independent buyers in the marketplace in 2017.

Gallagher announced 25 U.S.-based transactions, up from 23 in 2016. Last year was its most active acquisition year since 2014 and earned it a place among the top five most active buyers during 2017. Gallagher also announced eight international brokerage acquisitions, bringing the total count to 33 brokerage acquisition announcements.

Brown & Brown announced seven transactions during the year, a step higher than the four announcements from 2016.

Marsh & McLennan Companies completed four U.S.-based transactions in 2017, compared to five reported deals from last year. All four were completed by subsidiary Marsh & McLennan Agency, which is focused on the middle market.

The fourth public brokerage, CBIZ, completed only one deal in 2017, the same number as in 2016. 

While activity was suppressed for some buyers, we expect public brokerages to continue seeking external growth opportunities to supplement their organic growth rates and meet investor expectations. The newly minted tax law has brought lower corporate tax rates that should have a positive impact on the after-tax cash flow of the public companies. Thus, we expect them to be more competitive in the market. 

Rounding Out the Field

The buyer segment of Insurance Carrier & Other includes PE firms (direct investments from private equity firms themselves and not the previously described acquisitions through PE-funded insurance brokerage aggregators), underwriters, financial technology firms, specialty lenders and other unclassified buyers. Activity within this buyer group increased to 46 deals in 2017, up from 39 in 2016; however, proportionately, buyers in this group did not change much, representing 8% of deals in 2017 compared to 9% in 2016.

  • PE companies accounted for 15 deals within this category, including some PE firms acquiring their second or third insurance brokerage business.
  • Insurance carrier buyers completed 18 deals, compared to 13 the prior year.
  • Non-PE, non-insurance companies (mostly credit unions, private investors and other undisclosed buyers) represented 13 deals within this category.  

Banks and thrifts completed 22 acquisitions in 2017, largely unchanged from the 22 announcements in 2016, but represented only 4% of the total deal count, down from 5% in 2016. Acquisition activity in this segment has steadily declined over the past decade, as banks have either typically divested themselves of insurance operations or stopped acquiring at the same pace.

  • There were 19 bank acquirers in the market in 2017 (seven of which announced their first transaction), with only three completing multiple transactions.
  • Fifth Third Bancorp, Cashmere Valley Bank and OneGroup NY announced two acquisitions each in 2017.  

International Activity Down

International M&A activity was not as robust as the domestic market during 2017. The total number of recorded announced international transactions, completed by both domestic and foreign buyers, during the year was 80, down from 98 in the prior year. There were 44 unique buyers internationally in 2017, down from 63 in 2016.

  • Fifteen buyers were based in either the United Kingdom or the United States, representing nearly 70% of the international deal activity.
  • Of the 80 deals announced internationally, 37 were independent agency/brokerage acquirers, 29 of which were PE-backed. In all, PE-backed agencies represented 36% of the international deals in 2017, far less proportionately than the domestic market.
  • Public brokerages had a larger share of the market, making up 24 of the acquirers, or 30% of all deal activity.

Aon and Gallagher were the most active acquirers internationally, with nine and eight announcements respectively. One of the larger transactions announced during the year was Aon’s purchase of Netherlands-based Unirobe Meeùs Groep. Announced in August and completed in November, the acquisition was valued at €295 million, or roughly $350 million. Aon noted that the acquisition would help strengthen its small to midsize enterprise and consumer capacities within the geography.


The United Kingdom was the most active M&A market outside the United States and was home to 41 of the 80 target companies, or just over half of all international deal activity. Several holdings of Tosca Penta Endeavour Limited Partnership, a PE-backed firm, completed six of the 41 U.K. acquisitions, making it the most acquisitive in the geography. Nevada Investments Topco Limited (under the Finch Commercial Insurance Brokers Limited name) and Aon rounded out the top three buyers in the United Kingdom, with four and three acquisitions during the year, respectively. 

Canada was the second most active venue during the year, though a distant second to the United Kingdom, with nine deals. Hub acquired five of the nine targets in Canada. Founded by the merging of 11 brokerages in 1998, Hub has its original roots in the Ontario and Quebec provinces of Canada.

Costs Drive EB Acquisitions

In 2017, employee benefits and consulting (EB) firms were involved in more M&A transactions than in any of the prior five years, at 123 deals (with another 144 deals involving multi-line firms). Ten acquirers completed two thirds of the announced EB transactions in 2017, with the five most active acquirers closing more than half of the announced transactions.

The top buyers of EB firms in 2017 included Acrisure, Hub, OneDigital Health and Benefits, Alera Group, and NFP and Gallagher (tied for the 5th most active acquirer). The next five most active buyers represented roughly another 15% of the transactions.

Employee-benefits firm owners who consider selling may be motivated by a number of things, including:

  • Continued Market Uncertainty. The Affordable Care Act did not put EB firms out of business, but the lack of solutions to address the key problems related to the cost of healthcare have not been addressed, and that leaves the industry vulnerable to continued politicking. As a result, while the EB market continues to evolve, it is considered less stable by some, as compared to property-casualty, and that continues to drive many owners of well run, high-quality EB firms to consider a sale of their firm. That sale brings diversification and, frequently, access to p-c markets and the ability to cross-sell, as well as access to additional EB resources.
  • Lack of Investment in New, Competitive Resources. The vast majority of employers with more than 50 workers continue to offer health benefits (90% of firms of 50-99 workers and 96% of firms with 100 or more workers), according to a survey conducted by the Kaiser Family Foundation in 2017. As health insurance costs continue to rise and premiums continue to increase, EB advisory firms are looking for ways to help employers keep costs in check and still provide a competitive benefit plan to their employees. This has led advisors to move from recommending fully insured medical plans as the bedrock of the benefit plan to offering more creative solutions, often involving self-funded plans, partially self-funded plans and captives, and tailored offerings of ancillary benefits and voluntary benefits.  

As a trend, employee benefit plans are becoming more comprehensive of employee well-being and may include employee financial wellness, personal information protection and identity theft protection, and flexible work arrangements, in addition to the traditional medical coverage, employer-paid ancillary coverages, and voluntary benefits. 

  • New Buyers with a Compelling Story. The number of buyers of EB firms has held consistent over the last few years, with Hub and Gallagher repeatedly in the top five. In December 2016, PE-backed Alera Group emerged on the scene by bringing together 24 independent agencies. Alera completed eight EB deals (of 15 total deals) in its first 12 months of operations, which is no small feat. This past year brought an additional uptick in activity in the employee benefits space from Acrisure, with 24 employee benefits deals (of 72 total deals) compared to three EB deals in the prior year, and from newly recapped EB firm OneDigital, with eight deals compared to three employee benefits deals in the prior year.

    The most active buyers, which generally have large EB practices, have developed solutions and resources for their broker base nationwide, making them attractive to smaller firms struggling to finance and develop the resources required in the current competitive landscape. Buying firms continue to look for high-quality EB firms to join their organizations. High-quality firms typically have consistent organic growth, a youthful ownership group, strong operating profit, a sophisticated client service model, and/or some unique attribute to add to a larger organization, such as geographical presence, specialty expertise or programs, an innovative leadership team, or a unique approach to the market. These types of firms typically command higher valuations

Specialty Distributors Remain Attractive

Entering 2017, the environment for specialty distributor M&A was muted due to concerns about, among other things, the economy, political and regulatory uncertainty, market volatility and valuations. Those concerns waned as the year progressed due to the increasing prospects of significant pro-business legislation, including tax reform, which materialized at the end of the year.

As a result, deal flow in 2017 went gangbusters. Of the 557 announced transactions in 2017, specialty distributor deals represented approximately 13% of this total, or 74 deals. In absolute terms, the number of specialty distributor deals in 2017 (74) was up 7% year over year; however, on a percentage basis, 2017 continued a decreasing trend of specialty distributor deals as a percentage of total announced transactions. 

Specialty Distributor Transactions (% of Total)

  • Year-end 2017: 13%
  • Year-end 2016: 16%
  • Year-end 2015: 18%
  • Year-end 2014: 20%  

Notwithstanding this trend, we are seeing that specialty distributors continue to rank high on acquirers’ depth charts for a multitude of reasons, including: 

  • Inventory. Inventory of sellers remains high, particularly property and casualty sellers.
  • Age. The average age of owners exceeds 54 years, and many baby boomers lack functional perpetuation plans.
  • Valuation. The delta between internal and external valuations is significant.
  • External factors. The economy is robust, and interest rates remain relatively low.
  • Demand. Investors are plentiful and capital abundant.
  • Cost of capital. Debt capital remains cheap and access thereto easy.


Consistent with recent years past, private equity represented the largest buyer group of specialty distributors in 2017. Of the 74 deals, PE and/or PE-backed brokerages represented 37, or 50%. Private equity is now a household name with potential sellers.

Furthermore, many established consolidators are now pursuing investments in the specialty distribution sector. Traditionally, only a few consolidators—namely Gallagher (via Risk Placement Services), Brown & Brown, and Ryan Specialty Group—put their proverbial money where their mouths were in terms of specialty distribution platforms. Their consolidator competitors seemingly kept to the retail sector. However, this trend is noticeably transitioning. For example, last year we saw the following consolidators (all PE backed) acquire specialty distributor operations:

  • Acrisure
  • Alliant Insurance Services
  • AssuredPartners
  • Hub (via Program Specialty Group)
  • NFP
  • Risk Strategies Company.

Specialty Distributor Top Buyers

The top five buyers of specialty distributor operations accounted for 23 (of 74) deals, representing 31% of the total specialty distributor deals consummated in 2017.

Leading the charge on the buy side was Hub’s Specialty Program Group, the specialty distribution arm of Hub, with six deals. Next in line was Ryan Specialty Group with five deals, followed by NFP, Assured Partners, and US Risk, each with four deals.

  1. Specialty Program Group (“Hub SPG”) = 6 deals
  2. Ryan Specialty Group = 5 deals
  3. NFP = 4 deals
  4. AssuredPartners = 4 deals
  5. US Risk Insurance Group (“US Risk”) = 4 deals


Program Administrator Top Buyers

All six of Hub’s specialty distributor deals last year represented program administrators with significant contract-binding authority commission revenues. In other words, they took a pass on the traditional wholesale brokerage model, thereby ameliorating channel conflict with their large retail operations. Hub was consistent throughout 2017, closing one or more transaction(s) each quarter end. Hub’s acquisitions included a diverse mix of industries, p-c lines of coverages, and geographies, including:

  • Transportation commercial lines via the acquisition of Paul Hanson Partners Specialty Insurance Solutions, based in California
  • Financial and professional liability covers via the acquisition of Capitol Special Risks, based in Georgia. 

Sharing the silver medal in terms of program administrator deals was the traditionally retail-focused consolidator Assured Partners, which made a large splash in the program administrator space with four acquisitions, and serial acquirer Ryan Specialty Group, also with four deals. Rounding out the top five were retail consolidators Acrisure and NFP, each with three deals.

  1. Specialty Program Group (Hub) = 6 deals (2 deals in Q4)
  2. AssuredPartners = 4 deals (3 deals in Q4)
  3. Ryan Specialty Group = 4 deals (3 deals in Q1)
  4. Acrisure = 3 deals
  5. NFP = 3 deals

Wholesaler Top Buyers

On the wholesale side of the equation, AmWINS Group, Gallagher, and US Risk each consummated two wholesale brokerage acquisitions. 

Transaction Pricing and Structure

2017 wrapped up another seller’s market. High values remain prevalent, and the leveling of prices we saw in 2016 gained further momentum with platform, stand-alone and roll-in transitions all showing an increase in average total realistic purchase price multiples. However, in conjunction with the increase in purchase price multiples was an increase in the required growth rates to achieve the earnouts seen across most platform and stand-alone acquisitions.

Pricing Structure Breakdown

Two forms of purchase price are generally referenced in the industry: multiples of EBITDA and multiples of revenue. Here, we refer to multiples of EBITDA. To analyze transaction pricing, we’ll break the price down into three key components:

  1. Base Purchase Price: The dollar amount paid at close plus the live-out the seller is expected to receive.

            Paid at Close: The amount of proceeds paid at closing, including any escrow for potential indemnification items.

            Live-out: The amount a buyer may initially hold back but which is paid as long as the seller’s performance does not materially decline. This may also be paid at closing but could be subject to a potential adjustment. If the live-              out is not paid at closing, this payment is usually paid within one to three years, contingent upon delivering on the seller’s pro forma revenue or EBITDA. 

  1. Realistic Earnout: The anticipated purchase price to be achieved in the future based on a number of factors including seller historical and expected performance, buyer and seller realistic discussion of earnout metrics, etc.

            Realistic Purchase Price = Base Purchase Price + Realistic Earnout

  1. Maximum Earnout: The additional earnout above the realistic earnout that, if achieved, would generate the maximum possible earnout payment.

Maximum Purchase Price = Base Purchase Price + Realistic Earnout + Maximum Earnout


Purchase Price Trends

For sellers, a key goal is to maximize the purchase price paid up front, or base purchase price. Buyers realize that how a company performs after the transaction is critical. The earnout, or “at risk” component, should fairly reflect the risk profile the buyer supposes that, for the seller, will ultimately help drive shared risks and rewards. 

>> Earnout: A provision of the purchase agreement that states the seller is entitled to future compensation if it achieves certain goals, typically related to growth of revenue or EBITDA. In past years, stemming from the overall market- and industry-specific conditions, buyers sometimes reduced the base purchase price and shifted a larger portion of the total purchase price to the earnout. We saw this shift most recently in 2012.

However, up until last year, we saw continued increases in the amount sellers were paid up front, with gradual increases in the earnout potential as well. This past year showed a renewed increase in both the base purchase price and the earnout, with a more notable shift seen in the platform and roll-in acquisitions. However, buyers are also expecting greater growth hurdles for sellers to achieve higher earnouts due to the increase in base valuation.  

>> Pricing Ups and Downs: In 2017, the average base purchase price increased nearly 0.24 times EBITDA (or 3%) to 7.97 times EBITDA. The average realistic purchase price was 8.84 times EBITDA in 2017, up 0.31 times EBITDA (or 4%) from 8.53 times in 2016. The additional maximum earnout potential in 2017 was slightly lower than last year (0.07 times, or 4%), resulting in an average maximum purchase price of 10.37 times EBITDA in 2017, which in total is up 0.25 times (or 2%) compared to 2016. 

Industry Close-up: A Look at Purchase Transactions

Agency and brokerage transactions are classified into three major categories: platform, stand-alone and roll-in.


A platform agency is typically a larger agency that has a well-established territory, brand recognition, seasoned professionals and scalable infrastructure, among other attributes. The buyer of a platform agency is typically looking to establish a presence in a specific region or niche. 


A stand-alone entity may be based on size or geographic location. The firm is large enough to maintain its physical presence but likely reports into a larger platform within the given region. 

Whereas multiples for these firms dropped in 2016, we saw in 2017 an increase back up to levels consistent with those of 2015. Both the average base purchase price and realistic purchase price increased 3% over the prior year to 7.93 times EBITDA and 8.79 times EBITDA, respectively.


A roll-in transaction typically involves the sale of a small, privately held agency or book of business, which gets physically rolled into the buyer’s existing operations, either at closing or within a reasonably short period of time. 

In 2016, we saw a shift in focus for many buyers who acquired smaller roll-in firms with one assumption: that buyers were looking to complement their network of platforms. Another assumption made was that, due to the high valuations that have continued to increase over the last five years, buyers were looking to blend the average multiple paid across their acquisitions. We believe this trend continued through 2017. The average base purchase price increased 9% in 2017 to 7.20 times EBITDA, and the realistic purchase price increased 6% to 7.81 times EBITDA.

While purchase prices remained relatively flat in 2016, we saw a renewed increase in valuations in 2017, climbing to an all-time high despite rising interest rates and an uncertain tax environment. If early 2018 transactions are any indication, we believe the valuation environment will continue to blaze despite the continued economic uncertainty.



Just like in 2016, nine of the top 10 buyers in 2017 were backed by private equity—with one public brokerage rounding out the group. There has been a significant increase in private-equity backed buyer activity during the past 10-plus years—PE represented just 7% of deal activity in 2007. Each buyer has a unique approach to acquisitions. We asked them to share a bit of their strategy.



Last year, an uncertain political climate and concern over how tax reform would impact valuations led many to believe those factors would be the needle that popped the so-called bubble. But in fact, valuations are holding their ground for now.

We expect the total number of deals in 2018 to still be strong. And we anticipate seeing a fair number of larger firms potentially selling this year, with rumors of these significant deals supporting an outlook that 2018 will be a dynamic, exciting year for M&A.

What will continue driving M&A in 2018? Aside from attractive multiples and valuations, we are seeing a diversification of buyers. New private capital includes family offices, pension plans, sovereign wealth funds and long-term equity that is giving agencies an opportunity to focus on strategic growth. And it’s giving agencies options—more players at the table in addition to traditional private equity, which we expect will continue its assertive role in insurance brokerage M&A.

As the U.S. economy stays on a path of moderate growth—with positives like consumer and business spending and tax cuts freeing up disposable income—we do expect some higher interest rates in 2018. That said, any increase would bring rates to more “normal” levels. We believe that the moderately growing economy along with a potential hardening rate environment should result in more organic growth for agencies.

There is an undeniable uncertainty related to U.S. trade regulations, the stock market, government spending and regulations. No one is sure of the timing of changes—but what we can say with confidence is the factors we thought would potentially put a dent in M&A activity have not done so…yet.

We are beginning to see growing concern that the slow, steady fire that was burning in the economy may be flashed out by a number of different accelerants. The biggest concern is the long-term effect of the new tax code. While it may not have an immediate impact on 2018, it is our opinion that valuations are going to take a hit leading up to 2022.

The new tax code created lower corporate tax rates but also put a limitation on the deduction companies can use for their interest expense. Currently, they can deduct interest expense equal to only 30% of the firm’s earnings before interest tax depreciation and amortization (EBITDA). This is a significant change for firms that are heavily leveraged with debt. Some firms in the industry have debt equal to 7-8x their EBITDA on their balance sheet. This creates a lot of interest expense.

In today’s marketplace, the reduced tax rates offset the impact this limited deduction has on buyers. However, in 2022, the 30% limit starts to measure off of earnings before interest and tax (EBIT), which is a much smaller number for acquirers in the marketplace because of the significant amount of amortization they have from all of their historic acquisitions.

So what does all of this mean to you? It means that the cash flow of buyers is likely going to be significantly reduced in 2022 and beyond. Buyers are going to have a few options. They will likely either deleverage (which means reduce the amount of debt on their balance sheet) or be willing to take lower returns.

As we take a step back and look at this logically, the second option doesn’t seem like a real option. Firms putting private capital into the insurance distribution market are in the business of making money. Hoping that these financially oriented investors will make a lower return so that high valuations can continue is not the most prudent bet in our opinion.

What is more likely to happen? Buyers are going to use less debt in their deals. This means they are also likely to reduce valuations because they are not going to want to put more equity into their investments.

Additionally, the Fed intends to increase interest rates, which will likely exacerbate the problem. You can expect PE-backed firms to trade out their sponsors in the next couple of years because, if they wait and increased interest rates coincide with lower leverage, the larger firms are not going to get the valuations they counted on when they raised their capital from their current sponsors.

The sky isn’t falling yet. But we think you can expect changes in the market—and most likely very soon. We believe the volume of deals will continue at a record pace—59% of ownership still sits in the hands of baby boomers, and more and more private capital thinks insurance is a solid investment. We are confident, as are many of the private-equity funded buyers, that valuations will decline rapidly as we march toward 2022.

What’s to love
The weather! Further, downtown has gone through a dramatic change in the last 20 years and is a busy place 24 hours a day. There are new restaurants, hotels and attractions. It’s a safe city and a great place to live and work.

Food scene
There are so many restaurants opening these days. You can find any kind of food and atmosphere you might want.

Favorite restaurants
My favorites are two family-owned Italian restaurants, La Bruschetta Ristorante and Guido’s Restaurant, both of which are on the West Side. La Bruschetta is more elegant. The chef and owner, Angelo Peloni, has been making his homemade pastas and breads for 35 years. Guido’s serves more traditional, family-style dishes. But I like both of them for the same reasons. Everyone is friendly, the service is excellent and the food is delicious. Guido’s also has an outstanding wine list and a well-stocked bar. I love to entertain clients there.

My favorite watering hole is The California Club, which is in a landmark building in Downtown, across the street from my office. It’s one of the friendliest places I’ve ever been. While it is private, many of our “visiting firemen” stay here. The third-floor bar has an outdoor patio. In excellent L.A. weather, it is a delight in the evenings. I’ve never made a request that the staff hasn’t happily accommodated. As we say around the Club, what makes it special is that “it works.”

If you want to stay downtown, I’d recommend the J.W. Marriott Los Angeles L.A. Live, which is in the heart of things. You can walk to many good restaurants and the Staples Center. On the West Side, the only place to be is The Peninsula Beverly Hills. It’s a beautiful hotel and close to the shops on Rodeo Drive.

I love to hike with my dog, and there are many delightful areas to hike in the hills in town and up in the Santa Monica Mountains. Temescal Canyon is one of the easier places to hike. Most trails are about two hours up and down. The views are incredible. On a clear day, you can see all the way from Century City to Manhattan Beach.

Remember that everybody on our freeways are the survivors, so they’re much better drivers than most people think.

April 4, 2018, marks 50 years since Martin Luther King Jr. was assassinated while standing on a balcony at the Lorraine Motel in Memphis, Tennessee. Today, the motel is part of the National Civil Rights Museum, where interactive exhibits, oral histories of civil rights foot soldiers, and emotionally charged historical documents, objects and images tell the story of the American civil rights movement as well as five centuries of history preceding it.

As you walk to the museum’s entrance, along the motel, past room 306, where King stayed, you can stop at listening posts to hear the personal stories of people who were there in 1968 during the sanitation strike and other events that led to his death. It is a powerful experience.

What most people don’t know is that the Lorraine Motel is also entwined with the city’s musical history. An African-American couple, the Baileys, purchased the motel after World War II, creating an upscale place for black musicians to stay and play when they were in town recording at Stax Records. They also welcomed white guests (Steve Cropper, the guitarist for Booker T. and the MG’s, wrote “Knock on Wood” here) and served home-cooked meals to soul greats like Wilson Pickett, Otis Redding and Aretha Franklin. As Isaac Hayes was quoted as saying about the Lorraine, “We’d lay by the pool and Mr. Bailey would bring us fried chicken and we’d eat ice cream… We’d just frolic until the sun goes down, and [then] we’d go back to work.”

You can learn more about this chapter in Memphis history, a strand of the city’s DNA, at the Stax Museum. The self-guided tour begins with a short film that includes archival footage of performances and interviews with the musicians who worked at Stax, many of whom, like Cropper and David Porter of Sam & Dave, lived in the neighborhood. The tour lays the foundation for exploring the fascinating exhibits that document the evolution of the Memphis sound.

Jim Stewart, who founded Stax with his sister, Estelle Axton, was inspired to become a music producer by Sam Phillips, a Memphis radio technician who founded Sun Records and Sun Studio, where Elvis Presley made his first recordings. A stop here is another don’t-miss Memphis experience. A plumbing business and auto parts store set up shop in the studio during the two decades it was closed, but today the studio appears much as it did in its heyday. Among the cool features of this birth-of-rock-’n’-roll tour: listening to the original audio of Elvis, Johnny Cash, Carl Perkins and Jerry Lee Lewis bantering during an impromptu jam later dubbed the “Million Dollar Quartet” session.

Both markets, however, benefitted from underlying improvement in the U.S. economy and relatively strong capital markets. In short, both are in decent fighting form entering 2018.

P-C Disciplined

The U.S. p-c industry has been in an above-average financial position for most of the past 20 years, with the exception of the late 1990s to early 2000s. During this time, rates dropped considerably, and the U.S. entered a recession, causing financial distress at a number of large p-c organizations. The hard market pricing that ensued from 2000 to 2004 resulted in strong earnings and larger net capital gains, both of which helped repair balance sheets.

ALIRT has developed an industry composite score derived from 45 financial metrics that measure individual insurers on a holistic basis. These composite scores mark the financial pulse of the entire industry over time. Since the global financial crisis of 2008-2009, the industry has bumped along the long-term industry average score of 50, except for the period of 2013-2014, which benefitted from both low catastrophe losses and a “mini” price firming cycle. Gradual improvement in the U.S. economy has also helped boost exposure units.

As of nine-month 2017 financials, despite the large catastrophe losses, personal lines saw a higher ALIRT score than commercial, reflecting stronger net capital gains and improved parent company growth and earnings. The commercial lines score, however, saw a seven-point decrease due to weaker underwriting and operating profitability.

In 2018, aggregate industry rates should trend up slightly for commercial lines and somewhat higher for personal lines (largely in auto) while prior-year reserve releases remain positive but ease for both sectors.

In a “normal” catastrophe environment, look for near break-even underwriting results for commercial lines, with the personal lines industry perhaps a bit worse than break-even. While the relationship of rate versus loss-cost trend is important, much will also hinge on expense control and the quality of selected risks.

The contribution from investment income may continue to wane as current money yields catch up to portfolio yields. However, higher interest rates should ultimately boost operating profitability. Equity markets remain a wildcard.

Financial performance differs across the board in the commercial lines arena, with subsidiaries of Chubb, The Hartford and Travelers tending to outperform, while those owned by Liberty Mutual and AIG currently exhibit weaker financial profiles. Absent any extreme loss event, capacity remains ample for commercial and personal p-c sectors, dampening upward pressure on pricing; however, overall, the U.S. p-c market seems disciplined.

Larger Health Insurers Stable

The health insurers tracked by ALIRT have shown more stable scores than their p-c counterparts, reflecting relatively narrow swings in underwriting and operating profitability and a stable surplus/capital base. These scores have also trended above the long-term average health insurer score in each of the past 12 years, indicating that the 100 companies comprising the composite tend to be larger and more stable than the many small health insurers tracked by ALIRT.

Membership and premium growth have trailed off for the composite since 2012, with the exception of 2015, when both metrics rose due to higher enrollment in public exchanges. Premium growth, however, has consistently exceeded membership growth, given the impact of steady rate increases. The industry’s risk-adjusted capitalization has deteriorated somewhat over time, and insurers report more aggressive net premium leverage and large dividends paid out to parent companies.

The uptick in the composite’s score in the third quarter of 2017 largely reflects a sharp improvement in underwriting and operating profitability, as both medical loss and expense ratios improved (the latter helped by a one-year suspension of the Affordable Care Act’s health insurance tax).

In 2018, aggregate industry premium growth remains in the mid-single digit range while plan membership lags. The industry will continue to report a larger mix of government-sourced business while traditional commercial and individual health enrollment flatlines or declines.

Outsized underwriting profitability may fall back to longer-term averages, in part due to the return of the ACA fee, which will put upward pressure on expense ratios. That said, incremental improvement in the medical loss ratio over the past several years could well persist.

The industry will remain adequately capitalized despite the likely continuation of sizable shareholder dividends paid to large publicly traded parents.

Scale remains important, benefitting the large national health organizations. Almost all of the large national carriers tracked by ALIRT exhibit financial profiles substantially stronger than that of the industry average. Smaller health insurers, which lack the necessary scale, often exhibit much weaker financial profiles, resulting in scores well below composite average. Large groups should continue to make investments in technology/data mining as well as pursue additional strategic acquisitions, including provider groups.

David Paul is principal at ALIRT Insurance Research.

What will happen with the brand, technology and human resource functions? How will the coming together of two organizations impact the culture? What does it mean for the people?

Without thoughtful consideration of the following different integration items and approaches, sellers may find themselves facing challenges to preserving their culture during the transition from independent agency to third-party ownership. If expectations are not clearly set or communicated in an effective way, changes in staffing, policies and procedures may negatively impact the culture an owner has worked so hard to build. It can be very easy in the event of a sale to create a perception of secrecy and exclusion if the impact to employees’ roles, responsibilities and compensation is not clearly communicated in a timely manner.

To be sure, integration means different things to many buyers and sellers, and that’s because there are several different approaches to the process. In our experience, buyers generally can be categorized into three buckets in terms of how they view integration: centralized, decentralized or somewhere in between. (See what we mean by murky waters?)

  • Centralized: Buyers operating under a more centralized structure integrate acquired companies into a larger corporate infrastructure in all functions, including IT, accounting, HR, claims and licensing.
  • Decentralized: Buyers in a decentralized structure absorb few, if any, duties on the local level. Usually after the deal closes, day-to-day operations do not change.
  • Somewhere in Between: Not all buyers fall into the completely centralized or hands-off categories. Plenty of buyers take a hybrid approach and will roll in certain operations (accounting and HR, for example) while leaving other areas up to local offices.

The reality is sellers typically do not know what to expect when it comes to integration, even though they often have goals they want to achieve. Some sellers relish the idea of getting rid of all things accounting/finance, while others have a strong, strategic accounting/finance function and want to maintain that at a local level. And sellers can mistakenly assume that by “giving up” functions to corporate, they’re eliminating a cost. However, responsibilities that the buyer decides to centralize often come at a cost to the seller’s income statement, impacting the earnings before interest, tax, depreciation, and amortization (EBITDA) at closing and during an earnout period. So while a seller might think an operating expense is eliminated, the buyer is actually replacing that with some type of cost allocation. For this reason, among others, it’s important for buyers and sellers to come to the table with a clear understanding of each other’s integration expectations and goals.

Four Key Integration Areas

We believe branding, IT, HR and accounting/finance are key to integration. Here’s how different acquirers treat those operations based on their approach.

Branding: Branding integration can take on many different forms. Some buyers are quick to transition letterhead, logos and websites—they want to maintain brand continuity and leverage a strong national reputation in the marketplace. Others make little to no changes to marketing or branding. Buyers might allow acquired businesses to maintain their logos, websites and trade names in the marketplace. These buyers might even forgo a public announcement of the transaction or reference to the change in ownership. Finally, there are acquired agencies that carry two sets of business cards—depending on the client or prospect they are visiting, they may use whichever one they feel gives them an advantage at the table.

When there is a transition, we often see the buyer and seller work together to gradually implement branding initiatives. An acquired business might use its own brand and/or co-brand as a “division” or “partner” of the acquiring agency. The co-branding phase can last months to a year, depending on the circumstances.

Information Technology: There are several phases of IT integration. First come simpler tasks that are tackled soon after a transaction—like creating new email addresses or redirecting website traffic to a new landing page. Other IT-related issues, such as getting the seller under the same contract for duplicative software and systems (e.g., agency management systems, ratings software, subscriptions), may not be so easy. The acquirer might have to let the term of the current contract with the vendor run out before consolidating onto one master agreement. Other applications may be so unique to a seller’s niche that the buyer doesn’t currently utilize anything substitutable, so nothing changes. Hardware like phones, printers and computers tend to be handled case by case, with some larger national buyers utilizing national contracts but many leaving these to be managed locally. Some buyers do not even require a common agency management or accounting system if monthly reporting can be completed in an acceptable format.

Human Resources: Some buyers synchronize timing of raises and reviews, standardize titles and paid time-off allowances, while others allow acquired agencies to keep their own schedules and policies. Nearly every buyer in the marketplace will require a seller and its employees to terminate their benefit and 401(k) plans and join the parent company’s plan. Often, there are concerns about employment discrimination or fairness that could be raised if different benefits are being offered to different employees of a parent company. Recruiting and onboarding are also handled differently by different buyers, with some opting to use national/corporate resources to potentially draw a larger pool of candidates and others leaving these tasks up to local offices, where there is a greater knowledge of the community and available talent.

Accounting and Finance: Accounting and finance tends to be the area most integrated by buyers, regardless of size. There are often meaningful efficiencies to be gained by consolidating functions like accounts receivable, accounts payable and direct bill reconciliations. Most buyers have a corporate chief financial officer who will either manage a corporate team of accountants or the agency’s local staff. Accounting policies and procedures are often standardized to make sure reporting across agencies is consistent.

Is Integration Really a Dirty Word?

Integration can be the elephant in the room during an M&A transaction. There are plenty in the marketplace that view integration as a dirty word, and they’re reluctant to discuss it in detail early on in the transaction. Many integration details do not emerge until after a letter of intent has been signed. But having the talk sooner and maintaining open communications is key. Sellers should know how and in what ways their organizations will be integrated after the deal is done. How will the transaction impact the operations and culture? Do the buyer’s goals and objectives align with their own?

Some sellers are eager to release themselves of certain corporate responsibilities and decisions, while others are interested in maintaining complete autonomy after a sale. Not having a clear understanding of where a buyer may fall on the spectrum could lead to either a deal that does not close or disappointment and resentment after the fact when expectations fall short of reality. So talk about integration early and often. Make this discussion a part of the M&A transaction process so there are no surprises after the ink dries.

The demand that continues to drive activity within the industry seems to be endless. And it has led to more investor diversification, creating a new category of investor—private capital.

The typical private equity structure includes funds that deploy capital raised from multiple sources. The PE firms focus on a strong return that is created through earnings growth and an exit strategy typically three to seven years long. Private capital includes traditional PE players, and it extends to other sources, including family offices, pension plans, sovereign wealth funds and independent capital. These investors, who typically are investing directly into PE funds, are recognizing the value of buying into the insurance brokerage space: recurring revenue, stable performance, a must-buy product, relatively low risk. They are making the decision to bypass the PE fund and are investing directly. Additionally, many of these private capital investors bring a long-term perspective to the table. For example, when BroadStreet Partners aligned with the

Ontario Teachers’ Pension Plan, it was told an average hold was 18 years.

How are these new private capital players partnering with insurance firms? What opportunities are they providing in the industry, and how do they complement private equity as we know it? The deals that follow showcase the different types of private capital.

The Long View
USI Insurance Services

“We wanted to get off the treadmill of trades that happened every three to five years,” says Ed Bowler, chief financial officer at USI, an insurance industry leader that started in 1994 as a single office of $6.5 million in revenue and 40 associates and today is approaching $2 billion in revenue with more than 7,000 associates in 150-plus offices.

While the ongoing buy/sell cycle with PE meant a “mark on the equity,” Bowler explains that it also can be distracting, time-consuming and expensive. “We had been hearing about more permanent capital, or evergreen capital, coming in, so we took it upon ourselves to reach out in the marketplace.”

USI interviewed pension plans and long-term equity funds that put capital out over a 10-year period—double or more what USI had been experiencing with traditional private equity.

Then, the KKR/CDPQ proposal came forward. KKR had accumulated a healthy sum on its publicly traded balance sheet that it wanted to invest long-term. It created a joint venture with Caisse de dépôt et placement du Québec (CDPQ), and their core private equity partnership (including KKR’s funds and CDPQ’s pool of capital) allows for attracting investment opportunities with a longer duration and lower-risk profile.

This was exactly what USI was seeking—a partner that could support strong management and long-term strategic business building. And for KKR/CDPQ, the insurance industry and USI were enticing because of the stability of the industry and USI’s history of high performance. “We reached out to them and had the discussion and really liked what they had to say,” Bowler says.

In March 2017, KKR/CDPQ acquired USI from Onex Corporation. “This is the final owner of USI, as far as I’m concerned—and we’re real excited about that,” says Bowler, who has been with the firm through seven owners.

The long-term investment means internal rates of return (IRRs) are not as important, Bowler says—it’s more about “money on money.” Bowler points out, “I can’t spend IRR; I can spend money on money, so I’m happy with that focus and growing that capital.” While IRRs are critical to traditional PE funds for raising capital for the next fund, “they are less important to pension plans,” Bowler says. “And with what KKR has on its balance sheet, they were looking more for multiples of money over time.”

What will change at USI with a longer-term owner? With new acquisitions, will those owners have equity in the deal, and what does liquidity look like for management and future leaders in the firm?

After five years, there will be a potential for internal trades. But, Bowler says, “most of our people aren’t selling their shares, and we don’t have the cry for liquidity now. We will likely have an internal process not dissimilar to what an employee stock ownership plan does if people do want to cash in and gain liquidity.”

If USI meets its goals, it will begin paying out dividends five to six years out from the time of the trade. “Assuming we achieve our plan, this will be a dividend-performing stock because of the cash flow,” he says. “So, if you hold your shares, you are going to start getting chunky dividends in years five, six, seven and so on.”

The business will prosper as it continues strategically growing without being on the “PE toll road,” which results in costly trades every few years, Bowler says, noting that he envisions more pension plan and long-term equity opportunities for the insurance industry. “They like the insurance brokerage world for all the reasons we know—the recurring revenues, it’s a product that needs to be bought and there isn’t the obsolescent risk.”

Owning It

Greg Williams believes that Acrisure is unique. And as co-founder and CEO, he wanted to keep it that way. But the rolling ownership of PE made that difficult. In early 2016, when the company’s private equity partner Genstar Capital had decided to exit, Williams began discussing ownership options with his operating partners. The company had acquired 150 agencies over a three-year period, so a prosperous and meaningful exit was contemplated by all parties.

“I asked two simple questions,” Williams says of his conversation with his agency partners: “Are you interested in rolling equity assuming we secure a new capital partner that supports our objectives? And if so, how much equity would you be interested in rolling?”

Williams was pleasantly surprised when 99% of his agency partners said yes—they were in. And he was thrilled their aggregate equity roll was approximately 60%. So Williams did the math and figured that, with a slightly higher equity roll, he could present to a new investor a capital structure that would result in Acrisure’s management team and its operating partners becoming the majority shareholder of the business, including governance control.

“I felt strongly if we had majority interest and board control, it would help us grow from an M&A perspective, given there would be permanence in our capital structure. This permanence would ensure our unique and highly appealing operating model would not change, and our agency partners would not have to concern themselves with another sale of the business. We would be officially off the private equity train,” Williams says.

The value proposition was important, as Williams later had to go back to his operating partners with a specific request—he needed 75% of equity. For two and a half weeks, Williams and Acrisure’s chief acquisitions officer, Matt Schweinzger, did a “road show” for the company’s top 60 shareholders individually. They hit four or five cities a day, holding personal meetings. “We laid out a proposed capital structure if we rolled 75% of our equity,” he says.

It was a highly attractive scenario with a very positive reaction. “It gave me the opportunity to then go to potential investors in the market and say, ‘Look, we are more of a buyer than a seller. We are rolling approximately $700 million in equity.’” Williams offered a preferred equity position in exchange for governance control. “I received a number of interested parties,” he said of third-party investors. What resulted was a $2.9 billion management-led buyout. Today, the management team and its operating partners own 82% of the common equity, with outside investors owning 18%. Further, “we control the governance of the company, which is translating to comfort internally and externally because current and prospective partners don’t have to worry about that flip in three years,” Williams says.

The ultimate objective: “We want to own 100% of the business—and we are well on our way to achieving that.” Ownership and governance control is a competitive advantage in the marketplace, Williams says. “It makes us unique—it’s the private equity model turned upside down,” he says. “Value creation benefits owners, so our operating partners benefit from our growth at a disproportionate rate as compared to our competitors,” Williams says. “And, given our international expansion, our story is now being told in different parts of the world,” he adds.

Acrisure will continue to build the business both organically and through M&A, driven by a great deal of enthusiasm with its operating partners. Williams added “the excitement for being part of Acrisure is very high, evidenced by the number of employees that desire to become shareholders. We have an internal market that allows employees, based on certain criteria, to register to buy shares. Currently, the number of registered buyers to sellers is 10 to 1,” Williams says.

Looking at the value of the Acrisure stock today compared to 2013 when Genstar acquired the firm, the operating partners have realized over 11 times multiple on their equity, Williams says. “This has created wealth beyond their wildest dreams.” And, because of that dynamic, there is “extreme enthusiasm to continue growing the business both organically and inorganically,” Williams says.  

Head of the Class
BroadStreet Partners

For more than five years, BroadStreet has been aligned with the Ontario Teachers’ Pension Plan (Teachers), the largest of its kind in Canada, with more than $200 billion in assets. As an investor, Teachers provides BroadStreet with a long-term capital base that has helped drive consistent, high growth for the company.

It all started in 2012 when BroadStreet began exploring alternatives to support its growth plan, says Rick Miley, who founded the business in 2001. At that time, State Automobile Mutual Insurance Company (State Auto) was BroadStreet’s primary partner, and its funding appetite was not as strong as BroadStreet’s desire to grow. Both agreed that a change was necessary in order for BroadStreet’s model to flourish.

With State Auto’s support, BroadStreet began to explore a number of options, which included meeting with several private equity firms. “We had upwards of 10 individual PE companies come visit with us and discovered that they weren’t a good fit,” Miley says. The three- to five-year investment time frame was not appealing to BroadStreet, which was looking for a more stable capital base. “We needed a financial partner, not an investor with a pending flip date. Our business is based on a co-ownership model, which gives our core agency partners the freedom to run their businesses independently. In order to do this effectively, we needed a financial sponsor with a long-term outlook.”

Then, Teachers approached Miley. “They said they wanted to get involved in the insurance distribution business, and we connected—and that connection developed into them buying out State Auto’s interest,” Miley says. As for taking on a pension plan as a financial sponsor, “they think in decades rather than years,” Miley says. “We found out that their average hold time for a direct investment far exceeded the typical private equity time frame, and that was music to our ears.”

Teachers’ long-term investment horizon has made all the difference. “Alongside our core agency partners, we are developing this business knowing that Teachers has a desire to hold it a long time,” Miley says. “They encourage our core agency partners to bring on new producers, and they support capital expenditures in technology and scalable resources. They are averse to high amounts of debt and leverage, so we have a lower leverage ratio than most of our peers. In turn, our core agency partners generate significant free cash flow, and we use this cash to fund acquisitions, distribute dividends to our core agency co-owners and reinvest in the business.” 

BroadStreet’s co-ownership approach is an important distinguishing feature of its model that aligns interests and pairs well with a long-term view of the business. Importantly, BroadStreet creates and encourages liquidity for co-owners. “Our business thrives when ownership transitions among core agency leaders. Having an available market for our core agency partners to enter and exit equity holdings is critical for succession planning and reinforces the culture of ownership at our core partners,” Miley says.

Looking toward the future, BroadStreet anticipates a continued long-term relationship with Teachers and continued growth, which includes supporting its core agency leadership teams and creating opportunities to develop the insurance brokerage industry’s next generation of talent.

All in the Family
Baldwin Risk Partners

Aligning with a family office to provide long-term capital has given Baldwin Risk Partners a “forever partner” with multi-generational investors and complete control over their business. “We are insurance entrepreneurs and want that freedom and flexibility,” says Trevor Baldwin, president.

The model is a significant differentiator in the marketplace, according to Baldwin. “We want to build an organization that is a true partnership,” Baldwin says. “So what we have created is the best of both worlds: we have the operating environment and flexibility of a boutique privately held firm with the economic engine of a PE-backed business that allows us to create liquidity for partners and supercharge returns on the business.”

Baldwin Risk Partners’ share price has increased 450% during the last five years. “That doesn’t include the dividends we paid, which were substantial,” Baldwin says. “Factor that in, and you’re looking at close to a 700% return in five years, which you’re pressed to find anywhere. We expect that in the long-term, over the next five to 10 years, we can continue to generate annual returns in the 30-50% range for our shareholders.”

Baldwin says the ultimate goal is to be recognized by clients as a firm that delivers industry-leading innovative advice, ideas and solutions. When the time came in 2015 to bring in additional capital, they had to think outside of the box. Baldwin joined the organization in 2010, when the business was about four years old. He led a restructuring, the formation of the Baldwin Risk Partners holding company and the plans for strategic growth. “We were at a point of raising third-party capital, and we spent the next few years preparing for larger-scale growth—building out infrastructure, recruiting the right talent.”

Baldwin Risk Partners’ capital-raising efforts were not at all focused on liquidity, Baldwin says. “In fact, no shareholders of the business received any liquidity when we raised capital—it was all about growth, expansion and the creation of scale,” he says. The company recognized it was at a point where it needed to sell into the wave of consolidation happening in the industry or consolidate itself, “because scale was, and is, increasingly important,” Baldwin says. “We needed the ability to invest in and afford the type of resources necessary to remain relevant and impactful to our clients, and we needed the scale to access capital markets in a manner where we could leverage our balance sheet to create value for current and future shareholders.” What Baldwin did not want was a five-year turn.

They approached a number of capital providers—pension funds, sovereign wealth funds, family offices, and money center banks. The firm ultimately chose to partner with a family office for a couple of reasons: (1) it had an ability to provide continued capital; and (2) Baldwin Risk Partners could maintain control over the business. “The family office investor is essentially a passive investor,” Baldwin says.

The company accomplished its partnership with the family office in 2016 in the form of a preferred equity security that offers a fixed-rate return investment for the family office investors as well as some minority equity that vests over time. “It looks and feels a lot like debt but is structured like preferred equity as far as how it sits in our capital stack,” he says.

This tool gives Baldwin Risk Partners the flexibility to use leverage in a way that provides economic parity to its private-equity backed peers and the freedom to operate the business as a long-term independent brokerage firm, Baldwin says. “It’s the best of both worlds.”

Unlike private-equity peers, Baldwin distributes annual dividends. “Our capital is such that we don’t need to reinvest that into M&A, so our partners continue to get dividends on the equity they roll into the business, which is a nice way to access continued cash flow and makes the experience of ownership feel like what they’re used to as a sole proprietor or closely held private agency,” Baldwin says.

Last year, Baldwin Risk Partners’ organic growth was approximately 25%. It’s expecting similar growth this year. Baldwin says, “By being insurance-entrepreneur owned and controlled, we can generate great returns and create terrific results and outcomes for our clients.”

A True PE Partnership
NFP Corp.

In 2013, NFP embarked upon a pivotal $1.4 billion go-private transaction with Madison Dearborn Partners (MDP), a leading PE firm. This provided NFP with significant opportunities for future growth. In 2016, just three short years later, NFP had been so successful in executing on its five-year plan that a second PE firm decided to invest. The interest from a second PE sponsor was a gratifying validation of NFP’s strategic approach. “We were extremely proud of what we had accomplished. In particular, the real proof of our success occurred when other PE suitors came knocking at our door so soon after the initial go-private transaction,” says Adam Favale, senior vice president of M&A at NFP.

The company was prepared for the quick turn typical of PE investors when it entered into an agreement with HPS Investment Partners, a global investment firm, in which HPS assumed a substantial minority investment in NFP. MDP maintained a controlling stake in NFP alongside its management and employees.

Rather than the traditional PE-backed arrangement with one investment firm in the picture, NFP has two PE players at the table, and each brings valuable perspectives, says Carl Nelson, executive vice president of M&A at NFP. “They really act collaboratively,” Nelson says of MDP and HPS. “We feel fortunate to have two exceptional sponsors that are constructive, thoughtful and supportive partners,” he adds.

At NFP, employees and management, including the entrepreneurs that sold their businesses to NFP, own approximately 20% of the equity. “So we have a pretty big stake,” Favale says, noting that the remaining PE partners own the rest of the shares.

What about entrepreneurs who sell to NFP in the future? Many of them will become equity owners of NFP in connection with the sale of their businesses, and the equity is all one class of stock. This means it’s the same for all investors, employees and executives. “The single class of stock is important,” Nelson says. “It’s the same valuation, same terms.”

Nelson relates how NFP has built the business for the long term and maintains that point of view with liquidity. “We don’t have a view on the timeline of a future liquidity event,” he says. “If you build the business for the long term, liquidity will come at the right time and place.

Favale adds, “We have enjoyed partnering with like-minded investors. MDP and HPS have fully embraced our vision on how to grow the company, which allows us to execute on the strategic business decisions that not only align our employee and client interests but also reinforce the values that are core to our company philosophy.”

The New Faces of Private Capital
Whether an agency is planning to sell or perpetuate, these new private capital players are making a marked impact on the industry, and we believe they’re here to stay. They provide more options to sellers, and they will challenge firms that are perpetuating to constantly raise the bar, evolve and build value. It continues to be an exciting time in M&A, and we expect the momentum to continue in 2018 and beyond with a range of private capital getting involved in the insurance industry. As you consider your new partner, make sure you understand the capital structure and what type of reinvestment opportunity is available to you. More importantly, understand how you can monetize the asset. There are pros and cons in each structure. It is becoming increasingly more important for you to understand not just the business plan your future partner has developed but also how that ties into their long-term capital structure and your liquidity options.

Trem is EVP at MarshBerry.

As Washington continues to debate policy over solutions to help resolve mass shootings, local churches and insurance companies are taking direct action to protect their communities from future devastation.

For many religious institutions, the deadly church shootings of Sutherland Springs, Texas, and Charleston, Va., were a wakeup call to reevaluate their security and insurance. Many churches have turned to religious-based insurance companies for guidance in coverage, cultivating preemptive strategies and safety.

“Over the last two years we have really been working to develop these materials, webinars, and presentations to assist our customers to help them become more aware, to help them become more knowledgeable in what they should do,” said Cheryl Kryshak, vice president of risk control at Church Mutual Insurance. “We have received a large increase in calls particularly since the event in Sutherland Springs.”

Insurance company Brotherhood Mutual has also seen more demand recently. Assistant Vice President of Marketing Jeff Renbarger says that since January of this year, about 26,000 views on Brotherhood Mutual’s website have stemmed from its content detailing information on security and safety in churches.

“Mass shootings sadly have become commonplace in the country now, and so it certainly heightened our awareness of it,” a pastor of a D.C. Presbyterian church who wished to remain anonymous said. “Some religious communities, particularly African American religious communities and Jewish religious communities, have been familiar with security concerns for many years. For a church like ours this is something new, and so we are currently in the middle of a process to develop a security plan.”

According to the University of Maryland’s terrorism analytics program START, religious extremist terrorist attacks have more than tripled since 2000. However, Renbarger says terrorist attacks like these are not the main cause of church shootings. “Today, even though terrorism grabs the headlines, the biggest likelihood for risk in churches still comes from people in the church,” Renbarger said. “An attack is always going to come from someone knowing someone in the church, more so… than a terrorist attack.”

Even if terrorism is not the main cause of attacks on places of worship, it still seems to push spikes in coverage. According to Paul Felsen of Felsen Insurance Services, Inc., many religious institutions, especially Jewish places of worship, have been investing in coverage since early 2000. “Right after 9/11 there was an increase in premiums because the insurance industry was nervous and skittish on all religious institutions, not just those of the Jewish faith. But now, our clients are affected because they are held to a higher standard.” Felson added that these higher standards are similar to the security standards required of a large-scale business, such as a manufacturing plant.

Similar to the large spike in premiums post 9/11, anti-Islamic hate crimes also skyrocketed—from around 50 to more than 500 reported in 2001, according to CNN.

To provide data and recourses to their customers, insurers in this market like Church Mutual, partner with crisis management and security companies to come up with preemptive strategies. While covering insurance costs is what companies in this market do, they also try their best to consult their clients into practicing safety to prevent future accidents, Kryshak said.

Church Mutual advises churches to lock most doors (except the main entrance) and invite law enforcement to do an assessment of the building. Ushers can also play a vital role in safety and security in church. “Train the ushers to be the first line in defense,” Kryshak said. “They are the individuals who are welcoming people. They are shaking their hands, they can get a sense of really understanding the people that are coming in; being aware of those behavioral points.”

In addition to offering risk prevention strategies, insurers in this sector also allow places of worship to customize their coverage for special events and charity work. “We have a large Sunday dinner every week in which we serve a lot of unhoused folks in the neighborhood, and they’ve provided an additional insurance rider to cover that event,” the D.C. Presbyterian pastor said. “So, I think they seem to be aware and sensitive to the particular needs and activities of churches.” Felsen also added that with the high costs of security, the Department of Homeland Security holds a grant program for some religious institutions to apply for.

Church attendance generally spikes during spring and Easter, and both churches and their insurers know this. More and more places of worship are planning extra security measures in anticipation for the worst-case scenario, and insurance companies are stepping up their game to assist.

“We believe that in most cases you can’t stop the armed intruder,” Kryshak said. “However if you are preparing ahead of time and recognize some of those behaviors, [you] could stop a person from going forward with a plan or poor decision.”

Almost three in four insurance C-suite executives say they believe insurtechs are disrupting the industry, but only 43% see this same effect in their own businesses. Among the 400 insurtechs surveyed, 44% said they believe their involvement will be cooperative with the industry while just over a third expect to be competitors.

Companies wanting to thrive will have to innovate. That’s the key to unlocking $375 billion in new revenue globally in insurance, according to Accenture. Insurers that continuously innovate and adapt to changing customer needs will be able to capture emerging growth opportunities and outperform competitors, the firm says. Insurers could generate an additional $177 billion in revenue from areas such as emerging risks in cyber and autonomous vehicles. About $198 billion in new revenue represents the potential shift in market share between insurers who embrace transformation at the cost of less-nimble competitors.

Cyber Opportunities

Cyber does represent a significant growth opportunity, as many firms—particularly smaller ones—struggle to strengthen their defenses. Nearly three quarters of clients face major shortcomings in their cyber-security readiness, according to a Hiscox survey of more than 4,100 small and large companies in the United States, the United Kingdom, Germany, Spain and the Netherlands. Still, nearly seven out of 10 rank the threat of cyber attack alongside fraud as a top risk. And nearly 60% believe their cyber-security spending budget will increase 5% or more in the coming year. Small businesses lag when it comes to cyber insurance. The survey shows only 21% of U.S. firms with fewer than 250 employees have cyber insurance. Some 58% of companies with more than 250 employees have cyber insurance.

A growing cyber threat for 2018 is potential attacks against critical infrastructure as hackers target industrial control systems, according to a FireEye and Marsh & McLennan report. As more industrial and infrastructure systems come online, they become more vulnerable to digital attacks that can cause physical damage to facilities such as chemical and manufacturing plants, energy platforms, transportation networks and water systems.

While strengthening network defenses is crucial for cyber security, some decidedly low-tech risks can go overlooked, such as old-fashioned paper. A study in The American Journal of Managed Care finds that, while network attacks draw the headlines and affect more people, improper disposal and theft of paper records and patient films are more frequent causes of data breaches—even if much less severe. Lost or stolen laptops remain a major risk, according to the study, led by Meghan Hufstader Gabriel of the University of Central Florida.

Going back, you were working as an insurance attorney, so what led you into insurtech?
I got really tired of seeing the same documents over and over during litigation. One of the first cases I ever worked on, I was told to find the words “Montgomery Point” or variations of those words in probably more than a million emails, which took me about three years to review. I started paying attention to technology and different ways of doing things. I started noticing machine learning—in the litigation context, it’s called technology-assisted review. I realized machines could do what I was doing and they could actually do it much better.

How is technology able to tackle something as seemingly complex as insurance policies?
I would argue the policies are complex because of the convoluted way they are put together. A lot of times, a policy is a compilation of forms and endorsements, which is another way of saying it’s a handful of documents jammed together. We realized we could leverage machine learning technology to break an insurance policy down into its individual clauses and we could break the clauses down into their numerical values or the wordings to help people understand them faster. We could do that because of lot of the time the industry was using the same documents over and over and over. Machines are very, very good at sorting out repetitive documents.

You started with a focus on claims. How did the shift to policy analysis come about?
We started working with one insurance company and then another and collecting claim documents at the source and then uploading them to our software. The pivot point was when an underwriter called us on a very large claim. She said, “I’ve been reviewing the underwriting file in your claim document management software and really like it. Can I use this software for policy review?”

Like any good entrepreneur, I said, “Sure! What’s policy review?” I really didn’t know a whole lot about policy review at that time. Slowly but surely, we realized that this was a much bigger problem than the claim document problem we were solving and that we should go solve this policy review problem.

How are policies similar, and how do you find the differences that make a difference?
There are a couple different ways I look at a policy. There is the language, and then there are the numerical values.

Insurance language could be a clause that excludes any damage by war or terrorism or government. Another clause might say, “We do not accept responsibility for anything damaged if there is an attack, which involves missiles by a government person.” Those two different clauses may essentially mean the same thing.

The first thing we did on machine learning was we trained our machine learning platform—we call it Johannes—to understand that both clauses mean the same thing. Both should be labeled “Exclusion—War.” We’ve done this work on more than a million clauses now and identified about 3,000 categories. As of now, we can take wording from one carrier and wording from another carrier and line up similar clauses, even though these clauses are written differently.
Step two was to go deeper into the policy and not only pull out the policy language but also pull out the numerical values.

Imagine you have a war policy deductible for $10,000 and on another policy you have a deductible for a missile shot by a government person and that deductible is for $100,000. In the end, the broker needs to be able to line those up and tell their clients that both of these are deductibles for war and this one’s for $10,000 and this one’s for $100,000 and advise them which one’s better. In that case, you have to be able to apply a common label across both deductibles and show how the data compare. That’s our Policy Check tool we recently launched. It’s standardizing the language and the numerical values no matter what an insurance policy calls it.

Why Johannes?
Johannes is named after Johannes Gutenberg, the guy who invented the printing press. The more we have worked with insurance policies and artificial intelligence, the more I have come to appreciate old document systems. And the printing press was the first document system. Johannes is basically our attempt to pull apart existing insurance documents and turn them into usable data.

When did you launch and how has it been going?
We started building in late February 2015. We launched a beta version in February 2016. That was fun in that we brought people in and they broke the software immediately, which is how it should go. We launched a full version in late 2016 and signed two of our large enterprise customers. One of them is a partnership with QBE. They’re bringing 126,000 insurance forms into RiskGenius so that they can review, research and bind those forms a lot faster.

How do you see machine learning changing the industry?
A lot of the work that brokers have to do is highly repetitive, and they struggle to even get it done on time because there is so much of it. I compare it to Uber, which realized the supply of rides was not satisfying consumer demand. They created more supply by finding more drivers and cars.

On the broker side, there is a lot of demand for the best insurance product possible. A lot of time brokers don’t have the time to provide that analysis to their customers, particularly small and medium-sized customers. Brokers can’t put in the time needed to do that type of work because they need to focus on the big accounts. Our goal is to free up the brokers to do more policy analysis faster so they’re doing less of that repetitive work. In the long run, it’s going to create better relationships between brokers and their customers because they’re going to spend more time on risk management and finding what’s in the customer’s policy and what the best coverage is.

Later, visionary brokerages became aggregators, using sophisticated high-tech engines to allow consumers to find the cover they liked best by entering their details only once. Now insurers are bringing similar technological innovation to the commercial market, allowing distant carriers to offer their products directly to local brokers over the internet through quote-and-bind portals.

These proliferating websites enable U.S. brokers to buy cover—sometimes on admitted paper, sometimes from carriers and MGAs in other states, and even from London—without sending a fax, opening an envelope or picking up the phone. The revolution is wholesale.

“It is absolutely the future of distribution,” says David Umbers, CEO of Ascent Underwriting, a managing general agent in London. His company’s portal, Optio, is a hit in the United States. Ascent receives tens of thousands of online inquiries each year from its 90 selected and registered U.S. brokers. So far, the website delivers two main products to U.S. producers: a modular cyber cover for small to midsize enterprises and a medical billings policy.

More products are in development for distribution through the system, which provides country-specific products elsewhere around the world. Next up is a product for allied health professionals that incorporates cyber cover.

Quote-and-bind portals typically allow brokers to enter the fundamental details of a client’s risk into a secure website, select the coverage options they want, then submit the electronic proposal for instantaneous underwriting—or referral if the algorithms kick it back. If the system accepts the risk, the broker first views the price of cover, then may bind with a click before printing all the relevant documentation, sometimes with the broker’s own corporate branding.

A process that has taken days or weeks using traditional channels can now be completed within minutes. Not only do such systems slash costs from the process; they also allow broader choices.

“Cost is the big advantage,” Umbers says, “because the mechanism of distribution is so efficient, but quite often quote-and-bind portals provide a better product, too. They have to be best of breed. That is the key to Optio’s success.”

The Lloyd’s carriers providing the risk capital that backs Ascent’s portal-policies love it, too. Distribution through Optio allows them to get at small and midsize commercial risks that otherwise would not make economic sense to bring to London through the usual long chain of wholesalers and placing brokers.

“It is a great way of selling high volume,” Umbers says. “It gives us huge operational efficiencies and access to a market that is otherwise impossible to reach. It reflects complete concentration of value within the distribution channel.”

Our average policy premium is $500, so with this model it’s important that the machine take as much of the strain as possible. You almost have to have the mindset that, as soon as a human touches a risk, the agent and the underwriter lose money on such tight margins.

Kevin Kerridge, executive vice president, Hiscox USA

The Range of Options

Not all quote-and-bind portals are quite what they seem. Optio policies always carry the Ascent brand, but many carriers choose to extend their reach through a process known as “white labelling.” Local wholesalers or MGAs apply their own branding to the front end of the website and to the products distributed through it. White labelling is a valuable tool for carriers working with local companies whose home-market reputation and relationships may be stronger than their own, and it has obvious benefits for the distributor.

The systems also have the significant advantage of improving and radically simplifying data capture, dissemination and analysis. By their very nature, quote-and-bind portals capture data at the source, the originating broker. It is then available for analysis and reporting by everyone in the chain, all the way to the ultimate carrier and even to reinsurers, without re-keying.

It all began more than 15 years ago, when insurers first created e-commerce platforms. One first mover was the Lloyd’s operation Beazley, which in 2001 launched a platform called EazyPro to distribute specialist professional liability cover for SMEs directly to U.S. surplus lines brokers. In its first 10 months of operation, it brought in premiums of about $1 million. But things have moved a very long way since then.

EazyPro is now very close to retirement. It has been superseded by a new system called myBeazley. Its ancestor was primarily a quoting system. It priced risks—or referred them to London for underwriters to look over. Either way, risks were bound at Lloyd’s, and the documentation was posted to the broker. Today, myBeazley, like other new-generation portals, has many more bells and whistles and allows online binding of many risks with no human intervention at all. It limits questions to the bare minimum (in the case of professional indemnity policies, just four), then instantly provides pricing. Cover can be bound in less than two minutes, and supporting documentation is printed by the binding brokers.

Like Ascent’s Optio, the system refers more complicated risks to underwriters. Documents and data can be uploaded to them. MyBeazley has a monthly payment option, handles midterm adjustments, allows automatic renewal, delivers broker-branded documentation if desired, and provides management information with a click or two. Its latest new product for U.S.-producing brokers is event cancellation insurance.

“MyBeazley is generally used for SME and mid-market business,” says Paul Willoughby, head of IT strategy and innovation at Beazley. “Brokers can register in three or four minutes and will usually be visited by a Beazley underwriter before they get going for five or 10 minutes of training.” The system offers admitted and surplus lines cover for licensed brokers in the United States. Around the world, more than 400 are using the system to date.

Some systems have even greater reach. StarStone Insurance began developing its Escape portal in 2010 to distribute small umbrella excess casualty cover to wholesalers and MGAs.

“There was a market need for easy access to smaller-scale casualty covers,” says Kardiner Cadet, the insurer’s vice president and head of e-commerce. “Brokers spend the brunt of their time trying to place underlying policies and needed quick responses on the excess or umbrella cover.”

An important change, Cadet says, was StarStone’s move to admitted paper, which gave usage a dramatic boost since it eliminates the extra administration that comes with surplus lines. Admitted policies now account for 86% of those sold through Escape.

API technology means portals will probably be eliminated in the next few years. We have it up and running for our cyber product and could easily do it for myBeazley.

Paul Willoughby, head of IT strategy and innovation, Beazley

The online offering was expanded three years ago to include an equipment floater that offers coverage for contractors’ equipment and miscellaneous property. The most recent additions, now being rolled out, include a senior-care follow-form excess liability product for nursing homes as well as the newly launched Escape 123, an E&O product that targets professional service providers with revenues under $500,000.

The system now delivers about 40,000 policies every year from roughly 5,000 brokers who actively use Escape (about 20% log in every day). Most risks generate premiums somewhere between $750 and $5,000.

One reason for its success is the personnel support StarStone has dedicated to the product. Brokers currently initiate up to 150 live chats daily to consult with one of five dedicated underwriters, who respond on average in 18 seconds and typically conduct three or four chats concurrently. They also answer 40 or 50 phone calls and up to 100 emails on an average day. Meanwhile, e-business development representatives ensure brokers understand the products and the system functionality.

Cadet reports some impressive results. “Eighty percent of the accounts quoted go straight through to bind without the broker having to consult with an underwriter, 20% are referred to an underwriter, and half those are declined,” he says. That suggests a remarkable 90% conversion rate for business quoted across the Escape portals.

Even larger is Markel Online. Its various portals deliver an unusually wide range of products to wholesale brokers, allowing them to rate, quote, bind and issue property, general liability, liquor liability, inland marine and excess liability coverages on a non-admitted basis.

Paul Broughton, Markel’s managing director of marketing, says Markel expects to expand the available offering even further. “We are evaluating additional product line opportunities at this time,” he says, noting that for 2017 Markel expects approximately 250,000 quotes to have been created via Markel Online.

Wholesalers are attracted by the system’s efficiency. “By limiting the amount of data needed to produce a quote, with a complete application, our producers are able to bind a straightforward account in a matter of minutes,” he says. “Of course, a multi-line, multi-class, multi-location risk, or one requiring underwriter approval may require a bit more time.” Speed to quote is always critical when designing a portal, Broughton says.

Like many other quote-and-bind portals, Markel Online is available to specific individuals employed by appointed wholesalers. They gain access to certain products based on prior agreement. “Once a producer contact is created in our agency management system, specific rights are assigned to the user, and a password is provided for them to access Markel Online,” Broughton explains. “Our underwriters provide information on our risk appetite and training on underwing guidelines. Producers are then off and running, with little to no formal system training needed.”

Much of Markel Online’s business is handled by MGAs. “It has provided an excellent mechanism for our MGAs to produce quotes, bind coverage, and issue policies, thus allowing them to more effectively write business on Markel’s behalf,” Broughton says.

Hiscox, the Bermuda-headquartered insurer with its origins in Lloyd’s, uses its $250 million portal system internally, as well as with third-party intermediaries, to provide professional liability, general liability and business owners policies to U.S. companies with revenues up to $5 million. It provides same-day coverage for more than 150 professions. Hiscox handles the billing and, like myBeazley, the portal delivers automatic renewals, which allow originating brokers to earn commission for the lifetime of a policy. In some cases, Hiscox reports, the system has helped wholesalers acquire new clients that may otherwise have been channeled by their retail agents directly to insurers.

There was a market need for easy access to smaller-scale casualty covers. Brokers spend the brunt of their time trying to place underlying policies and needed quick responses on the excess or umbrella cover.

Kardiner Cadet, vice president and head of e-commerce, StarStone Insurance

“We have built this system to help our broker-partners and their retail agent audience bind the necessary coverage small businesses need in a matter of minutes,” says Kevin Kerridge, executive vice president for the Direct & Partnerships Division at Hiscox USA. “We also offer the ability to quote and bind over the phone with call center agents.”

More than 200,000 policies bound through the digital platform are in force today, many accepted through co-branded portals, which Hiscox says it can have up and running for a brokerage within a couple of weeks.

“Our average policy premium is $500, so with this model it’s important that the machine take as much of the strain as possible,” Kerridge says. “You almost have to have the mindset that, as soon as a human touches a risk, the agent and the underwriter lose money on such tight margins.” The results are impressive: 85% of applications get an immediate bindable quote. Still, even with its machine-driven approach to this kind of business, the Hiscox call center takes more than 50,000 calls per month.

Portals into the Future

Although portals are used effectively across many product lines today, some wholesalers are already looking to a next-generation approach that would reduce the number of systems they use during the course of their day, improve their internal efficiency, and let them retain the considerable account data they accumulate when entering risk and client information into portals. Many are embarking on their own system projects that rely on carriers’ application programming interface (API) systems to create internal quoting tools for their own use. An API allows a broker to enter the details of a risk once, then receive a quote from all of the multiple interfaced quote-and-bind systems.

“Brokers can integrate with us through API,” says Beazley’s Willoughby. “They don’t have to log on to the system. Instead, they get their prices directly from us on their own platforms.”

Several larger wholesale brokerages, that in essence have built their own internal aggregators, have developed such systems. Smaller firms might have to rely on re-keying into multiple quote-and-bind platforms for a little longer, until third-party vendors make an off-the-shelf aggregation product, although they typically stick to the quote-and-bind portals they prefer.

Meanwhile, as is so often the case with technological revolutions, some believe quote-and-bind portals are almost obsolete already.

“API technology means portals will probably be eliminated in the next few years,” Willoughby predicts, although currently only a handful of systems have built-in API functionality. “We have it up and running for our cyber product and could easily do it for myBeazley.” Such a move would give brokers’ systems access to everything including a document generation tool allowing them to create paperwork that carries their own branding. The next step in the revolution, according to Willoughby, is the incorporation of blockchain technology. “It could be incorporated, but I am not sure the market is quite ready for that yet.”

Hiscox believes a multi-channel customer experience is the future of distribution. “Whether it’s in person, online or over a mobile device, consumer demand is driving the future,” Kerridge says. “Companies across all industries are looking for ways to connect and transact with their clients in a smart and convenient way.”

But that doesn’t signal the end of the agent or broker. “We disagree with the notion that insurance agents are going the way of the dodo,” Kerridge says. “Agents are here to stay, but they will look different and be much more digitally empowered.”

StarStone’s Cadet is also thinking about the next big thing in technology-driven distribution. “I don’t believe company portals are the be-all and end-all,” he admits. “Technology is always evolving, and carriers need to find different and better ways to make their products more accessible to brokers. We must evolve and adapt.”

That, he says, could include mobile apps, integration with brokers’ management systems, even using bots. “We will see failures as insurtech evolves, but we should not be dissuaded,” he insists. “Most insurtech, while important, is simply a variation on an existing theme, not a true innovation. We must continue to keep our eyes open to spot the true innovations when they emerge.”

Leonard heads the Leader’s Edge Foreign Desk.

What is the target of Omada’s program?
Digital therapeutics are aimed at combatting obesity-related chronic diseases like hypertension and high blood fats. When you combine cardiovascular disease with those, you have the number-one health challenge in the world. There are a lot of other diseases we are trying to get our hands around, but obesity-related ones are clearly an issue: there is a 2030 projected spend of over $1.2 trillion annually on them. That makes it worth focusing a lot of attention here.

What is the difference between digital therapeutics and digital health?
The term digital therapeutics is used to differentiate this subcategory of digital health, which treats diseases by modifying patient behavior through digital programs and then tracks it via remote monitoring. The difference is that it’s evidence based. It’s not just a digital product that augments a medical product.

There are a lot of digital health products not based in science or proven to have the outcomes they claim. What an employer wants to pay for is something they know is going to have a good outcome. In medicine, it would be unacceptable not to have proven data.

How was Omada’s program built?
Our founders were relooking at this space and saw bodies of literature out there, some of which were being acted on on a small scale but which had a lot of opportunity for being grown and developed further. One of those was the Diabetes Prevention Program, whose results were published in The New England Journal of Medicine in 2002. People were being enrolled in the DPP but not at scale. So we asked how we could take this proven method and apply it in a scalable fashion, make it personalized and help affect that cost curve overall. Omada was built out of that.

How did Omada take the DPP work and create a digital program?
The initial body of work looked at a subset of people who were prediabetic and, if left untreated, 5% to 10% of that group would likely become diabetic each year. This is a large public health challenge with about 84 million people in this prediabetic category.

The CDC published this work that compared three groups of people with prediabetes. The first received intensive behavioral counseling, the second group received metformin [used to treat high blood sugar in people with Type 2 diabetes], and the third got a placebo along with basic advice and information from a physician. People who received behavioral counseling had a 58% decreased progression rate to diabetes. That was a significant improvement over the groups that took the placebo and metformin.

A lot of the work in the DPP was in-person settings with a health coach and lessons, and that model was very effective. However, when you are talking about working with 86 million people, you can’t scale that to meet that challenge. A digital format allows you to reach a larger number of people and collect data points to customize and personalize the experience for every individual in the program. Everyone going through has a slightly different experience based upon their inputs and how they interact with their health coach.

What does the Omada program look like?
Omada follows a CDC-approved curriculum. We use a virtual health coach and a cohort of like individuals to go through the program together. Tools people use will vary. Each person gets a cellular connected scale, which is an important element because self-reported weights aren’t very reliable. And from a behavioral perspective, there is value to having it auto-transmit into an account so they can see weight loss.

The elements of the program include weekly lessons for one year around changing food habits, increasing activity levels, preparing for challenges and reinforcing healthy choices. Participants are expected to weigh in daily. Most people stay in for up to two years. More than 140,000 people have been enrolled in the program since its inception.

What does the program cost?
We work with either self-insured employers or insurance companies as a covered preventive benefit for clinically eligible individuals. Because we operate as a benefit like this, we are able to charge organizational customers (employers or insurance companies) on an outcomes-based pricing structure. We do charge the employer/insurer when an individual enrolls; this mainly covers our marketing costs, as well as the cost of the welcome kit for the participant. From there, we charge the employer or insurer only if the participant achieves the desired health outcome (weight loss). We would invoice the employer/insurer monthly, based on how much weight the participant has lost and maintained—so not only is our business structure incentivized to create initial weight loss; we’re also incentivized to maintain that healthy outcome for as long as possible, because the better the outcome, the better the revenue. As long as our contract with a participant’s employer or insurer is ongoing, the participant will never pay any out-of-pocket cost for Omada.

What about ROI?
Of course, morbidity and mortality and prevention of disease are the most important elements, but cost savings is also something we are trying to achieve and is really important too. The program has been proven multiple different times to have meaningful cost savings as early as eight months in.

We did a claims analysis on a large cohort in one payer program started in 2014, and as compared to a propensity matched cohort, there was a $1,338 cost differential among people who went through the program in one year. This didn’t include the cost of program, but it is still in the positive if included.

When it was broken down, inpatient and ER visits were decreased. Only pharmaceutical spend increased slightly, but that’s because people were more compliant with their care, which we want to see. But even that was more than offset by other spend. Generally, within one year, Omada participants lower their risk of Type 2 diabetes by 30%, stroke by 16% and heart disease by 13%. After 16 weeks, individuals, on average, lower their body weight by about 4%.

What does demand look like from insurers and employers for wellness programs?
It’s really strong. People are realizing this is the number-one health challenge, and anyone who has risk for a population is interested in stemming these costs. It’s difficult to find an employer who doesn’t think this is a challenge. From a payer’s perspective, once they prove the cost savings, they want to make it broadly available.

Not all wellness programs are effective. Why are some unable to effect change among participants?
A lot of companies are quitting wellness programs because they have tried them and consistently haven’t gotten good outcomes. You have to have clinical evidence and studies that show the effectiveness of the products.

Compare it to something like chemicals pharmaceutical companies study and how few of those make it to market. If they put every chemical that came out on the market, there would be lots of failures. In the digital health space, anyone that has something that seems like a good idea and can get money can bring it to the market. There are going to be a huge number of failures there, too.

When analyzing wellness programs, brokers need to look at whether they are based in science, if pricing is based on outcomes, if there is published, peer-reviewed evidence that shows that that specific company’s program works, and if they are personalizing the experience. If a benefits buyer is evaluating potential partners with that level of rigor, it can sort this out. We just haven’t always applied those standards to wellness programs.

What do you know about long-term results of the program?
We have studied it for up to three years and shown durable, long-lasting outcomes both from a weight-loss perspective and reduction in HbA1c (blood glucose concentration over two to three months). We will continue to study it as people are in the program longer. The cost savings would be expected to extend for a longer duration, because we know people are maintaining metrics that yield outcomes. But to my knowledge, no one has studied total cost of care claims beyond one year. The Diabetes Prevention Program in general has benefits of up to 10 years. As that is around longer, we will continue to study that. Right now, outcomes look fantastic from a durability standpoint.

Have you looked at the impact on conditions other than diabetes?
We have studied other conditions. They include elements like hypertension, high blood fats and broader obesity in general. We have seen significant reduction in hypertension and triglycerides.

Even though prediabetes is the heart of what we are working on, we don’t just deal with that. We enroll people who are overweight or obese with one or more other risk factors like hypertension or high cholesterol. We can use a questionnaire with a risk-based screener to see who is eligible, or employers’ biometric data can be used to prequalify people for the program.

How can organizations like yours help employers encourage people to take part in digital wellness programs?
At Omada, we have a large engagement team. We work with an employer’s or health plan’s marketing team as a partner and learn what they have done in the past to engage people. But since we have done this well over 150 times, we bring out all of the elements that work best for an optimal campaign to get the most individuals in the program up front.

We optimize and co-brand with the purchaser, and we also have it announced by a leader in the organization. We don’t talk a lot about weight loss but, rather, about a new benefit that will help them improve their lives. We couple our knowledge with the best practices within the organization to get good results.

With such a focus on engagement, what kind of uptake do you get?
Within the known risk population, we can expect to get 20% enrolled. For anyone who has done this before—engaging in programs where you are asking people to enroll or participate—this number is world-class.

That seems like a small number of people actually taking part. What is “normal” for these kinds of programs?
From the outside, you can look at it like, if 20% enroll, it means that 80% didn’t come into it. And yes, there is still a long way to go. Part of the reason people don’t enroll is it’s just not the right time for people. In fact, according to a 2016 U.S. Chamber of Commerce report, more than 80% of people are just not ready to take action and make lifestyle changes at any given time. So, we continue to run refresh campaigns to connect with those people at a later time. There’s a lot of different reasons why it isn’t appropriate or people don’t feel like they have the time, so we try to get around those elements to let them know this is something different.

A lot of these folks have fought with this and been in weight loss programs in the past. So we make sure to tailor content so they realize it is something that will have an impact and we let them know they probably will have different outcomes this time.

The resulting #MeToo movement, a social media campaign that instantly went viral, highlighted just how prevalent sexual harassment is in the workplace. It vividly revealed a culture of harassment and intimidation that extends beyond casting calls and into boardrooms and office cubicles and, finally, the wallets of employment practices liability insurance carriers.

The business community is suddenly focused on its exposure for managers’ and employees’ atrocious behavior. Many expect increased awareness of sexual harassment—and its accompanying greater exposure—will most certainly drive sales of EPLI policies.

A Short History

The television phenomenon “Mad Men” made much of mid-century corporate culture, waxing nostalgic about alcohol-fueled lunch meetings, race relations and, yes, even sexual harassment. But the term itself wouldn’t emerge until 1973, when then-ombudsman Mary Rowe published “Saturn’s Rings,” a report about gender issues at the Massachusetts Institute of Technology.

The term would linger in relative obscurity within the halls of academia for years, until Supreme Court nominee Clarence Thomas’s confirmation hearing in 1991, when attorney Anita Hill testified before the Senate, alleging incidents of harassment by Thomas during their time together at the Equal Employment Opportunity Commission.

The televised hearing would captivate the nation and make “sexual harassment” a household phrase. While the Senate would go on to confirm Thomas to the high court 52-48, Hill’s testimony would energize a generation of women. Within a year, complaints of sexual harassment filed with the Equal Employment Opportunity Commission jumped nearly 60%.

Despite the increased awareness of sexual harassment, the number of complaints has remained relatively static over the past decade and has even trended downward lately. The amount of payout, however, has increased substantially, suggesting that sexual harassment cases have become more expensive. In 2010, for example, the EEOC received 7,944 complaints at a cost of roughly $41 million in compensation. In 2017, the EEOC received nearly 6,700 complaints, resulting in more than $46 million paid out in claims.

Obviously, these are only the incidents that get reported. A recent EEOC study estimated that 75% of workplace harassment cases never get reported because of fear of retaliation, whether subtle or overt.

EPLI risk will likely go up as more women speak out. A 2017 ABC News-Washington Post poll found that 54% of American women have experienced “unwanted and inappropriate sexual advances” at some point in their lives. That works out to roughly 33 million American women who say they’ve been sexually harassed at work.

But it’s not just women. A 2015 survey by the National Center for Transgender Equality found that 47% of transgender people have reported a sexual assault.

Awareness, naturally, is higher than it has been in nearly a decade. That same poll showed 75% of Americans admit sexual harassment at work is a problem, while nearly two thirds called it a “serious” problem.

Additionally, a 2010 Society for Human Resource Management study found roughly a third of U.S. companies had dealt with sexual harassment claims within the past two years.

U.S. companies spent roughly $2.2 billion on liability coverage in 2016, including EPLI policies, according to insurance analytics firm MarketStance. It’s certainly a niche of the property-casualty industry that’s seen a lot of growth. Back in 1991, when Anita Hill testified, there were five carriers offering EPLI coverage. Today, there are more than 50.

Not Fringe Coverage

John Milano, a senior vice president at RCM&D in Baltimore, hasn’t necessarily seen a jump in EPLI sales, but he readily admits an increased awareness of workplace harassment, whether it’s quid pro quo or an overall hostile work environment.

“This awareness has generated additional questions by clients and prospects on EPLI coverage, limits adequacy and the built-in resources that may be available through the insurance carrier providing the coverage,” Milano says.

These policies have long been underrated, he adds, and he insists they’re one of the most cost-effective ways to assist clients and their HR people in keeping up to date with employment policies, procedures and laws prohibiting harassment.

While brokers have seen more interest in EPLI policies lately, they recommend treating it as a mainstream product and part of more comprehensive coverage. EPLI policies typically go above and beyond the coverage included in comprehensive general liability insurance to cover judgments, settlements and the defense of most harassment and discrimination litigation. Covered parties typically include company officers, boards of directors and employees past and present (independent contractors and seasonal employees are usually excluded).

“EPLI, in a nutshell, covers things like wrongful termination, discrimination, sexual harassment and retaliation,” says Susan Combs, CEO of Combs and Co., a New York-based brokerage. “It can also cover things like failure to promote, deprivation of a career opportunity, and negligent evaluation, but these can be really difficult to prove. We see the costs start around $3,000 a year, and they go up from there. The main things that affect the rates are the number of employees and the gross sales of the company.”

State legislatures, like all workplaces, should be free from harassing and offensive behavior. There is an opportunity now for state legislatures to make that happen.

Johnny Taylor, president, SHRM 

Combs also points out that larger corporations are much more likely to face a harassment suit than a mom-and-pop shop that has a much more modest annual revenue. But there are other factors that can come into play when quoting an EPLI policy, Combs says, including the type of business. Industries such as retail and hospitality are more prone to harassment claims.

Companies can mitigate their exposure—and premiums—by having policies and procedures in place not only to prevent harassment from ever taking place but also to deal with it quickly and fairly when it occurs.

While harassment can be defined as unwelcome sexual advances, requests for sexual favors and other verbal or physical harassment of a sexual nature, the Equal Employment Opportunity Commission says it can also be something as simple as offensive remarks about someone’s gender. This can include sweeping generalizations such as “All women are weak” or “All men are lazy.”

It’s also illegal for an employer to retaliate against someone for “opposing employment practices that discriminate based on sex or for filing a discrimination charge, testifying, or participating in any way in an investigation, proceeding, or litigation under Title VII.” In fact, retaliation suits are the largest segment of employee litigation, according to Bermuda-based Hiscox. Nearly 46% of lawsuits brought annually against employers include claims of retaliation.

While most companies on average have only about a 10% chance of facing an employee lawsuit, those odds can vary wildly depending on the state. Nevada employers, for example, have a 55% chance of being sued by a current or former employee because of the state’s more liberal employment laws.

Lawsuits filed by an employee can be expensive and time-consuming. The average case takes 318 days. And while only a quarter of cases result in defense and settlement costs, when they do, the average bill is $160,000. Jury awards often go much higher.

Moving Forward

Statehouses across the country are beefing up outdated and often ignored sexual harassment policies. After a 50-state review, the Associated Press found nearly every state legislature now has a written sexual harassment policy in place.

The renewed effort comes in the wake of harassment accusations that forced more than a dozen state lawmakers in 10 states from office over the past year. And at least 16 others face accusations but remain on the job, says the AP.

The renewed focus on training is a welcome sight to the experts at the Society for Human Resource Management. “State legislatures, like all workplaces, should be free from harassing and offensive behavior,” SHRM president and CEO Johnny Taylor said in a statement. “There is an opportunity now for state legislatures to make that happen. Policies and procedures are important and must be put in place. But they alone are not enough. SHRM calls on state legislatures to build healthy workplace cultures that will support a harassment-free environment.”

Milano also advises employers to do more than just make sure sexual harassment is addressed outside of the employee handbook. “We also recommend seeking out employment counsel to review policies and procedures on an annual basis,” Milano says. “We have also seen employers use mandatory online anti-harassment training to reinforce their policies.”

Elizabeth Schallop Call, of counsel at Steptoe and Johnson in Phoenix, says claims of harassment and discrimination are highly sensitive, especially from a public relations standpoint. While the bulk of her experience is in conducting internal investigations once a concern is raised, she stresses that it’s critical for employers to be proactive about harassment.

“A lot of the harassment I run into is a lot more subtle, such as unwelcome romantic gestures that aren’t reciprocated,” Call explains. “You might have overly touchy contact by a male colleague or someone who comments on someone’s appearance, for example.”

To help build a better workplace environment, Call instructs employers to take a three-step approach. “First and foremost, it’s important that employers have a clear policy in place regarding acceptable behaviors,” Call says. She suggests companies institute a policy prohibiting bullying across the board, which covers issues of harassment, discrimination and retaliation.

Second, she says employers must go beyond the employee handbook and continually refresh employees on the workplace policy. She even suggests using the stories that continue to make the news as a possible entry point to send out an email reminding employees about the company’s policies. She also advises employers to tailor any anti-harassment training to the particular work environment.

Finally, Call emphasizes how important it is that employers take complaints seriously when they do arise. She says employers should conduct very thorough, objective investigations that result in direct consequences. This helps protect the employer as well as reinforcing what is acceptable behavior and what is not. Consistency is key, she points out, so the workforce knows there are no protected employees.

Publisher Condé Nast has perhaps shown employers one way forward. The New York-based publishing giant announced it would stop working with a pair of photographers who’d been accused of sexual misconduct.

The announcement follows months of work on a new code of conduct that began after the Weinstein story broke.

The new guidelines, spearheaded by editorial director Anna Wintour, forbid the use of underage models and alcohol at photo shoots and advise against models being left alone with photographers, makeup artists or any other on-set staff.

Experts also suggest employers take preventive measures not only because it’s the right thing to do but also because it will result in cheaper EPLI policy premiums. To reduce exposure, they suggest:

  • Establishing uniform hiring procedures that include detailed job descriptions
  • Publishing the company’s policies everywhere—online, in the lunchroom and in the employee handbook
  • Ensuring there is a clear and open channel for employees to file complaints
  • Fostering a corporate culture that leaves no room for discrimination or harassment
  • Documenting everything with a comprehensive recordkeeping system.

First and foremost, it’s important that employers have a clear policy in place regarding acceptable behaviors.

Elizabeth Schallop Call, of counsel, Steptoe and Johnson

The process of maintaining a harassment-free workplace is never-ending, experts say, and training is the foundation of a solid program.

Storey is a freelance writer.

Driven largely by increasingly sophisticated and destructive cyber attacks—and the failure of businesses to prevent them—U.S. and European authorities appear ready to prescribe cyber-security controls.

Last year, cyber attacks caused unprecedented disruptions to operations, the theft of massive amounts of personal data and soaring losses. The WannaCry ransomware raced around the globe in May, encrypting data on about 300,000 computers in more than 150 countries. A month later, the NotPetya malware, begun in Ukraine, crippled global organizations, among them Maersk, Federal Express and Merck, which each lost an estimated $300 million. All told, losses caused by WannaCry are projected to reach $4 billion.

More importantly, the WannaCry and NotPetya attacks targeted the viability of systems and the integrity of data, serving as a warning that future systemic attacks could result in catastrophic losses for insurers. A month before WannaCry, a hacker group called Shadow Brokers released a file of cyber software tools used by the National Security Agency, making them available not only to the cyber-criminal community but also to nation states and terrorist groups. The WannaCry attacks were unprecedented in scale, and the United States, Britain and Australia have accused North Korea of launching them.

Though roundly documented, these attacks don’t indicate the broader impact of cyber hacks. Last year nearly 40% of respondents to an AT&T survey said a cyber incident had an operational impact on their organization, and nearly 25% reported a cyber breach resulted in damage to reputation, loss of revenue and loss of customers. Small businesses are as much of a target as large ones; a 2016 Symantec report said 43% of cyber attacks target small businesses.

Last year, a report from Barkly blamed the leakage of the NSA cyber tools on the rise in “clickless infections” (such as NotPetya) that bypass the need for a user to click on a link or open an attachment to enable malware to enter a computer. The report said attackers were creating infections “that are more difficult to block, detect and contain.”

The cyber attacks have caught the attention of regulators, legislators, plaintiff’s attorneys and the public, resulting in an increasingly complex mix of federal and state rules.

Financial Services: Federal Regs or Joint Partnerships?

In 2015, I wrote a report titled “Governance of Cybersecurity: How Boards and Senior Executives are Managing Cyber Risks” for Georgia Tech’s Information Security Center. I found the financial services sector has better privacy and security practices than other industry sectors. But it’s also one of the most targeted sectors for cyber attacks. As a consequence, despite strong security programs, it is one of the most regulated sectors with respect to cyber security.

One of the first cyber-security regulations to hit the financial sector was the 1999 Gramm-Leach-Bliley Act and its corresponding Privacy and Safeguard Rules. The law, enforced by the Federal Trade Commission, requires financial institutions to enact safeguards to protect their customers’ sensitive data.

In 2014, the Commodity Futures Trading Commission recommended best practices for administrative, technical and physical safeguards for financial information subject to the Graham-Leach-Bliley Act. The commission also issued cyber-security regulations in 2012 pursuant to the Commodity Exchange Act and enhanced them in 2016 with requirements for cyber-security testing, remediation and governance.

Recently, however, there has been some shifting away from federal regulatory action and toward partnerships with the private sector to advance information sharing and improve resiliency and response capabilities.

The U.S. Treasury Department’s Financial Stability Oversight Council clearly recognizes the cyber risks facing the financial sector. But rather than responding with regulations, FSOC’s 2017 annual report emphasized the value of public-private partnerships, noting:

If severe enough, a cybersecurity failure could have systemic implications for the financial sector and the U.S. economy more broadly…. The fact that the sector is overwhelmingly owned and operated by the private sector makes the need for a close partnership between government and industry important to better understand these risks…. The Council [FSOC] supports the creation of a private sector council of senior executives that would focus specifically on ways cyber incidents could affect business operations and market functioning and work with principal-level government counterparts on cybersecurity issues.

The financial sector might have also gotten a break from the Trump administration. Near the end of 2016, federal financial regulators jointly published an advance notice of rulemaking on “Enhanced Cyber Risk Management Standards.” The notice outlined a comprehensive set of rules that would cover five areas of cyber-risk management, including vendor oversight and incident response, and additional standards for cyber security. The Trump administration, however, may be keeping its word to pull back on regulations. Arthur Lindo, senior associate director of the Federal Reserve’s division of supervision and regulation, recently signaled the administration would not proceed with the rulemaking on cyber-security standards. “We’re going to try a more flexible approach,” Lindo said.

Compliance with competing federal and state cyber-security requirements is problematic for the industry; we favor a collaborative, risk-based approach and harmonization of requirements—including terminology.

John Carlson, chief of staff, Financial Services Information Sharing and Analysis Center

John Carlson, chief of staff of the Financial Services Information Sharing and Analysis Center (FS-ISAC), says, “Compliance with competing federal and state cyber-security requirements is problematic for the industry; we favor a collaborative, risk-based approach and harmonization of requirements—including terminology.”

FS-ISAC is the global financial industry’s go-to resource for cyber and physical threat intelligence analysis. It was established by the financial services sector in response to 1998’s Presidential Directive 63 (later updated by 2003’s Homeland Security Presidential Directive 7) that requires the public and private sectors to share information about physical and cyber-security threats and vulnerabilities to help protect critical U.S. infrastructure.

States Push Regulation

In 2003, California started a state rush to pass privacy breach notification laws because companies were not disclosing breaches and consumers were being harmed through identity theft as a consequence. New York, as a leader in the financial regulatory arena, may have kicked off a similar movement in cyber-security regulation when the New York Department of Financial Services enacted its Cybersecurity Requirements for Financial Services Companies, which took effect in March 2017. In promulgating the regulations, the department noted the increase in cyber attacks and the lack of a comprehensive federal cyber-security policy for the financial services sector.

The regulations apply to all entities subject to the Banking Law, Insurance Law or Financial Services Law of New York, though there are some exemptions for small organizations. The regulations require each company to conduct periodic cyber risk assessments and develop and maintain a cyber-security program that addresses identified risks “in a robust fashion.” Although a chief information security officer must be designated to oversee the security program, the regulations hold senior management accountable for the company’s cyber-security program. Each entity must file an annual certification signed by the chairperson of the board or a senior officer confirming compliance with the regulations.

The FS-ISAC provided input to New York regulators who were drafting the regulations. Rick Lacafta, director of the center’s Insurance Risk Council, notes the New York Department of Financial Services paid attention to the financial sector’s input and suggested compliance approaches. “It was particularly helpful, we believe, in making the rule more risk-based than prescriptive, which is very important in enabling companies to be nimble and deploy the most innovative approaches.”

In this way, the New York regulations take an approach similar to that put forward by the National Institute of Standards and Technology (see sidebar NIST: A Flexible Framework) and the ISO 27001, which is the international standard for information security. They all give organizations the flexibility to implement controls and technologies suited to their particular risks, which provides more effective security than spending resources on compliance requirements that might not apply to an organization’s operations.

“What I think the New York Department of Financial Services has done is lay out the contours of how organizations should be structuring and thinking about their cyber-security programs,” says Thomas Finan, client engagement and strategy leader for North America at Willis Towers Watson Cyber Risk Solutions. “I think it acknowledges the reality that you can’t prevent every cyber event, that there are determined hackers and other folks out there who mean you harm and you have to have a holistic approach [that] certainly includes steps to identify, prevent and detect a cyber event but also to respond and recover from it.”

The National Association of Insurance Commissioners has taken a similar approach. In 2014, following some highly visible breaches of health insurance data, the NAIC formed a task force to study cyber-security regulations. After six drafts and three years, the task force adopted the Insurance Data Security Model Law last October.

The NAIC gives deference to the New York regulations and deems compliance equivalent to compliance with the Model Law. The association also considers those compliant with the Health Insurance Portability and Accountability Act Security Rule to be in compliance, provided they submit a written statement. The HIPAA Security Rule establishes a national set of security standards for protecting personal health information that is held or transferred in electronic form, and it requires a complete enterprise cyber-security program. In 2009, the Health Information Technology for Economic and Clinical Health Act extended liability for Security Rule compliance to business associates and established notification requirements for breaches involving personal health information.

The NAIC Model Law is well written and more detailed than the New York regulation. It sets forth requirements for an information security program that are consistent with internationally accepted best practices and standards for cyber security. Raymond Farmer, NAIC vice president, South Carolina insurance director and chair of the Cybersecurity (EX) Working Group, expects three or four states may take it up in 2018—and South Carolina will be one of them.

“This is the first step toward uniform cyber-security laws across the country for the insurance industry,” says Farmer. He says although NAIC’s focus and intent was to improve cyber security for the insurance sector, other industry sectors have asked to review the law.

The Model Law also received favorable reviews from federal regulators. “Treasury recommends prompt adoption of the NAIC Insurance Data Security Model Law by the states,” department officials said in an October report. “(I)f adoption and implementation of the Insurance Data Security Model Law by the states do not result in uniform data security regulations within five years, [Treasury recommends that] Congress pass a law setting forth requirements for insurer data security, but leaving supervision and enforcement with state insurance regulators.”

EU Leads in Data Privacy

In 1996, the European Union seized the global leadership role on privacy issues with its Data Protection Directive and declaration that any EU data transferred out of the European Union must be afforded equivalent or “adequate” protections in the receiving jurisdiction. The European Union has dominated the privacy realm ever since.

Most U.S. companies are not familiar with privacy impact assessments, and some of the new privacy requirements currently are not able to be performed by many applications, such as the deletion of data on a person’s request.

Phil Gordon, co-chair, Littler Mendelson privacy and background checks practice

The EU privacy requirements posed great challenges to U.S. industry and global commerce and required cyber-security controls for compliance. After much huffing and puffing, in 2000, the U.S. Department of Commerce managed to obtain EU agreement to the Safe Harbor Privacy Principles, which allowed U.S. companies that registered and self-certified compliance with Safe Harbor to be deemed an “adequate” jurisdiction and legally able to receive EU data. The Department of Commerce and Federal Trade Commission had enforcement authority over Safe Harbor registrants.

Fifteen years later, however, the Court of Justice of the European Union invalidated the Safe Harbor agreement, stating the framework did not provide adequate protections for data shared for national security purposes and made it too difficult for National Data Protection Authorities to intervene and ensure protection of EU data. This decision required U.S. companies using Safe Harbor to put in place the European Union’s standard contract clauses that require adequate protection of EU data for cross-border transfers outside the European Union. Depending on the size of the organization and flows of data, this was a compliance burden for many companies.

Finally, in 2016, the U.S. Department of Commerce and the European Commission agreed on a EU-U.S. Privacy Shield Framework to provide companies on both sides of the Atlantic with a mechanism to comply with data protection requirements when transferring personal data from the European Union to the United States. A separate Privacy Shield Framework was agreed to with Switzerland. Like Safe Harbor, the privacy shield will be administered by the Department of Commerce and enforced through the FTC.

During Safe Harbor, the European Union grumbled that the United States was lax in enforcing it. The FTC seems determined to be viewed differently in its enforcement of Privacy Shield. The agency wasted no time in filing three actions against companies that claimed they participated in the Privacy Shield program when they actually had initiated a registration but had not completed required steps for compliance.

GDPR Overhaul

When the European Union announced in January 2012 the coming of a new data protection regulation with new privacy requirements and fines of up to 2% to 4% of total worldwide revenue, businesses around the globe shuddered. Compliance with the Data Protection Directive (or Safe Harbor or Privacy Shield) required some changes to applications and controls in security programs, but the new privacy and security requirements in the European Union’s Global Data Protection Regulation (GDPR) would require many more.

The GDPR, which replaces the 1996 Data Protection Directive, came into force on May 24, 2016. EU member states must implement the GDPR into national legal frameworks by May 6, 2018. The compliance deadline for organizations of May 25, 2018, is now looming large over affected businesses.

There are some major differences between the Data Protection Directive and the GDPR. The GDPR has a broader definition of protected data, which includes internet protocol addresses, biometric data, mobile device identifiers and geo-location data. It also gives more power to individuals to obtain the data held about them, to have it corrected, and to request that it be deleted (“right to be forgotten”). Under the GDPR, both data controllers and data processors must be in compliance, whereas only the controller has been responsible under the Data Protection Directive.

The GDPR also requires privacy to be taken into consideration in every phase of the system lifecycle—system design, development, implementation, maintenance and retirement. Privacy impact assessments are required when processing on a large scale, monitoring or profiling are conducted. Warning: the Article 29 Working Party, the advisory body on data protection and privacy that was established by the Data Protection Directive, has interpreted these provisions broadly; large-scale processing can mean a hospital processing its patients’ genetic and health data, and monitoring can mean monitoring employee internet activity.

Another difference lies in the GDPR’s new breach-notification provisions, which require notification to data protection authorities within 72 hours and to controllers and victims “without undue delay.”

One of the most significant differences, however, is the jump in fines. Whereas fines under the Data Protection Directive were usually small and infrequent, the GDPR imposes fines of €10 million to €20 million and up to 2% to 4% of total global worldwide revenue. The threat of such draconian fines has jump-started GDPR compliance efforts around the globe. The revenue penalty, however, appears to apply only to “undertakings,” defined as a parent and its involved subsidiaries. This issue is worth exploring, as many of the articles and documents that discuss the GDPR and onerous fines leap to the conclusion that all infringements of the GDPR may result in penalties based on global revenue.

“Most U.S. companies are not familiar with privacy impact assessments, and some of the new privacy requirements currently are not able to be performed by many applications, such as the deletion of data on a person’s request,” says Phil Gordon, co-chair of Littler Mendelson’s privacy and background checks practice. “There are costly system analysis and integration issues that must be planned for with GDPR.”

But Privacy Relies on Security

Without security, there is no privacy. Therefore, Safe Harbor and Privacy Shield both necessitated controls in cyber-security programs to afford required protections to the data. And just the same, cyber security plays a prominent role in the GDPR. Article 32 on “Security of processing” requires the controller and processor to “implement appropriate technical and organizational measures to ensure a level of security appropriate to the risk,” including pseudonyming and encrypting personal data, ensuring the integrity of data, regularly testing security controls, and ensuring information is processed only as agreed.

Failure to meet these requirements could mean substantial fines. “The big change for businesses in the States is that they might be brought into GDPR merely by targeting customers in Europe,” says Mark Prinsley, a partner with Mayer Brown in London, “and the compulsory data breach notification provisions will drive data governance.”

We have tried to put insurance policies together that state the insurance companies agree to pay the fines and penalties to the fullest extent allowable under law in the jurisdiction most favorable to the insured.

Kevin Kalinich, global practice leader for cyber/network risk, Aon

Francoise Gilbert, a partner with Greenberg Traurig in Silicon Valley, who is also licensed to practice in France, issued a cautionary note about EU member states’ ability to impose additional requirements beyond those in the GDPR. “It takes a lot of knowledge about both the GDPR and additions or changes introduced by member states to maneuver this new compliance landscape,” Gilbert says.

To further complicate compliance, the European Union has also issued a “Directive on security of network and information systems,” known as the NIS Directive, which is broad in scope and authority. The NIS Directive entered into force in August 2016, and member states have until May 9, 2018, to implement it into national law.

The directive requires member states to identify operators of “essential services” within their territory by Nov. 9, 2018. Criteria for identification of such entities is based on whether an entity provides services “essential for the maintenance of critical societal and/or economic activities”; where the provision of the service depends on network and information systems; and whether an incident would have significant disruptive effects on the provision of that service.

Such entities are deemed critical infrastructure companies in the United States.

The annex of the directive lists the types of entities included for essential services, such as electricity, oil, gas, transport companies (air, rail, water and road), financial market infrastructures, health sector, water utilities and digital infrastructure.

The directive grants a substantial amount of authority to EU member states to ensure these identified entities manage security risks to their networks and systems, prevent and minimize incidents, and notify authorities of significant incidents without undue delay. The directive also empowers member states to assess the compliance of the operators of the essential services and requires the operators to provide all information necessary for the assessment and evidence of implementation of security policies.

Thus, private sector companies could be required to allow government authorities inside their properties to conduct assessments and to produce large amounts of highly sensitive documents. U.S. companies operating such entities in the European Union will be required to name a local representative and will have to comply with these requests.

Wow. Congress and U.S. officials must be jealous. Although U.S. businesses have to maneuver a wide range of cyber-security laws and regulations, they have managed to keep the government out of their data centers. The U.S. Department of Homeland Security has tried for years to assess critical infrastructure and obtain similar information from companies, only to be pushed back by industry.

Brokers Face Unknowns

Agents and brokers are working hard to help clients address these privacy and security compliance requirements, but there is no silver bullet and there is the unresolved issue of whether fines and penalties associated with the GDPR are insurable. “Cyber insurance policies need to continuously adapt to this dynamic cyber-risk environment,” says Jeffrey Batt, vice president of Marsh’s cyber practice. “It is our job as brokers to help ensure that clients are both aware of the risks that directly impact them and have sufficient coverage in place.”

Kevin Kalinich, Aon’s global practice leader for cyber insurance, says Aon also is trying to address the uncertainty related to insurability of fines and penalties through policy language. “We have tried to put insurance policies together that state the insurance companies agree to pay the fines and penalties to the fullest extent allowable under law in the jurisdiction most favorable to the insured,” Kalinich says. He noted even law firms don’t agree on whether GDPR fines and penalties are insurable.

But policies will not eliminate the need for system changes that may be necessary to meet the ever-growing landscape of cyber-security compliance requirements. Batt noted that Marsh is trying to raise client awareness and preparedness by engaging its Marsh Risk Consulting team. “We are advising clients on pre-incident planning, quantifying clients’ risk, and utilizing analytical and financial tools populated with client-specific data inputs. With respect to GDPR, we are helping clients understand how coverages will respond to a wide range of scenarios and counseling them on what their options are and guiding them toward potential solutions.”

Kalinich says awareness and education have risen tremendously among clients in the wake of cyber incidents such as WannaCry, NotPetya and Equifax, but execution lags behind. Aon is helping clients determine cyber-risk strategies and priorities by focusing on the financial impact of cyber events. “Consider the recent $80 million settlement of the Yahoo data-breach-related securities class action lawsuit following Verizon’s $350 million reduction in purchase price,” he notes. Enterprise risk management requires a quantitative analysis of factors, of which some are more equal than others, such as frequency, severity and cost-benefit analysis. He says this approach also helps clients prioritize actions since some of the changes required by the GDPR may take years to fully implement. “It is possible that EU GDPR compliance may have had the ancillary benefit of reducing the massive Yahoo loss,” he adds.

“You go back to the focus on a more macro level, holistic approach of cyber resiliency and going step by step through the regulations to comply with those policies and procedures,” Kalinich says. “The good news is the GDPR is so comprehensive it can help you satisfy some of the other 2018 regulatory requirements, such as the New York Department of Financial Services regulations and the updated SEC guidance recommendations.” (See sidebar: Regulating Across Industries.) Kalinich describes GDPR compliance as enterprise risk management that must include management setting a culture of cyber resilience. “If an entity’s culture is set from the top, then you can have a coordinated, unified approach…that can create tremendous efficiencies in the sales process, in the supply chain process, in the risk mitigation process…. It is no longer just an IT security issue.”

Willis Towers Watson’s Finan has a similar perspective. “We all are essentially cyber-security players, whether we recognize ourselves that way or not,” he says. “And if you’re in the business world, a small business or a very large enterprise, good cyber security is an essential part of doing business.”

Westby is CEO of Global Cyber Risk.

Best in Biz Awards just named you Executive of the Year and your company one of the fastest-growing companies of the year. How do you top that?
This business is a journey without a destination. We try to get better and better every day. This week we were named the Best High-Net-Worth Insurance Company at the Private Asset Management Awards. These team awards are really satisfying.

You founded AIG’s Private Client Group before founding PURE. Where did you get your entrepreneurial streak?
When I first explored building a business with AIG, I was 34. Hank Greenberg was 74 and told me that I should work for him because I was getting too old. He went on to explain that, as we were just about to have our first child, I might find it harder to take risks as time went on. I think that was a good reminder to me about the need to have that courage to try things. 

Have you mentored others in that way?
In some ways, but I also feel it’s deeply personal and everybody will make their own decisions. I probably used that advice to better understand why some people don’t want to take a chance.

What else did you learn from Hank?
There are two big themes I carry with me from my days at AIG. One is that culture matters. The other is nothing truly matters if you can’t execute. We spend an awful lot of time creating an environment where people can do great work and then making sure great work gets done.

When you talk workplace culture at PURE, what does that mean?
We fight hard to ensure culture doesn’t become a slogan or jargon. It’s not about our ping-pong tables or free food. It’s about an environment where people feel safe, where people feel encouraged and challenged to do great work, where they gain inspiration from their colleagues.

When you started PURE, how did you decide on the right people to work with?
We started by seeking smart, curious people who were willing to challenge the status quo and wanted to achieve great things. That prescription continues to serve us well.

You’ve had great success recruiting college grads. What have you figured out that others haven’t?
Our company is driven by young people in a way that I never could have imagined—61% of all employees are millennials, and 25% are under the age of 26. The vast majority of the graduates we hire come from liberal arts colleges, and they never imagined a career in insurance. In fact, the one area where we have not had success is recruiting through the college insurance programs. Why? Perhaps it’s easier to describe why we succeed in the strong liberal arts programs. We find intelligent, driven kids from Trinity or Williams or Bowdoin, and we train them to become underwriters or claims professionals or for a career on an actuarial track. Over the years, they go back and lead the next recruiting effort.

How about you. How did you get into the industry?
I went to Trinity College and got recruited on campus—so there you go. The job was in Manhattan. A lot of other jobs were in Hartford. I was a Boston kid, but I liked the idea of living in New York. Now, I am forced to raise Boston sports fans in New York.

Tell me about the Teddy Roosevelt bobblehead doll in your office.
I’ve tried to reinforce to our folks the message behind his “Man in the Arena” speech. In insurance companies, the people in the home office often tell people what to do, but they may never have sold a policy or settled a claim. “It’s not the critic who counts…but the credit belongs to the man who is actually in the arena.

What gives you your leader’s edge?
Having done one thing for over 30 years helps. As much as I think leadership skills are broad-based skills, it sure helps to be a subject matter expert. I do feel like part of my edge is I do know the high-net-worth niche, which is helpful.



The Buchmueller File

Favorite Vacation Spot: Newport, Rhode Island (“We’ve had a home there for years. When I go over the bridge onto the island, my blood pressure is lowered. Everything just feels great.”)

Favorite Movie: The Graduate

Favorite Actor: Clint Eastwood

Favorite Musician: Bruce Springsteen

Wheels: Audi A6

Reps and warranties insurance can help make a deal happen. It is used often to bridge the gap between a buyer and a seller for handling monetary obligations after closing. For anyone involved in negotiating a sales transaction, often the hardest issues to negotiate are those related to post-closing obligations and identifying breaches of the representations and warranties outlined in the transaction document. This includes whether money is going to be tied up, either through a holdback or escrow, to ensure funds are available to pay any future claim.

This specialty product covers the accuracy of representations and warranties made by a seller, subject to retentions, limits and exclusions. Policies are typically purchased by the buyer, but sellers buy them as well. Buyer policies tend to provide more coverage since they cover undisclosed issues at the time of the sale. Since sellers obviously know more about their own business, seller polices tend to cover less.

In a brokerage sale, there is typically one dominant document (the transaction document). Within document, the brokerage to be acquired makes certain statements that include such things as any current or pending litigation. It also attests that financial statements are in accordance with GAAP and the business complies with various legal requirements.

The seller may also agree to reimburse the buyer if the buyer is required to pay a tax liability the business acquired prior to the sale that is assessed after the deal is closed. The scope of these representations and warranties is negotiated. Then, the seller creates a set of disclosures, which set out issues that would otherwise violate reps or warranties if not disclosed to the buyer.

How does all of this come about? The reps and warranties insurance process begins with a broker’s request for a quote, which outlines the coverage needed. An underwriter provides a non-binding indication letter setting liability limits, retention, premium and areas excluded from coverage. It also outlines areas of significant concern, which are likely to be excluded, absent some due diligence.

Exclusions are based on known issues or issues that were not adequately investigated in the due diligence process. For example, there may be an exclusion for data security if the insured owns data centers. This is especially relevant if certain types of third-party testing were not done on the IT systems.

The client and its advisors will be heavily involved in the reps and warranties underwriting process, both in assisting the underwriter in understanding and getting comfortable with the risk and in the policy negotiation. As the broker, you will be in the middle of this process. In most cases, all communication flows through you from submission to final policy negotiations.

Unlike more traditional insurance products, the underwriting of reps and warranties insurance leverages the buyer’s due diligence. These are not cookie-cutter policies where the contours are essentially known at the outset. Legal counsel negotiates the text of the policy, including the exclusions, so no two policies are alike.

Reps and warranties insurance helps by limiting or—more and more—eliminating the need for funds to be held back or escrowed. And subject to the retention amount and the exclusions, it allows the seller to leave the transaction knowing that, for the cost of the premium, the remainder of the sale proceeds (those in excess of the retention) are not subject to clawback by the buyer in the event of a claim (other than fraud, which typically is not covered).

We are seeing more instances where reps and warranties insurance entirely replaces—absent fraud—a seller’s indemnity obligations. While “no
seller indemnity” deals have always been commonplace in public company transactions, reps and warranties underwriters are seeing more of these in private company deals, which creates a dramatic benefit for your clients.

As either the broker or insured, it's key to be prepared. Make sure all due diligence is completed and communicate that to your underwriter.

James Grayer is EVP for underwriting at Concord Specialty Risk.

What else do they have in common? As a rule, they generally do not understand diddly-squat about finance. We know that finance is the language of business, but if you are not a numbers person, finance can be daunting. However, no matter where you sit on the org chart, it is important to understand terms like EBITDA and net present value.

Without a basic understanding of financial concepts, managers can make ill-informed decisions. Those not comfortable with finance and its language “can find themselves struggling to operate as effectively as they could,” according to management consultant PHS Management Training. Business finance is not rocket science, but for those who do not feel they are good in math, it can be a challenge. This discomfort can hold them back from making contributions that their organization needs. Alternatively, managers who are comfortable with the numbers side of business generally make more informed decisions, operate more effectively and with authority, and are promoted more often and at a faster rate.

A Forbes article, “What Are Your Financial Statements Telling You,” identifies some reasons everyone should understand financial statements:

  • Gain a better understanding of the real status of the business
  • Become more proficient
  •  Improve communication skills with internal and external stakeholders
  • Feel better prepared for presenting business ideas and projects because of an understanding of how to analyze, interpret and challenge the numbers.

Not just managers need finance acumen; salespeople benefit
too. Financial literacy
is not taught or
even thought of as
part of the core skills
for the business development team. However, it should be, according to Cara Hogan at sales analytics company InsightSquared: “If you don’t understand the basics of finance, it’s next to impossible to sell effectively, explain the financial benefits of your product or even negotiate a deal.” Producers and account executives are often dealing with buyers steeped in finance. It is extremely beneficial to speak in terms that are relevant to them. When you can identify how your business solution has real financial impact, there can be an “aha” moment for prospects as they realize that your product can make a big difference to their bottom line.

In the LinkedIn article “The Role of Finance in Driving Sales Effectiveness,” Peter Chisambara states that good financial data will allow salespeople to “gain insights about changes in customer behavior which…leads to smarter pitches, shorter sales cycles and opening of new opportunities.”

How can one boost financial acumen?

Rebecca Knight, in the Harvard Business Review article “How to Improve Your Finance Skills (Even If You Hate Numbers),” says, “Stop avoiding finance because you’re afraid of numbers... the math is easier than you think.” The tricky part is the jargon.

The most important concepts to grasp are measuring profitability, EBITDA, operating income, revenue and operating expenses. Immerse yourself in your organization’s income statements. Study the balance sheet.

Reproduce the numbers, turn them into percentages so you can see the breakdown of revenue and expenditures—try to visualize the big picture.


  • Enroll in an online course or community college class about basic financial terms.
  • Review your organization’s quarterly reports.
  • Experiment with the numbers on your firm’s balance sheet.


  • Be intimidated. Business math is relatively straightforward.
  • Go it alone. Identify a trustworthy operations or financial manager who can answer your questions and serve as a sounding board.
  • Overlook the impact of financial skills on your career. If you want to advance, you need financial acumen.

Of course, The Council has your back as well! In May, we are offering a virtual workshop titled “Finance Is Fun.” It will cover the basics of finance, and as the title promises, it will be fun. Check it out at

I spoke to Jeff Lefebvre, the workshop facilitator, and asked for his words of wisdom on why someone should take this course. He said, “Seth Freeman, professor at the Stern School of Business, contends that the financial crisis of 2008 might have been mitigated if managers and leaders weren’t afraid to ‘ask the dumb questions.’ A lack of financial acumen can lead to a lack of confidence in asking the hard questions about why an idea might be good or bad financially. I work with business leaders from a wide range of industries—manufacturers, A&D, insurance, retail. If there is one consistent gap in knowledge across industries, it is financial acumen. And if that means you have leaders who are afraid to ask the hard questions, beware!”

All you liberal arts majors embrace your numbers side. Both you and your company will be better for it.

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

While insurance continues to play catch-up with other industries (including other financial services sectors) in using technology, sandboxes are drawing attention from innovators, investors and regulators.

There is no shortage of fundamentally new, tech-based ideas that can potentially have a profound effect on the way we do business. Regulatory sandboxes are viewed as a vehicle for innovators to explore those groundbreaking technologies in a favorable, controlled environment, while safeguarding the system and consumers’ interests. While their specific requirements vary depending on a region’s regulatory regime, sandboxes generally establish specific competences and financial criteria for operation and participation, provide a framework for real-time input and set a timeline to assess the viability of solutions. They aim to save time and compliance costs for startups while helping to foster innovation and competition.

Sandboxes have already been successfully adopted in the information technology, healthcare and transportation sectors. Smaller, technology-savvy markets are taking the sandbox a step farther by unrolling broader, innovation-focused initiatives to cover most economic sectors. Singapore’s Smart Nation is a great example of this. It is a whole-nation movement to harness digital technologies to drive pervasive adoption of digital and smart technologies throughout the country.

As the sandbox concept gains popularity globally, insurance regulators in various jurisdictions have begun to weigh their options.

Not Everyone’s Cup of Tea

The U.K. Financial Conduct Authority (FCA)—the British financial regulator—was, in 2016, the first to launch a fintech sandbox, and it remains a recognized industry standard. In its benchmark report last year, the FCA reported 90% of firms that completed testing in the sandbox are continuing toward a wider market launch. Most firms were granted full authorization, while 40% of firms from the first cohort received investment during or following their sandbox tests.

Despite its successful track record, the FCA’s vision for the sandbox is not completely shared by other regulators; governments’ sectoral priorities shape sandboxes’ objectives and specify technologies, companies under review and time horizons. As regulators’ mandates differ, those who are charged with promoting competition are likely to have a greater appetite for innovation. For example, the pro-competitive sandboxes in Australia and Singapore allow quicker validation of early-stage technologies, so startups are exempt from onerous licensing requirements.

Other jurisdictions may fall under the “exotic” category, which means they are farther away from the conventional understanding of sandboxes. For example, countries such as Bahrain and Sierra Leone struggle with vast socioeconomic challenges, including young populations lacking competitive skills, inadequate access to risk coverage and lack of full participation in economic activities (like purchasing insurance) among women and minorities. Their regulatory mandates can be dictated by a broader socioeconomic agenda of full employment and financial inclusion.

The sandbox approach may not be embraced by key economies either. When it comes to financial regulations, China usually takes a more reactive, wait-and-see attitude, allowing companies to innovate and stepping in when adverse events and crises strike. Online finance company Ezubao’s Ponzi scheme in peer-to-peer lending, which affected almost one million investors, is a recent byproduct of such policies.

Even in the United States, experts question if sandboxes are necessary, given America’s well-established and tested regulatory structure. They argue the U.S. regime in financial innovation is technologically agnostic, globally competitive and accommodating to new solutions and investors. The numbers, however, may tell a different story. The U.S. share of global insurtech investment has been steadily declining, while Europe’s share increased from 15% in 2012 to 33% last year, and London became the largest insurtech investment destination, ahead of New York and San Francisco. It’s possible that sandboxes may in fact have reinforced mature European financial markets’ global competitiveness to attract capital and talent.
Partners Wanted

Innovation cannot be contained within boundaries; neither does it evolve in a vacuum. Although sandboxes may require that technologies under review explicitly benefit the local economy, the platform is inherently primed to lift borders and test insurtechs’ flexibility and scale. Recently, we have seen a proliferation of international insurtech partnerships among various regulators. The FCA formed partnerships with Canada, China, Japan, Hong Kong and South Korea, while Singapore signed fintech accords with Australia, France, Switzerland, Denmark, South Korea and the FCA.

Future regional and global sandboxes may initially exchange insights on regulatory best practices and developments. Such sandboxes are likely to operate at the intersection of regtech and insurtech functionalities, be designed to clarify rules for companies with cross-border capabilities and encourage regulators to establish consistent cross-border reporting standards and certification requirements. In the long run, cross-border sandboxes can make a substantive contribution in helping develop cross-border solutions, targeting international payments, cyber security, blockchain and risk management for multinational accounts.

As an emerging player, insurtech trade associations have also become an important voice in setting sandboxes’ parameters and infrastructure. Earlier this year, several insurtech NGOs from Australia, Asia and the United Kingdom representing brokers, insurance startups and carriers formed the Global Insurtech Alliance (GIA) to promote global growth in insurance innovation, coordinate international activities and collaborate on industry insight. As the GIA explores its new mandate, insurtech regulation is a natural niche where it can weigh in.

Regulators worldwide are on the lookout for eligible startups for new sandbox cohorts, and so are insurance companies. Insurance carriers’ interest in startups is another manifestation of carriers’ efforts to stay relevant and participate in new insurance trends. As insurtech startups may be bound by investment agreement requirements, their participation in sandboxes can serve as an effective back door for well-established insurance companies to test their solutions or even participate in influencing new rules indirectly. Interestingly, sandbox participants Wrisk, Nimbla and PolicyPal entered into partnerships with established carriers prior to their engagement with regulators.

Since improvements in intermediation remain insurtechs’ focus, brokers should take note of such synergies and stay apprised of regulators’ appetite for competition through sandbox innovation.

Vladimir Gololobov is The Council’s director of international.

In any negotiation, knowledge is power. Step back and be honest with yourself. Are you truly ready to divest yourself of your most precious asset? Buyers are more sophisticated than ever, and deals are getting more diverse, complex and innovative as new private capital enters the insurance market.

For sellers, this means more options. Recently, we watched family offices, pension plans and sovereign wealth funds—not to mention independent investors—knock on the doors of agencies. They recognize the value of our industry’s recurring income, stable performance and relatively low risk. Insurance is an attractive buy for these players, and they’re interested in longer-term investment, which can be appealing to sellers.

Who are some of these new private capital players, and what types of deals are they structuring? Sellers should know so they can attract investors who are bringing more than just a liquidity option to the table. In certain instances, investors are bringing some creative stock options and profit-growing potential for the business.

In this year’s special mergers and acquisition supplement of Leader’s Edge, we explore private capital in the article “New PE Players” by telling the stories of five brokerages that each have a unique capital structure.

We found out what made their deals attractive, how they are structured and what this means for their future. We learned a lot (and we know you will, too).

Here are a few of the themes we uncovered:

  • There are new and different types of capital still entering the insurance distribution space.
  • The brokerage market is still a highly attractive investment for financial investors.
  •  Private capital can provide a longer-term investment than traditional private equity.
  •  Some owners felt relieved to get off the “treadmill” of recapitalizing with a new private equity firm every few years by partnering with an entity interested in longer-term investments, such as a pension plan or family office.

The M&A market shows no signs of slowing down, and we tracked an unprecedented number of deals in 2017 with continued momentum in 2018. The diversity of buyers is an interesting plot twist in the M&A story we’ve been telling for the past few years. And because of the complexity of these deals—and range of opportunities out there—it’s especially important for sellers to become educated and align themselves with the right advisors to assist them in maximizing value, terms and the right fit after closing. 

Buyers are sophisticated. And when sellers are properly positioned, they can take advantage of the opportunities that private equity or other types of private capital can bring to their business. Dig into the complexity of these buyers’ stories in this supplement and let us know what you think. Let’s start a conversation.

Market Update

Deal activity has continued in the first few months of the year. We believe the announcements are trailing the actual transactions being completed. Through February, we have a total of 58 announced transactions.

This is the fewest number of deals in the first two months of a calendar year since 2013. Do not read too much into this, though. I think the public relations teams are just a little behind on the press releases. In talking with many of the buyers, I get the sense that activity volumes are still at the same levels as 2017.

Alera Group has jumped into the year-to-date deal count lead with six transactions announced through February. Arthur J. Gallagher and Hub International are tied for second place, each with four announced deals.

Retail agencies make up 87% (44 deals) of the year-to-date activity. Specialty brokerages make up the remaining 13%, with sellers including six wholesale brokerages and eight managing general agents.

Expect additional announcements of new entrances of private capital into the marketplace in coming months. We think more top-100 brokerages are slated to sell and around every corner will be a new deal announcement that could surprise you more than the last. The rarity continues to be the firm that finds a way to sustain the independence many brokerages claim is their only choice…until a buyer backs up a Brink’s truck and makes an offer that is too hard to refuse.

Trem is EVP of MarshBerry.

Implementation of the Affordable Care Act actually could have gone either way with respect to this debate. I previously have ranted at length about the forgone opportunity mandated by that legislation to create a simple, streamlined, economical national plan that would be the basic plan on the exchanges. The Department of Health and Human Services under the Obama administration opted not to implement that requirement, and the Trump administration has taken the same path, at least to date—and despite our advocacy for them to do otherwise.

Instead, we have plans that are too rich and too expensive, and we have individual health insurance markets that seem to be teetering. And, as I am repeatedly reminded, we have done nothing to address the underlying cost of care issues that are the real root cause of access problems, regardless of your philosophical perspective.

But eight years after the ACA’s passage, the focus in Washington has shifted away from efforts to upend the law that dominated the House of Representatives’ debates for so long. The question now is what’s next?

For the balance of this year, more modest efforts to scale back the law and its impact will continue. Efforts to rationalize the ACA employer reporting requirements, repeal the Cadillac Tax and expand the reach of association health plans will continue, and expansion of the state waiver process could begin to erode some of the ACA’s universal coverage objectives. More fundamental reform, however, is off the table for now.

That could change next year, though. In the Senate, the Republicans hold a slim 51-49 advantage. The vast majority of the seats up this year currently are held by Democrats (24 seats) and by two Independents who caucus with the Democrats. Republicans have only eight seats being contested. In addition, 10 of those Senate Democrats seeking reelection sit in states won by President Trump in 2016. The current climate is unpredictable though, and the Republican advantage is razor thin.

In the House, there currently are 238 Republicans, 193 Democrats and four open seats (three Republicans and one Democrat have resigned and not yet been replaced). The Democrats therefore need to win a net 27 seats to get to the magic 218 to take control of the House.

A quick Google search for the “odds of the Democrats taking back the House in 2018” will identify myriad predictions that the likelihood of the Democrats taking control of the House is as high as 75%. Looking at political analyst Charlie Cook’s current race-by-race projections is much more sobering for Democrats, however, as they currently show the Democrats would have to win all of the 23 races Charlie has put into the toss-up category (which includes three seats currently held by retiring Democrats) to hit the 218 go-ahead number.

The bottom line in these volatile political times though: anything can happen.

Let’s do a thought experiment. What happens if (when?) the Democrats do take back the House and the Senate either next year or later? If the individual health insurance marketplace continues to be perceived as struggling, the first initiative might be the “Medicare for All” bills that have been introduced in both the House and the Senate.

Former (and future?) presidential candidate Senator Bernie Sanders first introduced this legislation in 2009. It garnered no co-sponsors initially or when Sanders reintroduced that bill in subsequent Congresses. Until this Congress, that is. The current version of the bill now has 16 Democratic co-sponsors (approximately one third of all Senate Democrats).

Now-retired House member John Conyers (D-Mich.) introduced companion “Medicare for All” legislation in the House last year. That bill now has 121 Democratic co-sponsors (almost two thirds of all House Democrats).

The train might be moving. If enacted, that engine would:

  • Create a universal healthcare system
  •  To provide “comprehensive protection against the costs of healthcare and health related services”
  • Funded by a variety of tax increases and new payroll taxes.

Under the Senate bill, it would be unlawful for “a private health insurer to sell health insurance that duplicates the benefits” that would be available under the bill in any way. Employers would be similarly barred from providing any such benefits.

The House bill includes a parallel bar on private insurers but does not—yet—extend that bar explicitly to employers (although presumably they could offer only self-insured coverage, and it is unclear whether they would be able to access stop-loss insurance).

Both bills also include long-term care insurance as a component of the universal healthcare systems they would create, and both would allow continued private market offering of benefits that would be in addition to those that would be provided under federal law. But the universal coverage floor under these proposals would be quite high overall.

The Democrats may not take control of either chamber next year, but at some point they will. And the momentum within the party to support this effort is growing. Enactment of the legislation in anything resembling its current form would be the ultimate victory for those who favor access to the same healthcare for all. It also would be the end of the employer-provided benefit system as we know it.

If that’s not a call to arms, what is?

Sinder is The Council’s chief legal officer and Steptoe & Johnson partner.

Movements like #MeToo and Time’s Up are transforming the workplace, and companies worldwide are working overtime to learn how to build progressive organizational cultures as quickly as possible.

Diversity and inclusion are nothing new. These are topics I remember hearing about as a kid in the ’70s, only a few years after the Civil Rights Act outlawed discrimination based on race, color, religion, sex or national origin. Yet last month as the world celebrated International Women’s Day, it seemed as though the cry for diversity and inclusion was louder than ever.

Perhaps it was.

Men and women alike are openly pushing for a more balanced world. In 2012, McKinsey & Co. reported that about 50% of all U.S. companies considered it a priority to hire and retain women. Today that number is 90%.

The 11.6 million women-owned businesses in the United States generate more than $1.7 trillion in revenue annually. At the same time however, the World Economic Forum Global Gender Gap Report estimates that it will take 217 years to close the gender parity gap.

There’s been progress, but there is still a long way to go.

Gender parity isn’t the only battle cry. When it comes to building for the future, studies show a company’s ability to recruit top talent increases dramatically when it improves its inclusive workplace culture. That means more respect, more mentoring and better opportunities for women, people of color, people with disabilities, the LGBT communities, millennials and a host of other demographic groups. Inclusivity is not just making sure everyone has an equal seat at the table; it’s creating an environment in which everyone feels able to truly engage in the organization. As author, activist and cultural innovator Verna Myers says, “Diversity is being invited to the party. Inclusion is being asked to dance.”

Studies show organizations that are committed to and see the value of diversity and inclusion not only improve their candidate and employee experiences but also add to their bottom line. A 2016 national survey by Future Workplace found that 83% of human resources departments said that “employee experience” is either important or very important to their organization’s success.

So how do we move the needle? Like most things, real organizational change starts at the top. Executive leadership needs to be committed to diversity and inclusion as part of the organization’s culture and align them with a business initiative so they are seen as valuable investments as opposed to a fleeting “feel good” project. When it comes to creating high-performing teams, neither skin color nor age nor gender nor handicap should matter.

The only way to develop diverse workforces is through a continuum of time, exposure and regular practice. And it’s not just demographic diversity; we can close the gap with cognitive diversity, experiential diversity, diversity of thought and diversity of leadership. All of this collectively affects our ability to recruit, retain and promote.

The message in all of this is clear. It starts at the top. It starts with us. It starts now. It’s time to get uncomfortable about diversity and inclusion.

But no Poirot can compare to Peter Ustinov, who played the role in six movies with subtle wit and sly sophistication.

In the star-studded Evil Under the Sun (1982), an insurance company engages Poirot to track down the ginormous diamond that Sir Horace Blatt gave to his most recent mistress. He wants it back, and the insurance company wants to sell a policy to cover it.

The usual Christie dustup ensues: Poirot follows Sir Horace to the mythical island of Tyrania, played by Majorca, to meet up with his former mistress and her husband, her new lover, and the well-spoken motley crew that always appear in Christie novels.

Everyone wears fabulous over-the-top ’40s clothes by Oscar-winning designer Anthony Powell. (Poirot’s bathing costume alone is worth the price of rental.) Boats are rowed, tennis is played, cocktails are consistently served, the men are civil and helpless, the women are vengeful sirens who plot revenge, snarl and scratch at each other, and change clothes often. (Are there actually insurance jobs this glamorous?) Naturally, there is a shuffling of couples, a murder and the reappearance of the real diamond, which can now be insured. Phew.

Like the movie, Ustinov himself (1921-2004) was soaked in European glamor. Born in Britain, he was the grandson of Russian nobility and counted Italian, French, Ethiopian and German ancestors as well. (He once did a stage play in a different accent every night.)

Ustinov dropped as many bons mots in real life as he did while playing Poirot. To wit: “I imagine hell like this: Italian punctuality, German humor and English wine.”

Next time you’re in Majorca, you may borrow that.

Telehealth, or telemedicine as it is also called, refers to virtual healthcare provided remotely by a doctor, nurse practitioner, registered nurse or other medical specialist. Employers that provide telehealth services to employees are able to reduce absenteeism caused by the need to visit a doctor physically, enhancing employee productivity while reducing overall healthcare expenditures.

In 2017, 71% of employers with 500 or more employees offered telehealth services, up sharply from the 59% that offered it the prior year, according to a study by Mercer. These numbers may go down in the aftermath of the Net Neutrality ruling, which is perceived to have a disproportionate impact on consumers in low-income and rural areas.

Companies in these regions are a key target market of telehealth providers, given the significant distance an injured or ill employee must travel to obtain adequate healthcare. “Reliable broadband connectivity is needed for telehealth services to thrive for all patients and healthcare facilities,” says Mary Kay O’Neill, M.D., senior clinical advisor at Mercer Health and Benefits.

The repeal of the Net Neutrality law effectively allows giant internet service providers (ISPs) to slow down broadband connections for low-income content customers to provide greater bandwidth to more financially valuable forms of content, such as streaming television. “The ISPs can play favorites among different entities that deliver content,” says O’Neill. “Large healthcare systems in primarily urban areas will have an unfair advantage over smaller, rural ones.”

This disparity can have a dire impact on telehealth services like behavioral health. “Employees receiving smoking cessation, weight management, psychological counseling and other forms of behavioral assistance need these telehealth services to be readily available, due to the coaching and frequent back-and-forth texting and FaceTime that occurs to help the person through the day,” says O’Neill. “If this is interrupted, no one benefits.”

The ruling introduces other broadband access concerns. For instance, high-speed internet connections are needed to link personal medical devices and wearable sensor technologies to remote telehealth providers. A case in point is the use of a personal glucometer for diabetes management.

“When the reading exceeds a certain threshold, the information automatically uploads to a database in a cloud, where a nurse can access it remotely,” says O’Neill. “If the data doesn’t upload in time, not only is this dangerous from a patient safety perspective, it is a wasteful use of a healthcare facility’s money.”

She adds, “This is one of the hottest things in healthcare software right now, but it depends on connectivity.”

Forced to negotiate for bandwidth, small rural hospitals may decide to curtail their telehealth programs and invest their financial resources in other areas—to the detriment of companies and people that truly benefit from the service.

What’s the solution? “Really this is a tough one to solve,” O’Neill says. “I would urge rural citizens to urge their legislators to take actions to ensure we don’t have a two-tier system in which lower-income people in rural regions get the short end of the stick.”

Read our feature on telehealth, “Virtual House Calls.”

It enjoyed great prosperity in the 1930s and was later known as the post-Soviet bloc. Recently, CEE has become an attractive destination for global investors, and our insurance market growth has consistently outpaced that of Western Europe.

Despite differing opinions across nations, many people in Central and Eastern Europe believe being a part of the European Union is the best thing that has happened to their countries. Businesses in CEE have been helped by the single market in many areas—it has brought along more consistent regulations across countries, which fosters a better business environment; attracted foreign capital; and facilitated access to the European and global markets. EU support programs for eastern members have added to the region’s success in the market.

In 2016, the mergers and acquisitions market for all industries in the Czech Republic grew 38%. Two of 2016’s Czech transactions crossed the $1 billion mark, and Czech M&A altogether represented $10 billion.

The average sovereign debt in CEE countries is around 60% of GDP. It’s around 100% in the countries of Western Europe. This demonstrates healthy economies in the CEE, so much so that these countries could borrow to fund their future growth, though they don’t necessarily need to. CEE adds 1.3% to each 1% of the EU’s rate of economic growth. The appetite to invest in the region’s business and economic growth go hand in hand with the growth potential of the insurance market.

The region’s assets include a high standard of technical education, the ability to learn from the success stories (and failures) of the West, adoption of new technologies, and stable inflation. Leading companies include the Czech brand LINET, which makes beds for patients in the world’s best hospitals; Avast, the world’s leading provider of PC and mobile security solutions; and automotive manufacturer Škoda (a wholly owned subsidiary of Volkswagen), the most successful Czech company ever.

According to Eurostat, the region’s GDP is 38% of Germany’s GDP. And gross premiums written are 28% of Germany’s, according to the European Insurance and Occupational Pensions Authority. True, the market in absolute terms is smaller than Germany’s, but the past decade of growth and insurance demand suggest a bright future. During that time, the CEE region’s GDP has grown 1.5 times faster than Germany’s. In 2016 alone, CEE’s GDP grew 50%, whereas Germany’s grew 32%. In the past decade, gross premiums written in the CEE grew 61%, which is about three times faster than the 24% growth in Germany.

The growth chart shows the relationship between the growth rate of GDP and gross written premium over the past decade. It demonstrates the real potential of the Czech Republic and other CEE countries to create a bridge between East and West. If the living and economic development standards in Eastern European countries approach those in the West in the coming years, GDP growth in Eastern European countries may be at a minimum three times larger and would pull up the insurance market. There is also a larger gross written premium gap than GDP gap between the regions, which means bigger opportunities for profit growth in the CEE region.

I believe the countries of Central and Eastern Europe have what it takes to ensure continued growth, and I am confident we can take on any challenges (and opportunities) that lie before us. We will build on the best European traditions and cultivate competitive markets, care about security, invest more in education, increase our productivity, foster the business environment and gradually make more countries part of the Eurozone (some, like Slovakia, are already members, and they are better off for it).

Nepala is managing partner of Czech-based Renomia Group.

Culture is a building block for companies. While culture and engagement have been widely discussed, today’s work demands require companies to rethink their workplaces. Thanks to technological, social and demographic changes over the last 15 years, employees have fundamentally changed how they look at work in their lives.

That has caused a major disruption, as turnover and disengagement have grown rapidly across the United States. Some 70% of U.S. workers either hate or are actively disengaged from their job. Turnover rates are at all-time highs. So it’s time to begin to rethink how we work and rethink what our internal cultures need to look like to attract and retain the best talent available to combat the disenfranchisement of so many employees.

Workshop Objectives

In this three-week virtual workshop, participants learn how to create a culture for today’s top talent, the new work world, and the leadership required to match it. The workshop delves into:

  • The context and reality of what these work changes look like
  • Why there are so many issues around engagement and retention
  • What you need to do to create a culture specifically for your company and your target employees
  • What is required from leadership
  • How to get your organization to buy in to the culture and vision you see.

Live Virtual Session Dates

Tuesday, March 6, 2018 – 2-3 p.m. ET
Tuesday, March 13, 2018 – 2-3 p.m. ET
Tuesday, March 20, 2018 – 2-3 p.m. ET

Patrick Kelly
Founder and President of Change Point Consulting

  1. Assign roles and responsibilities for cyber security, both within the executive ranks and at the operational level.
  2. Maintain up-to-date inventories of applications, data and hardware—an organization has to know what assets it has in order to secure them.
  3. Demand strong access controls; use two-factor authentication for remote access (e.g., password and biometric authentication or fob code).
    1. Do not allow shared user accounts.
    2. Require strong passwords or biometric authentication.
    3. Change all default passwords, even on printers, copiers, scanners and digital cameras.
    4. Limit access to only the data and systems needed for job performance.
    5. Privileged access for system administrator functions should be controlled and monitored. Only system administrators can install software or add hardware.
  4. Install anti-malware software, automatically update it and run scans frequently. Use next-generation firewalls.
  5. Use only equipment and software that is within vendor support (check Microsoft products by referring to this site:
  6. Get rid of legacy applications that require out-of-support software or operating systems (no matter how much the business users love them).
  7. Update all software and apply patches within one month of notification—sooner if serious vulnerabilities have been identified.
  8. Allow local admin rights on workstations or laptops only where absolutely necessary.
  9. Use full-disk encryption for laptops and encrypt sensitive data at rest.
  10. Use network segmentation to restrict users and applications to defined areas of the network.
  11. Develop an incident response plan capable of managing all types of incidents and test it involving all stakeholders.
  12. Regularly back up systems and data, store backups offsite, and develop and test recovery plans.
  13. Restrict the use of removable media (thumb drives, CDs, external hard drives).
  14. Develop and implement cyber-security policies and procedures in alignment with best practices and standards.
  15. Perform regular risk assessments of the cyber-security program, including reviews of cyber insurance.

Startup Narus Health seeks to use data analytics and mobile technology to better coordinate healthcare for employees who need it most while improving employers’ return on investment in health benefits.

Tell us about how Narus Health coordinates care for employees and individuals.
We built our business model around monitoring the population, looking for leading indicators that identify individuals who are trending toward or already experiencing a significant illness. When someone gets the rug pulled out from under them, they have multiple issues they must deal with at once. What are my options? What is covered by my health plan? How do I coordinate all these medical visits and remain working if possible? Are these symptoms I’m having to be expected?

Right or wrong, many people feel like they are passive participants in their medical experience—relying on the structure of the health system, the recommendation of their providers, the permissions of their benefits, and the influence of their caregivers—all while dealing with the illness or disease itself. For most, it’s an overwhelmingly exhaustive task.

Great care-management organizations understand the importance of delivering clinical support. The differentiating value of Narus Health is our deep understanding and our ability to manage the non-clinical issues people have. Do they have a caregiver? Can they get to a doctor? Can they afford their medication? And are they compliant with it? All of these things are significant contributors to total medical costs.

We capture these issues, along with their clinical profile, in a personalized care plan. We’ve developed a proprietary, structured-data format both to provide the attending physicians new insight and to build predictive analysis of the psychosocial issues—the soft drivers—and to superimpose them on the clinical drivers of care, painting a fuller picture of each individual and their unique care needs.

We’ve learned over the years the best way to help support people through complex care management is an informed and engaged multi-disciplinary team. Every person we enroll is assigned a dedicated team based on their unique needs: a registered nurse, care coordinator, social worker, chaplain and nutritionist. We’re available 24/7/365 for our patients. We know that, to really help people with complex issues, we’ve got to be available at two in the morning to triage and potentially avoid an ER visit.

Who are Narus’s clients?
We began our business by offering a direct-to-consumer service in March 2017, enrolling individuals who wanted to subscribe to our service. We quickly received recognition from self-insured employers who saw our service as a much more relevant way to provide great support for their employees. Employers have a lot of reasons to work with us, including an enhanced employee experience, full coordination of both chronic diseases and complex illnesses, and total cost savings. We make the healthcare benefit actually feel like a “benefit” again. The employers we’ve worked with say, “Our employees are part of our family, and we want to take care of them.” So they’re replacing outdated disease and case management with Narus Health’s services.

One example of our value-add offering—especially for employees of a self-insured employer—is benefits guidance. We’re able to connect patients and their families to employer resources they may not realize are available. Employers really appreciate that because right now a lot of those benefits happen in silos. There’s not much transparency. We connect people to benefits already being offered and offer insight into their efficacy.

For employer clients, which patients does Narus work with?
Our care-management services are tailored by the employer. For the most part, we provide a core set of services. Number one is population analytics and evaluation of the top 10% of employee claimants that account for 70% of the employer’s healthcare spend. Regardless of what their condition is, they need help. We typically find the top 2% of claimants represent nearly half the medical spend. They desperately want our help. Number two is evaluation of claims data to identify other employees who may benefit from our help—for example, people newly diagnosed with a condition that is likely to be chronic and require extensive treatment, follow-up, lifestyle adjustment and encouragement. Without engagement, many people in this situation will progress to far more complex conditions. Number three is 24/7/365 mobile support for all eligible employees to use for as-needed assistance, such as explanation of benefits, finding a new doctor and general medical education.

How does Narus use technology to coordinate healthcare?
At the center of our technology strategy is our proprietary care-management platform, Compassion. This platform provides our team an optimal way to develop care plans, share data and reports with physicians, schedule appointments, collaborate as a team and deliver a highly personalized care plan.

A second piece of technology is our mPower app, which renders in four different versions, depending on whether the user is the patient, the caregiver, or a friend or family member. mPower is available to all employees and offers a mobile messaging feature that allows any employee of one of our clients to start a secure, confidential conversation with our team. Even if they’re not one of our active, enrolled patients, we can help solve as-needed problems for all employees. We’re able to connect the majority of a company’s employees on the same platform and communicate with all of them, simultaneously. We can send out reminders of flu shots, annual appointments, whatever the case is, through mPower.

How does Narus use data analytics?
Our data analytics team combines numerous sources of data, such as medical claims, pharma and demographics, to help us engage with the right person at the right time on their own terms. That’s a game changer in the care-management space.

Prior to onboarding an employer, our team focuses on clinical and demographic data. We seek to identify co-morbid conditions and patterns of use of the healthcare system for that employer. By understanding patterns specific to an industry, a service line, a geography, we better know what’s happening to individuals in their day-to-day lives. This way, we can identify how we can be most helpful to them and their family.

Once they’re enrolled, we monitor relevant activity while adding new data we’re collecting—psychosocial needs, community resources, the patient’s goals and expectations. Often, we see patterns or similarities not only with individuals but with other employees. For example, if employees living within a community in Tennessee are having problems getting certain medications filled, is that a problem with that employer, the health plan, the supplier or the pharmacy? Knowing this, we can solve for problems before they even occur for other individuals.

Where does Narus fit between patients, doctors, employers and insurers?
We’re partners to the patient, the physician and the employer. We’re in lockstep alignment with the patient, completely and without bias, advocating for them and their family. We work collaboratively with their physician and other providers to better coordinate care with the patient, the caregivers and available employer benefits. We help employers understand the health status of their workforce and the benefits that are most meaningful to the workforce during an illness or injury. We make a significant improvement in the employee’s experience while affecting total cost. We’re one of the few places in the health system that can actually say that—with research and data to support it.

How has Narus been growing?
We are having a substantial burst of growth within the self-funded employer market. Benefit brokers are realizing our services offer a significant enhancement beyond the legacy disease-management and case-management programs currently available. Employees we’ve supported are telling their co-workers, you need to talk to Narus Health. More and more employers are choosing to take control of their own destiny with regard to their health benefits and are becoming self-insured. We also have a strategic partnership with Lucent Health, which is delivering additional customers eager to integrate progressive solutions such as Narus Health.

Why was Narus founded?
We formed this business because we saw an unmet need in the patient experience that required an innovative approach. Each of us, in various roles, has lived the problems we now solve every day as a company. For every one of us, it was a highly personal decision to join a startup opportunity. We all were established in successful careers. We left our former jobs not out of necessity for employment but out of necessity to solve something we had lived.

So many people are in serious need of help, serious need of navigation and serious need of support. The system is not improving fast enough. We’re trying to make people’s lives better and a bit more simplified so they can focus on the things most important to them. We measure our business value in the data we analyze and the savings we generate. But we see the true impact of our care in the cards around our office and the photographs and paintings on our walls—all gifts of appreciation from those we are fortunate enough to serve.

It is for those patients that Narus Health was formed.

Telemedicine is touted for presenting a cost-effective way for employees to receive on-demand care for a variety of low-acuity medical conditions. Physicians, nurse practitioners, psychologists and other medical specialists provide fast access to needed care via the web, video and phone consultations.

For insurance brokers, telemedicine can be an adjunct benefit to the healthcare plans they offer corporate clients and their employees. Benefits include lower employee absenteeism and higher employee productivity, engagement and job retention. Best of all, many employers are extremely interested in offering telemedicine and other virtual care concepts like health-monitoring tools.

When sitting down with a virtual care provider to discuss a partnership, consider the following to ensure the best fit between provider and clients:

  • What kind of access do patients have to their medical information compiled by the provider? Will the patient’s healthcare plan and primary doctor receive this information electronically? Just how and with whom will the patient’s data be shared? If medicine is prescribed, will the prescription be routed to the patient’s pharmacy of choice?
  • What kind of technology platform does the provider support? Does it support video, web and phone consultations? If video is provided, what is the bandwidth? Can video be accessed on a mobile device? Is around-the-clock care provided?
  • What are the specific medical conditions for which care is provided? Does the provider offer on-demand psychiatric and psychological services for behavioral issues?
  • How long does the provider take to respond to a request for service? Is there a time constraint on a consultation with a medical specialist, such as 10 minutes, or can patients discuss their issue for as long as they need?
  • How does the provider charge for services—on a per consultation basis or more of a subscription model? Is there an additional fee for follow-up care for a previously reported medical issue? Does the provider charge a fee to set up its technology with the employer? Are these various charges negotiable? How can a contract with the provider be terminated?

Tim Smith, principal and national leader for healthcare information technology at Deloitte, offers one last tip. “I think it’s sensible to ask a provider for evidence that they’ve actually prevented unnecessary patient admissions to an ER room or walk-in clinic and unnecessary ambulance care,” he says. “You want to be sure they’re good at the front-end diagnosis, using the best technology to prevent costs from spiraling out of control.”

As on-demand, remote medical care via mobile devices increases in popularity, several providers have entered the telemedicine market, each with their own mix of services. Among them are Teladoc, American Well and Virtuwell, whose services and pricing structures vary widely.

Teladoc offers consumer access to U.S. board-certified doctors, dermatologists and therapists on a round-the-clock basis, via online video or phone consultations. The service is priced at $40 per consultation, plus an annual fee of $150 or less. Once a person contacts Teladoc, the average response time is fewer than 10 minutes. The doctor will review the patient’s medical records and history of conditions and medications. There is no time limit for the video or phone conversation.

If necessary, the physician writes a prescription and sends it to a pharmacy of the patient’s choice. In the background, Teladoc shares the electronic data from the appointment with the person’s primary care physician and healthcare plan. Customers include Boeing, Coca-Cola and other large companies, as well as many midsize businesses.

“We’re servicing more than 22 million individuals across the United States,” says Peter McClennen, Teladoc’s president. “The return on the investment for employers is significant. Our research indicates that, by deferring a single visit to an emergency room or walk-in clinic, a savings of almost $500 can be realized.”

The company recently acquired Best Doctors, a network of more than 50,000 medical experts across 450 specialties. The acquisition gives Teladoc the ability to provide second opinions electronically on more complex and critical medical conditions, like cancer.

“Unlike other telemedicine providers, we are uniquely positioned to deliver basic services for pink eye and the cold all the way to cardiac conditions,” says McClennen. He says Best Doctors’ diagnoses save an average $360,000 in medical costs per second opinion.

American Well provides on-demand video consultations with medical specialists on a round-the-clock basis via the web, mobile devices and kiosks. The cost is just under $59 per visit.

“We are a technology company first and foremost, having invested $350 million in our platform, network and infrastructure for optimal electronic healthcare delivery,” says Michelle Gile, American Well senior vice president for health plans and employer solutions.

Like other providers, American Well’s online network offers a robust suite of video-based clinical services for low-acuity medical conditions like colds and behavioral issues like depression and anxiety.

“You simply go to our website, download the AmWell app, and then create an account with basic personal information like your health insurer,” she says. “When you’re feeling unwell, you log onto the app and enter the reason for your visit.”

Depending on the condition, the person will interact with a doctor or nurse practitioner specializing in the medical issue. If a prescription is needed, it is electronically sent to a pharmacy of choice. The company’s online behavioral services are growing, Gile says, giving the ability to consult with a therapist or psychiatrist on an almost immediate basis, as opposed to scheduling an appointment two weeks later.

“Our lactation services also are getting a lot of attention, since all a mother really needs is for a lactation specialist to see over video how she’s positioning the infant,” she adds. “This can be a significant money saver.”

Gile also touts the company’s kiosks as a value proposition other providers lack. The kiosks can be set up at a company’s headquarters or satellite facilities to provide on-demand services. Several medical instruments are also on hand to check blood pressure and heart rate, as is a camera to zoom in on suspicious looking moles to ferret out possible skin cancers.

American Well’s technology infrastructure permits the rapid exchange of patients’ electronic data with their health plan and primary physician. “We’re able to determine within 30 seconds if the patient is still an active member of the health plan, in addition to their deductible and co-pay status,” Gile says.

Virtuwell provides online diagnosis and treatment on the usual 24/7/365 basis at a $49 per consultation rate. Part of Health Partners, an integrated provider of healthcare and health insurance, Virtuwell does not offer video consultations.

Laura Linn, Virtuwell’s senior brand manager, says the company does an online interview with the patient, who responds by typing in multiple-choice answers to questions, beginning with the first one: What’s wrong?

“We provide treatment for 60 medical conditions deemed safe for online care, such as rashes and acne, and sinus and bladder infections,” Linn says. “We submit the claim just like a doctor’s office would do. The health insurer responds back if the person is covered and provides the deductible. If the amount falls within the deductible, the person’s credit card is charged.”

What if a medical condition appears more serious than the 60 listed conditions? “In such cases, our practitioners reach out and ask to see the patient in person, and the per-visit fee is cancelled,” Linn says. “An example is a photo of a patient’s mole that is uploaded to us and does not look right. This is where our parent company, Health Partners, is a key differentiator. Another is that our $49 per visit flat fee includes follow-up care, without the addition of extra fees.”

Insurance brokers are very enthusiastic about the Virtuwell model, Linn says. “Brokers are able to provide their clients with products and services that save them more than they cost,” she says. “We have no hidden fees—no administration costs, licensing costs and setup costs. We’re now approaching 350,000 treatments provided.”

Other providers in the space include This American Doc, LiveHealth Online, Specialists On Call, and AmeriDoc, among several others.


United Agricultural Benefits Trust (known as UnitedAg) is familiar with the productivity pains caused by an employee’s lost time from work. The associated healthcare plan, composed of more than 700 agricultural employer groups with 42,000 members spread across California’s vast agricultural industry, sought a way for workers to receive more expeditious care at the same or higher quality and at lower employer cost.

Telemedicine (also called telehealth) was the solution.

“Our members didn’t have good access to healthcare in the rural environments where they worked,” says Christopher McDonald, UnitedAg’s chief innovation officer. “They also tend to carpool to work. This meant someone feeling ill might not have a car to drive to a clinic. So they end up taking a full day off for a medical condition that could easily be addressed with a simple prescription.”

UnitedAg signed a contract with Teladoc, one of the top telemedicine providers in the fast-growing virtual healthcare space. Telemedicine is on-demand healthcare provided remotely by a doctor, nurse practitioner, registered nurse or other medical specialist. Access is within minutes. Employees with a bad headache, bladder infection or more than 50 other low-acuity (read: non-life-threatening) illnesses log onto an application and communicate their concerns to a medical specialist, who prescribes treatment.

Depending on the telemedicine provider, the back-and-forth online consultation may involve video (like Skype), a phone conversation with uploaded photos, a question-and-answer written exchange—or all of the above.

Not only is this fast-track process more humane for the injured or ill employee, it may sharply reduce the cost of employer-provided healthcare.

“By deferring a visit to an emergency room or a walk-in clinic, hundreds of dollars are shaved off each time,” says Peter McClennen, Teladoc’s president.

Add up those deferred visits, and companies with a large employee population can save a bundle. Other employer benefits include reduced absenteeism and a related uptick in productivity.

“Telemedicine also makes employees feel their employer values them, which increases their engagement levels, improving job retention,” says Aamir Rehman, M.D. and head of clinical services for the United States at employee benefits provider Mercer.

So it’s small wonder that virtual healthcare is taking off. According to Mercer, 71% of employers with 500 or more employees offered telemedicine services in 2017, up sharply from the 59% that offered the services in 2016. “It’s just exploding,” Rehman says.

Spiraling out of Control

Today’s healthcare system is in disarray, with competing agendas in Congress and no clear consensus on an optimal solution. “The volume of research papers today on healthcare is outsized—literally hundreds of papers published per day,” McClennen says.

Meanwhile, the average total health benefit expense per employee keeps creeping up for employers—from 2.4% of revenues in 2016 to 2.6% in 2017. Deductibles in traditional preferred provider organization plans also continue to rise, reaching nearly $1,000 on average in 2017 for employers with 500 or more employees and nearly $2,000 for companies with 10 to 499 employees.

Other examples of rising healthcare costs include:

  • Americans pay $858 on average for their prescriptions, compared to $400 per person across 19 other industrialized nations.
  • Doctor-dispensed drugs cost 60% to 300% more than medicines distributed at retail pharmacies.
  • Average annual salaries for nearly all physician specialties increased between 11% and 21% in 2016.
  • The cost of emergency room visits can reach well into the thousands of dollars.
  • Many ER visits are unnecessary, the medical condition easily treated with over-the-counter medications or a visit to a less expensive walk-in clinic.
  • Nearly half (46%) of physicians mandated by law to digitize patient records have spent more than $100,000 each to implement an electronic health record system.

Eight years ago, a company like ours didn’t exist, but neither did Uber. The world is changing. We’re able to bring all the pieces involved in patient care to employees in an automated, mobile way, making access to care easier and more satisfying.

Peter McClennen, President, Teladoc

These various expenses trickle down to affect the overall cost of healthcare for employers and everybody else. Telemedicine offers a way to trim the excess fat, while providing much-valued access and convenience to employees.

Tomorrow’s Healthcare Today

Think of telemedicine as a walk-in clinic without the walking. By all accounts, it appears to be the least expensive option to treat many low-acuity ailments such as bronchitis, athlete’s foot, deer tick bites, pink eye, laryngitis, and sinus, yeast and ear infections. That’s because employees don’t have to make a time-consuming trip to the ER, a walk-in clinic or a doctor’s office to treat such conditions.

“A key driver of telemedicine is to prevent overuse of the ER,” says Tim Smith, a principal at Deloitte, where he is the national leader for the consulting firm’s healthcare information technology practice. “If someone needs a prescription for penicillin because they have a rash, the person does not need to sit for three hours in an emergency room to be handed a piece of paper. With telemedicine, a doctor or nurse practitioner can immediately diagnose the rash and route the prescription to a local pharmacy for the person to pick up at lunch or on the way home from work.”

Telemedicine also puts injured or ill employees in the driver’s seat when it comes to their care. “Historically, if I wanted to see my doctor, I had to make an appointment when it was convenient for the doctor,” Rehman says. “With telemedicine, the doctor sees me at my convenience. For employees at work, this is a great alternative. They don’t have to leave work, drive to the care provider, and wait around in a waiting room for who knows how long. The physical barrier to providing care has been removed.”

Many telemedicine providers offer services beyond low-acuity medical conditions, such as providing dermatology and psychological care. Although the companies price their services differently, most charge a specific fee for a consultation with a medical specialist. UnitedAg, for instance, receives electronic data from Teladoc notifying it that one of its employee members consulted with the provider.

“The fee is well under what a regular doctor’s office or clinic charges,” says McDonald. “We also paid a one-time fee to set up the exchange between their system and ours.” He preferred to keep these amounts proprietary, noting they were negotiated with Teladoc.

The big question about telemedicine is whether the quality of care is on par with or better or worse than seeing a physician in person. Rehman seems to lean toward “on par.”

“As a doctor, when a patient comes to me with a sore throat, I examine the person to see if there might be something else going on,” he explains. “This might indicate that a physical visit is superior to a virtual one.

But we’ve surveyed our clients’ employees about this, and the reality is their doctors spend very little time with them in the examination room. It was painful for me as a physician to read these responses.”

He adds, “The reality is that with telemedicine, patients aren’t giving up much, since their doctors tend to give them so little time anyway.”

Telemedicine, in fact, may be a better alternative to walk-in clinics.

“The quality of care in telemedicine outpaces brick-and-mortar clinics because everything is documented,” Rehman says. “If the patient is prescribed a medication, that person’s personal physician and healthcare provider receive this information electronically. Not all walk-in clinics have this capability.”

That’s not good. Rehman provided an example of a patient who receives a prescription from a nurse practitioner at a walk-in clinic that may exceed the dosage the person’s physician would have recommended, given the patient’s other medical conditions and prescriptions.

“With telemedicine, the patient’s personal physician is alerted immediately to the new prescription, whereas this may fall through the cracks at a clinic,” Rehman says. “If there is a problem, it can be quickly discerned and solved.”

The quality of care in telemedicine outpaces brick-and-mortar clinics because everything is documented. If the patient is prescribed a medication, that person’s personal physician and healthcare provider receive this information electronically. Not all walk-in clinics have this capability.

Aamir Rehman, M.D. and head of clinical services for the United States, Mercer

Several studies indicate virtual care has its plusses and minuses. A 2016 Rand Corporation study indicated the ease of telemedicine consultations actually resulted in overuse, increasing the use of healthcare. A 2013 study published in the Archives of Internal Medicine, comparing telemedicine with face-to-face examinations of patients with sinusitis and urinary tract infections, confirmed the traditional benefits of telemedicine—convenience, avoidance of travel time, and lower costs—but found that telemedicine providers had prescribed antibiotics at a higher rate for sinusitis than did other doctors. And the benefit of antibiotics for sinusitis is unclear.

One can argue this research is four years old—antiquated given today’s blistering pace of technological development. In the interim, video sharing, digital technology and data analytics software have improved markedly, possibly moderating the tendency to overprescribe.

A New Service Line of Business

Telemedicine appears to be a cost-effective and highly valued employee benefit for insurance brokers to present to commercial clients.

“We’re very bullish on this concept of delivering healthcare, as I am personally,” says Deloitte’s Smith. “The technology now exists for patients to have much more interactive conversations with quality caregivers using video and other visual tools. Ten years from now, sitting in a waiting room will be passé.”

Many brokers are already partnering with a telemedicine provider (or several) to offer the product to clients. Aon is a case in point.

“The future of healthcare will be driven by people taking ownership of their well-being, and telemedicine enables this type of behavior,” says Ted Cadmus, senior vice president and a local practice leader in Aon’s health and benefits practice. “Right now too many people go to the ER for things like a sinus infection or a cold, which eats up capital and human resources and does tremendous disservice to the individual…. Telemedicine fits beautifully in our fast-paced, mobile technology world.”

Teladoc’s McClennen agrees that brokers have a lot to gain from presenting telemedicine as an additional employee benefit.

“Undoubtedly, the early movers will have a leading edge, given the trend toward virtual care,” he says. “Eight years ago, a company like ours didn’t exist, but neither did Uber. The world is changing. We’re able to bring all the pieces involved in patient care to employees in an automated, mobile way, making access to care easier and more satisfying.”

While Cadmus believes younger employees are most likely to pursue virtual interactions with care providers, in time every employee will do the same.

“Some older baby boomers who are used to face-to-face doctor visits might still prefer that form of interaction,” he says, “but as they retire, telemedicine and other forms of virtual healthcare, like remote monitoring of patients, will be the primary means for treating diverse medical conditions.”

By remote monitoring, Cadmus is referring to digital technologies that collect medical data from individuals remotely to interpret and monitor their heart rate, blood pressure, blood sugar and other personal health data. Like telemedicine, this component of virtual healthcare is predicated upon reducing visits and readmissions to an ER, clinic or doctor’s office, improving patient quality of life while containing costs across the continuum of care.

These savings can be substantial. Mercer’s study indicates a typical telemedicine consultation costs less than $50, whereas the average office visit costs about $125. And a 2017 study by the online journal Value in Health suggests telemedicine consultations at the University of California Davis saved patients nearly nine years of travel time, five million miles and $3 million in costs.

Another study by Accenture found 78% of consumers are interested in receiving virtual health services. A study by Deloitte came to a similar conclusion, finding 74% would use telemedicine services if they were available at work. Meanwhile, 70% of the respondents said they were “comfortable” with consulting about their medical issue with a medical specialist via text, email or video.

Employers are not deaf to this growing interest. About 90% of large employers said they would offer telemedicine as part of their employee health plans in 2017, according to a 2016 National Business Group on Health survey. Altogether, the virtual healthcare market is expected to reach $3.5 billion in revenues by 2020.

The future of healthcare will be driven by people taking ownership of their well-being, and telemedicine enables this type of behavior.

Ted Cadmus, senior vice president, Aon

“Healthcare is fast becoming one of the most automated industries in the world, making care easier to access and less expensive to acquire,” says McClennen.

All this makes telemedicine an enticing opportunity for brokers. Clients can obtain the aforementioned benefits—increased employee engagement, higher workforce productivity, improved care quality and lower healthcare use—at a much lower cost.

“Depending on the health plan provided by the employer, telemedicine may be a free add-on,” Cadmus says.

Aon has brokered deals for multiple commercial clients involving telemedicine providers Teladoc and American Well. “Which provider we choose depends on the client’s healthcare plan,” says Cadmus. “American Well may be right for one client, whereas another telemedicine provider may be right for a different client. We’re not locked in to any one of them. We play the role of third-party expert for our clients, identifying the solution that’s best for their employee population.”

For this service, Aon receives a commission from the provider on the dollars of business placed, although the firm also has charged fees, depending on the arrangement.

“This isn’t about money anyway,” Cadmus maintains. “The motivating force for us is to clearly demonstrate (to clients) that we’re thinking ahead toward their best interests—always in front of the next technological curve. Right now telemedicine fits this bill.”

Banham is a Pulitzer Prize-nominated author and insurance journalist.

Mark & Graham’s leather pouches have long been a favorite of stylish globetrotters. They are great for stashing keys, sunglasses and other travel sundries. You can throw them into a carry-on bag and easily get to what you need. For traveling techies, Mark & Graham has now introduced the Commute Clutch, a zippered leather pouch that has interior compartments for credit cards, tech cords and cables and a power bank. The clutch is made of imported leather, comes in sky blue, charged pink and other fun colors and can be monogrammed.

Last year, Audi acquired Silvercar, a company that revolutionized the industry with an app that streamlines the car-rental process and offers a fleet of silver Audi A4 sedans equipped with complimentary GPS, Wi-Fi, SiriusXM satellite radio and fair toll pricing. The company is now expanding. In response to requests from business travelers who want a larger vehicle for leisure travel, the company is adding Audi Q5 SUVs to its fleet and replacing all Audi A4s with the swish 2017 model. You can rent a Q5 in Fort Lauderdale, Miami, Denver, Los Angeles, Phoenix, San Francisco, Seattle, Orlando and Salt Lake City. The SUV will be available in all 18 locations by July 2018. Silvercar also plans to launch operations at five new airport locations in the next six months, including San Diego and Tampa.

Amanyangyun, Aman’s fourth destination in China, debuted in January. The ultra-luxury resort and holistic retreat is part of 15-year architectural and ecological conservation project. Set in a relocated forest of ancient camphor trees outside Shanghai, the light-filled suites, villas and pavilions are nestled in a reconstructed historic village of 50 Ming and Qing dynasty houses. The holistic wellness facilities—the state-of-the-art Aman Spa and a fitness center—focus on nutrition, movement, beauty, and emotional and spiritual well-being.

But when a crimson-clad waiter shows me to Bruce Carnegie-Brown’s office on the 12th-floor pinnacle of the corporation, Lloyd’s new chairman is at his desk, sans sarnies. He’s meeting me at lunchtime, but we’re not having lunch.

“There’s not much time in the day,” the affable and clearly clever Carnegie-Brown declares. “Insurers have been slower to give up on lunch than other parts of the financial services market, but I did quite a long time ago in the interest of greater efficiency.”

Indeed, efficiency is the current holy grail for Lloyd’s. Clobbered by costs, everyone is clamoring for efficiency. The companies that comprise the market are investing in it, and joint market initiatives are attempting to drive it. My first impression is that Carnegie-Brown is a man well suited to the leadership of Lloyd’s efficiency drive.

Tech-Driven Efficiency

Back in 2003, when he began a brief stint as president and chief executive of Marsh Europe, Carnegie-Brown said the future of London wholesale broking, and thus the Lloyd’s market—which is dependent entirely on broker distribution—rested on its ability to embrace technology. Nearly a decade and a half later, the same market faces the same challenge. Only about 10% of market business is placed electronically, although the need to go digital is more pressing than ever.

“I am somewhat surprised by how resilient the Lloyd’s model has been, because clearly it has prospered in the absence of making a much more radical transformation,” he says. Outside the high-value, high-complexity end of the insurance market, dramatic change has happened since his time as leader of one of Lloyd’s largest brokerages. Online selling has driven almost complete disintermediation in U.K. personal lines, for example. It’s a subject Carnegie-Brown knows a lot about. Alongside his Lloyd’s job, he is chairman of Moneysupermarket, an online financial services aggregator listed on the London Stock Exchange.

“The most differentiated value of a broker is the provision of advice, and when you’re buying motor insurance, you don’t need advice,” Carnegie-Brown explains. Today in the U.K., more than 70% of consumers buy their auto cover online, most through aggregation websites. Within the space of a minute, they get scores of insurers bidding for their business. “Even the most efficient broker would struggle to compete with that level of efficiency and responsiveness,” the chairman argues, “but the high-complexity lines like aviation, marine, catastrophe and cyber insurance haven’t changed nearly as quickly.”

Not yet, he says, but change must come, even in Lloyd’s complex sweet spots. Expenses are too high and competition too fierce for the plodding old ways of Lloyd’s, where brokers still wait in queue to make their pitch to underwriters, to continue in the age of technology.

“Everyone I meet agrees that the future of the Lloyd’s market relies on our adopting more efficient ways of working and better technology to execute them,” Carnegie-Brown says. “It is a natural occurrence in the evolution of markets. They become more efficient over time. Inefficiency gets squeezed out. If we remain inefficient, we will become uncompetitive.”

The data is adaptable in digital form. Ensuring that all of our data is digital has to be the overarching strategy for Lloyd’s. People can then engage with it in the ways that they choose.

The goal isn’t new for Lloyd’s, but so far every comprehensive attempt to modernize the placement process has failed at the implementation stage, despite the millions London has splurged on tech since the 1990s.

Carnegie-Brown ran Marsh Europe after the failed revolution of Electronic Placing Support (EPS), the London market’s first concerted attempt to join the digital revolution. When EPS simply wouldn’t stick to the wall, the biggest brokerages launched their own electronic trading platforms. But proprietary systems created fiefdoms, which don’t suit the subscription nature of the London market. Since then, things have changed. “The risks of technology transformation are reducing,” Carnegie-Brown declares.

A decade ago the insurmountable challenge was to get everyone to sign up to a single, marketwide approach. Today, efforts to create an open-architecture environment for London’s commercial insurance business should remove the competitive considerations from the market’s uptake of sophisticated IT solutions.

Carnegie-Brown’s technology vision is nuanced differently from his predecessors’ programs. He doesn’t see any single market system as the answer. His goal is more fundamental. “The challenge is to ensure we move from an analog market to a digital market,” he says. “Once there, everyone has a huge number of choices about the applications they use and how they run their businesses.” If any compulsion is involved for those trading in the Lloyd’s market, it will be a means to that end and will be imposed only to drag the laggards along.

Herding cats can be easier than creating consensus in Lloyd’s, even for its chairman. His job is to run the market, not the market’s businesses. He heads the central facilitator, which has provided market infrastructure since 1769, but he has only limited control over how the constituent underwriting players—Amlin, Beazley, Hiscox, Catlin, Kiln and scores of others—manage their own affairs, let alone their systems and data.

He has even less authority over the brokerages. Central strategies have not always been welcome. Market cohesiveness has been greater and growing since Lloyd’s escaped from the perilous brink of collapse in the 1990s, but decrees don’t land lightly.

But like others, Carnegie-Brown believes the modernization prize is too big to shy away from. Conversion to a digital market will bring enormous value, as it should strip away much of the vast cost associated with business processing.

“Data input just once can be used by different market participants in different ways for the different functions of their business,” he says, listing a few examples. After entry, digital information can be used to settle an insurance premium through a foreign exchange transaction or to inform an underwriter’s risk model. A reinsurance broker can use digital information to aggregate a customer’s risk portfolio. “The data is adaptable in digital form,” Carnegie-Brown says. “Ensuring that all of our data is digital has to be the overarching strategy for Lloyd’s. People can then engage with it in the ways that they choose.”

Which brings him back to the topic of efficiency. Digitization, he says, is “part of improving the efficiency of the market: reducing errors, cutting costs and improving the value of our ability to use the data that we have.”

Fundamentally, the value propositions presented by both underwriters and brokers will remain the same, he says, but will get more of the attention they deserve in a digital market. “The huge value in what brokers do lies in providing advice to their customers on risk-management strategies, part of which involves the placement and transfer of risks into the insurance market. That won’t change.”

It will look like good value only when its cost structure is improved so that more of the premium people pay buys risk protection. The future sustainability of the market is intrinsically tied to its ability to be more efficient, which will make it more valuable.

The same, he says, is true for underwriters, whose huge value lies in deploying their experience and data to make informed decisions about risk pricing, capital allocation management, which risks to write and which to refuse. Digitization won’t change that either, he declares.

What will change is all the activity that does not add value. For example, Carnegie-Brown says, “Brokers and underwriters—the people who provide the advice that clients desire—spend too much of their time on unnecessary processing.”

Normally mild-mannered, Carnegie-Brown seems almost offended by this injustice. “The whole process of change is about eliminating the low-value activities that contribute substantially to very high costs in the insurance industry as a whole,” he says.

Global Strategy

Then there’s relevance. The Empire is over. Wooden ships sunk. Bringing risk to a pinstriped man in London is no longer the only option. Alongside efficiency, relevance is Lloyd’s next great challenge. Market insiders have been searching for ways to remain relevant for nearly as long as their quest for efficiency. “We start there already, with Lloyd’s as a global market leader in a whole variety of specialty insurance lines,” Carnegie-Brown says. “Part of the mission is to preserve that status.”

The challenge isn’t child’s play. The world is Balkanizing, he says, with rival insurance hubs growing in places like Miami, Dubai and Singapore. “Lloyd’s challenge is to make sure the business, which historically has always come to London, doesn’t get disintermediated into other centers,” he says.

Carnegie-Brown wants Lloyd’s to change from what he calls a “Walmart model,” one based on a physical footprint, to an “Amazon model,” where flag-planting is deemphasized in favor of a product focus supported by digital distribution. He has already announced that Lloyd’s will rein in its recent near-frenetic establishment of underwriting platforms around the world, which was part of his predecessor’s “Vision 2025” relevance strategy. In Carnegie-Brown’s view of the world, getting closer to the customer (another insurance industry trope) does not necessarily mean physically closer.

Carnegie-Brown would approach Lloyd’s clientele through monitor and keyboard, or maybe smart phone. “We have a central nervous system here in Lloyd’s, with an incredible resource of skills, of data, of expertise,” he says. “We have an opportunity to deploy that resource into new parts of the world, and to do so differently in our existing markets, to make our products available to more customers, and to make them more relevant in new geographies.”

The technology is readily available to make Lloyd’s easily accessible to people in remote locations, he says. “That’s quite a different way for the international insurance industry to look at the distribution of its products,” he admits.

Lloyd’s, through its member firms, already employs some of the most sophisticated internet distribution in the sector, but it remains a very traditional market, and brokers really do still queue up to see underwriters, sometimes laden with foot-thick piles of paper in their slip cases (although the successful implementation of electronic claims filing more than a decade ago has cut many of those large bundles down to size). Late adopters will be coached, tempted, goaded and ultimately shoved into the digital age.

Lloyd’s is open for business. We are enthusiastic to expand our business in the United States, which is our single most important market.

In this, as in all that Carnegie-Brown has to say, his views chime with those of most broking and underwriting executives at the leading edge of Lloyd’s. The urge to remain relevant through modernization while exploiting technology to garner efficiencies propels a large proportion of market companies’ agendas. Another driver is the hope of selling more cover to existing clients.

“The level of underinsurance around the world, even in rich economies, implies people don’t find value in the insurance product. That is one of the reasons they don’t buy it.”

Lloyd’s new chairman acknowledges underinsurance is driven by many factors, but he rates the value proposition as “significant.” It is partly a marketing problem. “We have to do a better job as an industry, as advocates of the purpose and value of our products,” he says. Insurers help to put peoples’ lives back together after a crisis, but, he says, that role often goes unpublicized. “We talk about the transactions and the negotiations, about minutiae, without recognizing the bigger picture, without mentioning what we do to help rebuild people’s lives and livelihoods,” he says.

More than just talk is required, Carnegie-Brown concedes, if insurance is to appear more attractive. “It will look like good value only when its cost structure is improved so that more of the premium people pay buys risk protection,” he says. “We ought to do a better job of focusing outwardly on the solutions we, as an industry, can provide to our customers.”

The Inside Outsider

Many challenges lie ahead, but Carnegie-Brown may just be the right man for the job. He is broadcasting on the same frequency as much of the rest of the market and has the outward credibility to carry it forward.

Many in Lloyd’s had wanted his job to go to an insider, someone weaned in the cathedral-like room, especially after outsider chairmen held the post for nearly two decades. Many thought the city grandees who came before Carnegie-Brown just didn’t get Lloyd’s. But others argued that was the whole idea—that outside eyes would help the market to navigate the radical change reshaping the international insurance environment.

Carnegie-Brown, a banker by background, is insider and outsider after his stint at Marsh and subsequent board-level roles at Aon and JLT and at the Lloyd’s underwriting agency Catlin (whose eponymous founder Stephen Catlin was a popular insider candidate for the chairmanship).

“Any organization looking for a chairman will discuss whether they want an insider or an outsider,” Carnegie-Brown says. “Happily, I am both.” He says he aims to bring a breadth of perspective. His work at Moneysupermarket, he says, informs his thinking about the transformation, over several years, of the commercial insurance model intended to bring efficiency and relevance to Lloyd’s.

Further, his roles in asset-management businesses have left him with an understanding of the centrality of investing that lies at the heart of underwriting. He also knows regulators, which Lloyd’s, with more than 200 insurance licenses, has in abundance.

“A big part of the role of the chairman of Lloyd’s is to provide market oversight from a regulatory perspective and to be the person most accountable to the external regulators, in the U.K. and internationally,” he says.

And he has a few words for the U.S. broking fraternity: “Lloyd’s is open for business. We are enthusiastic to expand our business in the United States, which is our single most important market. We are working hard to ensure access to Lloyd’s gets easier, more efficient and lower cost and that we continue to earn our very strong U.S. reputation as an innovator and a payer of claims.”

Leonard heads the Leader’s Edge Foreign Desk.

Accelerators aren’t the only kind of early-stage investment organization out there. There are angel investors, seed-stage venture capitalists, even incubators. And somewhere among these organizations sits Matter, a three-year-old Chicago-based nonprofit focused on fostering innovation in healthcare. Most of its funding comes from 70 major corporate sponsors, including the American Medical Association, Blue Cross Blue Shield of Illinois, large pharmaceutical companies, device and diagnostic companies, hospitals, insurance companies and other parts of the healthcare industry.

Matter selects healthcare startups at different stages of development to mentor and coach. It offers classes, coaching, clinics and meetings with financial companies, as well as guidance from the mentor firms about what it takes to succeed in healthcare. Matter CEO Steve Collens says Matter’s 200-plus member companies have raised more than $500 million since their inception. The member companies generated more than $71 million in revenue in 2017 while raising $122 million.

Collens says healthcare can be a challenging field for startups to decipher. Matter allows entrepreneurs to work closely with the established industry to fine-tune their products into something the industry will buy.

“We work with the larger companies to understand the challenges they are facing,” Collens says. “What are the business problems that they are looking at? Where are the needs for innovation? How can we work with entrepreneurs and facilitate the collaborations that ultimately are going to get new solutions to market the fastest way possible?”

Matter combines a series of onsite workshops with talks from industry leaders and intensive mentoring from established customers in the healthcare industry to help foster innovation. Its curriculum includes advice on recruiting founders and employees, raising money, identifying and approaching customers, shortening sales cycles, building pipelines, and scaling up for success.

Entrepreneurs are also given access to investors and advice for building relationships with them because, Collens says, the challenges in healthcare are unique.

“Healthcare is particularly complex,” he says. “Unlike most industries—where, if you create a solution that solves a problem, you can expect there will be a way to generate money off it and create business—in healthcare it doesn’t work that way. You really need to understand the economics of healthcare and the workflow of healthcare to develop a business model that will work, in addition to a product that will work. That requires a deep amount of industry expertise.”


“When I arrived in Hartford, I was thinking, wow, there’s got to be a lot of stuff going on,’’ Tyler says. “I started reaching out to a lot of people to see what was happening, and it was very, very quiet, just kind of waiting for somebody to throw a match.”

Two years later, a match has been thrown. Helped by a grant from the state of Connecticut and investments from several major Hartford insurance carriers and other investment groups, Hartford InsurTech Hub opened in January. It’s driven by Startupbootcamp, a Danish firm that operates accelerators in several industries to identify promising new startups and expose them to investors and industry partners. Eleven startups selected from more than 1,000 applicants will participate in the three-month accelerator, where they will be coached on how to improve their products and how to get their ideas in front of the right people in the insurance industry.

“For many years [Hartford] was the go-to place for insurance technology specialists,” says Frank Sentner, sole proprietor at Sentwood Consulting and former technology guru for The Council. “Unfortunately, it plateaued and stayed there for 25 or 30 years. They didn’t invest in technology, so there are very few people here who have the skills necessary to meet today’s needs. Insurance companies are having to go to New

York or Boston to attract people who have the skill set they need.”

Sentner believes the Hartford InsurTech Hub is an opportunity to move past that plateau and bring innovation back to Hartford. Tyler agrees. “A lot of people want to talk about disruption, but I think we’re really focused on evolution,” Tyler says. “And I think we all need to figure out how we rewire ourselves so that we continue to grow and insurance remains a vital part of Hartford. The need here is for this group to rapidly educate itself and start to rewire the industry.”

What’s in It for Me?

Accelerators have shown they can provide a range of benefits—jump-starting a local economy among them. According to a 2016 Brookings Institute report, the first U.S. accelerator was launched in 2005, but growth in U.S.-based accelerators really took off after 2008. Business models vary, with some accelerators making their money from investors who want a front seat to check out new technology, while other accelerators take a percentage of equity from participating startups. They may also charge investors to participate.

Working with young entrepreneurs is a great place to be. These entrepreneurs often deliver in creative ways solutions able to solve world problems in an easier and faster way than we will ever be able to.

Sabine VanderLinden, CEO, Startupbootcamp InsurTech

Startupbootcamp, for example, takes a small equity stake in the startups it accelerates. Additionally, major corporate sponsors contribute to each accelerator that Startupbootcamp offers. In the Hartford case, corporate sponsorship is provided by Cigna, The Hartford, Travelers, CTNext, USAA, White Mountains, and Crawford & Company. In exchange, the sponsors give Startupbootcamp guidance on what types of technology they would like advanced.

“Working with young entrepreneurs is a great place to be,” says Sabine VanderLinden, CEO of Startupbootcamp InsurTech, which is based in London. “These entrepreneurs often deliver in creative ways solutions able to solve world problems in an easier and faster way than we will ever be able to. While they bring product design knowledge, creativity and marketing acumen, large entities provide years of data, regulatory expertise, relationships.”

For The Hartford insurance company, having an accelerator in its backyard allows the carrier to expose more of its employees to new technologies, says John Wilcox, the company’s chief strategy and ventures officer. “There’s obviously benefit for us in terms of outsourced R&D at some level, but there’s also benefit in getting some of our people exposed to this ecosystem and this set of new ideas and the creative thinking of the startup community. That’s hard to do when they are on the West Coast,” Wilcox says. “Having them here in Hartford, we can engage in a much more robust way. It’s easy for us to get mentors and executives to go and spend time there and understand what they are doing.”

The Global Insurance Accelerator (GIA), launched in 2015 in Des Moines, Iowa, also positions access to startup innovation as a selling point for funders. GIA has seven sponsors that contribute $100,000 each to the accelerator. Each sponsor receives an equal share in the 6% equity surrendered by the participating startups, which each receive $40,000. “The ask of these seven was a $100,000 contribution per year and participation from their key leaders,” says Brian Hemesath, managing director of GIA. “The promise of delivery was that there would be this new innovation platform where they could discover new technologies and they could interact with the startup companies and their employees would get a chance to learn from working with them. If you do the math on a multi-member fund like this, where we only take 6%, the potential for return just on that 6% is not anything to get excited about.”

In addition to making it easier for brokers, carriers and others in the industry to witness insurtech technologies in person, accelerators can help these stakeholders keep tabs on what competitors are doing or identify rising talent.

“We get visibility in an efficient way because accelerators are a gathering place for startups,” says Paul Mang, global CEO of Analytics at Aon, a corporate sponsor of GIA as well as Plug and Play, another leading insurtech accelerator. “Startups converge at a place where, for us at Aon, we get more access, more connections to interesting ideas that are coming from outside our own boundaries. Not only do we get to assess the ideas that are coming from different non-traditional sources, but we are there looking for talent. We’re at least looking at people we might track as they develop. And we also get to see what others in the industry are doing, what the other corporate sponsors are doing.”

Marie Carr, PwC Partner–US Advisory, says leaders at carriers and brokerages are beginning to appreciate the innovations being developed by startups. “Insurance moves at a very cautious pace, even if there is a potential need,” says Carr. “What has changed is that every executive that I talk with now is saying, ‘This stuff is so good. That company right there could solve a number of our problems.’ They are really looking at partnering. A couple of them are not only looking at offensively, but defensively, which is, ‘Hey, maybe I should get in and buy this startup because I know my competitors are investing in it too. I think I want to own it.’”

From Insight to Investment

We get visibility in an efficient way because accelerators are a gathering place for startups.

Paul Mang, global CEO of analytics, Aon

For the startups themselves, participating in an accelerator can yield a range of possibilities. Initially, startups can gain valuable insight into what their products need in order to be a viable investment for the industry.
“The terrific thing about them is they are smart people, they understand technology, are creative and high energy,” Wilcox says. “But their depth of insurance expertise varies. Obviously, what we can bring to the table is people who are experienced in business and have deep subject matter expertise as well as just an understanding of what’s required for a startup to scale and be a valuable partner to a large insurance company.”
GIA, for example, aims to foster innovation in the insurance industry by producing an annual, mentor-driven, 100-day program in which startups receive insurance-specific mentoring through one-on-one meetings with industry executives. The startups also receive basic business infrastructure assistance, coaching on garnering investments, and product-specific insights into strategies for increasing applicability to and feasibility for the insurance industry.

Will Dove, CEO of Extraordinary Re, says joining an accelerator provided entry to boardrooms faster than he thought possible. Extraordinary Re, which has created a platform to foster a new marketplace for trading insurance liabilities, went through Plug and Play’s 2017 insurtech accelerator.

“The biggest benefit is just being part of the Plug and Play ecosystem—being on the list that Plug and Play presents to corporate sponsors and investors,” Dove says. “We got dozens and dozens of meeting with some of the biggest insurers and reinsurers in the world, and those kind of relationships and activities continue to this day.

“I do have a lot of connections in the insurance and reinsurance industry, so the companies that we met through Plug and Play I think we could have gotten meetings with, but it would have taken us at least a year to get the number of meetings and the right people at each of the organizations instead of three months through Plug and Play. That’s the real value of an accelerator. You just get through a lot more a lot faster in that environment than you could on your own.”

Steve Sherlock, founder and CEO of Pablow, an Australia-based vacation rental insurance startup, says getting accepted into the Global Insurance Accelerator was transformative. “Since we didn’t understand the regulations that are required in the insurance industry in the U.S.,” Sherlock says, “going through the accelerator gave us access to people, like insurance commissioners, so we could understand what insurance regulations we need to meet.”

Ultimately, many accelerators aim to foster true investment in viable industry solutions that will benefit all stakeholders. “The ultimate goal is to enable startups with solutions relevant for corporates to find their first customers and then the investment required to grow and scale,” VanderLinden says.

Hemesath, from GIA, says investment opportunities arise when a carrier makes a seed investment in a startup and takes a deeper equity position. “At the end of the day, if GIA does not bring startups into the fold to the carriers to actually work with and do pilots and improve the industry, then we shouldn’t be doing this,” Hemesath says. “We hope that we find companies that otherwise are almost broke or don’t have very many prospects to break into this very hard industry to break into. And we hope that we give them the guidance to do those things and that, on the flip side, the industry is better off for it.”

Do they deliver?

At the end of the day, if GIA does not bring startups into the fold to the carriers to actually work with and do pilots and improve the industry, then we shouldn’t be doing this.

Brian Hemesath, managing director, Global Insurance Accelerator

“I think the accelerators have largely delivered what they said they would deliver—the aggregation of innovative ideas and all that,” says Aon’s Mang. “But I think the real question is are the large organizations that are part of them—the partners—are we really getting the most out of it. Are we able to make the most out of that access? I think it’s too early to tell.

“I think the challenge is that getting access to ideas externally has no economic value. The real challenge is how it affects what an organization does to deliver to its own client base.

“[But] we’ve seen in recent months some very promising technologies built into new business models that are addressing real pain points in core insurance operations. I’m excited about innovations that help our industry dramatically improve operational processes that will ultimately provide clients with new, innovative solutions to tricky risk problems. For instance, we have already successfully piloted a machine learning claims management solution and have begun deploying it into the market. There are other core operation solutions being evaluated now and I anticipate this area will gain more attention in 2018.”

Patten is a contributing writer.