I look forward to our leadership issue every year. It’s generally a time when I can give you my perspective about leadership in general or reflect on something positive that happened over the summer, like the impressive work of our 14 college interns who recently completed their time with us (and who may be knocking on your door in the near future).
As a CEO, passion for the business can be a beautiful thing. But when that passion extends to being engaged in every last detail, things can get ugly.
In a masterpiece of marketing, Dubuque, Iowa, now calls itself the “Masterpiece on the Mississippi.” Indeed, in recent years the city of 58,000 has been lauded for its lively, art-infused riverfront development, growing technology and financial services industries, and relaxed way of life.
As CEO at Cottingham & Butler, Becker has become a fixture in Dubuque, Iowa, the hometown he left behind for 20 years.
After nine years as a consultant with McKinsey & Co., Becker came to Cottingham & Butler with no experience in insurance.
Since Becker started in January 2004, the company’s annual revenues have more than quadrupled, to $146 million.
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When hedge fund manager and activist investor William Ackman sent a letter to the board of directors of pharmaceutical giant Allergan three years ago, he didn’t leave anyone guessing about his intentions. “Your actions,” Ackman wrote, “have wasted corporate resources, delayed enormous potential value creation for shareholders and are professionally and personally embarrassing for you.”
Economist Milton Friedman, the father of activist investing, criticized calls for corporations to act for the public good.
In 2016, activist campaigns were directed at more than 750 companies.
The insurance industry has largely been protected from activists, thanks in part to tight regulatory oversight.
My main goal was to control my destiny.
When it comes time for brokerages and independent agencies to partner with carriers to insure a client, more and more are choosing Nationwide because of its highly diversified portfolio and its expertise in helping to find the right mix of solutions to protect a client’s assets.
Nationwide offers a full breadth of products and services in its highly diversified portfolio.
Its 90-year history demonstrates that Nationwide will be here in the long term.
Reliability and deep industry expertise are two hallmarks of the organization.
A tidal wave is headed our way in the insurance industry—one that will change our business forever and test our resolve as leaders and as companies. As the leader of one such affected company, I welcome this transformation.
In today’s fast paced, tech-driven world, consumers and organizations constantly keep a finger on the pulse of new technological advancements. For consumers, it may be due to FOMO (fear of missing out), but for organizations around the world and across industries, it’s the fear of being blown out of the water by their competitors.
The merger and acquisition process is ultimately driven by communication. Who communicates what—and when and how they do that—at every stage of the buy-sell journey could ultimately determine the success of a deal.
Cyber attacks finally grabbed the attention of executives and board directors in 2014 when Institutional Shareholder Services recommended seven of the 10 board members at Target not be reelected because they failed to ensure the company’s digital assets were protected against a data breach.
The U.K.’s Insurance Act of 2015 imposes a new legal framework that affects every business insurance policy placed in the London market (and every London policy renewed or amended) going forward. The act is good news/bad news for policyholders.
Your mother told you to mind your manners. London commuters mind the gap, and sailors mind the rocks. You know you can mind your own business, but did you know you can mind your mind? Your mother told you to mind your manners. London commuters mind the gap, and sailors mind the rocks. You know you can mind your own business, but did you know you can mind your mind?
There’s been some chatter lately about an interesting insight published in a McKinsey 2015 report. It revealed that in 1990 the top three U.S. automakers had among them $250 billion in revenue and 1.2 million employees.
We want people to shop around for their healthcare, but we don’t necessarily arm them with all the tools to do so.
In the war against cyber attacks, a major complication is the constant evolution in the scheming originality of the attackers. Last year more than 18 million new malware samples were conceived—an average of 200,000 viruses, spyware, worms and other insidious codes each day.
One study found the average annual cost of cyber attacks worldwide was more than $9.5 million per company.
Cyber thieves want different things, from inside information on a new product to personally identifiable information for credit card fraud.
The National Cybersecurity Center grew from the vision of Colorado Governor John Hickenlooper.
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A foreign country launches a physical attack by air, sea and land against a large American city, resulting in extraordinary property destruction and the loss of untold lives. Is this war? You bet.
Across the globe, there is no statutorily agreed upon definition of cyber war.
If a cyber attack were considered war, insurers would be on pretty firm legal ground to exclude insured losses resulting from the event.
The world’s inability to come to consensus puts brokers in a very uncomfortable position.
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Our $5 trillion global insurance industry is in the midst of one of its biggest upheavals in history, and it will affect how brokers interact with and retain their clients. In an industry whose basics have remained largely unchanged for more than a century, longtime players are now scrambling to reshape the entire value chain, from product development to distribution to service delivery strategies.
With client expectations rising, there’s more pressure to deliver real-time customer service.
A litany of routine tasks can be resolved more efficiently through automation, from processing a claim to sending a cancellation notice.
Customers expect what they want the way they want it when they want it, and technology can help provide it.
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When AIG announced in June it had completed its first multinational insurance “smart contract” using blockchain technology, Risk Cooperative, a commercial insurance brokerage and consulting firm, was announcing to the industry it was partnering with blockchain tech firm Bitfury to make the same technology available to commercial insurance brokers.
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It’s a broker’s fantasy world. What if there were enough data at their fingertips to more accurately estimate how many of a client’s healthy employees will suffer a chronic disease in the coming year? Or which benefits options are most effective at retaining employees? Or what potential employee issue is hiding under the radar?
As a long-standing payroll and benefits administrator, ADP has aggregated and formatted data from more than 30 million employees.
The company is using the data in areas such as human capital management and predictive analytics.
ADP is investigating other potential models to help clients understand possible future outcomes.
Everywhere you turn, someone is talking about the death of the insurance agent. In its “2017 Top Issues” report, PwC says insurance is the industry most affected by disruptive change. This comes from CEOs who are extremely concerned about the speed of technological change, shifting customer behavior and competition from new market entrants.
When I told Hillary Clinton she was my inspiration for doing the work I do…she said that’s what makes her continue her journey.
Given the pace of change in insurance, it’s imperative management not overlook the opportunity to improve growth and profitability by harnessing top talent. Businesses that successfully identify and promote talent without biases, such as gender, have proven to be those best able to compete.
It’s a nightly occurrence in office buildings worldwide. As the business day winds down and your employees head out the door, computers are left on, laptops are left out and passwords are scribbled on sticky notes in plain sight.
Think about your organization from the lens of a buyer. Put yourself in the acquisition seat for a moment. Now, what does your business look like?
The recent WannaCry ransomware outbreak was the major global cyber attack that security experts have been warning of for years. It wreaked havoc by encrypting data on an estimated 230,000 computers in 150 countries and demanding a $300 ransom paid in bitcoins to get the computer decrypted (which reportedly did not work in some cases).
The announcement of Amazon’s acquisition of Whole Foods has caused a ripple effect through the retail grocery industry. While most analyses focus on the market strength and reach of both brands, a look under the hood reveals some trends and direction that will continue to affect the way business—all business—will be done as we continue to hurtle into the future.
Right now, Washington has become a town built on exciting sagas: investigations into Russian relationships, the ongoing Obamacare repeal-and-replace debacle and the tax reform debate. They are all great examples of potentially titanic developments that could result in fundamental changes to the way we do business.
IBM’s Watson is in the news again. But he may need therapy after the latest reports.
It’s July Fourth. For many Americans, it’s a day to take time off to enjoy with friends and family, maybe watch a parade and, as the day settles into night, take in some fireworks.
Last week, Senate Republicans released their Better Care Reconciliation Act, which leaves the employer/employee tax “exclusion” on group health benefits untouched, but perpetuates an ongoing fight around subsidies and Medicaid.
The way consumers are viewing auto insurance is changing, says a Willis Towers Watson Survey on usage-based auto insurance, or UBI. The survey examined how the spread of in-car technologies and connected cars is influencing, among other things U.S. consumers’ attitudes toward UBI.
Thirty-five years ago, American employers began shedding costly pension plans and shifting their workforces to newly minted 401(k) plans. Today, those savings accounts present problems of their own—and opportunities for benefits brokers thinking about entering the retirement planning space.
More than 30 million workers nationwide do not have access to tax-deferred 401(k) accounts.
By some estimates, America’s retirement savings shortfall is as high as $14 trillion.
Delayed retirements affect the bottom line through increased health costs and strains on productivity and innovation.
Phil Rigueur, VP, Joint Venture Markets, Aetna
If you want to understand business trends, you’re often told to follow the money. We watched more than a billion dollars pour into insurance technology companies in 2016, and one of the most heavily funded insurtech areas was healthcare.
Among the most pressing issues facing the healthcare industry: the unsustainable pace of rising costs.
Yet even as consumers pay more, most have no idea what they’re spending.
Insurtech startups are diving in with potential solutions to price transparency, but uptake is low.
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Traditional long-term care insurance has been plagued by a series of increased premiums, reduced benefits and consumers leaving the market altogether. Yet every day 10,000 baby boomers turn 60, and most will require long-term care during their lifetime.
Women bear the brunt of providing long-term care assistance to family members.
The average woman is also more likely than the average man to require long-term care.
The 65-and-older population is expected to jump to 74.1 million by 2030.
What does it take to get to the top and stay there? With annual premium growth across the market dragging in the low single digits, how can companies grow?
Top brokerages are redefining their business models to build and bolster a competitive edge.
Many are acting more as consultant than salesman.
This changing model is having an impact on revenue streams.
As benefits brokerages search for ways to set themselves apart, a new battleground is emerging: finding and retaining key people. The battle for talent has always been an issue for brokerages, and now it’s also a problem for their clients.
Too often, human resources departments are mired in the day to day instead of long-term planning.
Companies such as ADP handle day-to-day HR tasks and provide advice on client-specific problems.
These services free HR departments to work more strategically on long-term planning.
They’re like, “What? You have what going on?”
When was the last time you experienced buyer’s remorse—that unsettling feeling you get when a purchase just doesn’t live up to your expectations?
When thinking about cyber risks, most companies envision external bad actors trying to hack into their systems or disrupt their operations. They’re half right.
The pain points for purchasers in group health insurance over the last five years have been aggressively targeted by startups. As always, this is an opportunity and a threat.
You’re in acquisition mode and engaging with sellers. You’re putting out feelers for prospects and entertaining conversations with interested parties.
The day-to-day work of the NAIC, during which regulators talk the nitty-gritty of actual regulation, is done in its countless committees and working groups. And, more and more, interest is growing in how technology issues—insurtech, big data, cyber, etc.—affect insurance markets and consumers.
No matter where you go these days, you can always find something to read about insurtech. In the insurance-industry specific press, the coverage is starting to reach Trumpian levels of overexposure, which makes it exceedingly difficult to filter out the noise. But there are still useful things to explore.
Council members offer some of the most compelling insights into today’s—and tomorrow’s—insurance market.
The continuing soft property-casualty market doesn’t necessarily mean hard times for brokers. Many don’t even consider market conditions when formulating organic growth strategies.
For some firms, organic growth can be bolstered using strategic M&A.
The greatest opportunity to maximize organic growth might just be retaining your clients.
Technology plays a role in organic growth by allowing customers to transact business digitally.
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The startup wave that’s transforming insurance is still dominated by the U.S., but insurtech is becoming a truly global phenomenon. Cities such as Berlin and Singapore are among the hotspots outside the traditional big insurance centers of New York and London.
Karen Gustin, LLIF, Ameritas Life Insurance Corp., EVP, Group Division
I was the kid who had the lemonade stand.
Caribou Honig co-created Insuretech Connect last year, the largest insurance technology conference of 2016. He has been a venture capitalist for several years and has a keen interest in insurtech. He will be leaving QED Investors, a firm he co-founded, later this year to devote more time to insurance technology and education. We recently sat down with him in his Old Town office in Alexandria, Virginia.—Editor
About two years ago, we saw insurtech was about to go through what I call its Cambrian explosion—a bunch of experiments, many of which natural selection would eventually prune away.
The product side is actually where I see the greatest opportunity to change the game, to create bigger transformation.
If you are a carrier and you’re worried about your existing agent distribution footprint retiring off, you still need to worry.
Cyber insurance is one of the fastest growing insurance markets; it is expected to grow from $2 billion today to $20+ billion over the next decade. It has given agents and brokers the boost they have needed as global insurance rates have steadily declined over 15 consecutive quarters.
Mike Holley was on a plane to Germany within days of the U.K.’s vote to leave the European Union, and he says authorities in Hamburg “rolled out the red carpet” in welcome.
Holly is chief executive of Equinox Global, a London-based managing general agent specializing in whole-account trade credit insurance.
Under Brexit, British brokerages and insurers appear certain to lose their passporting privileges.
Some British firms are moving to establish EU subsidiaries.
The doomsday scenarios that were predicted after the vote will likely not materialize.
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Besides revenue, what do you have to offer a buyer? What else do you bring to the table that sweetens the pot? Whether your agency is focused on employee benefits, property- casualty or both, in our experience the ultimate differentiator is predictable, profitable, organic growth.
Speaker of the House Paul Ryan and the newly minted Trump administration vowed to replace what some called the “Obamination” with a national health strategy that would return insurance plan choice to individuals.
The latest salvo in the cyber-security regulatory wars is the recently issued New York state Department of Financial Services Cybersecurity Rule. The far-reaching rule technically applies to every individual and entity operating in New York under the banking, insurance or financial services laws.
Most people who keep up on current events can name at least one celebrity banking executive—for example, Mark Carney, the oft-quoted governor of the Bank of England. But a celebrity insurance exec? Not so much.
Hey, it’s May. What do you mean, “so what?” The year is almost half over. Remember back in January, when you identified all those things you wanted your organization to achieve, that amazing strategy you put together for 2017 filled with things you wanted to change? How’s that going for you?
Sellers still rule, but for how long? And if you don’t want to sell? Then you must have a succession strategy. This year’s M&A supplement, provided by MarshBerry, includes a 2016 year in review, a 2017 outlook and other insights for buyers and sellers in the broker M&A market.
Anthony Kuczinski, President and CEO, Munich Re
Workers compensation reform is likely to remain a controversial issue in the coming months as state legislatures across the country debate proposals that range from limiting the drugs doctors can prescribe for injured workers to shrinking employers’ obligations under the system.
In a recent House Homeland Security Committee meeting, Homeland Security Secretary John Kelly testified that under his watch all foreign visitors to the United States will be asked, “What [Internet] sites do you visit? And give us your passwords.”
How do commercial insurance brokers conquer the world outside their home borders? They choose carefully.
No matter how you do it, all paths to cross-border alliances must be approached with caution.
The nature of such alliances varies, as does the scope of commitment.
Recent data show the global deal volume in 2015 was nearly $20 billion.
It was June 2015 in Philadelphia, and the time had come to fish or cut bait. The conversations, the questions—the possibilities—had been murmured about for years.
From its start in 2002, the Benefit Advisors Network was designed to share best practices and collaborate for mutual benefit.
Alera Group is composed of 24 entrepreneurial insurance and financial services companies from across the country.
Alera began in January as one of the largest privately held multi-line insurance brokerages in the country.
Want some click bait? According to John Wright, “If you cross the border with your business and you don’t have somebody who has experience with that country’s insurance regulations, you’re lighting a stick of dynamite.”
Insurers and business owners have gone to jail over their ignorance of local insurance regulations.
The boom in cross-border purchases affects not only Canadian and U.S. brokers and agents, but carriers as well.
If a U.S. brokerage isn’t licensed in Canada, it will work with a Canadian firm to ensure it’s doing business legally.
The potato gun has been the featured event at a number of our sales retreats, much to the chagrin of the resorts.
A financial meltdown. A sluggish recovery. A growing concern over income inequality. An increasing distrust of elites.
Coal miners once brought caged canaries into the mines to warn them of pending trouble. If dangerous gas were present in a mine, the canaries would die first, serving as a warning for miners to get out fast.
When Verizon agreed to buy Yahoo for $4.83 billion, it didn’t know about Yahoo’s 2013 and 2014 data breaches. They were disclosed in the midst of the acquisition—driving home the importance of conducting cyber due diligence early in the M&A process.
Culture can be a strong and unique differentiator. Like an iceberg, the bulk of it lies below the waterline, things you can’t see, such as implicit norms, values, hidden assumptions and unwritten rules, says Edgar Schein in The Corporate Culture Survival Guide.
But this time was different. Leadership is being tested around the world both in public and private places, online and in communities, and I was torn about whether to comment on what is happening around us. It took nine drafts of this column before I finally surrendered to the printer.
Leadership is about responsibility. It’s about passion and motivation. It’s about making change happen and being genuinely concerned for those you lead. Every day, you are faced with mounting pressures—rapidly changing technology, globalization, a 24-hour news cycle, changing client expectations and other business challenges specific to our industry. But you thrive because of your leadership skills. You surround yourself with the best talent, listen and seek your teams’ advice, create a positive and supportive culture, take risks, overcome generational stereotypes, embrace diversity, understand industry shifts and work to attract more great people. There are probably a whole host of other things you’d add to this list, but at the end of the day, your leadership yields both present and future success.
It seems like a straightforward formula.
But something is amiss in today’s culture. I understand the diverse nature of leadership in this day and age. I realize there are different definitions, different expectations and non-traditional approaches. But chaos is not an approach. Bullying is not governing. Creating an atmosphere of uncomfortable angst and indecision is not vision.
When did gamesmanship replace statesmanship?
I have admired and respected many business leaders over the last 25 years. Those who come to mind for me were men and women of principle. They understood the value of communication and compromise. They listened to and deliberated different points of view because it was the right thing to do. From them and through my personal experience with mentors and peers throughout the years, I’ve learned how rewarding pragmatic leadership can be. Being open, clear and authentic leads to better results and greater morale. When I challenge my team, I do it to bring out the best in them, to help them realize that they are capable of something greater. At the same time, I make sure they know that I care about them and their values. Doing these things isn’t a sign of weakness; it’s a measure of respect.
I recently returned from a trip to Italy. When we told people we were from Washington, D.C., they looked at us worried and offered unsolicited observations. After it happened a few times, it caused me to pause and really think hard about how the world has changed.
This month’s issue highlights how trust, communicating your ideas, listening to others’ ideas, and recognizing your own weaknesses can make you a better leader. Ups and downs are part of the job; we all know that. But it is the responsibility of the leader to navigate the noise, build trust, be accountable and put people first.
Thank you for your leadership.
“I’m not sure exactly what the turning point was,” admits Adam Bruckman, president and CEO of OneDigital Health and Benefits. “But as the company grew larger, it just became impossible to keep up with this growth and still stay involved in every aspect of the business.”
A blindspot had been unveiled. Bruckman recognized he wasn’t willing to delegate. He felt if he didn’t do it himself things wouldn’t be done to his satisfaction.
“Essentially, I was worrying way too much about the small stuff rather than developing my team and trusting this team to help lead and develop the business,” he says.
Fortunately, one of Bruckman’s strengths is a willingness to listen and take feedback. And after hearing the same encouragement to focus on the bigger picture “over and over again,” he finally began to do just that.
“Now, we work regularly with our leaders on building out their teams, delegating more of the tactical work and focusing their time on high-value and strategic activities,” he says. Recognizing and working through that blindspot ended up strengthening not only Bruckman but also the company as a whole.
The most challenging thing about blindspots is that, well, we tend to be blind to them.
But as Bruckman and other leaders can attest, taking the time to honestly explore one’s own strengths and weaknesses—even if takes others helping us recognize what they are—is about far more than personal growth.
The Leadership Literary Landscape
In recent years, a handful of new and updated business books have tackled the balance of strengths and weaknesses and their impact on leadership in varied ways. Robert Bruce Shaw’s Leadership Blindspots describes the blindspot as an “unrecognized weakness or threat that has the potential to undermine a leader’s success.” This might be related to one’s own beliefs and behavior, the capabilities and motives of the team, the capabilities and culture of the organization, or the trends and competitive threats in the industry. But not all blindspots are bad; according to the author, they can be adaptive
Unique Ability 2.0: Discovery–Define Your Best Self by Catherine Nomura, Julia Waller and Shannon Waller is based on a concept by Dan Sullivan, co-founder of Strategic Coach. It focuses on finding the very best version of oneself by exploring innate uniqueness, passions, talents and life experience.
“Because you use [unique ability] so naturally and willingly, it’s constantly evolving and improving as you move through life,” the authors say. “When you give it room and focus on it, that evolution speeds up, and the value you create for others increases, as do the rewards.”
The long-standing model of the Johari window helps individuals understand how they relate to themselves. And the tried-and-true 360 Degree Feedback process is also an effective tool.
However, no leadership discussion is complete without mentioning the celebrated business management book First, Break All the Rules: What the World’s Greatest Managers Do Differently, which was expanded and re-released last year.
Jim Harter, Gallup’s chief scientist of workplace management and well-being, has been involved with Gallup research for more than 30 years, including the studies that led to the initial publication. The work focuses on strengths-based leadership, a concept Harter still finds often misunderstood.
If I do a good job at removing hurdles and roadblocks for the team…and let them do their job…then I’ve done my job.Tweet
“The approach, which we’ve found to be extremely effective, doesn’t imply you shouldn’t know about or even think about weaknesses,” he says. “The goal is to put employees in positions where they can spend an abundance of their time doing what they do best, knowing they’re still going to have to do some things they don’t love to do. But it’s also becoming aware of weaknesses so you can make those weaknesses irrelevant by partnering with the right kind of people, building the right kind of teams over time, and designing jobs where people can leverage who they are rather than who they aren’t.”
That requires self-awareness on all counts. The way Harter sees it, it’s essential for those in leadership to continue seeking—and exhibiting—discernment of their own strengths. When the leader is engaged, the rest of the employees are more likely to be as well.
“People assume that when you get to a higher ‘rank’ that development is no longer necessary,” he says. “It’s just the opposite. It’s continually important and necessary, regardless of the individual’s tenure or status in the organization.”
We asked some successful leaders in our industry how they continue to explore, grow and—as a result—build out their organizations in healthy ways. And we found that though they may all have different strengths and weaknesses, discovering how they can best support and position their teams for success is a true foundation for leadership.
Steve Brockmeyer, President & CEO
Bolton & Company, Pasadena, California
Self-Described Strengths: Collaborative, non-dictatorial, modeling through example
Admitted Weakness: Conflict avoidance, jumping in too quickly with “solutions”
Brockmeyer has always been a “roll up the sleeves and get it done” kind of guy. So much so that, when he was asked to take the helm at Bolton & Company in 2001, the then-president told him, “You’re doing the job anyway.”
It was the same way with his fraternity, Sigma Nu, at the University of California, Santa Barbara, more than a decade earlier. He was always “setting up, advocating for this, promoting that,” until all of a sudden, at 20 years old, he found himself running the equivalent of a small company with 70 people (an experience he still describes as the best takeaway of his college career).
He continues to prefer doing instead of just talking, he says, but over time, he has learned to step back and let others jump in first.
“I tend to default into problem-solving mode,” he admits. “Not in a dictatorial way or, ‘You should….’ But when someone asks me a question, or many times even if they don’t, I start talking. I tend to jump right to ‘solutions’ and don’t take the time to ask for more clarity or context around the issue…or what they think.”
After enough conversations ended with confusion and “Thanks, but that’s not really what I was looking for,” he began to recognize the blindspot, and he’s worked to listen more effectively and ask more questions.
“I realized a significant amount of the time the person I was communicating with already knew the answer or the path to take but maybe didn’t even realize it,” he says. “As we talk, they begin to see the path more clearly, and they are solving the issue, not me. Hopefully that gives them more confidence and education that will enable them to grow and become more self-reliant.”
Bolton & Company has invested heavily in leadership development, communications training, mentoring and other initiatives to help its 180 employees grow as individuals. A couple of years ago, Brockmeyer helped establish a “people team” led by a senior-level director of organizational development.
“Our assets are our people,” he says. “That’s all we have, and we need to do a better job with them. It’s that old story: your assets walk out the door at the end of every day, and you just hope like hell they walk back in the next.”
Personal development, he says, doesn’t just happen by chance—and he knows this from experience. Those habits of quickly taking the lead meant he didn’t receive formal training early on.
Don’t wait around for somebody to say, ‘Hey, do you want this promotion?’ Go for it. If you really want it, step up and ask for it.Tweet
“But we’ve got young people up and coming, and I want to make sure they’re getting the support they need to be better at what they do,” he says. Brockmeyer has done his fair share of self-exploration through study, training, mentors (and learning from his own father’s example), and that practice won’t stop any time soon. It’s not just about being a better leader, he says, but rather being a better person—one more able to enrich the lives of others.
“As a leader, I’m not looking for followers,” he says. “I’m looking for people I can help….I joke I don’t know what my role in the company is. But if I do a good job at removing hurdles and roadblocks for the team…and let them do their job and give them the right facilities and support and tools and markets, if I can give them that, then I’ve done my job. That’s who I am. People don’t work for me. I work for them.”
Duane Smith, President
TrueNorth Companies, Cedar Rapids, Iowa
Self-Described Strengths: Visionary, quick starter, win-win
Admitted Weaknesses: Low follow-through, impatience
When TrueNorth Companies presented its “2020 Plan” to employees in 2010, the announcement was alive with possibility. The organization was at $26 million in revenue with 133 employees and, with conservative growth of 5% organically and $5 million through mergers and acquisitions, was projected to expand to 400 people and $100 million in revenue in the not too distant future.
“We shared that with everybody and said, ‘This is an opportunity for everybody here,’” Smith says. “‘If you’re wearing three hats now, and if in the future you want to wear just one, or if you want to wear a totally different hat, we’re going to be adding 270 people minimum over the next 10 years. There are tremendous opportunities within every segment of this firm for you to grow.’ The second thing we told them was, ‘We’ll help you identify those opportunities…but you need to take ownership. Don’t wait around for somebody to say, Hey, do you want this promotion? Go for it. If you really want it, step up and ask for it.’”
The organization is already closing in on those goals, recently at 300 people and $65 million in revenue. “It worked so well that in 2015 we did a 2025 plan,” Smith says. “In 2025, we’ll be over $200 million in revenue with 900 people.”
The key to that success? Not only developing the plan but also communicating it clearly.
Easy enough for Smith, whose own personal mission statement is that he is “passionate about providing vision and instilling confidence in others to follow and succeed.” And by doing what he does best, he has helped others to do likewise.
“I have found that when I am engaged in this capacity, my energy level is very high and it is the best use of my time,” he says. He developed his mission statement using the book Unique Ability: Creating the Life You Want (also by Catherine Nomura, Julia Waller and Shannon Waller).
It’s about putting people in positions to be successful, finding ways to motivate them individually, and realizing some need to see a softer side and others need a kick in the butt.Tweet
Smith is so sold on the benefits of identifying individual passions and exceptional talents that he estimates he’s given away more than 300 copies of the book to others.
But that’s not all: TrueNorth has developed an operating model it calls the Owners Manual, used to communicate focus and lead change. There’s an element called Structured Entrepreneurialism, which aims to balance structure with an entrepreneurial, innovative mindset, creating a dynamic culture of high-performing talent and opportunities.
“After identifying my unique ability 10 years ago, I re-engineered my life to focus on my personal mission statement and fired myself from the majority of the tasks that were not within my unique ability,” he says. “I had reached a ceiling of complexity that many of us reach throughout our career. I was the CEO at TrueNorth, but I also was the sales manager, producer, peacekeeper, you know the drill…. We were at a crossroads: sell and let someone else fix our issues or roll up our sleeves and fix it ourselves. We decided to fix it ourselves.”
As for “fixing” his individual weaknesses, Smith admits he’s from an era in which people worked harder on improving the negatives than highlighting the positives. It’s taken him decades to change his way of thinking, he says, and he has learned to do a lot of delegating along the way. That’s especially the case when it comes to his challenges with impatience; TrueNorth has grown from one project manager to six, he says, and clear timelines and progress reports help him stay calm.
Adam Bruckman, President & CEO
OneDigital Health and Benefits,
Self-Described Strengths: Visionary, collaborative, inclusive
Admitted Weaknesses: Ability to delegate and stay out of others’ areas of expertise
Bruckman considered himself fairly self-aware. But over the last few years, he’s found unexpected new passion, energy and purpose by diving into something he’s long advocated to others: greater work/life balance.
Bruckman, who played lacrosse while studying economics at Tufts University, coached both his sons through junior levels. But then he was asked to become the varsity lacrosse coach at their high school, leading to “a very reflective few months.”
Yes, he leads an organization of 800 employees, one he started in 2000 at age 32. But he also knew that the shared time with his boys would be fleeting.
“I love what I’m doing day to day in my job,” he says. “But I love being with these young men, too, teaching and coaching them. It’s really not that much different. It’s about putting people in positions to be successful, finding ways to motivate them individually, and realizing some need to see a softer side and others need a kick in the butt.”
And as he invested time in doing that, he says, his time at the office has become more streamlined and efficient. He has delegated more, and he sweats the small stuff less. And the organization is all the better for it.
“As you get a little larger, you have the luxury of rounding out your leadership team,” he says. “That has really allowed me to not try to be all things to all people but to really focus on what I do well.”
In recent years, the original leadership team of three tripled, including the addition of a COO and several other executive-level positions. (Digital Insurance and its advisory arm, Digital Benefits Advisors, rebranded as a single operating company, OneDigital Health and Benefits, in August.)
“I love the people side of the business, being able to inspire folks,” he says. “That’s what I do well, and the company is best served when I focus on those things, not when I’m telling our CFO how to manage the
numbers or our head of sales how to close a deal.
But it’s been something that I’ve had to work hard on over the years, to not feel like I have to have the answer for everything.”
The company—which also has an executive vice president of culture and corporate development—offers a number of different initiatives for employees to likewise discover their unique capabilities, especially focusing on growing leadership from within. One curriculum has four levels, from the basics of interviewing as a new manager to attending leadership training at Disney Institute.
“In our industry, particularly on the agency side of the business, there just aren’t a lot of organizations putting in that time and effort,” he says. “We’ve had really great feedback, and it has been extremely valuable with retention and attracting the right talent…. We work hard on creating an environment where it’s more than just a job.”
Damien Honan, CEO
The Honan Insurance Group, Southbank, Australia
Self-Described Strengths: Motivator, ability to set and maintain culture
Admitted Weaknesses: Being too nice, forgiving to a fault
Honan has learned an important lesson about decisions: as a leader, he’s often judged as much for the ones he doesn’t make as the ones he does.
You can’t make everyone the captain of a team when they don’t possess the skills to do it. But teams need more than just a leader.Tweet
Case in point: dealing—or, rather, not dealing—with nice people.
He’s found himself hoping that nice people within the organization would “respond and make it, when all the signs are showing that their skills, efforts and contribution are not to the level we require,” he says. “That impacts the morale and culture. Other people start to feel there is one rule for them and another for us.” It shows, he says, that he’s willing to accept lower standards from some. But hoping never works, he admits.
What does work, however, is helping employees learn what their individual strengths are and, when something isn’t a good fit, helping those employees consider other options.
Honan gives the example of a particular employee in the finance department who had superior people skills but not other traits that would help him rise to leadership in that department.
“We identified that he had the skills to be a producer,” he says. It took 12 months for the transition to happen, “but his results have been outstanding. He is such a high-level producer, and his contribution to the culture of the company has been amazing. Here was someone who was in the back office and didn’t have high visibility within the broader broker side of the business, who is now front and center of that unit.”
Honan also has seen success by recruiting from outside the industry, especially from fields such as teaching (the ability to clearly communicate), science and finance (analytical thinking skills).
Honan’s father founded the company in 1964, and Damien became CEO in 1996. Since then, he has maintained his easy-going style even as the company has grown. He has learned to focus more on his ability to set corporate culture and feels less like he has to step in and do everything himself.
“It takes a while to trust,” he says. “Not trust in the sense that someone is going to be untrustworthy but more that you can trust their abilities will be able to deliver the outcomes, the results, you want. My leadership has developed in the sense of trusting the people around me to live what the vision and the goals of the company are.”
One of those goals, he admits, is to ensure people want to stay at the company for more than simply monetary reasons, that they understand the expectations of what the company is trying to achieve and feel empowered to act within that framework.
“The ultimate mantra is that we want our people to be the best so that everyone else, all our competitors in the industry, want to steal them,” he says. Even across borders.
Honan’s company is based in Australia, but that doesn’t mean he believes all the keys to business success are found there. Rather, he takes a global approach to best practices and ensures his roughly 185 employees have the opportunity to do the same.
“We invest a lot of resources, through the various programs we run, sending people overseas,” Honan says. Conferences and workshops in the U.S. and Europe may see teams of a dozen or more from Honan at a time, “and the primary reason is for our people to learn how others are operating, how they communicate, how they talk about their businesses.” (North American leaders, by the way, tend to be more assertive but also more politically correct, he says.) A number of training and development programs are available at home, too, helping employees capitalize on individual skill sets.
“You can’t make everyone the captain of a team when they don’t possess the skills to do it,” he says. But teams need more than just a leader.
Soltes is a contributing writer. FionaSoltes@aol.com
Family: Married to Amy since September 1995; three sons, Jonathan, 18; Matthew, 16; and Charlie, 11
Home: Dubuque, Iowa
R&R/Family vacations: Hilton Head Island, S.C.
Good works: Board member of Holy Family Catholic Schools, where he helped rebuild its financial, physical and educational infrastructure; member of the Greater Dubuque Development Board of Directors; member of the Washington University Olin School of Business National Council
Books: Thank You for Being Late by Thomas Friedman; Upside: Profiting from the Profound Demographic Shifts Ahead, by Kenneth Gronbach; Competing Against Luck, by Clay Christensen; The Undoing Project, by Michael Lewis; and anything by the late David Halberstam
Geeking out: Reads everything he can about Nobel-prize-winning physicist Richard Feynman. “I also have the Feynman lectures on physics, so I’m geek enough to read that stuff even though I don’t fully understand it.”
Fun time: Golf and fantasy baseball, where he serves as the commissioner of the league he’s been playing in for 20-plus years. “The only area where I question his integrity is on some of his trades,” jokes longtime friend and early McKinsey mentor Michael Farello.
“You have to take the emotion out of it, and he’s very good at looking at things analytically and objectively,” Farello says. “I daresay I think he has won the league more than anyone else over the last 20 years.”
Awards: Washington University Distinguished Alumni
Industry boards: Council of Insurance Agents & Brokers
Motto: Get better
But in the early 1980s, when David Becker was in high school, Dubuque held little promise or opportunity. The collapse of the farm economy and labor disputes resulted in the closing of the local meatpacking plant and massive layoffs at the John Deere factory. By 1982, the unemployment rate soared to 24%. So when Becker left Dubuque in 1984 to attend college in St. Louis, he says, “I never dreamed for a second that I would be back.”
Even as the city’s renaissance began in the 1990s, Becker still hadn’t given it a thought. He was too busy, first selling IBM systems out of a Lincoln Continental, then attending Harvard Law School and, ultimately, as a consultant with McKinsey & Co., advising CEOs on how to run their businesses. Someone should have told Becker never to say never.
To the surprise of no one more than himself, Becker, 51, has now become a fixture in the hometown he left behind for 20 years. He was lured home by an offer to lead Cottingham & Butler, an insurance brokerage owned by the same family since 1887. He figured he could put into practice the messages he’d been preaching from his perch at McKinsey, with the added benefit of spending more time with his wife, Amy, and his three sons.
Since he started in January 2004, the company’s annual revenues have more than quadrupled, propelling C&B to become one of the top 10 employers in Dubuque. Along the way, he’s helped rebuild a struggling Catholic school system and worked with other movers and shakers to forge the city’s future.
From Consultant to CEO
During his nine years at McKinsey, Becker had seen many of his colleagues leave—some to turn around large businesses, some to join private equity firms, others to start their own companies. But for Becker, uprooting his family from Chicago to become the first outsider to lead someone else’s family-controlled business in an industry he didn’t know was not exactly an obvious next step. Some might even view it as a potential minefield.
Becker himself thought the idea was crazy when, early in 2003, John Butler, the owner of the insurance brokerage founded by his great-grandfather, broached the subject over breakfast. At 72, Butler was looking for someone to help him run the firm. Becker’s father, Marvin, served on the C&B board after many years of buying insurance from the company for the Dubuque-based furniture maker Flexsteel, where he was CFO.
He’d been talking up the talents of his son, the Harvard Law grad and partner at McKinsey. Whether the elder Becker, who died in 2015, saw it as a ploy to get his faraway grandkids back to Dubuque is anybody’s guess.
David Becker attended the breakfast meeting as a courtesy. “I basically told him that’s the craziest thing I had ever heard,” Becker recalls. “I don’t know anything about insurance, and I certainly don’t want to be in Dubuque. So I said, ‘Thanks for the waffle, and no thanks.’”
I basically told him that’s the craziest thing I had ever heard. I don’t know anything about insurance, and I certainly don’t want to be in Dubuque. So I said, ‘Thanks for the waffle, and no thanks.Tweet
Several months later, however, Becker started thinking maybe nine years was enough time to be sleeping in hotels 200 nights a year. And like many consultants who spend their days telling CEOs how to do it right, he says, “You get that itch to maybe do it yourself.”
When Becker accepted the offer from Cottingham & Butler, Aon CEO Greg Case, who then headed McKinsey’s financial services practice, invited him to his office for a crash course in insurance. Becker approached his new job as if he were starting a McKinsey study, interviewing the top 30 people to identify the company’s strengths and weaknesses. “Like every business I’ve ever dealt with in consulting,” Becker says, “the people largely know where the problems are and where the opportunities are if you take the time to ask them.”
Becker quickly won the respect of the sales team by burrowing into the details of the business to figure out how producers could better help their clients. “My ability to get my hands dirty is pretty high,” he says. “So I wasn’t just a giant bureaucrat who was going to call them and say, ‘What have you done this week?’ It was: ‘How can I help you be successful?’”
Having won their trust, Becker proceeded to the next big challenge: shifting the culture of the family-owned business so managers felt they had greater authority to make decisions. Butler’s great-grandfather had started the firm in 1887. When Butler joined 70 years later, he was one of just three employees. Over four and a half decades, he built it into a very successful regional brokerage with 245 employees and more than $34 million in revenues. But as often happens in family-owned businesses led by a singular patriarch, employees were reluctant to do anything without clearing it through the chief.
Ten months after Becker started, his leadership was put to the test. While on a bicycling trip in Morocco, Butler and his wife, Alice, were in a serious car accident, leaving Butler unconscious for several weeks and requiring months of rehabilitation. The situation was precarious, both for him and for the business.
“If it had not been for David, my family would have sold,” says Butler, who is the firm’s executive chairman. “As it turns out, we kept going without a hitch.”
Under Becker’s leadership, Cottingham & Butler has vastly expanded its vision, its geography and its size. When Becker arrived, every employee worked in Dubuque, even though 98% of the firm’s clients were located elsewhere. So Becker embarked on an expansion plan to establish offices closer to clients, and today more than a quarter of C&B employees work in regional offices spread across 12 states.
Revenues have grown at an annual average of 12%, from $34.4 million in 2003 to $146.5 million last year, and Becker projects the firm will generate $166 million in revenue in 2017. C&B ended 2016 with 805 employees. With few acquisitions, the company’s growth has been almost entirely organic.
“The C&B organic growth performance is industry-leading,” says Bobby Reagan of Reagan Consulting, which advises brokerages on strategy, mergers and acquisitions. “There are other firms that have matched their results for a given year, but there are few that have achieved the consistent growth they have achieved, particularly with their size. For a firm that will exceed $150 million in revenues this year, these growth results are spectacular.”
The C&B organic growth performance is industry-leading. There are other firms that have matched their results for a given year, but there are few that have achieved the consistent growth they have achieved, particularly with their size.Tweet
Early on, Becker reorganized C&B’s insurance advisory business into specialty practices and divorced that side of the house from the medical third-party administrator. Forced for the first time to stand on its own, the TPA became a successful wholesaler of its services. “It’s the power of being entrepreneurial,” Becker says.
Perhaps Becker’s signature achievement has been establishing a health-and-wellness company that capitalizes on the emerging interest in using data to improve employee health and reduce employer costs. HealthCheck 360° is now the fastest-growing business in the C&B portfolio.
To better understand the analytics that would help him know whether HealthCheck’s programs really worked, Becker enrolled in an online course in biostatistics and epidemiology through the Harvard School of Public Health. “My wife thought I was nuts because it was 12 hours of additional work a week,” Becker says. But it was free, and at least it was related to his work. Becker’s recreational reading includes The Feynman Lectures on Physics, a three-volume textbook based on Nobel laureate Richard Feynman’s lectures to Caltech undergraduates in the early 1960s.
In high school, Becker had been a smart but unmotivated student, choosing study hall over attending class as often as he could. But he was competitive, and when challenged by his government teacher, Donald “D.J.” Ruden, to do more, he accepted. Ruden “got under my skin and introduced me to a lot of ideas and books that started to expand my thinking.” Becker soaked up the books Ruden handed him, many of which were about social inequality. “The curiosity he piqued in me has been something that I think has served me really well in my business career and in my life,” Becker says.
And he never forgot about the tremendous impact Ruden had on the course of his life. After Becker returned to Dubuque, he created a scholarship for the city’s college-bound high school students. Each year he and Ruden gather for a dinner with the finalists. “It’s probably the highlight of his year to sit down with people and talk about how they see the world,” Becker says. “For me, it’s a way to just pay tribute to him and the impact he had on me and on so many young people.”
After graduating from high school, Becker left for college at Washington University in St. Louis. Becker, who has three older sisters, was the only one of his siblings to leave Iowa for college. He graduated in five years with a bachelor’s degree in computer science and engineering and an MBA.
He took a job as a systems engineer for IBM but was unexpectedly reassigned to a three-person sales team pitching Unix systems to Southwestern Bell offices. They loaded a Lincoln Continental with gear and drove from city to city in Missouri, Kansas, Oklahoma, Arkansas and Texas. “I was the worst salesperson one could ever imagine,” Becker admits. But as a tech geek he could fulfill the outrageous promises the other guys made in order to close their deals. Within three and a half years, they’d taken their market share from zero to 98%. “Once you get to 98% market share,” he says, “you kind of get bored.”
Besides, IBM was a mess at the time. So at 26, Becker noodled his way into an early retirement program, packed four suitcases and some stereo equipment and started life anew as a law student at Harvard.
But he learned pretty quickly once he had his degree that he really didn’t want to practice law. So he signed up to meet with a McKinsey recruiter on campus. During his case interview, a hallmark of the McKinsey hiring process, the recruiter unwittingly threw Becker a softball: “If you’re Lou Gerstner and you’ve just been hired to rescue IBM, what would you do?” An eyewitness to IBM’s problems for more than three years, Becker gave what the interviewer described as the greatest answer he’d ever heard. “You talk about a good break in life,” Becker says. “That was it.”
He can break down a problem like nobody else. His processor is constantly going on high speed.Tweet
Maybe so, but his success at McKinsey was hardly an accident. “He is extraordinarily intelligent, and I don’t use that word lightly,” says Michael Farello, a longtime friend and mentor who was Becker’s first manager at McKinsey. “Because at McKinsey it was hard for people to stand out for their intellect.”
Colleagues admire Becker for his analytical mind, pragmatic approach to decisions and disdain for hierarchy. He typically distills the two or three essential things that matter and pushes people to create a plan for acting on them. “He can break down a problem like nobody else,” says Nicole Pfeiffer, an employee benefits consultant who joined C&B four months after Becker. “His processor is constantly going on high speed.”
Becker has imbued in Cottingham & Butler the idea of having “wildly important goals,” with constant attention to “how you are moving the ball to accomplish those goals on a weekly basis,” says Chris Vogel, vice president of the firm’s transportation practice. “It’s long-term thinking boiled down into day-by-day activities.”
Becker’s management style reflects his many influences. Among the half dozen he mentions are former McKinseyites like Farello, a venture capitalist who encouraged Becker to take the job at Cottingham & Butler, and Jeff Luhnow, now the general manager of Major League Baseball’s Houston Astros. McKinsey, Becker says, provided “amazing training for how to think through problems.” He also got an education in client service. “We spent almost no time thinking about how to run McKinsey. We spent all of our time thinking about how we help clients.”
With the vision and direction of C&B’s businesses well established, Becker focuses much of his attention on one of the industry’s greatest challenges: recruiting and developing high-quality employees to drive growth. And perhaps fittingly, one of the obstacles he faces is the very thing that first soured him on the idea of joining C&B. “It’s very tricky to find people who want to come and work in Dubuque, Iowa,” Pfeiffer says.
To combat that, Becker has created an environment that gives young professionals opportunities they can rarely find in companies the size of C&B. In addition to logistical benefits like covering housing costs for college interns, Becker offers access to leadership—a rare find for a recent college grad.
“Most CEOs of 800-person companies tend to put layers in between them and new sales people that get hired. David takes the opposite approach,” says Matt King, a former McKinsey colleague whom Becker brought on board last October to be president of regional operations and corporate development for Cottingham & Butler. “Every time we hire a 22-year-old or think about how to develop those 22-year-olds, David gets involved, because he recognizes that, if the program around recruiting and developing college kids isn’t working, that’s hugely problematic for the future, because they will be the rainmaker producers 10 years from now.”
To identify future leaders, Becker establishes personal mentoring relationships and assigns high-potential employees to cross-company projects. More than five years ago, he tapped two people in their early 30s to lead Cottingham & Butler’s largest industry practice, the transportation division.
“I would challenge you to find anyone in the organization who would question David’s motives as being anything other than in the best interest of the business,” King says. “People respect the outcome because they recognize he’s doing it for the good of the organization.”
Most CEOs of 800-person companies tend to put layers in between them and new sales people that get hired. David takes the opposite approach.Tweet
When Becker accepted the job at Cottingham & Butler, friends advised him to stick around for three or four years “and then get the hell out,” he says. But over time, the business came to feel like home, and so did Dubuque. “People have a hard time believing it, but I don’t have a high ego need for running a bigger company. I’m having fun. I’m making a contribution.”
Hann is editor at large. firstname.lastname@example.org
Ackman’s hello-you-must-be-going note was one of multiple salvos he fired at Allergan leaders when they resisted a push by his fund, Pershing Square Capital Management, to sell the company to controversial rival Valeant Pharmaceuticals. Although the proposed deal eventually fell through, Allergan did end up with a new owner, Actavis—netting Ackman and team a $2.2 billion profit for roughly seven months of work encouraging a sale. (His victory, as it turned out, was short-lived; he later lost $4 billion in a separate investment in Valeant and is being sued over the Allergan deal.)
Variations of that exchange—some just as heated, some more conciliatory—have played out in boardrooms around the nation and across the globe in recent years amid the rapid rise of activist investors in the marketplace. Yet some critics of activist investing see signs of a shift away from the era of “shareholder primacy,” the term used by management consultancy Bain and Company. These critics question whether activist investors are really good for corporations in the long run—especially when draining them of resources for R&D and other urgent corporate growth needs—and point to some pretty damning statistics to back their claims. And yes, they even question activists’ effect on the U.S. economy. Some contend activist investors have contributed greatly to today’s huge income gap between the business class, middle class and working class.
And that begs the question: could a corporate culture shift be in the offing?
At the moment, activists continue to wield outsized power. According to Bain, activists control only about $150 billion in assets under management, a figure dwarfed by the $30 trillion held by mutual funds. Ackman and fellow hedge fund operators—Carl Icahn, Nelson Peltz and Daniel Loeb, among them—typically acquire a 5% to 10% stake in a company, and they move quickly to shake up management, shuffle priorities, spin off divisions or sell the entire company.
Activists contend they bring new energy and a fresh perspective to companies struggling to compete and maintain profitability. But critics contend activists put their short-term interests ahead of the company’s long-term health and push through bad decisions that undermine corporate values like customer service and employee-driven innovation.
It’s probably easier to list the names of companies that haven’t found themselves in a sudden tangle with an activist since the 2008 market collapse. DuPont, Apple, Xerox, Rolls-Royce, Volvo, Yahoo, J.C. Penney, Sony, Wendy’s, McDonald’s, Macy’s, Sotheby’s, Whole Foods, Nestle—all those, and more, have been the focus of activist investor campaigns.
The pace is so frenetic that some companies attract return visits. In late 2012, Peltz’s Trian Fund Management successfully pushed Kraft Foods to spin off its snack food business, creating Mondelez International. A little over a year later, Mondelez became a target of Ackman’s activism.
Prior to the recession, a few dozen companies were subject to activist demands each year, but activist campaigns surged as investors sought to regain ground lost in the market collapse.
The number of companies targeted by activist campaigns topped 500 in 2013 and surpassed 750 last year, according to the research group Activist Insight. Through May of this year, 434 companies have been on the receiving end of activist demands, the group reports.
Widening the Playing Field
Who’s a target? “Effectively everybody and every sector,” says Daniel Kerstein, managing director and head of strategic finance at Barclays Investment Bank. “It’s really a function of where activists and investors think there are assets that are undervalued or underappreciated by the broader market, where they can make a reasonable return for their money.”
“No firm is safe,” says Duke University professor Jillian Popadak, part of a team of researchers who have done extensive research on activist investors. “It typically used to be that they went for underperforming funds in an industry. But recent evidence, post-crisis, shows they will go for large, popular firms that are successful, even relative to their industry peers.”
The turning point was in 2013, when, for the first time, one third of activist funds focused on companies with market capitalization greater than $2 billion, according to Columbia University professor John Coffee and Rutgers University professor Darius Palia, authors of The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance.
“Seemingly, if a credible scenario can be offered to the market that breaking up a company will yield shareholder gains,” they write, “activist funds will assemble to attack even those companies with a long record of profitability.”
No firm is safe. It typically used to be that they went for underperforming funds in an industry. But recent evidence, post-crisis, shows they will go for large, popular firms that are successful, even relative to their industry peers.Tweet
So far this year, almost 28% of the companies targeted were large-cap ($10 billion and above) and close to 17% mid-cap ($2 billion and above), according to Activist Insight.
Popadak cites a couple of theories about why activists are eyeing large companies. One claims they’ve already picked the smaller, easier targets and are now expanding to those that will require a bit more work. The other is that they feel they can now count on institutional investors, who were initially leery of activists, to support their efforts.
Kerstein agrees that traditional investors are showing more interest in activism. “We’ve seen Neuberger Berman effectively initiate the campaign at Whole Foods,” he says. “They were out actively seeking an activist fund in what we jokingly refer to as an RFA, a Request for Activism.” The campaign succeeded, leading to Amazon’s $13.7 billion acquisition of the organic grocery store chain in June. Activist Barry Rosenstein’s Jana Partners was involved in the deal.
With the exception of a couple of high-profile cases, the insurance industry has largely been protected from activists, thanks in part to tight regulatory oversight. Kerstein says there’s greater risk of a deal falling apart in a regulated industry, so activists would need to see the potential for larger return than they’d get in other sectors before launching a campaign against a publicly traded insurance company or brokerage.
Yet those buffers may not last under the current administration. “I think the regulatory environment we’re moving into now, in all likelihood, is going to be a bit more of a laissez faire approach,” he says. “My guess is there’s probably less protection than there may have been in the past.”
Amrit David, a managing director at Barclays, points to another deterrent to activist investors that isn’t likely to change—the insurance industry’s complexity. “It’s very different to say a retailer or a company should spin off a division or sell some stores or revamp the product line,” he says. “When you start dealing in financial services, insurance and banks and others, it becomes increasingly difficult because of the complexity of the organizations, the way they’re linked in on multiple levels and a number of different ways the various business lines interact.”
Kerstein says he has expected activist interest in insurance to expand for a while now, but the industry is faring well in the stock market and the push for increasing share values isn’t as strong as in other sectors. “To my knowledge, it’s been pretty quiet,” he says.
David says a favorable rate environment and the potential for tax reform, as well as a strong market showing, play in the industry’s favor. “That’s not providing a lot of ammunition for folks to come in on,” he says.
But, as two iconic names in the insurance industry can attest, activist investors do come calling.
The Knock on the Door
The Ackmans and Icahns of the world generally get what they want. In 2015, close to 70% of activists in the U.S. achieved at least part of what they sought from a shareholder campaign, according to Activist Insight.
And even where they fail or bow out—as hedge fund operator John Paulson did a few years ago at the Hartford Financial Services Group, and as Carl Icahn has, for the moment, at AIG—they tend to have a lasting effect.
The Hartford, in some ways, seemed like an unlikely target for a shareholder intent on shaking up the institution. It began its storied history in 1810 as a fire insurance company, slowly building an empire over the next century as competitors succumbed to massive claims filed after major fires in New York, Chicago and San Francisco. The Hartford branched out into a wide variety of insurance and financial services, selling homeowners insurance to Abe Lincoln and Robert E. Lee and disability insurance to Babe Ruth, as well as helping to finance the Golden Gate Bridge, St. Lawrence Seaway and Hoover Dam, among other American landmarks.
But by November 2011, fresh from its 200th birthday celebration, The Hartford was wobbling badly, hurt by $2.8 billion in losses sustained in the market collapse. Company leaders had invested heavily in variable annuities in the runup to the crisis, and The Hartford’s stock was trading at less than half of book.
CEO Liam McGee, brought in to repair the damage, felt he and his team were making progress. But Paulson, who had amassed a fortune betting against the subprime mortgage market ahead of the collapse and had watched The Hartford’s annuity problems build up, wasn’t happy with the pace of the company’s recovery. He pushed for the company to spin off its life insurance business and focus on property and casualty.
They want to know that boards are actively pushing and engaging with management and, to some extent and not necessarily in a negative sense, holding management’s feet to the fire, pushing them to make sure the paths and strategies that are taken are the right ones.Tweet
McGee and the board held their ground, aware that regulators were leery of increasing risk for life insurance policyholders. The company forged ahead with its plans over Paulson’s objections, selling portions of its business to AIG, Prudential and MassMutual and backing out of annuities.
Share prices rallied in 2012 and again in 2013, and Paulson backed off his demands, content that the company was on the mend. He didn’t get exactly what he wanted when he started, but he did achieve smaller elements.
Paulson later praised McGee for leading “a generational transformation” of The Hartford and “positioning it to prosper by focusing on operations with industry-leading positions.”
In an interview with Chief Executive magazine shortly before his death in 2015, McGee said Paulson “indirectly did us a favor” when he set his sights on The Hartford. “We certainly didn’t want to be attacked. But it was serendipitous: it gave us cover to pursue what we were going to do anyway,” he said. “People weren’t happy about the new direction, so the attack helped us move to some painful changes in the organization.”
In 2015, as things began to settle down at The Hartford, the company that bought its broker-dealer arm, AIG, landed in Icahn’s sights. With a 4% stake in the company, Icahn began pushing for a breakup of AIG, which was still struggling from the 2008 financial crisis. AIG had recovered enough to pay back a $185 billion bailout from the federal government, but its shares still weren’t performing on pace with competitors.
Icahn also lobbied for the ouster of CEO Peter Hancock, who’d been brought in to lead a recovery from the crisis. The investor described Hancock as “someone who was trying to do brain surgery but was really a knee surgeon.”
Hancock resigned this spring and has been replaced by Icahn’s chosen successor, Brian Duperrealt, who is credited with rescuing Marsh & McLennan amid a shareholder revolt. Recent reports indicate Icahn has decided to back off his push to break up AIG, at least until the new CEO has a chance to try his hand at surgery.
Those encounters and others have had a far-reaching effect on all industries, according to CEOs and board members. Barbara Hackman Franklin, a former U.S. secretary of commerce who has served on more than a dozen corporate boards, recently told Harvard Business Review that activists influence strategic development and the allocation of resources even at companies they don’t target. “The idea that we should ‘think like an activist’ pops up from time to time in boardroom conversations,” she says.
What About Value Creation?
The founding father of activist investing was economist Milton Friedman, who penned a 1970 piece for The New York Times Magazine that sharply criticized calls for corporations to do more for the public good. He argued that a corporation’s primary mission is to boost shareholder value, or—as the title of the essay more bluntly declared—“the social responsibility of business is to increase its profits.”
Joseph Bower, then a young Harvard Business School professor, derided Friedman’s argument, calling it “pernicious nonsense.” Almost 50 years later, he hasn’t changed his mind. This summer, Harvard Business Review published an essay by Bower and Harvard colleague Lynne Paine that’s capturing attention in C-suites and the investment community. Citing Ackman’s involvement in the Allergan deal as a prominent example, the professors build a case that an overemphasis on shareholder value weakens companies by curtailing R&D and innovation and other long-term investments. They warn that activists could do broader damage to the economy and society if they don’t consider the corporation as an entity apart from its investors.
“No doubt, in some cases, activists have played a useful role in waking up a sleepy board or driving a long-overdue change in strategy or management,” they write. “However, it is important to note that much of what activists call value creation is more accurately described as value transfer. When cash is paid out to shareholders rather than used to fund research, launch new ventures or grow existing business, value has not been created. Nothing has been created.”
The idea of creating value could have both internal and external implications. “A lot of the unrest we’ve seen over the past year is rooted in the idea that wealthy, powerful people are disproportionately benefiting from the changes happening in society,” former Allergan CEO David Pyott told Harvard Business Review. “A lot of companies think that they need to make themselves look more friendly, not just to stockholders but to employees and to society. Having a broader purpose—something beyond simply making money—is how you do that and how you create strong corporate cultures.”
But Popadak and her colleagues at Duke found investors, when shaking up a company, often undervalue the importance of corporate culture, which is a mix of intangibles such as pledges to integrity and customer service.
In a piece for the Center for Effective Public Management at the Brookings Institute, Popadak reports that executives interviewed by researchers lamented the lack of attention to cultural values that sustain a business beyond a few quarterly earnings reports, such as avoiding morale-destroying mass layoffs in a downturn.
It is important to note that much of what activists call value creation is more accurately described as value transfer. When cash is paid out to shareholders rather than used to fund research, launch new ventures or grow existing business, value has not been created. Nothing has been created.Tweet
“As one interviewee put it, ‘We certainly do not get credit for culture-related investments particularly if you think of the short-term nature of some of our investors. Our long-term investors get it and understand it completely,’” Popadak writes.
The Long View
Company culture isn’t the only area in which the effects of a long-term versus short-term strategy can be seen. In an article accompanying this summer’s Harvard Business Review essay, researchers from McKinsey Global Institute and FCLT Global analyzed 615 non-financial U.S. companies and found that companies with an identifiable long-term orientation fared better from 2001 to 2014 than those with an identifiable focus on short-term gains.
“What if all U.S. companies had taken a similarly long-term approach?” they write. “[W]e estimate that public equity markets could have added more than $1 trillion in asset value, increasing total U.S. market cap by about 4%. And companies could have created 5 million more jobs in the United States—unlocking as much as $1 trillion in additional GDP.”
Other research has questioned the long-term effect of activist investors. A study by the Institute for Governance and Private and Public Organizations, a Canadian think tank, found that companies targeted by activist investors pushing for cost reductions in the United States and elsewhere saw a 4% drop in employment between 2008 and 2013, compared to a 9% increase among all companies.
In today’s ever-changing, tech-driven business environment, the lack of funds being reinvested in the business that is only after short-term shareholder gains can hinder a company’s ability to keep up. In a recent report for Bain and Capital, partners James Allen, James Root and Andrew Schwedel contend the shareholder primacy view is shifting under significant pressures on companies to adapt more quickly to market changes and customer wishes—two things that don’t always dovetail with activists’ focus on cost-cutting and short-term gains in stock value.
“In our conversations with CEOs,” they write, “we consistently hear how difficult it is to free up trapped resources to mobilize against important challenges and opportunities, despite the obvious and growing need for speed.”
While we may be more likely to hear about the quick-moving encounters, like Ackman’s involvement at Allergan, that singe the leather seats in the boardroom, there are activist investors out there who do take a longer look at the business. Kerstein, who frequently talks to hedge fund operators so he can advise clients at Barclays, says sometimes it’s just the most practical approach.
“We’re actually seeing them, in a way, forced to stay longer because they based their campaign on operational performance, which takes a longer time frame to actually implement and show results,” he says. “They don’t get the return until those things start to bear fruit.”
For example, the activist campaign by Jeffrey Ubben at Microsoft took a longer and more cooperative approach. Ubben’s San Francisco-based ValueAct Capital Management has distanced itself from its more aggressive colleagues in New York and cultivated a reputation for conducting activist campaigns through “gentle nudging rather than public shoving,” according to Financial Times editor Owen Walker in his book Barbarians in the Boardroom: Activist Investors and the Battle for Control of the World’s Most Powerful Companies (Financial Times Press).
In 2013, ValueAct contacted officials at Microsoft and asked for a meeting to discuss operations before obtaining a single share in the company. After acquiring a little less than 1%, Ubben and team began pushing for a realignment of priorities and strategies that eventually led to the departure of CEO Steve Ballmer. They secured a cooperative agreement with Microsoft management that gave ValueAct a seat on the board in exchange for concessions from the hedge fund.
“Publicly at least, you hear lots of wonderful things being said about ValueAct by management and by other board members,” Kerstein says, “and you hear lots of wonderful things being said about the board and management by ValueAct.”
Trian, led by Nelson Peltz, is another fund that tries to avoid quick-hit campaigns, Kerstein says. “They have been aggressive in places, they have pushed out some management teams, but I also think that they have done a pretty good job of focusing the operations in some places and finding ways to cut costs and really pushing management to a level of focus that was attainable—not unreasonable but difficult. They’ve been very upfront: look, this is what we do and this is how things are going to operate when we’re here.”
Preparing for That Knock
Michael Dell, head of the computer company that bears his name, figured out the most effective way to fend off activist investors like Carl Icahn: he took the company private in 2013.
The social responsibility of business is to increase its profits.Tweet
The increased emphasis on shareholder value had produced “an affliction of short-term thinking” at Dell, he later wrote in The Wall Street Journal. Going private, he said, gave employees “freedom to focus first on innovating for customers in a way that was not always possible when striving to meet the quarterly demands of Wall Street.”
That’s not a practical solution for most companies, of course. To stay ahead, they need to develop a plan for how they’ll respond if an activist investor emerges among their shareholders.
As in many things, the best defense can be a good offense. “The best course of action that companies can take in terms of avoiding shareholder activism is clearly performance,” Kerstein says.
Stock prices are an obvious indicator of how well a company is performing, he says, but sometimes circumstances can overtake a company, or its industry may fall out of favor with investors, driving down value. In those instances in particular, Kerstein says, company leaders need to be ready to explain to shareholders how they’re managing risk, how they’re exploring new lines of business and how they’re keeping costs down.
“These are all things we all, to some extent, take for granted as being the hallmarks of good management,” he says. “I think it’s important to remember that’s really what it is that we’re being pushed to do by activist investors.”
Kerstein says activists look closely at the performance of corporate boards, too. Many investors perceive boards, especially in the United States, as caretakers. “They want to know that boards are actively pushing and engaging with management and, to some extent and not necessarily in a negative sense, holding management’s feet to the fire, pushing them to make sure the paths and strategies that are taken are the right ones,” he says.
That doesn’t mean boards need to fight with management every day, Kerstein says, but they do need to be able to show investors there is a healthy debate among board members and with management. “A board needs to make sure they’re asking the right questions and digging in on issues and ultimately, maybe, agreeing with exactly what management has recommended to them,” he says.
If they’re targeted, CEOs and boards need to become familiar with how that activist typically proceeds. “Each fund has its own style and approach that it takes to companies and situations,” Kerstein says. He says that Barclays engages regularly with fund managers to understand their approach and what they’re hoping to accomplish.
Some campaigns begin simply, with the investor acquiring a small stake and asking questions that any new investor might. Kerstein says it’s critical “to engage with the shareholder, whether they’re an activist or not, and not give them an excuse or something they can look to later as a reason for why they had to take more hostile action.”
Company leaders should make sure they have a team of advisors—including board members and others, preferably with experience dealing with activists—on standby, ready to develop a coordinated response. “Each situation has its own nuances,” Kerstein says. “We’re often asked, ‘Can you help us prepare a response in the event that we have an activist show up?’ I always say there’s a lot of different responses you need and sometimes the best response is actually none at all.”
Duke’s Popadak says companies should be ready to respond swiftly. “My sense is that, from the firms that we’ve interviewed and surveyed, they don’t really have a team in place to think about and deal with a hedge fund activist,” she says.
Telling the story about a strong corporate culture can help company leaders push back at activists asking for quick, major changes that may undermine a company’s long-term health, according to Popadak.
Corporate culture and other intangibles can be difficult to quantify, but numbers can be persuasive to hedge fund managers. Those metrics, she says, can include customer satisfaction surveys, churn rates for employees and any other leading indicators that show how company profits are reliant on product quality, customer service, and employee retention and innovation.
Convincing activists of the value of corporate culture is a challenge, Kerstein says. “Often where we see a positive culture, they see a culture that is rewarding management, rewarding employees, or rewarding other stakeholders at the expense of shareholders,” he says.
Boardroom veterans caution against returning fire with fire, yet sometimes a blunt response to activists is warranted. “You should listen to what they say and respond when you can. But remember: asking is free,” Allergan’s former CEO Pyott recently told Harvard Business Review. “If they say, ‘Hey, we want more,’ you have to be willing to come back with, ‘This is what we can commit to. If there are better places to invest your funds, then do what you need to.’”
Lease is a contributing writer. Daryl.Lease@gmail.com
Cyber attacks remain front-page news, but businesses are getting a little relief: data breaches are getting less expensive. The average total cost of a data breach declined more than 9% to $3.62 million from $4 million globally, according to the annual IBM and Ponemon Institute data breach study. The average cost for each lost or stolen record declined more than 10%, to $141 in the 2017 study, from $158 last year. That little bit of good news, however, is tempered by the fact that nearly half of the global decline in costs was due to the strong U.S. dollar. That doesn’t help companies in the United States, where the average cost edged a bit higher.
In fact, breaches are most expensive in the United States, where the average per capita cost of a breach was $225, followed by Canada at $190. The United States also leads in notification costs, the study finds. Nearly half the 419 organizations participating in the study pointed to malicious and criminal attacks as the cause of data breaches.
While there is plenty of cyber coverage to choose from, more companies are deciding to use captives for cyber liabilities, according to Marsh’s 2017 “Captive Landscape” report. Cyber liability programs in captives have more than tripled since 2012, and Marsh-managed captives using cyber liability programs rose nearly 20% in 2016. The advantages of using captives for cyber include filling gaps in standard cyber coverage and securing coverage for emerging and unique cyber risks. Marsh says it expects that trend to continue.
Cyber risk is moving on from the bits and bytes of the virtual world to the hardware of the real one. The latest ransomware attack, dubbed NotPetya, showed that it could disrupt operations in a variety of businesses, including oil companies, electric utilities and airlines. The New York Times reports hackers have broken into the computer networks of nuclear power companies, although not into the operational systems. Cyber-security firm Kaspersky says industrial enterprises have become a growing target of cyber attacks and noted that malware can bring down industrial control systems. Such systems for energy, water, transport and other purposes are increasingly networked or controlled remotely and, so. are exposed to vulnerabilities on those networks, according to risk modeling firm RMS. Those risks carry potential exposures for non-cyber insurers, such as when property damage caused by a cyber attack is not specifically excluded under a traditional property and casualty policy. This “silent” exposure may carry significant risks for insurers, RMS reports. Policyholders may believe that they have coverage under policies that were not designed to protect against emerging cyber risks, according to JLT Re, and carriers may not fully understand the scale of potential losses in incidents where coverage for cyber-related damage is included by default. As for brokers, they need to help their clients understand where they do, and do not, have coverage for the physical ramifications of attacks in cyber space.
Advent Solutions Management
Launches Sparta, a portal-based provider of specialist ancillary products for brokers. The startup incubator and insurtech investor says Sparta intuitively suggests ancillary products based on broker input about clients. advent.global
Church Mutual Insurance
Receives the Award in Innovation from the National Association of Mutual Insurance Companies for its Sensor Technology Program. The program uses temperature and water sensors to protect vulnerable parts of buildings or areas where valuable and often irreplaceable items are stored in houses of worship nationwide. churchmutual.com
Reaches 14,315 homeowners policies as of June 1, up from 6,000 at the end of March and surpassing its year-end target of 13,000 customers. Plans to launch its renters and homeowners coverage in seven new states, including Texas and New Jersey, adding to its presence in New York, California and Illinois. lemonade.com
Receives £5 million ($6.54 million) in a Series A financing round led by Aviva Ventures and joined by Munich Re. The funding will help the U.K.-based company further develop its connected-home systems and increase its underwriting capacity through an MGA agreement with Munich Re. neos.co.uk
Announces American Express has joined its Series A funding round, bringing the total for the small-business insurer to $35 million for the round. Other investors include Munich Re/HSB Ventures, Markel and Nationwide. next-insurance.com
Wins “Best Insurance Telematics” award at the TU-Automotive Detroit Show for its in-vehicle Surround technology that provides monitoring of driver behavior and vehicle health along with location-based services. Surround is part of Octo’s telematics products for insurers. octousa.com
Ryan Specialty Group
Names Kathy Burns chief digital officer and SVP. Before joining Ryan Specialty, Burns was CEO of Ventiv Technology, previously known as Aon eSolutions. ryansg.com
The Chicago-based startup closes a $12 million funding round led by Tola Capital, which will be used to accelerate its artificial-intelligence enabled virtual claims platform. Appoints Andy Cohen, formerly vice president of worldwide field operations at CNA, as COO. snapsheetapp.com
Raises $8 million in a Series A funding round led by Ignition Partners and joined by Zetta Venture Partners as well as several insurance industry leaders. Tractable develops artificial intelligence programs to perform visual tasks, such as assessing vehicle damage for auto claims. tractable.ai
Willis Towers Watson
Establishing Home Telematics Consortium with Roost. Will comprise five to 10 U.S. carriers to combine data and measure the effectiveness of home telematics devices in mitigating water and fire losses and in boosting customer engagement. willistowerswatson.com
St. Louis is a great big little city. Home to many wonderful old companies, it has a thriving startup community with an abundance of available capital to invest in innovation and bioscience companies. Many St. Louisans return home because it’s a family-friendly city with easy commutes and wonderful education.
Our restaurants are a mix of classic and trendy. From ethnic cuisine to food trucks to award-winning chefs, St. Louis is a foodie haven. We are fortunate to have restaurateur Zoe Robinson, who has spent decades creating special dining experiences. Her newest place, Billie-Jean, named for her parents, opens this fall and is sure to become one of my favorites.
Favorite old-school eats
Another Robinson restaurant is I Fratellini, in the suburb of Clayton. It’s a hideaway, a classic Italian restaurant that smells great when you walk in and makes you feel like you’re in Venice. Order the grilled zucchini appetizer and red pepper and spicy sausage lasagna, a festival for your taste buds.
The bartender at the French bistro Bar Les Frères is a pro. It’s warm and inviting inside in the winter and terrific for outdoor drinks in the summer. It is also another one of Robinson’s restaurants.
The business hub of St. Louis has moved west to the City of Clayton, where The Ritz-Carlton is the place to stay. It has a great bar for a nightcap and is within walking distance to dozens of restaurants and shops.
Thing to do
Experience Forest Park. Opened in 1876 and the site of the 1904 World’s Fair, the 1,300-acre park is home to five major cultural institutions: Saint Louis Art Museum, Saint Louis Science Center, Missouri History Museum, Saint Louis Zoo and The Muny, an outdoor musical amphitheater (1,500 of the 11,000 seats are free). There is also the Jewel Box, an art deco conservatory that is open to the public.
Again, Forest Park is the place to be. I go there to bike the six-mile paved loop. You can rent a paddleboat and cruise the lagoons. There are rugby, archery, softball and baseball fields, and a tennis center. You can play golf on two courses, skate on an outdoor rink and fish in the lakes. A bonus is the spectacular views of St. Louis, Washington University and the museums.
How did the idea for Decisely come about?
Two years ago, in 2015, I got together with EPIC Insurance Brokers and Consultants CEO John Hahn and The Carlyle Group to talk about the small-business arena and what was happening in the industry. We started having a conversation around the idea that we could build a broker-centric product in which you could partner with brokers. This was in contrast to what was happening at the time: many direct-to-employer, tech-based employee benefits were coming into the marketplace and threatening the brokerage world. We thought we could build something that was more broker friendly and that we could solve problems that brokers have with respect to margins, profitability and servicing these small businesses more effectively. In December 2016, Two Sigma Private Investments invested in this idea and made a funding commitment of $60 million.
How does Decisely help small businesses and brokers?
We’ve built a core HR platform around employee benefits for small businesses. As their broker of record, we become the small businesses’ trusted advisor. Every client and their employees have a licensed relationship manager who is assigned to them. Any time they have health insurance needs, which includes medical, dental, vision, as well as voluntary benefits, they can consult with us. We built Decisely in a digital manner so that employers can manage their employee benefits as well as life event changes, onboarding services, recruiting, 401(k), and payroll—all via our Decisely platform.
Our platform is free. We help brokers manage small businesses and nurture them into medium-sized businesses. A company may be only 10 lives today because it just started, but once they become a 100-life group, then we hand the client back to the producer or broker to start handling it. We specifically stick to small businesses and act as a nurturing arm for the brokerage firm. We have the ability to work with any brokerage, from the top 25 down to the smallest of agencies.
How does Decisely use technology to improve the benefits experience for small business?
Were we first with technology? No. We have the luxury that others have started for us. Small businesses are thinking about insurance, benefits and HR from a different perspective because of technology. Small businesses are looking to their broker to be more than just employee benefits. They’re looking for them to provide recruiting capabilities, payroll integration, and software to onboard employees. They want technology to manage all of this for them, and they are looking for something beyond what they can currently obtain.
Can you talk about how your experience comes into this?
My experience is looking at how digital technology and e-commerce will transform relationships with businesses. In 1995, I launched Delta Air Lines’ website and ran that business through the first $2 billion of revenue. This is what my real interest is here. The airlines went through a fundamental change and transformed into digital technology in ’96—20 years ago. Technology is just now starting to infiltrate healthcare, and it’s going to fundamentally change health insurance and the whole marketplace as it did the airline industry. Today, no one can imagine not being able to go online and look at pricing transparency to investigate their flights or book their flights. No one can imagine not going online to travel. In 10 years, it’s going to be the same in the insurance vertical as well. People are going to go online to do their research and transact.
People think of New York and San Francisco as hubs for startups, but you’re in Atlanta.
Georgia is a great place to start a business. Airline transportation is really key, and this is the largest hub in the world for Delta Air Lines. There is a lot of venture capital in Atlanta. It’s known for its tech community and entrepreneurs. You can think of companies here that are entrepreneurial, such as Kabbage, a small-business loan provider, and Square, a payment systems provider with a large engineering staff in Atlantic Station. You have great colleges such as Georgia State University, my alma mater, as well as Georgia Tech, which is known for engineering. It’s really a great city.
On the mezzanine level of The Broadmoor’s main building, not far from three Maxfield Parrish paintings depicting the surrounding mountains and around the corner from “Chippewa Indians Playing Checkers” by artist Seth Eastman, is a glass case containing a bottle of Moët & Chandon vintage 1898. It is one of the displays interspersed with works from Broadmoor owner Philip Anschutz’s collection of Western art. As noted on the engraved plaque, the bottle was used to christen the hotel in 1918, a date that heralds the 100th anniversary of the resort.
The Broadmoor is planning a year of centennial celebrations, with each month devoted to a chapter of the hotel’s history. Like the displays, they will tell a colorful tale of the resort and its flamboyant founder, Spencer Penrose. From a riding academy to a skating rink to the Cheyenne Mountain Zoo, Penrose never tired of creating something fun for his guests to do. A hundred years later, his spirit lives on.
Penrose loved the outdoors. In 1923, he purchased Camp Vigil from the Girl Scouts and formed the Pikes Peak Camping & Mountain Trails Association. Today, it’s the location of The Ranch at Emerald Valley. Along with Cloud Camp and Fly Fishing Camp, the resort has opened three wilderness experiences since 2014. You can hike across the valley from the ranch to Cloud Camp, which was built on the foundation of Penrose’s 1927 Cheyenne Mountain Lodge. It’s the kind of place where you can let the world spin without you. Watch the sun rise over the plains from the wraparound deck. Gaze out to Pikes Peak from a hot tub behind your cabin. Sip a Moscow Mule after the flag is lowered at sunset. Views stretch over the plains from the back deck of the exquisite new meeting space, The Overlook, an inspirational setting for a corporate retreat.
Spending a few days at a lodge after the Insurance Leadership Forum is a wonderful way to unwind. If the resort is your base camp, you can enjoy adventures in the surrounding mountains through Broadmoor Outfitters. Two of the newest adventures are zip lining and falconry.
The Broadmoor’s zip lining course has been acclaimed by social media reviewers as thrilling beautiful, even “dope.” Last summer, the Fins Course opened. An extension of the Woods Course that opened in 2015, it has three new lines that represent a remarkable feat of engineering. You cross two suspension bridges to reach a 1,800 foot span of cable, then fly down at 45 miles an hour 449 feet above the canyon floor. The bird’s-eye views of the gorges, mountains and Seven Falls, including two rock formations that look like fins (hence the name), will blow you away.
The falconry program is another very special experience. You walk with the falconer and one of his birds of prey—a Harris hawk or falcon—around a field as the bird casts off and returns from his arm as he explains the “sport of kings.” In the field or at the falconry center, you will meet the other birds (Alice the owl, with her big orange eyes, is a magnificent creature), and have the opportunity to put on a falconry glove so a bird can perch safely on your arm. Quite the photo op.
Penrose also loved food. He was a member of the “Rabbit Club” in Philadelphia, a gourmet social club for gentlemen, which he re-created as The Cooking Club in Colorado. The Broadmoor’s new executive chef, David Patterson, who developed the luxury dining menus at its Wilderness Experience and Restaurant 1858, resurrected the club for guests at Cloud Camp.
Chef Patterson, who spent five years with the acclaimed chef Alain Ducasse, is only the sixth executive chef in the history of the resort. He traces his love of food to his Southern upbringing and helping his grandmother in her garden. “We canned tomatoes, shucked corn and pulled the strings off beans,” Patterson says. “I learned the importance of the focus on ingredients. Alain had been doing it for 30 years. In Monaco, a farmer grew artichokes just for him.”
Ristorante del Lago, where everything is made in-house, including the pasta, is a good example of how Patterson has incorporated ingredient-driven cuisine at The Broadmoor. “If you don’t have good potatoes, you don’t have good gnocchi,” he says. He was one of three chefs that spent a month in Italy sourcing olive oils and cheeses and learning authentic dishes for the restaurant. He is now overseeing 20 kitchens and 250 “white coats,” and is focused on cultivating the talent of the culinary team. “We are developing the balance of homegrown talent with new talent from the outside. It’s a big operation and we need experienced people, but we also need fresh ideas.”
The new talent includes two alumni of The French Laundry, chef Thomas Keller’s iconic restaurant in Napa. Maxwell Robbins, the new chef de cuisine at The Penrose Room, is already incorporating his dishes into the menu, including an exquisite morel mushroom porridge with pan-roasted sweetbreads. Luis Young, the new chef de cuisine at Summit, is expected to make big changes.
As for homegrown talent, Justin Miller, the former chef de cuisine at Ristorante del Lago, is now in charge of groups, where he is positioned to integrate this ingredient-driven philosophy into the banquet program.
“Ultimately, I want to be a part of redefining what five-star is in a resort setting,” says Patterson.
To find out what else is new at The Broadmoor, click here.
You’re very devoted to Mount Vernon, New York, where you grew up. Tell me about Mount Vernon.
It’s a tough town, a tough environment. Just north of the Bronx. I went to Mount Vernon High School, which was somewhat unusual, as many of my friends went to private school or moved out of town. I am very proud of my roots and love that city. My way of giving back is being a board member of the local Boys and Girls Club, as it is a safe haven and shining light in town.
Who were your childhood heroes?
Roberto Clemente, Mickey Mantle and Gus Williams. The first two passed away before I got a chance to meet them. I am very proud that Gus has become a friend.
Mets or Yankees?
You’re a big golfer, and you just shot your first hole in one. What’s your home course?
Fenway Golf Club in Scarsdale, New York. I’ve played most of the top 100 courses, including Pebble Beach, Pine Valley, and the Old Course at St. Andrews. There are still a few open pegs on the board, and I’m ready and able to go at any time. I’m also a new member of Hudson National, in Croton-on-Hudson, in New York, a top-100 course. I pinch myself every time I tee it up there.
You’re a big fan of Jim Valvano, the former North Carolina State basketball coach. Why Jimmy V?
I’m proud to be a significant contributor to the Jimmy V Foundation for Cancer Research. I still listen to Jimmy V speeches all the time. Very inspiring.
And you’re a Howard Stern fan. Why Howard?
He’s tremendous the best entertainer there is. I listen and laugh every day. And he’s the best interviewer. When I’m giving a speech, I’ll often start with, “Hey, now,” as a shout out to Howard.
Your father and grandfather both worked in the insurance industry. Did you expect to join them?
My father worked with his father—the agency was called Hamlin and Co. They sold it to Alexander & Alexander when I was in middle school, so there was no business for me to go into. My grandfather retired that day, and my father became an executive at Alexander & Alexander for many years.
So how’d you get into the business? I went to American University in Washington, D.C. My senior year, I interviewed with a few insurance companies that my dad helped set me up with. I started three days after graduation in downtown Manhattan as an underwriter at Commercial Union. After a few years, I joined Alexander & Alexander as a casualty broker and was there for 15 years before joining York International.
And how’d you come to York International?
I knew one of the partners and was in the process of moving to Westchester with my family. I met the key people and liked what I saw. My main goal was to control my destiny. At the time, we had 18 employees, and I was the third partner. Today, we have 50 employees and 11 shareholders.
Did you have your sights set on becoming CEO?
Those who know me would say, “Of course you did.” But in my mind, I just wanted to be a partner in the business. Around 10 years ago, we grew to a point where it became necessary to have titles and reporting lines. I became the CEO at that time.
You’ve described your dad as your most influential mentor.
My dad believes in me. He’s very optimistic. He’s a great listener and gives pointed advice. Once he gives advice, it is upon you to go out and do it.
What lessons did you learn from your dad? My dad was a worker. That’s the best way to say it. He never missed a day of work. He was up early, shoes shined. He’s very straightforward. He believed in his people and they believed in him. He also knows how to have a good time.
What gives you your leader’s edge?
I have great passion for the industry, York International, our clients and underwriters. I believe I have a good eye for talent in a team environment.
Wife, Helen (married for 22 years); sons Daniel, 20, and Curtis, 18
Tesla model X
“We didn’t come this far to only go this far.”
Douro in Greenwich, Conn.
Favorite dish at Douro:
Chicken Frango (“So good!”)
The Open Man, by Dave DeBusschere
The Godfather, Jerry McGuire and Diner
“Across the insurance industry, brokers and agents have experienced a shift in the ways that customers are seeking out business relationships,” says Mark Berven, president and COO for Nationwide Property & Casualty. “There is a demonstrated increase in demand for reliable partners that customers trust to deliver the right products and services to protect their business, which is often a customer’s largest and most significant asset. Nationwide recognizes these challenges, and we have a shared mission to partner with brokers to provide consistent service and quality products that support their customers and their businesses.”
Gary Douglas, president of Nationwide National Partners, says the company’s other differentiators include expanding its commercial offerings and the national scope of its distribution relationships.
“I encourage all brokers to consider Nationwide because of our strength and stability as an organization,” Douglas says. “In addition to our unquestioned strength in personal lines, Nationwide also is the number one writer of small commercial in the country, the number one writer of farms and consistently ranks in the top three for excess and surplus—all while growing our capability in the middle market.”
Most carriers that brokers deal with typically specialize in either property and casualty or financial services. Nationwide stands out because it does both equally well, providing a true one-stop shop across a national footprint.
“Our partners value the breadth of products and solutions we can provide, and some are surprised to learn about the full range of the business we write. We encourage brokers to talk to us so we can work together to identify what opportunities there might be to solve their clients’ needs.”
J. Powell Brown, president and CEO of Brown & Brown, has used Nationwide for years and considers it one of his top 10 carriers.
“We do a lot of business with their wholesale arm, Nationwide Excess & Surplus, (previously Scottsdale),” Brown says. “We’ve developed a high degree of trust with the people we work with, and there is a compatibility there. They like middle-market business, and we write a lot of it. They are one of our top 10 partners, and we have a very good working relationship with all levels of their organization in both retail and wholesale.”
Brown says he appreciates Nationwide’s creativity and commitment when working on complex cases.
“I appreciate Nationwide’s flexibility and timeliness,” Brown says. “That doesn’t mean that we expect them to say yes on every account—no one does—but even if the answer is no, it’s a quick no, and that’s critically important. Conversely, if they say, ‘Yes, I think we can do that,’ they go off and figure out a way to get it done. As a broker, we don’t want somebody saying, ‘Yes, let me think about that’ and then hope we might get a quote back. We value clarity, and Nationwide gives it to us.
“They do an exceptional job on both wholesale binding authority and retail. When we bring them a challenge, they’re able to collaborate with us and come up with a wide range of solutions. That’s what we’re looking for in a carrier—someone who will roll up their sleeves and focus on wins for all involved.”
Douglas says those kinds of meetings are commonplace at Nationwide.
“Nationwide has long been committed to our relationships with independent agents and brokers, and we remain committed to their continued success,” says Douglas. “We value the ability to work closely with those agents and brokers to find new ways to collaborate.”
Nationwide’s unique depth and breadth of products and services comes with deep industry knowledge and broad expertise.
“Nationwide is a recognized industry thought leader, and we’re always looking for new ways to learn and grow. We intentionally seek out industry experts and invest in their continued growth and development so they stay current in a rapidly changing environment,” Douglas says. “Our team has deep knowledge and experience across industries. For example, we have underwriters that grew up on farms and still hold active roles on the farm. The diverse experience across our leaders and associates allows us to better understand the diverse and complicated issues that business owners and farmers are facing and the unique protection needs that they have.”
Based in Columbus, Ohio, Nationwide has $209.8 billion in total assets and ranks No. 68 on the Fortune 500. The company has nearly 34,000 employees and does business in all 50 states. Nationwide holds a number of significant rankings including:
- No. 1 total small business insurer
- No. 1 farm insurer, based on premiums written
- No. 1 pet insurer
- No. 3 excess and surplus lines insurer
- No. 6 provider of variable life insurance
- No. 7 homeowner insurer, based on premiums written
- No. 7 commercial insurer
- No. 8 auto insurer, based on premiums written
- No. 8 total property and casualty insurer
- No. 8 provider of defined contribution plans
- 8th largest life insurer, based on total premiums
- 9th largest writer of variable annuities.
There is a demonstrated increase in demand for reliable partners that customers trust to deliver the right products and services to protect their business...Nationwide recognizes these challenges, and we have a shared mission to partner with brokers to provide consistent service and quality products that support their customers and their businesses.Tweet
“Across the company, we continually refine and develop our areas of expertise, which has led to tremendous success over our 90 years of doing business,” Douglas says. “As a company now going to market as one brand, Nationwide, we’re able to fully leverage our expertise and deep relationships to serve our brokers’ diverse needs across all sectors.”
So, what else are brokers looking for from Nationwide?
“Brokers expect us to be on top of market trends and to be prepared to respond accordingly,” Douglas says. “Our insight and expertise can help prepare brokers as they interact with clients who are more informed than ever before.”
Industry consolidation also weighs heavily on brokers, he says. “One of the big topics of conversation and concerns across the industry is the pace of consolidation that’s come to the market in the last seven to 10 years.” says Douglas. “Consolidation presents agents and brokers with a new challenge in determining the right carriers with which to do business. And when they ask, ‘Is Nationwide one of those companies that will be here in the long term?’ the answer clearly is yes.”
Given Nationwide’s more than 90 years in business, there is no doubt that the answer is yes.
Our team has deep knowledge and experience across industries. For example, we have underwriters that grew up on farms and still hold active roles on the farm.Tweet
The first signs are already here. The tidal wave is the confluence of two key developments: (1) the emergence of technology as the defining driver of the future and (2) the arrival of the millennial generation as the group that will chart the course over the next decades. Rather than fear this change, we must embrace it for all of the benefits it will bring.
The numbers are startling. As the insurance industry evolves due to technological advancements and as the baby boomer generation hits retirement age, there’s a need to fill 400,000 positions within the next three years, according to The Institutes. These positions run the gamut from underwriters and claims adjusters to data scientists and technologists.
My challenge to all of us who have spent our lifetime in this business is this: we must make insurance a career of choice for the best and brightest who graduate from our colleges and universities. We must adapt to the new order and be flexible in our thinking. Our future depends on it.
We know our industry has an image problem, especially in terms of recruitment. We are seen in some quarters as boring, slow-moving and the definition of old school. Those of us on the inside know this is not true, especially as we adapt to the two-pronged wave of change hitting the insurance world.
The good news is that the new generation of insurance professionals already likes what it sees. The insurance technology provider Vertafore surveyed 4,000 19- to 35-year-olds already on the job. More than 80% say they plan to remain in the industry for as long as possible. And the way they operate is vastly different from previous generations.
When I started in the insurance industry 31 years ago, success was often measured by the knowledge someone possessed—or hoarded. This was the currency a person used to prove value. The ones who had the answers were the ones who got ahead. Today, that notion has been turned on its head.
Sharing and collaboration are now fundamental to any successful organization. The new generation has grown up in a digitally connected social media world that defines both the personal and professional. The insurance industry is perfectly positioned to leverage this new spirit. It makes us more efficient, and it makes us more attractive as a career. But we need to make certain that collaboration is truly rewarded and built into our business practices.
The new generation also gives me great hope for our industry because of their commitment to the greater good and to a purpose-driven life. The insurance industry is a natural place for those seeking such fulfillment, but we need to tell our story in stronger terms. We are the industry that puts lives back together when disaster strikes. We rebuild local businesses and get people back on the job. We are the glue that makes the economy possible in the first place.
One lesson we can all learn from this new generation of professionals is how to navigate work life and personal life. The common term is balance, but that’s always been difficult to attain, and one part usually suffers at the expense of the other. I fundamentally believe that work/life fusion is more attainable than work/life balance.
There’s something to be learned from the way millennials do this. New professionals are much more comfortable in communal workplaces, with flexible hours, and working to accomplish a task wherever that takes place. In many ways, they bring their life to work and work to home. We must adapt to this changing nature of the workplace environment.
There is real value in this work/life fusion. It is common for the new generation to be described as lacking certain social skills, as they often communicate via devices and screens. I could not disagree more, based on what I witness across CNA. Their ability to quickly make connections with people across the globe and to work together in real time is something of a marvel. The new generation is constantly and effectively collaborating, easily providing real-time feedback to peers and business partners. We all can learn this social skill.
The speed of change will have no limits, nor will the opportunities in the insurance industry. The impact of data-driven business models and technological advancements will continue to redefine how we operate and whom we need in our companies. Rather than fear this future, I see it as perfectly aligned with who is walking through our doors.
In my vision of the future, insurance is not just a noble profession, it’s a career of first choice. In many regards, we are there already—a place where trust, sharing and giving back to society defines our nature. Because technology and collaboration are ingrained in millennials’ DNA and what will drive our success, it’s a match made in heaven. We just need to recognize the advantages millennials inherently bring, tell our story and embrace the waves of change.
Dino Robusto is chairman and CEO of CNA Financial Corp.
Sponsored content from CNA, a Council Partner in Excellence
The insurance industry has historically been the techno-laggard of the financial services world. Nonetheless, when an insurance organization invests in new technology early on, it can experience a slew of benefits, gaining significant advantage over other players in the field.
Recently, there have been several new technologies emerging through insurtech investments that can bring radical change to the industry and a competitive advantage to early adopters. However, as I’ve seen as an intern at The Council, there has specifically been a lot of excitement surrounding blockchain use cases in and outside of the insurance industry.
You’ve certainly heard of blockchain, cryptocurrencies and smart contracts, but you may have gotten bogged down in the technical definitions of each, the consensus algorithms behind them, and the “mining” that allows it all to function. If so, you probably just threw in the towel because you saw no correlation to the insurance industry, rightly identified the technology’s immaturity, and were confident it wouldn’t take effect any time soon.
Frankly, I don’t blame you. To start, cryptocurrency is a limiting term that has little relation to the insurance industry, and it’s outdated for the technology it runs on—blockchain. Bitcoin, the first token to emerge in 2009, was and still is a cryptocurrency in its purest form (a digital currency). Since then, we’ve seen the emergence of many other players in the space, one of which is synonymous with smart contracts: Ethereum.
Ethereum, which is Bitcoin’s biggest competitor and is frequently cited as the future of blockchain and smart contracts, has completely revolutionized the blockchain ecosystem. Ethereum has produced so much change with smart contracts and dapps (decentralized applications) that there are calls for ditching the term cryptocurrency altogether and replacing it with cryptoasset. The revised term encompasses so much more than strictly digital currencies or tokens, reflecting the capabilities of Ethereum, blockchain and the like.
For those in the insurance industry, a blockchain, also referred to as distributed ledger technology, should simply be thought of as a synchronized, append-only database of contract, claims and policyholder information that is not centralized in any contributing party, allowing for standardized recordkeeping as well as increased security and transparency.
There are three types of blockchains: public, private and consortium. Consortium blockchains will likely be the direction the insurance industry takes. This is especially evident in the emergence of the Blockchain Insurance Industry Initiative (B3i), a consortium of 15 insurers that are testing blockchain use cases for the industry.
But to understand a consortium chain, you must first understand public and private ones. In a public chain, such as Bitcoin or Ethereum, anyone can access and make transactions on it. Those transactions must be validated and organized into blocks by miners. The first miner to create a block submits it for validation to the general mining community. Once the mining community validates the specific block and consensus is established, it’s appended to the blockchain, which every node in the network (users and miners) can see.
The miner that successfully submits the block that is appended to the chain receives newly “mined” tokens for the work. Tokens are not mined on private or consortium chains; therefore, those responsible for validation and consensus building are referred to as nodes.
In a private chain, parties need permission (which is why they are also referred to as permissioned chains) to access, view and transact on them. There is one predetermined node, typically the organization managing the chain, responsible for validation and consensus building. As a result, private chains are more centralized than public ones, since one node is validating and building consensus compared to a vast community of miners on a public chain.
Consortium blockchains are a hybrid of public and private chains. Since they have multiple validating and consensus-building nodes, like a public chain, they can be considered decentralized. Despite the multiplicity, they are predetermined and consist of the organizations managing the chain (e.g., the 15 members of B3i), similar to a private chain. Furthermore, on a consortium blockchain, only permissioned transactions are being facilitated, hence increased efficiency and privacy, also like private chains.
Now that we’ve established the blockchain basics, let’s add in smart contracts and see how the combination can help decrease fraud, increase efficiency, and mitigate legal disputes in the insurance industry, as some experts are claiming.
A smart contract is a digitized contract (literally code built into the blockchain) that automatically processes claims by validating and executing payments when predetermined conditions are met, and it cannot be altered unless all stakeholders come to a consensus. So, in regards to fraud, one claim couldn’t be submitted multiple times; in fact, no claim would be submitted at all. The smart contract codifying a policyholder’s insurance contract would only execute payment if predetermined conditions specified in the contract were met.
The smart contract is triggered soon after the event occurs, shortening what could be a month-long process to a matter of minutes. A claims adjuster, plenty of paperwork, and back-and-forth communication are no longer needed to finalize the claim, saving plenty of processing fees.
The smart contract codifies the intent of the two parties who created the contract or policy. There is no textual ambiguity in code; it does exactly what it’s designed to do. Therefore, a policyholder has no grounds to sue the insurer, because coverable conditions were specified in the contract and coded onto the blockchain.
Blockchain in insurance is still in a proof-of-concept stage. Scalability is a major dilemma for all of the major players. Some things hindering full implementation are insufficient blockchain network infrastructure, consensus architecture, characteristics (such as scaling without centralizing the network) and threats to integral blockchain principles. But consortiums, such as B3i, and independent companies, such as AIG and Standard Chartered bank, are constantly testing different use cases.
With every successful proof of concept, blockchain and smart contracts’ potential to revolutionize the insurance industry grows. Your firm should be proactive, get involved in proofs of concept and test out possible use cases for blockchain in the industry. The question is no longer how or to what degree blockchain will change the insurance industry; it’s when.
Daboul, a senior at Ithaca College’s Park School of Communications, was a summer intern at The Council. email@example.com
We’ve seen trust erode and deals fail because an executive sponsor for the buyer fails to stay engaged. We’ve watched owners disclose too much information to their employees before a deal is actually complete, causing uneasy feelings that lead to lost talent, trust and leverage. And we never underestimate the importance of releasing communiqués to the marketplace in a way that benefits all parties.
Communication can be a complicated web during an M&A transaction, but by strategically thinking about what, when, where, why and how communication happens and who releases information to whom, you can actually strengthen relationships and help create a smoother transaction.
Communication involves a vast range of nuances and details—critical information that is being discovered and shared during the M&A process. Initially, there’s a courting aspect to the exchange, when a buyer, and more specifically the executive sponsor, is getting to know a potential company to acquire. As the M&A process unfolds, the relationship goes deeper.
Sometimes communication can fade out as a buyer and seller manage day-to-day business. Other times, once the deal is progressing and due diligence is under way, the buyer’s representative might detach and move on to the next deal, allowing that one to work itself to the close. This can make a seller feel jilted, after all of the attention and focus up front, only to be shifted to the perceived back burner. It’s important to stay engaged through the close of the deal.
When there’s strong communication during the entire M&A process, from the initial engagement to close, it typically results in a high level of trust that can help prevent insecurity or irrational fears from derailing a deal. When the executive sponsor is engaged throughout the process, steering the way when buyer and seller are immersed in everyday business, the M&A process is more likely to continue on a smooth track versus stalling—which then can result in second-guessing and unnecessary stress during due diligence and other key aspects of completing the deal.
Communicate with Purpose
Communication within the selling organization during an M&A transaction can be a complex situation for owners to manage. We see this all the time, where a dedicated owner is dealing with internal turmoil—feeling an obligation to be overly transparent with employees and share information about the deal before the transaction is completed. Many owners feel dishonest about not disclosing the fact that a deal is in progress. They feel like they owe it to the team that is so committed to the company to let them know that change is coming. The problem is, there’s no solid idea of what that change means for employees until the deal is much closer to close.
When an owner discloses information to staff, there can be a loss of confidentiality or ability to manage and direct how the message is communicated to the marketplace. Firms that tell their staff about M&A transactions before they are close to completion typically deal with more challenges during the process. They might lose staff. They can sacrifice productivity. The value of the firm can be compromised.
The reality is most employees want to know how a deal will affect their job, compensation and benefits. Communication should wait until an owner can answer those questions—and that usually is within a week or two of closing. Until then, only those individuals who will influence the decision should be part of the conversation.
If an owner’s conscience is the reason for discussing the deal, that’s reason to take a step back. Consider the impact the message will have on staff. Long-term, based on our experience, it’s much more beneficial to save any announcements until the details can be spelled out to employees so they walk away from the conversation with a real understanding of what the future brings for them. Proper communication can also engage employees after the deal is closed and create an even stronger team.
Good leaders are typically great communicators. They understand that, during any process, proper disclosure is critical. What you say and how you say it requires discipline. It involves strategy, too.
Sellers should craft their communication not only with staff but also to clients and stakeholders like insurance carriers, vendors and strategic partners. Buyers should enlist an executive sponsor who will communicate openly and consistently throughout the process, focusing on relationship building and executing the deal. Usually, buyers will provide guidance based on their communication best practices concerning how, when and to whom announcements about a deal are released after close.
What’s important is to always keep communication top of mind. Make it intentional. Keep it consistent. And remember that the relationships you build with positive communications can help position your firm for success in a transaction and in life after the deal.
Deal activity in July 2017 slowed to 28, down from 54 in June. The year-to-date number of transactions through July is up from last year, however, at 283 compared to 265. The most frequently purchased targets have been property-casualty brokerages (143 of the 283 deals).
Acrisure continues to be the most active buyer, announcing 26 deals through July. Broadstreet Partners was the second most active with 20. Both Arthur J. Gallagher & Co. and Hub International announced 17 deals.
July saw several significant transactions. The Carlyle Group announced it is selling its majority stake in Edgewood Partners Insurance Center to Oak Hill Capital Partners, another private equity firm. EPIC’s annual revenues approach $300 million. Terms of the deal were not disclosed, but it is expected to close in the third quarter of 2017.
Markel and State National Cos. announced a definitive agreement for Markel to acquire all outstanding shares of State National—a total transaction value of about $919 million. State National operates two niche businesses, Lender Services (collateral protection insurance) and Program Services (more than 60 programs with more than $1.3 billion in gross written premium). The deal is subject to approval from shareholders and standard regulatory review but is expected to close in the fourth quarter of 2017.
Trem is SVP at MarshBerry. Phil.Trem@MarshBerry.com
For more details on M&A activity, visit LeadersEdgeMagazine.com.
Despite the proxy advisor’s recommendation, shareholders reelected the directors, but the message resonated: boards and senior leaders could no longer leave cyber risk management to IT staff.
This is definitely a shift in thinking, and the insurance industry has been seeing evidence for a while. When boards and senior management began pulling risk managers aside and asking if the organization’s cyber risks were under control, risk managers, in turn, began calling their agents and brokers to discuss cyber insurance and trying to understand an area where they had no baseline information. Increasingly, IT or security personnel were summoned to report to the board or a board committee on how they were managing cyber risks, and directors strove to ask interesting questions as proof they were exercising proper oversight.
Boards also became more aware of cyber-security standards and best practices, including the following:
- The Payment Card Industry Data Security Standard is the set of technical and operational requirements for credit card data. The PCI standard was developed by the major credit card companies and applies to all merchants accepting or processing credit card transactions. Financial institutions that have to cover fraudulent charges or reissue credit cards to consumers whose cards were affected can seek indemnification from the breached merchant under this standard. Target paid more than $39 million to settle such claims.
- Some cyber-security standards are mandatory and codified in federal regulations, such as the HIPAA Security Rule (applicable to personal health information) and sector-specific regulations, such as the North American Electric Reliability Corporation’s Critical Infrastructure Protection security requirements for utilities engaging in electrical generation, transmission or distribution. Penalties and fines associated with violations of these standards can run into the millions of dollars, and they are usually accompanied by unwelcome headlines.
- There are several other information security standards that may apply to organizations, such as National Institute of Standards and Technology’s Federal Information Processing Standards and guidance that are applicable to certain government contractors and the cyber-security requirements imposed on financial institutions. Due to the nature of their operations, some organizations have to comply with numerous standards, making cyber-security compliance a complex undertaking.
While boards and executives are now generally aware of the cyber-security standards applicable to their operations, many are not aware that standards have been developed that apply to the board itself in the governance of cyber risks. Only recently have boards begun to realize they actually have roles and responsibilities for cyber risk management that are defined by internationally accepted best practices and standards.
The Information Systems Audit and Control Association has been a frontrunner in IT governance best practices and founded the IT Governance Institute (ITGI) in 1998 to advance the governance and management of enterprise IT. The ITGI’s Board Briefing on IT Governance (2nd edition) has served as a guidepost for many boards trying to understand how to manage digital risks within their organization. The publication, however, focuses more on IT risks than cyber-security risks. As IT systems have become increasingly vulnerable through networking and internet connectivity, securing these systems is an essential element of IT governance.
Just months before the Target breach in December 2013, the International Organization of Standardization and International Electrotechnical Commission published ISO/IEC standard 27014 on Governance of Information Security. The standard sets forth actual roles (called principles) and responsibilities (called processes) for board directors and senior management in governing cyber-security risks. The standard notes that “the key focus for the governing body is to ensure that the organization’s approach to information security is efficient, effective, acceptable and in line with business objectives and strategies giving due regard to stakeholder expectations.”
ISO/IEC 27014 is not the only standard for cyber governance, however. Governance requirements are mandated by the Federal Information Security Management Act and have been integrated in NIST guidance (Special Publication 800-100). The Federal Financial Institution Examination Council’s Cybersecurity Assessment Tool has an entire section on cyber risk management and oversight, with controls specified for baseline, evolving, intermediate, advanced and innovative governance. The New York State Department of Financial Services’ Cybersecurity Requirements require an annual signed certification of compliance by the board chairman.
These standards for information security governance should be taken seriously and adopted in board and executive processes. Directors and officers have a fiduciary duty to protect the assets of the organization and the value of the company. The increased dependence upon IT systems necessarily extends this duty to include the protection of the organization’s digital assets (data, networks and software). Fiduciary duty lawsuits were filed against directors and officers of Target, Wyndham Hotels and Home Depot following major breaches at these companies. Although these suits have not fared well in the courts (each suit was dismissed on various grounds, but some settled on appeal), the plaintiff’s bar can be expected to become more experienced in standards and best practices and may increasingly point out board failures to comply with the standard as a basis for its claims. Unlike these fiduciary-duty suits, a securities-based class action lawsuit was filed earlier this year against Yahoo’s board and officers after its disclosure of a breach of 1.5 billion user records.
In deciding cyber cases, courts have looked at how the board or board committee reviewed and evaluated the company’s cyber-security controls and protective measures, how many times cyber security was discussed, or how many cyber-security reports the board received. Those factors are a low bar compared to meeting the requirements of ISO 27014 or other governance standards.
Scrutiny of cyber governance can be expected to continue as attacks become more severe and business interruption costs mount. The recent WannaCry and Petya malware attacks that hit companies around the globe, for example, created significant business interruption for affected companies and, in some instances, required substantial remediation efforts.
The best strategy in countering cyber attacks—and the ensuing lawsuits—is to plan for them. Brokers, agents and risk managers should examine their own cyber coverage, including the extent to which current D&O or cyber policies cover these types of lawsuits. They also should review how boards and executive teams they work with are governing cyber security, including whether they have implemented ISO/IEC 27014 or other best practices for governance, and raise awareness of governance standards.
Westby is CEO of Global Cyber Risk. firstname.lastname@example.org
On the good side from a policyholder perspective, insureds can now seek damages from insurers based on unreasonable delays in claims payments. This applies to commercial insurance contracts after May 4, 2017. To take advantage, policyholders must notify the insurer when the policy is put into effect of any reasons why a delayed claims payment could adversely affect their business.
The British Insurance Brokers’ Association (BIBA) recommends policyholders maintain clear records of financial losses resulting from delayed claims payments and document any attempts made to mitigate their losses (by, for example, seeking bridge financing) to best position themselves to make a potential claim under the act.
With the good come some new burdens. The act expands a set of obligations captured under a statutorily imposed duty of fair presentation. Previously, it had applied only to brokers, but it now applies directly to insureds as well. It is crucial to understand that violation of this duty can result in rescission or reformation of the policy, so ensuring compliance is essential.
The goal of the duty of fair presentation appears to be equivalent to the original intent of contingent commissions in the U.S.: to require or incentivize (i.e., contingent commissions) sharing relevant information so the underwriter can fairly assess the risk presented.
Under the duty of fair presentation, customers are obligated to present information to the insurer relevant to the exposures they are seeking to insure against. The duty includes an obligation to conduct a “reasonable search” and to present information in a “clear and accessible” form.
To satisfy this “reasonable search” component, BIBA advises a customer to:
- Identify and verify any information relevant to the insurance being sought
- Ask all senior management with relevant knowledge and anyone involved in the insurance procurement process (including brokers) to identify any potentially relevant information and
- Ask anyone doing business with or on behalf of the business (including external consultants, contractors and anyone insured by the policy) to identify whether they have any such relevant information.
Regarding the “clear and accessible” format requirement, BIBA notes large amounts of data provided in an unstructured format (so called “data dumps”) do not satisfy this obligation. Any unusual activities or known areas of potential concern for the insured must be adequately highlighted.
So what’s a broker to do? The primary role of a U.S. broker who directs a client to the London markets (and/or has clients accessing those markets) is to advise them of these obligations. Because this is an obligation to disclose relevant information not explicitly requested on an insurance application, at some level it is counter to the way U.S. brokers are accustomed to doing business. Ensuring your clients understand the expanded information expectations in the U.K. thus may be critical.
BIBA also recommends clients seeking coverage in the London markets institute procedures designed to facilitate compliance with these expanded obligations, including policies to:
- Clearly understand the risks being insured
- Document the process of compiling and checking risk information (including recording who is involved and any potential process shortcomings)
- Document whom the client is treating as “senior management” (and why) and who may have relevant information (both internally and externally) and
- Clarify internal sign-off/approval processes.
From a broker’s perspective, the act provides new tools that should help you more constructively engage in the underwriting policy on behalf of your clients and better advocate for quick claims resolutions. Ensuring clients are fully cognizant of their new rights and obligations may be most essential though. As they say when I check in at the Holiday Inn, the best surprise is no surprise.
Well you can, and it’s called being mindful. You may have noticed that over the past few years mindfulness has become a hot topic when talking about leadership.
Bill George, a retired executive vice president with Honeywell, is not some granola eating, incense sniffing yogi. For him, mindfulness is a way of staying “grounded and authentic.” Leaders who are mindful are better in stressful situations because they are better able to control their emotions. Remember the time you blew up in front of someone? You know what I am talking about and probably wish you had not reacted that way. Being mindful means being aware of your impact on other people. That allows you to recognize the long-term implications of your actions and may increase the likelihood that you will hold your temper or at least think before you speak.
Jon Kabat-Zinn, in his book Wherever You Go, There You Are: Mindfulness Meditation in Everyday Life, defines mindfulness as “paying attention in a particular way; on purpose, in the present moment and nonjudgmentally.”
You may be thinking mindfulness is just too out there, too fringe. But Goldman Sachs and BlackRock do not think so. Both companies see mindfulness classes for their staff as a good investment. Aetna, Google, General Mills, Intel and Target all run mindfulness programs.
Jeanne Meister, HR author, speaker and strategist, wrote in Forbes that studies show “the benefits of mindfulness can lead to improvements in innovative thinking, communication skills, and more appropriate reactions to stress.” Another benefit is increased productivity.
Jutta Tobias, PhD, of Cranfield University in the U.K., says “Mindfulness is a skill that can be learned rather than a personality trait or mindset few people possess.” What it involves is practice and a commitment to a set time every day to step back from the pressures of leadership to reflect on what is happening.
Kabat-Zinn calls this “stopping” or “non doing.” To be mindful, he says, we must shift from “doing mode into being mode.” When we do this, when we stop for even just a moment, things get simpler. It may sound dramatic, but he likens stopping with dying, and I think it makes great sense.
“If you were to die, all responsibilities and obligations would immediately evaporate,” he says. “By taking a moment to ‘die on purpose’ to the rush of time while you are still living, you free yourself to have time for the present. By ‘dying’ now in this way, you actually become more alive now. This is what stopping can do.”
Mindfulness requires active participation and commitment on your part. A mindfulness practice is something you must do every day. The difficult thing is learning to quiet your mind. Most people think of mindfulness as being all about meditating. However, a mindfulness practice can take many different forms. The breaks you take to clear your head at work can be mindful breaks. Cranfield University’s School of Management developed a Mindful Breaks Inventory to help you determine whether your breaks are actually helping you restore your energy and increase your focus.
Mindfulspring.com gives examples of simple practices to incorporate mindfulness into your day.
- When feeling stressed or tense, focus on your breathing. By simply bringing your attention to your breath, you can help restore your sense of calm.
- Listen carefully and with full attention. If you are distracted when speaking with someone gently bring your attention back to the conversation.
- Use the traffic stop signal as a reminder to focus on your breath. Don’t change your breathing, just notice the air flowing in and out.
- Notice the sensation of walking. Feel the ground as you move about your daily activities.
- Eat slowly and chew your food well. Experience the flavors and textures of the food in your mouth.
George tells us that prayer, journaling, reflecting while walking, and even jogging or physical workouts can be daily practices that allow you to be mindful and to renew your mind, body and spirit.
Kabat-Zinn tells us a mindfulness practice can be as simple as sitting down and becoming aware of our breath occasionally throughout the day. “Breathe and let be. Die to having to have anything be different in this moment…give yourself permission to allow this moment to be exactly as it is…”
It does not matter which mindful practice you choose, mindfulness will help you remove unnecessary clutter in your mind and needless worry about unimportant things. It will make way for clearer, more introspective thinking, which will benefit you and those around you. Start a mindfulness practice today.
This is not mind over matter. This is mind over what matters.
McDaid is The Council’s SVP of Leadership & Management Resources. email@example.com
The top three tech companies in 2014 had roughly the same revenue and only 137,000 employees.
There are a number of potential reasons for this shocking contrast, but regardless of the mix of factors, it demonstrates a readily apparent shift in the way the economy is evolving. Traditional ways of doing business will not provide the profitability required to compete.
I view the insurance industry more like a tech business than an automaker. It is data-driven. We deal almost exclusively with communication, data and financial transactions—activities that are ripe for effective automation. Other industries have already modernized these types of activities, but in nearly all cases, we continue to lag behind. Given our transactional nature, we should be closer to the revenue/expense ratio of a Google than we are to a General Motors.
To understand the threat of continuing to accept our traditional ways of doing business, we have to understand the concept of hyperscale. Simply put, hyperscale is the ability to automatically process massive amounts of transactions. For example:
- Google processes four billion searches every day.
- Twitter processes 500 million tweets every day.
- Alibaba processes 254 million orders every day.
These numbers are so large, their impact is likely lost. In contrast, the average midsize agency processes between 1,000 and 5,000 transactions in a day, often with a healthy dose of manual handling at every stage.
Hyperscale is achieved through the combination of effective data processing and an optimized business process. Our industry is not known for either; however, the paths to both of these are well defined. The struggle for most agencies in choosing to innovate is both the risk involved with wholesale change and the fact we have historically been able to both grow and exit businesses regardless of our efficiency.
Despite the fact that so much of our work is transactional, we know the value of the independent agency market is not in the transaction but instead in our role of trusted advisor. However, our effectiveness at processing transactions actually improves the value of our advice. The ability to process more transactions leads to greater revenue. The ability to process transactions more efficiently leads to greater margins. Higher revenue and higher margins enable agencies to develop more analytical capabilities, which lead to higher value as a trusted advisor. This is the model for the agency of the future.
I’m not suggesting we run off and immediately build systems that process at hyperscale, but we could benefit from some significant improvement. The castoff technology from organizations that produce hyperscale is enabling new entrants to approach transactional markets with a different model and value proposition. These entrants are focusing their efforts on financial services including insurance.
What kinds of castoff technologies are making their way into insurance? It’s all about that data, baby—from big data tools that automate data collection to disparate database integration to automated data governance. Software is basically sitting on the ground waiting to be picked up by those with the willingness to step into the future. Data visualization tools are now affordable enough for college students to buy. In 2002, building a predictive modeling capability was expensive, confusing and risky. There were limited tools available and no guarantee the models would produce meaningful insight. Today, the concept is proven, and models often can be built online with only a base knowledge of data analytics. If you have the willingness to change, there is now a path to get there.
When you consider the size of the property-casualty market is about $620 billion, one would assume that we are investigating these concepts—either individually to increase market share or as an industry to protect our market. Unfortunately, we are not. Our focus seems to be on growth through legacy business models. This does not bode well for us.
Let’s Get Some Jets
So, what’s the problem? We effectively operate the same way the Army Air Corps did at the end of WWII. Good thing we won when we did. The other side began using jet aircraft near the end.
Here’s a quick airplane history primer. Need a plane to go faster? Spin the propeller faster. Funny thing, though: when you spin the propeller past a certain speed, the air turbulence at the tip of the propeller drags the engine speed down. So then you bend the propeller tip to give yourself more RPMs before it happens again. Eventually, you’ll spin the propeller at its absolute limit. Want to go faster? You need a jet.
How does this tie into our world? Let’s get real about the mystery and celebrity behind insurtech. As someone with a tech background, I have to admit I like the rockstar status given to tech firms, but there’s a reality. We’re just a bunch of nerds with jets.
At some point, someone is going to put good pilots in those jets. When that happens, this little $620 billion game will be over. Spoiler alert: we are the better pilots. Let’s get some jets.
How do you change your fate? We need to consider our business process first. How do we approach servicing? Where does manual work help, and where does it hurt? We have to be willing to challenge why we work the way we do. Efficiency and automation does not always equate to low-touch client service. There is a balance where we have the advantage. We have to fix our business models first, then bring in the technology to make it work. The idea that software and tech are silver-bullet solutions just simply doesn’t ring true. As an industry, we have traditionally expected software to solve our problems, but in reality, the software available to us just boxes us into the old ways of doing business.
Unless you’re currently executing your exit strategy, you’ll likely be among the generation of agency executives left behind. (Yes, that’s you I’m talking about.)
“Not on my watch” just isn’t going to cut it anymore. Those who choose flexibility and an openness to change will find a place in the future economy. Make sure you secure your place.
Gagnon is The Council’s CIO. firstname.lastname@example.org
Kim Buckey, vice president of client services at DirectPath, helps Fortune 1000 employers engage their staff in healthcare decisions. She’ll discuss where we are in terms of improving healthcare consumerism and where we still need to go.
WHAT’S NEW AT THE BROADMOOR
From a riding academy to the Ice Palace skating rink to the Cheyenne Mountain Zoo, Spencer Penrose never tired of creating something fun and interesting for his guests to do. Today, his spirit lives on. Here’s what’s new at The Broadmoor.
The resort just converted one tennis court into three pickleball courts. The sport, which combines elements of tennis, badminton and ping-pong, is played with a whiffle ball and paddles. It is all the rage and one of the fastest growing sports because anyone can enjoy it, regardless of your age or experience.
Seven Falls Prospector’s Pick Kölsch
Spencer Penrose was an ardent anti-prohibitionist. He had several train cars of liquor shipped to The Broadmoor from Philadelphia before the country went dry. As the story goes he kept his stash in the resort’s basement, accessed by a stairway hidden behind rolling bookshelves. The Prohibition-era bottles displayed in the cases in the Tavern, and along the wall outside the restaurant, are a testament to the spirits that flowed here during Prohibition.
Spencer would no doubt approve of the new beer that is being brewed exclusively for the resort, The Broadmoor’s Seven Falls Prospector’s Pick Kölsch. A nod to the men who worked the mines and the nearby waterfalls, it is a collaboration with Red Leg Brewing Co. in Colorado Springs, where owner and U.S. Army veteran Todd Baldwin “serves those who served” at the military themed brewery. There are two types of German hops used to make the Kölsch, which is light, crisp and refreshing. It’s available in cans and on tap in the bars and restaurants throughout the resort as well as the wilderness lodges and 1858 Restaurant.
The Broadmoor also serves many of Red Leg Brewing Co.’s other beers. They are easy to spot, as they all have military-related names like the Devil Dog Stout, which won Bronze at the World Beer Cup in 2014.
Quantum Lift Facial at the Spa
A new treatment you will want to try at the resort’s Forbes Travel Guide 5-star rated spa is the Quantum Lift Facial, which “tightens, tones and firms” all in one session. After cleansing, the aesthetician uses equipment akin to a tingly Clarisonic brush that delivers radio frequency energy to the collagen tissue. Once she has done half of your face, she holds up a mirror so you can see your skin before and after. The results of this proprietary technology are impressive.
Changes at the Shopping Plaza
Expect to see some changes in the location of some of your favorite shops as well as some new boutiques. Of note, Peter Millar will open a stand-alone luxury lifestyle apparel boutique in September. The clean lines of the light-filled store will have accents of walnut and brass, a reflection of the brand’s classic look. The shop will offer formal clothing, coats, sportswear and active apparel.
Christmas at Cloud Camp
For the very first time, Cloud Camp will be open for Christmas. One family or group will have exclusive use of the entire main lodge and its seven bedrooms. Fill your days relaxing by the fire, joining chefs in the kitchen for “cooking clubs” (with special holiday dishes and cookie making), tasting wine, building snowmen, and taking in the 360-degree views of nearby Pikes Peak and Colorado Springs below during a wintry walk among the clouds. Staff can customize the entire experience for your family’s specific holiday memories and recipes. All meals, beverages and alcohol are included. Starting at $40,000.
From a workers comp perspective, why is there a need for devices that can promote safety on construction sites?
Construction is an inherently dangerous industry but one where technology can make things safer. Part of that is simply providing visibility and information. Knowing when workers are hurt and where they are on the site can get help to someone faster and substantially decrease the severity of injuries.
Right now, other than cell phones, there’s not a great way for workers to communicate if they’re injured or if they see something unsafe on the job site. Providing a wearable device that allows for a real-time communication of injuries tagged with an interior geolocation provides real, positive benefits.
What are the challenges in construction?
One of the biggest challenges is the very nature of construction itself. You’ve got a very chaotic environment with a workforce that’s changing daily. Different workers from different trades are coming and going. From an IT infrastructure standpoint, it’s incredibly challenging to deploy technology. You have heavy machinery that’s moving around, constantly changing the physical environment. Compare that to a factory floor where you have a fixed building, repetitive tasks and workers on a shift basis and you can start to see the difference and the challenges.
What is your technology and what does it do?
The “spot-r system” is a network connectivity solution for the jobsite. It consists of three components. The first is a mesh network that gets deployed on the construction site and provides that connectivity. The second is a device that the workers wear and is assigned to them in a safety briefing. The third is a dashboard that is available on any device that has an Internet connection.
The system allows you to know how many workers you have on a site and where they are in 3D space—what floor of the construction project and which zone of the floor in real time and historically. That’s paired with a host of safety features on the wearable, including a push button so an injured worker can send an automated alert to the safety supervisor’s phone with the worker’s name and location and an automated slip-trip-and-fall alert that sends the name and location of a worker who falls on site, whether that’s off a piece of machinery or down an elevator shaft. The entire system functions as an evacuation alert that can be triggered off the mobile dashboard.
Everything has very good power efficiency. There’s low to no maintenance from the worker’s standpoint, which is key. When you’re talking about wearable technology, if it’s not easy to use and it doesn’t provide real safety benefits, you’re going to have a hard time with compliance.
Where did the idea come from?
Triax was founded initially around a head impact monitoring technology to tackle the concussion crisis, particularly in youth sports. The company built a sensor-based wearable that went in a headband. It accurately kept track of the number of hits, the location of hits and the severity of hits to an athlete. The real breakthrough we achieved in that market was the ability to speak to many, many sensors over a wide geographic area with low power drive.
How does it affect workers comp?
It’s a multifaceted tool to attack some of the workers comp costs on a construction site. One important part is the ability to get to injuries faster, particularly if you have an on-site medic. There are also some proactive features that we believe will reduce claims over time. One of those is the behavior modification and enhancement to a safety culture that comes with someone putting a safety device like this on their belt every morning and knowing that if they push that button the safety supervisor gets an alert and needs to respond.
A lot of customers also use the push button for an unsafe work condition that needs attention. If you’re on a remote part of the site and you see a dangerous condition, instead of having to wait for the lift and find the safety supervisor and spend a good amount of time away from your work, the worker can simply push a button and know that someone will come and address the situation right away.
New and exciting
The number of new restaurants and bars opening literally every day is staggering. It’s hard to keep up! A new trend is share plates, which is great because it allows you to try many dishes during a meal rather than just one main meal.
Best new restaurant
The new Stokehouse Melbourne is fantastic for the food and views. Whether you are upstairs in the formal dining area or downstairs in the casual bar, there is always something to see and exciting to eat.
France-Soir in South Yarra. It is an old-school French bistro that hasn’t changed in the past 30 years. It’s perfect for the long lunch. I love their steak with pomme frites.
Bar Di Stasio on Fitzroy Street in St Kilda is a must. It has become an institution. I strongly recommend sitting at the bar on an early evening and enjoying a house-made negroni.
Even though it is an hour drive from Melbourne, I would encourage visitors to spend a weekend at the Mornington Peninsula and stay at the newly opened Jackalope Hotel. There are some fantastic wineries down that way. If you are looking for something in the city, stay at the design hotel QT Melbourne and have a drink at the rooftop bar on a Friday afternoon.
Thing to do
My favorite thing to do is to head to the Melbourne Cricket Ground to watch a game of Australian Rules Football. Make sure that you visit during winter, the heart of the Australian Football League season.
Melbourne is famous for the Royal Botanic Gardens just outside the Central Business District. Around the garden is a running track called “The Tan,” which is very busy before and after work.
If you want a fun week with your friends, the Spring Racing Carnival at Flemington in early November is where you want to be. The whole city turns into a weeklong party with plenty of racing, drinking and late-night events.
There are ski resorts a few hours outside of Melbourne that are great for a winter weekend getaway. They may not be as big as the mountains in Europe or the United States, but there is generally plenty of snow and always a party vibe at night.
Forty-one feet high, weighing 73,000 pounds, with a wingspan of 68 feet, the stainless steel falcon, on display outside the new $1.5 billion Mercedes-Benz Stadium in Atlanta, is the largest freestanding bird sculpture in the world. Designed by Gábor Miklós Szőke, who studied at Savannah College of Art and Design, the sculpture is also a tangible symbol of the Atlanta Falcons, who will kick off their fall season in the new retractable-roof stadium. The raptor, clutching a football in its talons as it takes flight, could also be a metaphor for the city. Reflecting the Falcons’ “Rise up” slogan, Atlanta is soaring in a visionary new direction.
There is a roster of reasons you will want to check out the new stadium, even if you are not a Falcons fan. The city’s new Major League Soccer team, Atlanta United FC, will also play there. And it will be the site of three major upcoming sporting events: the College Football Playoff National Championship in 2018, Super Bowl LIII in 2019, and the 2020 NCAA men’s basketball Final Four.
In other splashy sporting event news, this season the Atlanta Braves began playing at their new ballpark, SunTrust Park, which is surrounded by The Battery Atlanta entertainment complex. Among the current eating and drinking establishments is The Terrapin Taproom, which features craft beers from the Athens, Georgia-based microbrewery and BBQ. Coming soon is C. Ellet’s, an American steakhouse/New Orleans mash-up by chef Linton Hopkins, who tied for the James Beard Best Chef: Southeast Award in 2012. For music, the Coca-Cola Roxy Theatre, a state-of-the-art resurrection of the legendary Buckhead club that closed in 2008, is showcasing acts like current heartthrob Harry Styles.
For a hands-on sporting experience, check out the Porsche Experience Center, where you can road-test one of 75 of the latest-model Porsche vehicles on the 1.6-mile track. The $100 million, 27.4-acre complex, which opened in 2015, offers the one-on-one supervision of a drive coach, such as professional racecar driver Shannon McIntosh. The six different track modules include the Handling Circuit, designed to mimic a winding country road, where you learn how to navigate curves and properly brake.
The city’s most visionary project might be the Atlanta BeltLine, a sustainable redevelopment of the old railroad corridors that once encircled the city. It will eventually connect 45 neighborhoods via a 22-mile loop of multiuse trails, but for now you can hike and bike along the Eastside Trail, which runs from Piedmont Park to Inman Park and the Old Fourth Ward and has public art and cafés where you can stop along the way. Take a breather at the Ponce City Market, just north of the North Avenue bridge in the old Sears, Roebuck & Co. building, where you can enjoy a glass of wine at City Winery, eat Southern seafood at W.H. Stiles Fish Camp, and shop at upscale boutiques like Q Clothier.
In the NCC’s bunker-like room surrounded by giant TV monitors—a mini version of NASA mission control—NCC officials prowl the dark net, the anonymous network used for illegal peer-to-peer file sharing. In these murky corners, the spoils of a data breach are offered for sale.
“The dark web is essentially anything on a computer network that’s not indexed for location by typical Internet search engines like Google, Bing and Yahoo,” explains Ed Rios, CEO of the National Cybersecurity Center. Many sites on the dark web use the Onion Router, often called TOR, a tool designed to keep location and users anonymous.
According to Wired, TOR works by having your traffic bounce through a series of routers until it gets to an end router, which then gets the requested web page and sends it back through the tubes, but none of the individual routers know or remember the IP address of the original requester.
“TOR was originally created for legitimate purposes by the U.S. military. In defense, it’s preferable to keep location and identities secret,” Rios says. “However, TOR is also now used for nefarious criminal activities to include the sale of black market items, services and stolen information. Everything from hacking services to personal information and beyond can be found on the dark net if one has the system and knowledge of how to access it.”
What’s the NCC doing there? “It uses the dark net in support of customers for hack validation and consequence management,” Rios says. “It is also used for cyber defense research, training and general situational awareness.”
Kill one virus and another takes its place. How can companies possibly do battle against such a multiheaded Hydra?
One way is for businesses to share information about their data breaches. Other deterrents include greater cyber awareness, education, training and a rapid response to the incident. These opportunities will be available to insurance brokers and agents (and other commercial enterprises) once the National Cybersecurity Center in Colorado Springs opens its doors for business.
The NCC is a nonprofit organization founded in 2016. Supported by philanthropic and corporate donations, the center’s ambition is to vastly improve the cyber preparedness, security and response of primarily midsize and smaller companies.
Its impact is likely to be widespread, given that all businesses are vulnerable to cyber threats. The Ponemon Institute, which conducts independent research on privacy, data protection and information security policy, tallies the average annual cost of cyber attacks worldwide at more than $9.5 million per company. Some pay more, some less. Although large companies are not immune to cyber attacks, they do have greater capital and personnel resources to prevent, detect and mitigate data breaches. Smaller companies simply don’t have the same capacity.
Cyber thieves want different things, such as inside information on a planned acquisition or a new product, compromising information about a top executive for blackmail purposes, employees’ personally identifiable information for credit card fraud, or ransom to decrypt an encrypted IT network and systems. Today’s hackers are an increasingly broad group of perpetrators, ranging from criminal organizations executing ransomware schemes to nation-states looking to disrupt large institutions like banks and utilities. In between are malicious corporate insiders, hacktivists promoting social or political causes, and traditional hackers exploiting IT systems for bragging rights.
The attack surface for these varied agents has also become much broader. A decade ago, when the first smart phones debuted, there was little (if any) in the way of machine learning, artificial intelligence, mobile applications and the Internet of things. Each technology presents a new doorway for hackers to get inside the corporate perimeter. “With technology moving at the speed of need, the risks are constantly evolving,” says Ed Rios, CEO of the National Cybersecurity Center.
Three Pillars of Security
The NCC grew from the vision of Colorado Governor John Hickenlooper, who urged state legislators to fund the development of a nonprofit cyber education and research facility. Colorado Springs seemed like a natural fit because it has a growing technology sector and “a confluence of military operations, technology companies and commercial enterprises all engaged in some aspect of cyber-risk analysis and security,” explains Matt Coleman, Colorado market president at insurance brokerage Hub International.
In Hickenlooper’s State of the State address in February 2016, he pledged the facility would become the “country’s foremost authority” on cyber research and development, enhancing the ability of businesses to rapidly detect and react to cyber attacks. Three months later, the state’s legislature voted by a strong majority to back its creation.
The organization’s leadership has created three pillars to achieve its mission, each pillar comprising a bucket of different services that will be available via a subscription-based model.
The Cyber Institute is a dedicated education and training center focused on increasing the cyber-risk awareness of the C-suite, boards of directors, other corporate executives and elected officials to improve their governance and oversight of cyber risks.
Such awareness is needed. According to a 2017 survey by professional services firm EY, which polled more than 1,700 global executives, information security managers and IT leaders, nearly one in three respondents (32%) said a lack of executive awareness has challenged the effectiveness of their cyber-security planning. Only 38% of respondents said they believed their boards of directors had enough information to evaluate their organization’s cyber risks, and nearly half (49%) said their boards were unsure of the financial repercussions of a cyber attack.
“Cyber risks have moved from the server room to the boardroom,” says Kyle Hybl, who chairs the NCC’s Cyber Institute Advisory Board. “The risks to an organization are not just financial—a company’s hard-earned reputation is at stake. The challenge for businesses is they have to win every single time they defend against a cyber attack. The attackers just need to win once.
“We’re going to train business leaders about cyber risks, so when they confer with their chief information security officers they’ll know what’s needed, resource-wide, to make the company as secure as possible,” Hybl says.
The insurance industry is a repository of (cyber-loss) claims information that can add dimensionality to our growing database and knowledge transfer efforts.”Tweet
He pointed to an organization’s “crown jewels,” the sensitive and high-value data most important to protect. “Business leaders need to know what their crown jewels are,” Hybl says, “where they’re located, who has access to them and what to do from a disaster response standpoint if someone tries to steal them.”
The Cyber Research, Education, and Training Center is a cyber academy affiliated with the University of Colorado campus in Colorado Springs. The training center will provide certificate-awarded courses in cyber risk and security awareness. The ultimate goal is to make the NCC a national focal point of a cyber-educational curriculum for the business workforce. A full-time staff connected to leading cyber-security researchers across the world will operate the academy.
The Rapid Response Center is a dedicated facility designed to assist NCC members prior to and in the event of an attack with proactive threat analyses and reactive threat response options. “When something bad happens to a small or medium-sized business, they often don’t have the ability to understand what is going on, much less the tools to react to the incident,” Hybl says.
The response center will draw upon leading cyber-security experts, cyber vendors, and both public and private partnering organizations to forensically determine the category of an attack, such as a ransomware demand or a distributed denial of service attack. Once the attack type is verified, a short list of NCC-certified cyber-security vendors adept at resolving the specific cyber incident is provided to the member company.
“We want to be the front door resource to medium and smaller companies—a one-stop shop when they need to immediately resolve an active breach,” Hybl says.
He and other NCC personnel refer to such businesses as the “Unfortunate 50,000,” meaning they lack the financial and personnel resources to combat cyber attacks as effectively as their larger counterparts. But the NCC’s operating model is designed to assist companies of all sizes, with the aim of becoming a clearinghouse for cyber-related information.
This data warehouse will also be populated with government data on cyber incidents. The NCC is one of several operations nationwide, known as Information Sharing and Analysis Centers, that collect, analyze and disseminate actionable threat information from commercial entities, government agencies and cyber-security firms to prepare their members for an attack.
“We have up-to-the-minute feeds on different attacks coming into us on a 24/7 basis from Homeland Security, the Defense Department and other government agencies,” Rios says. “We’re not there yet, but our goal is to anonymize this classified information and push it to our members.”
“You want to immediately share this information, because hackers don’t just stay on one company,” says Mark Turnage, CEO of OWL Cybersecurity, a cyber-security consulting firm. “If there’s something unique about an attack, this information can be quickly shared across the NCC’s membership to allow for a more prepared and timely response.”
The NCC provides the means for businesses to share their cyber-attack experiences on an anonymous basis. For example, information about a threat may come from a government source and be leveraged by the NCC to assist a private-sector business. “But the source of this information and methodology would never be identified,” Coleman says.
Rios points out that NCC information is private data. “Cyber-security breach information remains confidential between the victim company and the NCC,” he says. “It’s up to the company to report publicly or to the government or not.”
A United Front
Coleman sees tremendous value in what the NCC can offer the brokerage industry and its clients. And with the subscription-based model, members could pick and choose from the available services. “Membership fees could range from $50 a year for individuals to possibly $25,000 for an organization,” says Rios, though he cautioned these rates are not set in stone. “Such costs are generally less than what you would pay for a for-profit security consulting firm. … As a nonprofit, we’re able to present a financial structure that allows for greater utility by more people.”
When something bad happens to a small or medium-sized business, they often don’t have the ability to understand what is going on, much less the tools to react to the incident.Tweet
Some brokers may be interested in cyber-risk education and training alone, others may want to avail themselves of the value of the Rapid Response Center, and many may want to leverage NCC membership to assist clients with their cyber-security concerns. While clients would need a subscription for the Rapid Response Center, brokers could certainly leverage the knowledge and training they gain from the center to provide value and expertise in advising their clients. “The NCC represents an external cyber-risk control resource with a reach and expertise that is far beyond what most insurance brokers could either staff or afford,” Coleman says.
And the value has the potential to go both ways. “A co-branded strategic partnership would be very beneficial,” Rios says. “The insurance industry is a repository of (cyber-loss) claims information that can add dimensionality to our growing database and knowledge transfer efforts. We’re all in this together.”
Hybl shares this perspective. “All kinds of businesses today are part of a digital ecosystem; each party’s vulnerability to a cyber attack potentially exposes the other parties,” he says. “Malware that affects an insurance agency may be passed on to an insurance carrier and to that insurer’s customers. A united front is needed.”
Banham is a financial journalist and author. Russ@RussBanham.com
While the federal government currently has no consensus as to what constitutes cyber war, Congress is certainly doing a lot of talking about the cyber threat. As of June 2017, there have been 20 congressional hearings pertaining to cyber security, cyber threats and cyber warfare. Congress has also considered related legislation, most having to do with strengthening local and state cyber capabilities versus defining cyber war.
One of the more recent pieces, an amendment to the Countering Iran’s Destabilizing Activities Act of 2017, was introduced June 12 by Senate Majority Leader Mitch McConnell, R-Ky., on behalf of Sen. Mike Crapo, R-Idaho. The amendment (S.A. 232) escalates and expands the current sanctions against Russia by codifying and modifying six current executive orders, two of which relate to Russia’s malicious cyber activity. The amendment also creates several new sanctions against Russia, including for “malicious cyber actors.” As memorialized in the Congressional Record of June 13, 2017, Crapo said on the Senate Floor, “Our amendment also demonstrates our resolve in responding to cyber attacks against U.S. citizens and entities and against our allies.”
One of the few direct inquiries into cyber war occurred more than a year ago, in June 2016, when Rep. James Himes, D-Conn.—a member of the House Foreign Affairs and Armed Services committees—introduced the Cyber Act of War Act of 2016. This bill directs the president to develop a policy for determining when an action carried out in cyber space constitutes a use of force against the United States and to revise the Department of Defense Law of War Manual accordingly.
In developing this policy, the bill asks the president to consider the ways in which a cyber attack’s effects may be equivalent to a conventional attack’s effects, including physical destruction or casualties, and intangible effects of significant scope or duration.
While it seems like this bill speaks to the issues being wrestled with, it doesn’t seem to have moved since being referred to the House Armed Services Subcommittee on Emerging Threats and Capabilities in June 2016. For its part, the Trump administration has made some efforts to strengthen cyber security. On May 11, the president signed an executive order requiring each government agency to submit a report describing its security measures and significant risks. It also requires all federal agencies to adopt the Framework for Improving Critical Infrastructure Cybersecurity, developed by the National Institute of Standards and Technology, and to upgrade critical infrastructure. Additionally, the Department of Defense has requested $647 million dollars for its U.S. Cyber Command, an increase of 16% from last year’s requested amount. On June 12, the chairman of the Joint Chiefs of Staff, Gen. Joseph Dunford, told lawmakers that the U.S. Cyber Command is “simultaneously conducting cyber operations now against multiple adversaries.”
Since 2012, the DoD has also conducted an annual Cyber Guard, which is a multiweek exercise that includes hundreds of participants from all sectors, including the federal government, state National Guards, power companies, banks, port facilities and allied foreign partners. “This is our seed corn for the future,” Adm. Michael Rogers said in a DoD news article. Rogers commands the U.S. Cyber Command, directs the National Security Agency and serves as chief of the Central Security Service. He noted that those who work at CYBERCOM view themselves as “the warriors of the 21st century.”
Since cyber war has yet to occur, this means all other hacking incidents perpetrated by nation-states and terrorist organizations to date have been something less. Nevertheless, many government officials and respected publications have a tendency to overuse the term. In March, for example, The New York Times wrote in a headline: “Trump Inherits a Secret Cyber War Against North Korean Missiles.” The Atlantic in July 2016 reported,
“The Defense Department launched into a full-on cyberwar against the Islamic State.”
When North Korea allegedly conducted an effective cyber attack against Sony Pictures Entertainment in response to a film that ridiculed its leader, Sen. John McCain, R-Ariz., called it a “manifestation of a new form of warfare.” He added: “When you destroy economies, when you are able to impose censorship on the world and especially the United States of America, it’s more than vandalism.”
Despite his tendency to shoot from the hip when speaking and tweeting, President Donald Trump has yet to call a hacking incident an act of cyber war, including the recent WannaCry ransomware attack allegedly perpetrated by North Korea. But if he did utter the words, would that legally give insurers freedom to activate the war exclusion in their policies and not pay related claims?
In 2001, President George W. Bush clearly perceived the terrorist attacks on Sept. 11, to be the equivalent of war, stating that the “enemies of freedom committed an act of war against our country.” He further commented, “Our war on terror begins with al Qaeda but does not end there.”
Despite this informal declaration of war, the insurance industry did not exclude coverage to the hundreds of businesses affected by the terrorist attacks. Within hours of the attacks, Robert Hartwig, then president of the Insurance Information Institute, was in the difficult position of being asked by The Wall Street Journal whether the property losses would be covered by insurance.
“I instantly said yes,” recalls Hartwig, today a professor of finance at the University of South Carolina. “I felt the attacks did not fit the technical definition of war. Within two days, the industry came to the same conclusion, ultimately paying out more than $30 billion in claims.”
But what if the same country launches a cyber attack against the electric power grid in the same city, radically disrupting the flow of business for tens of thousands of companies over a period of many weeks and contributing to the deaths and injuries of dozens? Is this war? That’s where things get complicated.
Across the globe, there is no statutorily agreed upon definition of cyber war. Neither the Hague Conventions nor the Geneva Convention references the term. The United Nations and NATO also do not define what it is (or isn’t). Even the U.S. Defense Department’s 2015 Law of War Manual—a document defining a broad spectrum of wartime actions—has no mention of “cyber war” or “cyber warfare.”
Why care? Because of the war exclusion found in the vast majority of insurance policies, which determines coverage for losses arising out of war or war-like actions. If a cyber attack were considered war, insurers would be on pretty firm legal ground to exclude any and all insured losses deemed a result of the warlike event. But what if the attack on the power grid is not cyber war? Without a clear definition, the insurance industry must tread carefully to exclude coverage.
At a time when insurance brokers see cyber insurance as a fast-growing business opportunity, the world’s inability to come to a consensus puts brokers in a very uncomfortable position. They are stuck between corporate risk managers concerned about potential uninsured losses and insurance markets still struggling to find their way with emerging cyber-related exposures.
“As risk advisors, we’re in uncharted territory,” says Eric Seyfried, senior vice president and cyber and E&O leader at Aon Risk Solutions. “Since we haven’t seen a nation-state-sponsored defined act of war or terrorism in a cyber context, we don’t know if it would be covered or not.”
“Cyber-security experts have been wrestling for some time to legally define what cyber war is and isn’t,” says David Inserra, a policy analyst at the Heritage Foundation who specializes in homeland security and cyber policy. “It’s a big gray area. Maybe the first time everyone agrees it has happened, the insurance industry will activate the war exclusion and businesses would pay. But businesses can’t keep paying all the time.”
What If the Government Declares It?
The United States hasn’t officially declared war since World War II yet has been involved in numerous other conflicts since then. And when it comes to insurance coverage, many feel that it takes that official declaration to activate the war exclusion.
“There’s the traditional declarative state of war, such as FDR’s declaration of war against imperial Japan following the attack on Pearl Harbor, and then there’s all these other events that may or may not constitute acts of war or hostility,” says Alan Cohn, former assistant secretary for strategy and planning at the Department of Homeland Security and currently of counsel at law firm Steptoe & Johnson. “Unless the president declares something an act of terrorism or an act of cyber war, it’s unclear what the effect would be. Legally, it’s a very muddy area.”
Cohn should know. During his time working for the federal government, discussion arose several times over declaring cyber events to be terrorism or an act of war. “A similar debate is now under way trying to determine the difference between traditional war and the various types of cyber attacks and disruptions we see today,” Cohn says.
“Until an event is analyzed and declared an act of war, it isn’t an act of war,” says Lani Kass, a former senior policy advisor to the chairman of the Joint Chiefs of Staff, where she was responsible for high-level military assessments and analyses of international crises. “The key is the declaration.”
Robert Hartwig, a professor of finance at the University of South Carolina and former president of the Insurance Information Institute, agrees with the importance of the declaration in claims outcomes. “It is almost unavoidable that a declaration of cyber war by the president or Congress would encourage insurers to exclude the related losses, which would result in long-lasting claims disputes and protracted litigation between claimants and insurers,” he says.
The importance of the official declaration was apparent in the 2013 Boston Marathon bombing, when claims were not excluded under terrorism policies. This is because the bombing was not officially declared an act of terror. For the same reason, businesses that had purchased terrorism insurance could not file claims under these policies. Terrorism insurance is backed up financially by the federal government’s Terrorism Risk Insurance Act (TRIA). “TRIA requires a formal declaration of terrorism by the Treasury Department to pay out, which was not in the offing [in the Boston bombing],” Hartwig says. “So an event that certainly looked like a terrorist attack was not covered by terrorism insurance.”
Could Engaging in Armed Conflict Be Enough?
As risk advisors, we’re in uncharted territory. Since we haven’t seen a nation-state-sponsored defined act of war or terrorism in a cyber context, we don’t know if it would be covered or not.Tweet
Now, as is clear by the many conflicts that continue to occur around the world, regardless of whether a formal declaration of war is made, countries can still engage in warlike actions. “There does not need to be a formal declaration of war for the laws of armed conflict to apply,” says Jody Westby, CEO of Global Cyber Risk, a provider of cyber risk advisory services to government and businesses.
Westby maintains that insurance companies “may reasonably decide to activate the ‘act of war’ exclusion to claims—even if there has not been a formal declaration of war. If it looks like a duck, acts like a duck and quacks like a duck, insurance companies should not need Congress to say it is a duck,” she says.
With traditional war, the term of art is that an act of war involves another nation’s “use of force or armed conflict,” says Adam Segal, director of the digital and cyber space policy program at the Council on Foreign Relations. “But even in such situations, these things are politically defined by context.” Segal notes that context would also be applied to a determination of cyber war. “I’ve been told by Israeli officials that a cyber attack that shut down traffic lights in Tel Aviv would be considered a potential ‘use of force’ and ‘armed attack’ since the country relies on massive mobilization” of soldiers to battle, he explains. “Traffic is bad enough in Tel Aviv as it is. But it’s unlikely the U.S. would go to war over the same thing.”
Under international laws of armed conflict, force must be limited to accomplishing military objectives, and excessive force is prohibited. Also, certain targets are protected, such as hospitals, religious sites, and transportation of sick or wounded. These provisions are intended to prevent unnecessary suffering and destruction.
The same rights may be granted in the context of specific cyber attacks. “The destruction or incapacitation of critical infrastructure like communications, water systems and utility grids could cause extreme suffering and hardship,” Westby says. “In today’s connected society, these networks should be off limits for cyber attacks.”
Such attacks could constitute an act of war, as the attack would shut down the transportation network, curtail the normal course of business for tens of thousands of companies, and plunge millions of people into darkness without access to food and water. “It would likely fall under the definition of ‘use of force,’ giving insurers some ground upon which to deny claims,” Segal says. “But that doesn’t mean the government would see it that way.”
Attribution May Be the Linchpin
What would it take for insurers to make that determination if not a formal declaration? “The key for carriers to activate the war exclusion is attribution,” says Andy Lea, vice president and head of the media, E&O and cyber practice at CNA. “Without attribution—a nation-state stepping forward to declare it perpetrated the cyber attack—it would be forensically difficult to discern who did what.”
If North Korea were to boast that it had unleashed the WannaCry ransomware attack, would the insurer activate the war exclusion in its insurance policies that were affected by the malware? Lea says yes. “To the extent there is a war exclusion in a property and casualty policy and it could be applied,” he says, “we would apply it.”
Julie Bernard, a principal and insurance sector leader at Deloitte Advisory who heads its cyber-risk services practice, agrees. “Here’s the thing with war—it requires attribution. The same would apply to cyber war. You need to know who did it—was it China, ISIS or some guy in a hoodie in a basement…. The problem with cyber attacks, unlike physical attacks, is that it’s not easy to prove the source.”
A case in point is a nation-state that recruits third-party hackers to launch a devastating cyber attack. The target country would need to demonstrate a clear connection between the two parties, particularly if the nation-state denies involvement. Such links are vastly easier to assert and prove in the context of traditional war. “The laws of armed conflict allow a country to use third-party combatants as soldiers,” Westby says, “but they must have distinctive emblems or uniforms, carry their arms openly, and be directed by a person responsible for subordinates.”
A nation-state that recruits hackers to launch a cyber attack fits none of these criteria, subverting the ability of the target nation to assert attribution. “China and Russia have been known to use third parties for cyber attacks, then deny any knowledge or involvement,” Westby says. “If the third parties are not recognized as a lawful combatant and the U.S. declared an act of war against Russia or China, it could theoretically be in violation of the Geneva Convention.”
Without clear attribution, much less an agreed upon definition of cyber war, it remains uncertain how the United States, or any other country, could respond to what it considers to be an act of cyber war. “It may boil down to whether the attack is of such a size, scope or scale that it triggers a nation’s right to self-defense—in the U.N. Charter sense of the phrase—for a cyber attack to be deemed an act of war,” Cohn says. “As yet, this remains untested.”
Cyber War Manuals
Until an event is analyzed and declared an act of war, it isn’t an act of war. The key is the declaration.Tweet
Although there is no universally accepted definition of cyber war, there are plenty of attempts at describing what it could be. For instance, the Institute for Advanced Study of Information Warfare describes cyber war as “any action by a nation-state to attack and attempt to damage another nation’s computers, critical infrastructure, or information networks…to deny, exploit, corrupt, or destroy an adversary’s information, information systems, and computer-based networks.”
The Tallinn Manual on the International Law Applicable to Cyber Warfare offers a deeper analysis of what constitutes cyber war. The 125-page document was developed by cyber-security experts from multiple nations working with NATO’s Cooperative Cyber Defense Center of Excellence, which is based in Tallinn, Estonia, hence its name.
NATO set up the center after North Korea was accused of hacking Sony Corporation in 2014. (Today, there is still doubt as to who was responsible.) Despite the center’s NATO sponsorship, the manual does not have the power of a treaty signed by many nations. It essentially is a working document for analysis and commentary.
In the manual, the experts provide examples of what they consider cyber warfare. One example is a nation that acquires control over enemy weapons through cyber means and uses those weapons to attack that country or another. Another example is the use of a botnet, a collection of Internet-connected devices such as computers or smart phones that are infected and controlled by malware, to conduct a distributed denial of service attack against a target country’s electric power grid. Both are introduced in Rule 41 of the manual.
Rule 42 presents another example of cyber war—the superfluous injury or unnecessary suffering of people harmed in a cyber attack. Rule 71 cites an attack against the computers, computer networks and data of medical units and transports as a warlike event. “Some experts contributing input to the Tallinn Manual take the view that a cyber attack that does not result in injury, death and destruction but produces extremely negative effects can be construed as an act of war,” Inserra says. An example listed in the manual is a crippling attack against a major stock exchange that results in a catastrophic stock market crash. However, Inserra notes, “others take the opposite position.”
Since the manual is not a treaty and does not have the power of international law, these examples are essentially suggestions of how governments may define cyber war. Still, the document is important as debate on the subject proceeds. In some cases, it could serve as the basis for an insurer’s interpretation of a cyber attack as “warlike” and therefore excluded from coverage.
Consider Costs, Confer with Clients
The lack of a clear and certain definition of cyber war is reflected in the wide range of cyber policies and exclusions themselves. “The ambiguity of cyber space makes the demarcation between cyber war and cyber crime unclear,” says Daniel Garrie, executive managing partner at Law & Forensics, a consulting firm focused on forensics and cyber security. “Our read of the dozens of different cyber insurance policies in the marketplace indicates different definitions of what constitutes a cyber attack, much less cyber war. Each appears to vary as to specifics.”
For the tens of thousands of companies that have purchased property insurance absorbing their business interruption expenses, there is no assurance their losses would be covered in the event of an act of cyber war.
Speaking on a Marsh webcast on managing terrorism risk last year, Matthew McCabe, senior vice president of Marsh’s cyber practice, “suggested businesses should be particularly vigilant for language that would apply the exclusion to any act of a foreign nation state,” reported the Claims Journal.
“Cyber has created a vast, untested category of claim that could well fall between the cracks in many commercial insurance programs,” Hartwig says. “Just because the president and members of Congress refer to a specific cyber event as an act of war or an act of terrorism does not necessarily mean it fits the insurance industry’s definition of an act of cyber war. It’s a huge gray area.”
And were it to happen, the cost could be staggering. For example, an attack on a city’s electric grid that shuts down critical infrastructure could have more than $1 trillion in economic impact, according to a 2015 Lloyd’s study on behalf of the city of London. The insurance institution estimates a cyber attack would result in as much as $71.1 billion in claims, assuming they are all paid.
The onus is on insurance carriers now to carefully consider these consequences before they occur and for brokers to confer with clients in the interim.
There does not need to be a formal declaration of war for the laws of armed conflict to apply. If it looks like a duck, acts like a duck and quacks like a duck, insurance companies should not need Congress to say it is a duck.Tweet
“Just because there is a broad war exclusion in a property and casualty policy doesn’t mean that an insurance market might not be open to a carveback for certain types of cyber events, including an attack by a nation-state on a company’s network,” Aon’s Seyfried says. “The war exclusion would still apply, but the company would then be covered for losses from the attack. This is definitely something we brokers need to discuss with our clients and the insurance markets.”
Until then, Segal maintains, there has to be more clarity in the insurance industry as to what is covered and what isn’t for different types of cyber attacks. “Insureds and insurers need to figure out where their responsibility begins and ends,” he says. “The ambiguity needs to be narrowed.”
Banham is a Pulitzer Prize-nominated investigative reporter. Russ@RussBanham.com
A major challenge for brokers is keeping up with the pace of global change and the rate at which technology is advancing. It can be daunting for carriers and brokers to meaningfully transform their business to compete in the on-demand economy. But change is needed, and it’s already happening. So let’s get started. Here is a 10-point checklist to stay ahead of change:
- EVOLVE YOUR APPROACH: Look for ways to restructure your organization and team to focus on data intelligence, automation and the move to the on-demand economy.
- ADOPT A CLIENT-CENTRIC POINT OF VIEW: Put the client at the center of everything you do. The tipping point for your brand is what you can do to positively affect your clients’ experience.
- AUDIT EXISTING SYSTEMS AND PROCESSES: Identify areas of your business that are vulnerable to disruption.
- LEVERAGE REAL-TIME DATA TO IMPROVE THE CUSTOMER EXPERIENCE: Beyond operational data and metrics, look for ways to leverage real-time data to close the experience gap—for example, by immediately addressing any customer dissatisfaction expressed in real time on social media.
- COMMIT TO DIGITAL AND MOBILE: There’s no time for second-guessing. If you haven’t gone all-in on digital, mobile and intelligent automation, you’re already behind.
- STREAMLINE THE PATH TO SUCCESS: Remove obstacles and barriers to change. If there are silos in your company that will inevitably slow the process of change, work to more elegantly bridge the gaps between them.
- INSTILL A SENSE OF URGENCY: Leaders set the tone for the rest of the organization. Establish a culture that rewards action and embraces change. It all starts at the top.
- PARTNER UP: There’s no need to do everything yourself. Look for strategic partnerships to make up for organizational gaps.
- DON’T DRINK YOUR OWN KOOL-AID: A focus group of one is going to get you nowhere. Take stock of what’s happening in your industry, assess and test your ideas, and make moves accordingly. Let the market decide your strategy. Talk to your clients. But more important: listen to your clients.
- ALIGN INTERNALLY: Make it known that your organization is change-focused by spreading the messaging across all levels and departments. Align everyone within the organization toward shared goals to achieve business results.
Those who understand the depth, breadth and radical nature of the change and opportunity that’s ahead will be best able to reset their biases accordingly, shape their new world, rise to the new leadership challenges and thrive.
Of companies in the 1955 Fortune 500 are no longer in business
Of executives at insurers agree that traditional organizations must evolve their business before they are disrupted
Of companies expect to compete mostly on the basis of client experience (versus 36% four years ago)
The number of connected devices worldwide by 2020, according to some forecasts
No. 1 challenge of digital and technology transformation
Developing new business models to cope with increased connectivity and engagement
For those not familiar with the term, a chatbot is a computer program that conducts an online conversation with the client. Chatbots are often designed to convincingly simulate how a human would react as a conversational partner (known as natural language processing), thereby making clients think they are actually communicating with a human being instead of a computer program. If the conversation gets to a certain level of detail, the chatbot will pass the conversation to a real human, who then completes the transaction. Chatbots are great for such things as customer service dialogue and for clients seeking information acquisition.
Some that have been successful include “Health Tap,” a bot that helps people take care of their health and well-being, and “Florence,” a healthcare chatbot that reminds you to take your medication, checks your symptoms, sends you daily health tips, finds a doctor for you and helps you make appointments.
Bots are being used to ensure patients follow the correct protocol in advance of procedures and answer questions. They can also be used to anticipate issues based on data, proactively and periodically check in with the patient after the procedure to ensure pain levels are being managed, schedule follow-up appointments, confirm and reorder prescriptions, send and receive photo and video updates, and track progress toward the employee’s return to work. The bots are available 24/7 to serve the patient, they never forget and they get smarter with every interaction. I guess you could say they make house calls.
The hope is to give a spit-shine to tired old operating models.
Why now? Over their shoulders, major players eye a well-funded insurtech industry ready to disrupt and redefine their markets. Billions have been invested to streamline business processes, cut costs and improve the user experience. At the same time, client expectations in the on-demand economy have risen. There’s now more pressure to deliver seamless, real-time customer service in every industry. We can no longer live inside the safety of our own industry verticals, comparing ourselves to the competition. All companies now live on a horizontal—where clients compare us to their last best or worst experience across other industries.
The truth is, incremental improvements over time are no longer enough. It’s time to shift from a strictly rules-based approach of gradually evolving legacy systems to one in which insurers continuously apply real-time learning through artificial intelligence and data science.
Can you imagine the customer experience if your brokerage could automate processes in real time? Or guide clients via text through forms and applications? We expect our clients not only to speak our language but to understand and navigate our processes successfully. With something as simple as a chatbot there to answer questions, you can be sure the required information is gathered accurately and effortlessly the first time, every time.
Think about all of those routine tasks that can be resolved more efficiently through automation: issuing a certificate or endorsement, collecting underwriting information, processing a claim, sending a cancellation notice, collecting a premium or answering frequently asked questions.
With technology taking care of the mundane, you can free your best people for more complex matters. This is not about technology replacing jobs. It’s about using tech to augment people and help companies consistently deliver better experiences.
Clients Have Control
The ultimate disruptor in this equation is the Client—yes, with a capital “C.” In today’s digital world, clients are more empowered than ever. They expect intuitive technology that knows and remembers them from one interaction to the next. Today, more than half of all customers say they’ve switched companies solely because of poor user experiences. Market research firm Walker Research says that by 2020 client experience is expected to be the number-one competitive differentiator, surpassing both product and price.
This transfer of power from brands to clients has in many ways already begun to reshape the industry. Large organizations that hold on to legacy structures rather than embracing customer experience enhancements through technology are at risk. They become vulnerable to smaller, emerging businesses that are focused on client empowerment via on-demand cloud services and hyper customization.
To be successful in today’s market, both insurers and brokers have to find a way to adapt and personalize the experience for clients in real time across channels based on each client’s communication preferences. Those who fail to embrace real-time data to improve the customer experience as a strategic path to growth won’t just lag behind—they’ll get left behind.
Some brokers are incorporating digital strategies to proactively reach out to clients with value-added information, reminders and offers with a full understanding of client needs. Now, through the use of predictive data, process automation and, in some cases, artificial intelligence, brokers have an opportunity take it one step further, reshaping the client experience in real time, increasing satisfaction and reducing costs.
In the past, companies would try to identify the gaps in the client experience by looking at operational data, research, surveys and segmentation. In today’s hyper-personalized, always-on world, this approach no longer works. Swimming in a sea of aggregates and hiding behind the law of large numbers is no longer a smart strategy.
Companies should tap into real-time experience data to see what’s driving specific actions with clients, better understand the client’s journey to make an impact on customer experience, and fully understand what’s working and what’s not.
Consider the case of commercial fleet insurance and how brokers help clients better manage risk through on-board systems. The real-time data made available through telematics (from driving habits to recording accident data) help brokers develop strategies and programs to manage and mitigate risk and ultimately streamline processes, thus improving the client experience.
Communication should be in the channel of choice and free-flowing at every point, whether it’s quote to bind, policy administration or claims management.Tweet
Fleet managers can also monitor driver behavior so notifications are sent and corrections are made immediately. These data can inform a driver’s scorecard to fuel rewards and recognition or reprimands and retraining as required.
According to industry research, 30% to 40% of all commercial and government vehicles in the United States are currently equipped with telematics. A majority of vehicles should have a telematics system on board by 2020. We’re quickly going to see a tipping point at which the use of telematics will be completely commonplace. Businesses that don’t use this technology will lag behind their competition.
“For brokers in particular, the desire to move beyond the transactional and truly fulfill the role of trusted advisor to their clients requires they live out on this same edge of insight and foresight,” says Chris Mandel, senior vice president of strategic solutions and director at the Sedgwick Institute, an incubator for dialogue in the risk and benefits industry. “To succeed today, it’s paramount brokers leverage and explore relevant and value-enhancing technologies.”
You must be able integrate client profiles and map out their journey to understand it from their perspective. Only then can we design technology solutions that deliver true value to individual clients. Remember: one size fits one. But with today’s access to technology and data, we can effectively customize and scale at the same time. The two are no longer mutually exclusive. This brings massive value to both the business and the client.
Democratization of Data
Communication flow is one of the aspects of the client experience that lend themselves to technology-driven innovation. The more fragmented the information delivery, the harder it is for clients to navigate and get the timely information they need. Internally, transformation here focuses on breaking down the barriers to information sharing, streamlining the communication flow and processes, and getting to resolution faster.
In the insurance industry, one of the more complex communications conduits is one that involves the client, a broker, a carrier, outsourced call centers or third-party administrators, and networks of certified affinity partners. The opportunities to fail the client are numerous. Think about the possibility of a borderless and digital supply chain. When you are able to connect these dots and bridge the gaps between clumsy handoffs, you enable real business transformation to improve performance and ensure a competitive advantage.
At its core, communication should be easy and the processes frictionless. When clients have a problem or an issue, they most often reach out to the company, not a specific person. It shouldn’t matter whom from your company they end up speaking with, they should be able to get the answers and information they need. Communication should be in the channel of choice and free-flowing at every point, whether it’s a quote to bind, policy administration or claims management.
We’ve all experienced the agony of an auto claim, whether it’s a fleet vehicle or your personal automobile. It’s bad enough that your vehicle is damaged. Now you’re forced to navigate the gauntlet that is the claims process. Think about a world in which you could begin the claims process from the accident scene via mobile messaging. This is possible through integration between client relationship management and claims management systems. Some carriers are already doing this.
At the scene of the accident, you would be recognized as a policyholder, and assistance would be called—either emergency services, a tow truck, a rental vehicle or a pickup. In addition, you could send any kind of rich media from the scene—photos, videos and other information—to digitally populate a claim filing.
But that’s not all. Imagine if you were immediately assigned a claim number and adjuster, provided contact information, scheduled for a call and proactively notified of the claim’s status—all the way through to close? The entire claims process could be under way all via text submission. And everything is date- and time-stamped and stored, so there’s no disagreement about what information was exchanged or who said what. Lemonade, a new personal lines insurer, is already doing this with its limited offerings—and without brokers. Think about the future commercial ramifications of that for a moment.
Part of this is focusing on the communication channels clients have access to. Relying on traditional channels, such as the telephone as the primary means of communication, leads to a lot of frustration. The hold times, callbacks and voicemail just don’t align with how people communicate with each other today. The rise of conversational technology, like AI-powered chatbots and IoT devices—especially through mobile—will be key to client relations. This technology is becoming increasingly popular in the mainstream. There are tens of thousands of chatbots out there across various messaging channels, and businesses are exploring new chatbot use cases every day.
Here’s how you would like your chatbot to work. A company identifies a business process as a likely candidate for automation. Once the process is mapped out and conversational scripts are finalized, the systems involved are identified and connected. These connections enable chatbots to pull and push information from a variety of systems internally (and, if needed, externally) to the enterprise. Then, via “chatting” with the chatbot, a client can quickly have questions answered, information provided, claims handled or other issues resolved. By engaging in conversation to fill out forms, chatbots can ensure crisp, correct and consistent service and make the process easy to understand.
Mobile messaging also is having a profound effect on improving process flows and client success. It is the fastest-growing communications channel in history, with more than 8.3 trillion messages expected to be sent in 2017. This trend is expected to grow and has already begun to manifest itself in the business context. Don’t be surprised when the main line of communication and transactions between commercial clients is also messaging-based.
With all the functionality that smart phones offer today, there’s no reason why they can’t be better used to streamline communication. The use of smart phones for voice has already taken a back seat to data.
For brokers in particular, the desire to move beyond the transactional and truly fulfill the role of trusted advisor to their clients requires they live out on this same edge of insight and foresight.Tweet
Commercial insurance brokerage has been based on trust and personal relationships. That doesn’t have to change. In fact, your clients’ risks are growing more and more complicated and they need a trusted advisor now more than ever. But what can change is how you interact with them through the process.
“Client experience” often implies companies should be delighting their clients at every turn. But when it comes to insurance, policyholders don’t necessarily expect to be delighted. Insurance clients focus more on utility than the extraneous features. One of the first steps of staying ahead of disruption is to make the front-end basics run smoothly.
The future of business communication is firmly rooted in the on-demand economy. So the insurance industry must be focused on making intuitive processes that are easy to access. The biggest drivers of innovation in this area will be utility and simplicity.
The New Paradigm
These changes require an organizational transformation that reaches deep into your firm. It may require a complete overhaul of your status quo—from the executive suite down to entry-level employees. A company’s commitment to this transformation indicates its willingness to change to remain competitive.
For example, IT should no longer be a department or a function. Instead, it’s a way of working that should permeate the entire company. If it’s not, you need to get there fast. Successful programs stem from small pilots and trials in test environments. Companies should realize that, on the broader scale, it’s not so much about specific projects, programs and initiatives but about a fundamental change in the way you think about your business every day and over the long haul. Adopting an experimental mindset will help you approach innovation with a “fail-fast” attitude that helps you identify the right path to follow through a process of elimination.
Consider this line from General Electric’s 2000 annual report: “We’ve long believed that when the rate of change inside an institution becomes slower than the rate of change outside, the end is in sight.”
Peeples is chief client officer at Pypestream. email@example.com
We asked Carol Barton, president of AIG Multinational, about AIG’s first blockchain smart insurance contract.
At what trigger do you consider this a success?
The pilot achieved its goals. Because of this partnership with our clients, we have a better understanding of this new technology, how it works, and its potential.
What kind of efficiencies and cost savings do you foresee by using blockchain for your contracts?
Any technology, including blockchain, that can increase trust and transparency for an industry whose pillars are built on that should be fully explored.
While it is still preliminary, blockchain’s value could be enormous in terms of building more effective and cost efficient processes. The pilot demonstrated how permissioned individuals across the insurance value chain can check instantly whether cover is in place, if premiums have been paid, and whether claims have been filed or paid, reducing the need for numerous phone calls and emails, which in turn will reduce costs and provide timely certainty and transparency.
This pilot project is an important step forward.
Would using blockchain enable you to sell more coverage in the future?
We specifically chose to execute the pilot within one of the most complex areas of our business to test its limits. The results are promising for business expansion, particularly the demonstrable ability to onboard additional stakeholders, such as banks and brokers, within the ledger.
No broker was involved in this contract. Do you see using more smart contracts to bypass brokers in the future?
Our key driver for this initiative was to explore how we might leverage emerging blockchain technology to increase trust and transparency in the insurance value chain—core values that our industry is founded upon. We are focused on how we can learn from this pilot so that we can deliver operational efficiencies for our clients, our broker partners and AIG.
Do you foresee commercial brokers creating these contracts for insurers?
When looking across the spectrum of clients and the risks that they face, there is no “one size fits all” solution to delivering insurance protection. The answer may be different depending on the specific needs and complexity of each client. At AIG, we are committed to partnering with our clients and brokers to deliver innovative solutions that meet their risk, governance and contract certainty objectives.
Big change is here.
Risk Cooperative CEO and founder Dante Disparte says brokers will be using blockchain technology to create smart contracts over the Internet on a regular basis in three to five years. “Big swaths of this industry will be changing,” he says. And more importantly, he adds, “Better the brokers do it rather than insurers, or brokers really do risk becoming irrelevant.”
As he sees it, the emerging use of the technology will hasten the changing role of brokers by expanding their role into such areas as management and risk consulting.
The first blockchain insurance contract is the latest step in bringing new, faster, secure technology to the commercial insurance sector. But it’s not the first industry use of the technology. A year ago Allianz and Nephila Capital announced they had initiated the first successful natural catastrophe swap using blockchain.
And last October a consortium of carriers (now numbering 15) was formed to explore the potential for use of “distributed ledger technology” in the industry. Known as the Blockchain Insurance Industry Initiative (B3i), the group hopes to prove the concept that the technologies can be used to create secure insurance contracts where all involved parties can view their contents in real time.
The idea is to use mutual distributed ledger technology as a platform for blockchain technology. Distributed ledgers are records of various transactions in an insurance contract and are shared among participants and stored in multiple locations with no central ownership. Each time a change is made to the document—such as a new address, name, date etc.—it is securely recorded. Each new entry is known as a “hash.” A hash from a previous entry is incorporated into the new entry hash. This results in a permanent, secure copy of both the original and corrected document that all parties can see in real time. This leaves an audit trail, which is what makes the technology so attractive for insurance contracts.
The initial AIG insurance contract in June—a pilot project it was working on for mouths—used blockchain technology and Hyperledger Fabric, a blockchain framework. AIG created the smart contract for Standard Chartered Bank of London and three of its overseas affiliates in the U.S., Singapore and Kenya. This first insurance contract did not include the services of a broker.
“The pilot took about six months from start to finish,” says Carol Barton, president of AIG Multinational. “The insurance policies were already in force prior to the pilot, and the steps necessary to execute and perform them, including premium payment, had already occurred through traditional channels. What the pilot did was build a secure, transparent blockchain platform to digitally deliver a multinational program efficiently with relevant payment and policy details visible to the appropriate global or local stakeholder in real time.”
The choice of making the Standard Chartered Bank the first smart contract of its kind was deliberate. AIG wanted something complicated to see how well blockchain would work. AIG worked with IBM Blockchain to create the technology for the smart contract. It spanned four nations with four different sets of regulations. Such multinational contracts are usually issued in the country where the client’s headquarters is located. They are frequently unwieldy because regulations, payment terms and required paperwork vary from nation to nation. Typically, such a contract would take a month or more to create along with lots of paperwork to deploy. Using its contract software developed with IBM, AIG managed to issue the new document in a matter of days.
This increased efficiency should cut costs for all parties and result in fewer delays. “By creatively leveraging smart contracts to help address tough regulatory requirements across different markets, we are seeing the enormous impact blockchain can have to improve efficiency and open up new business models,” says Marie Wieck, general manager of IBM Blockchain. With contract provisions available in real time, any issues—including regulatory ones—quickly become apparent and can be addressed.
One aspect of so-called “smart contracts” is they are digital, self-executing and self-enforced agreements. One purpose is to allow two or more parties to engage in a predetermined contract automatically when some special occurrence takes place—thus the term “smart contract.” Because of the nature of the contract, there may be no need for a middleman, such as an insurance broker. AIG says not having a broker involved in the pilot does not mean it will no longer use brokers in the future. (See Barton Q&A.)
While carriers are working together through B3i to iron out the kinks, the partnership between Risk Cooperative and Bitfury is still in its infancy, but its goals are in sync. The two firms are hoping to create blockchain pilot projects for commercial brokers in the near future.
“At the end of the day,” says Bitfury CEO Valery Vavilov, “we want to make sure people know how this technology can help them and their businesses, so we want to do everything we can to make this possible…. Our plan is to carry out pilot projects that will simultaneously improve the risk-transfer process for brokers and serve as guidance for…insurance companies interested in utilizing blockchain, so education about the technology will definitely be a part of our process.”
“Our role is to help normalize blockchain in the insurance industry,” says Risk Cooperative’s Disparte.
“We believe,” Vavilov says, “blockchain has the potential to assist both brokers working with multinational policies as well as with the insurance value chain, which is what our project will focus on. Our goal is to broaden market access and to design and implement new classes of insurance that use blockchain technology.”
Room for Modified Brokerage Model
Risk Cooperative and Bitfury want to expand the use of blockchain by creating tools to enable commercial brokers. Disparte described the AIG contract as more of an effort to “simplify policy administration. It feels like it was a service arrangement rather than a risk transfer mechanism.”
That’s important, he says, because it shows big insurance companies are starting to weigh in on smart contracts. “I think the opportunities are much bigger than that.”
Such contracts, he says, should be written by brokers, many of whom don’t like policy administration, but, he says it could very well turn into a major role for brokers in the future. “I think the fabric needs to be woven by the broker.” The technology would enable brokers to become enterprise risk managers rather than write a single line of insurance, which many tend to do today, he says. Contracts would become more of a living document that needs to be managed and changed over time. The broker role would thus evolve.
As he sees the future role for brokers, contract origination will still warrant a comparable commission to today’s business. But the efficiencies created by the new technology will cut costs and put pressure on policy administration and maintenance, which will then demand creating new brokerage business models for those aspects of the contract. Disparte says he is concerned many smaller and middle market brokers will not want to undertake the learning curve and cost of acquiring and using blockchain technologies. If that happens, he says, more innovative brokers (or carriers) will fill the vacuum.
He also thinks the efficiencies will expand markets. The lower costs for carriers as well as brokers should presumably lower premiums, enabling clients to purchase more coverages, which could then require even more broker involvement.
Rick Pullen is editor in chief of Leader’s Edge. Rick.Pullen@leadersedgemagazine.com
As the uses for big data expand, so will the ability to draw upon historical performance to model potential outcomes, which carries far-reaching implications for brokers.
Dan Openshaw, Hub International’s director of analytics, says data historically has been siloed, making it unavailable to answer questions and preventing brokers from applying it to optimize the delivery of benefits packages.
“We’re seeing on the Internet we’ve got all kinds of data available to us, but that hasn’t been the case in employee benefits for many reasons, mostly technological issues,” says Openshaw. “There has been a lot of difficulty in aggregating and sharing information.”
What if someone could aggregate, then make anonymous and finally share massive quantities of data critical to benefits brokers in a format that was simple to understand and manipulate? What opportunities would such a service create?
“It’s the art of the possible,” says Marc Rind, vice president of product development for ADP. “Understanding and doing analysis across the board of the best types of plans that are being chosen by different segments of the population across different locations.”
ADP was known for decades as a top third-party payroll and employee benefits administrator, but in recent years the company has begun using its giant data resources in areas such as human capital management (HCM) and predictive analytics. In late 2016, ADP released a new feature of its ADP DataCloud analytics solution called Turnover Probability. Turnover Probability complements the existing reporting, analytics and benchmarking features of the ADP DataCloud to enable clients to project future turnover based on historical trends in their data. That allows them to understand the factors that influence turnover, to identify where turnover is most likely to occur, and to develop strategies to proactively avoid increasing turnover based on these insights.
ADP is currently investigating other potential models to help clients understand possible future outcomes given historical patterns in their data. For example, data models can help companies determine which internal candidates would be the best fit for which roles or which elements of a compensation package most correlate to accepted offers by role, location and other data points.
“The fact is we pay one in six people in the U.S.,” Rind says. “We have this wonderful, huge data set that we’ve been collecting as we process payrolls and W2s and manage the HCM.”
That has major ramifications for benefits brokers, Openshaw says. “I think this is a huge win for employers, because they have so much information at their fingertips today but they’ve never really used that information.”
The fact is we pay one in six people in the U.S.Tweet
Openshaw says that, while there are other third-party vendors who offer this type of service, none has the data bank that ADP has, which offers “decision-quality,” payroll-based data insights as opposed to alternative data sources that are survey-based. “Imagine if they are able to aggregate all this and create benchmarks for a client in specific industries or a region of the country, because everything is different regionally,” Openshaw says. “Costs are different. Salaries are different. Everything is different.”
How It Works
Dino Zincarini, the ADP DataCloud product evangelist, says the company’s long-standing position as a payroll and benefits administrator means it has already aggregated and formatted data from more than 30 million employees. Expanding to data analytics from payroll administration was a logical decision, he says.
“We own the transactional systems that generate the data that eventually get analyzed; therefore, why don’t we help companies get started with analytics?” Zincarini says. “We already have the transactional data from systems like payroll and human capital management. What ADP did was build a big data infrastructure to take the data out of those individual transactional systems, aggregate it and visualize it so that people apply the data to help make better business decisions.”
Because of the advancement in big data technologies, ADP sees many possibilities around the use of its benefit plan enrollment data, combined with its payroll and HCM data. “We are able to build profiles of employees across various sectors and company profiles,” says Rind. “Leveraging that information to understand the types of benefit plans being elected by which types of employees could help inform companies to provide the optimal plans based on their own organization’s profile.” Rind adds that, “with the ability to combine data…it will also be possible to see the ultimate impact of unattractive benefit plan offerings on employee retention.”
Art of the Possible
Zincarini shares how one company he worked with applied analytics to past medical benefit plan usage patterns to understand which features of the plan were most valued by which segments of the employee population. The company then redesigned its plan with multiple tailored programs rather than having a larger, generic plan with features that many employees didn’t use, which also reduced costs.
Openshaw says companies can also dig deeper into benefits data to see how they compare to the competition. Or they can look at pharmacy data to determine which prescription drugs are actually used, versus those that are prescribed but not taken by the patient. “These could be young individuals who have never been on an insurance plan or a medical plan,” Openshaw says. “Maybe they can’t afford the deductible on the plan. [Brokers can] look at all these elements together and in combination and try to create a strategy around what would be a good plan.”
“When I think predictive analytics, I’m thinking from an employer’s cost perspective,” Openshaw says. “What data can they get their hands on to either estimate future costs and/or model optimized scenarios that they could implement to prevent future costs?”
Showing clients how to reduce their medical costs is a differentiator. And it can go beyond looking solely at medical data. Openshaw says there may be ways to use big data to identify lifestyle habits that negatively affect employee health. For example, he notes clients might consult information regarding absenteeism, workers compensation, demographics and workplace safety. “On the job, where do we have accidents?” he says. “What’s going on with some of the individual performers? Has something changed in their performance? That may be a trigger to something else going on, and maybe you can prevent a future accident on the job or pull them off a job.”
I think this is a huge win for employers…because they have so much information at their fingertips today, but they’ve never really used that information.Tweet
Changing HR’s Role
Zincarini says predictive analytics should also be a transformative development for the human resources community.
“HR departments are very interested in analytics at this moment and are often catching up with the analytical capability of other departments, like finance,” he says. “I think the reason HR has lagged is because companies haven’t made HR technology a priority, but lately that’s changing. Most business leaders will say people are their number-one asset. With HR analytics, companies are starting to think about how they manage that asset overall and understand it better. In short, they are applying the analytical techniques and tools they’ve used on other types of data to the people-data owned by HR.”
This new emphasis is bringing HR into the decision-making process and empowering it as a key advisor to the business.
“I believe HR has the hardest data to work with,” Zincarini says. “It’s the most diverse data in the company. Hardly any HR department uses just one system to handle all the processes necessary to manage a workforce. What that adds up to is HR has a hard time trying to extract insight from its data.”
Despite the expense and the complexity involved, Zincarini says, the past five years have brought about technical innovations that make it easier and less expensive to put people-data to work. He says ADP is well positioned to help companies develop predictive analytic capabilities because it created the systems that are generating the data. That allows ADP to efficiently transform the transactional data into reports, metrics and probability models.
“We have an advantage,” he says. “We don’t just produce an analytics solution. We produce the systems that generate the data that feed the analytics solution. We know how the data are stored. We know exactly what [the data] mean. It’s much easier for us to take all of that, combine it with our knowledge of what business problems HR needs to solve and bring it all together in a way that adds value for our clients.”
Patten is a contributing writer. firstname.lastname@example.org
I believe HR has the hardest data to work with. It’s the most diverse data in the company.Tweet
Analyst firms are tracking the billions invested in startups focusing on various segments of the insurance value chain. And even a new website, willrobotstakemyjob.com, predicts there’s a 92% chance the role of the insurance agent is “doomed.”
We know insurance is much more than just a calculation of risk done by a machine. Consumers and business owners of all ages want a relationship with an advisor who will help them protect their most valuable assets. In fact, a recent survey of more than 1,200 adults in the U.S. revealed most people (78%) simply aren’t comfortable with the idea of technology completely replacing insurance brokers. At the same time, the younger, connected generation is redefining what a broker-customer relationship means, revealing new lanes of digital communication.
Now is not just an opportunity for brokers to differentiate themselves from emerging insurtech startups and chatbots; it’s a mandate to make the brokerage model more efficient and competitive while also enhancing the customer experience. Of course, that’s easier said than done. Brokers face many obstacles on the path to technological transformation, but there are concrete steps to help them ride the wave of change.
Many insurance brokerages find themselves relying on legacy infrastructure—on-premise servers and a host of disparate technologies that mire them in paper and process. Producers on the road visiting customers have to call the home office to quote insurance rates, while brokers and customer service reps have to log in to multiple carrier systems and double down on data entry. This system doesn’t just waste valuable time; it also increases the risk of human error.
As the ability to purchase insurance directly online becomes more readily available for consumers, it’s crucial agents and brokers create a more efficient, automated process for clients. Integrating technology, like an agency management system, can streamline and even automate paperwork, enable electronic signatures and provide real-time insight into ratings and reporting anytime, anywhere when connected to the cloud.
While cloud-based computing has been gaining steam in the insurance sector, adoption still has a long way to go. A cloud-based agency management system can store information in a centralized location while simultaneously sharing and saving it across multiple devices in real time. That means agents and brokers can access individualized customer information anytime, even during a meeting. This is the type of personalized, immediate customer service being required of all industries in the on-demand world.
When producers miss a sales goal, they often lack the resources or insight to understand why. Friendly recommendations and a firm handshake no longer suffice as the primary source of new business. Studies show sales professionals who leverage the power of customer relationship management software are 50% more likely to reach their quotas than those relying on traditional methods. CRM software provides automated and accessible insights into the team’s sales activities and roadblocks all in one place. CRM solutions also allow producers to generate more volume because they spend less time inputting and tracking relationships and more time talking to customers or prospects.
While tools to automate the internal sales cycle are important, just as important are the external digital tools that bring awareness to your agency and interact directly with your audience. Consumers have become accustomed to using social media channels like Twitter, Facebook and Instagram to praise good service, initiate a customer service request or crowdsource recommendations about products and services. You should create social accounts to interact directly with your clients and prospects and to track your brand mentions, competitors, products and any other ideas or themes relevant to your business.
Perhaps an even more important aspect of a comprehensive social media presence is it legitimizes your business in the eyes of Google and other search engines so your company’s information shows up in a search. If you don’t show up there, you don’t exist.
Once thought of as luxuries, social media and CRM tools are now business imperatives that connect brokers to new customers and sustain the relationship year over year.
The Silver Tsunami
For any industry to survive, it has to attract new talent. The average U.S. insurance agent is 59 years old. Research by The Hartford in 2015 revealed just 4% of people age 18-34 say they were drawn to insurance. Many described the industry as “boring.” Meanwhile, millennials will occupy 76% of the workforce globally by 2025, bringing with them a wide range of deep technical skills and high expectations for work/life balance, efficiency and transparency from their employers.
Just as agencies should adopt technology like agency management systems, cloud computing, mobile devices, and digital marketing tools to attract new consumers and increase their efficiency and pipeline, they should also be aware of the impact technology can have on hiring. The millennial generation has grown up, been educated with, and relies on technology to work efficiently and collaboratively. Brokerages must modernize to attract new recruits.
More than adopting the technology itself, adopting an innovative mindset will go a long way to attracting recruits. This means fostering an organizational environment that provides a vision of the company while empowering others to make decisions and take ownership over their outcomes.
If you haven’t made these changes yet, you still have an opportunity to attract this generation of workers. Contrary to popular belief, the majority of millennial brokers think a career in insurance offers many desirable benefits that meet their career priorities. One recent survey reveals 81% of millennial brokers plan to work in the industry for as long as possible. In addition to providing work/life balance and career growth and development opportunities, insurance offers financial stability and an active community with social ties—essential career priorities for the millennial generation.
It’s more important than ever for brokers to recognize the new reality and adopt the technologies that make them more efficient and bring them closer to the connected customer. If you don’t, robots likely won’t take your job—but another broker will.
Schaknowski is Vertafore’s SVP and chief sales and marketing officer. email@example.com
Sponsored content from Vertafore, a Council Partner in Excellence.
Did you grow up in Philadelphia?
No, a little town in southwest Pennsylvania called Waynesburg, close to the West Virginia border. It’s a coal-mining area, a very small town. Everybody knew everybody. I grew up on a 119-acre farm, but that wasn’t my parents’ livelihood. My dad was an elementary school principal. My mom stayed at home when we were kids, then went back to work. She also worked in insurance. I have two siblings, and you had to get along because you didn’t have other playmates. Your closest neighbor was a few miles away. We only had two channels on TV, so we played outside a lot. We fished, we explored.
Who were your childhood heroes?
I’ve always been drawn to political leaders. In second grade I was obsessed with Abe Lincoln. Being a small, country-town lawyer and making it big, that was inspiring. Also, he used his influence to help those less fortunate. And that’s always a trait that my parents instilled in me. Even as a child, you were kind to everybody, you didn’t make fun of other people, didn’t bully them. I saw those traits in Abe Lincoln. He fought for an entire community.
Did your Abe Lincoln obsession have anything to do with your decision to go to law school?
My passion for going to law school was more from Hillary Clinton. By sixth or seventh grade, she was on my radar screen. I started researching children’s causes and her work with the Children’s Defense Fund. Her book, It Takes a Village, resonated with me.
Were you active in her campaign?
I’ve been a Hillary supporter since 2008. When I met her, I told her she was one of the reasons I volunteered at the Support Center for Child Advocates. It’s a nonprofit organization that provides legal services to children who are in the care and custody of the Department of Human Services.
Tell me about your work with the Support Center.
Someone calls the hotline and says, “I think the child is in danger.” Maybe I see bruises. Maybe the child has told me there’s been some abuse. If the agency determines it’s a credible threat, it files a petition with the court. The court assigns an attorney. I make sure at every court proceeding the child’s voice is heard, that the child is provided for. Most importantly that the child is safe. My main objective is to make sure all decisions made by the court are in the child’s best interest.
What’s your caseload like?
I always have an active case. The case I have now has two children. That was one of my conditions of employment at Conner Strong—that I be permitted to continue my pro bono work, because it is so important to me. Without hesitation, they let me continue.
Is there a case in particular that stands out?
Every case stands out for me. Those first few years of life are so precious. When you get a young child, getting them on track is so important. I’ve had some tough cases, with criminal components to it. My hurdle is not to get emotionally invested.
That must be hard.
That’s impossible for me. I just make sure the days I go to court end with a few glasses of wine.
Tell me about meeting Hillary.
I met her when she came to Philadelphia early on in the campaign. When I told her she was my inspiration for doing the work I do with the Support Center, she was very touched. She said that’s what makes her continue her journey.
What appeals to you about the insurance industry?
It’s the safety net in everybody’s life. It’s interesting; it’s complex and ever-changing. And it’s a great career for women.
I don’t hear that very often.
It is a male-dominated business. But luckily the men who dominate it no longer hold the door shut for women to walk through it. They are opening those doors.
If you could change one thing about the insurance industry, what would it be?
The lack of diversity at the top. That is something that is sorely missing.
What gives you your leader’s edge?
Empathy and insight. I’m able to work out a complex situation, empathize with everyone involved and come up with a strategy to resolve it.
Favorite Vacation Spot
My parents’ home.
(And I love Italy. I’m going back this year.)
An Affair to Remember
Eleanor Roosevelt (Always fighting to improve the lives of others. She was first lady—she couldn’t be president—but she took that role to a whole new level.)
Three Favorite Philly Restaurants
Rangoon (A Burmese place in Chinatown. I love the women who own it.)
Gran Caffe L’Aquila (It reminds me of my family in Italy.)
Dizengoff (All they serve is hummus.)
Like in many other businesses, managers in the insurance industry might not be aware of the progress in the last decade around development and evaluation of evidenced-based tools to attract, retain and promote top talent. These are readily available and can improve business performance without major financial investments.
Some tools focus on inclusion and others on pay inequity—particularly the disparity between women and men. On average, women are paid just 80% of what men earn for the same job. The unfairness of pay inequity itself is not the only issue, but it is a sign a business has likely not optimized hiring, retention, promotion and use of its top talent—and that’s lost income for the firm. It’s a barometer that shows a business is failing to take advantage of the opportunity to improve its performance by implementing evidence-based practices around human capital.
The sources of pay inequity are complex, but in part they reflect biases often difficult to recognize since we are all steeped in the same culture. These biases are referred to as “implicit.” And both women and men demonstrate bias against hiring and fairly compensating women. It is difficult to help people set aside their biases when performing talent management roles in a company—even if they wish too. Nevertheless, bias is a problem we all must address if we wish to optimize business performance. And who doesn’t want to do that?
Look to Your Business, Not Yourself
It is more effective to “de-bias” workplace systems than to try to rid ourselves of our own biases.
So begin by taking stock. The more granular you can make this process the better. What is the breakdown of your talent force throughout the organization? What are the percentages of women and men at every level of the organization? Are there clusters in particular areas? Is there a level at which the inclusion of women drops off? Pay attention to intersectionality—do you have trouble promoting Latina women beyond director level? Do you have any men of color at the senior vice president level or above? Where do you find a breakdown in retention? Lack of diversity can cost you. If the team you hired and trained departs when they reach a certain level in the organization, you incur the costs associated not only with candidate searches but also with training new hires—a process often estimated at 20% or more of the position’s salary.
There may be many in your company who say, “that doesn’t happen here” or “we are a meritocracy” or “everyone is paid fairly.” Those statements, though likely to be inaccurate, often stem from an earnest desire by people who mean well. The best way to overcome such objections is with data.
Second, address your hiring processes. Focus carefully on job descriptions and ensure all necessary skills and experience are included while non-essential items are not. Men tend to apply for positions when they have 60% or so of the requirements, but women tend to apply only when they have them all. So seek to enlarge the number and diversity of qualified applicants. Advertise the position in communities and associations that may have been missed before. Implement blind processes so résumés have names removed when reviewing them. Just this one step removes a significant amount bias. We are more likely to hire someone who stereotypically fits a role or someone like ourselves rather than the non-traditional candidate with equal or greater skill—even when we are made aware of such a predisposition. By contrast, blind résumés can be an effective means to systematically overcome this tendency.
Interviews—a standard of the hiring process—tend to give our biased minds lots of noise with little predictive value. We are more likely to feel positively about candidates if they look the part or have something in common with us rather than just based on their skills. If your company continues to do interviews, make them structured. Ask every candidate the same set of questions that are highly specific to the job and do so in the same order. Later when you review the information gathered, “batch” the answers, reading and scoring all the answers to question one, then all the answers to question two and so on. This reduces both the halo and noose effects caused by an ideal or less than desirable answer at the beginning of the interview.
Hiring from Within
When we promote, we often do so looking at one employee at a time. Evidence suggests that when we do this we are comparing one person to an idealized candidate and our biases are more likely to engage. If, however, we compare the candidate to another person’s actual performance, our mind focuses on the skills required to do the job rather than the person’s “fit.” Often with little cost or effort we can compare two or more employees when making promotion decisions. When you do not have a second candidate, try comparing the person’s résumé and performance with the last person promoted for that role.
Even when we provide our best efforts to reduce bias in our talent acquisition and management, our organizations may be sending mixed signals about who can be successful there. Your firm will not be fully successful until employees can look up and see role models who are like themselves. Deliberate efforts to remove bias and achieve diversity at all levels of the organization will serve as a catalyst for future success in talent acquisition and retention.
To compete in a global marketplace, companies need to draw their workforce from all of the available talent. Population demographics will require it. By 2044, today’s minorities will be tomorrow’s majorities in every major U.S. city. Women are already outpacing men in earning college and graduate degrees.
We do not need to be perfect managers to be effective leaders, but we must build the right systems and use proven tools to help us. In so doing, you will not only help your business succeed but create a bit more equality along the way.
Budson is founder and the executive director of the Women and Public Policy Program at the Harvard Kennedy School of Government. Victoria_Budson@hks.harvard.edu
We’re all aware of cyber risks in this day and age—both after hours and during the work day—and everyone has malware in place to deal with the obvious, but that doesn’t necessarily mean you’re bulletproof—or that your employees are adhering to the rules.
Organizations of all sizes are becoming more aware of the prevalence of cyber risks. In fact, cyber insurance is expected to grow from $2 billion today to more than $20 billion over the next decade. While the market is one of the fastest growing, it’s also a long way from stabilizing. This means a few things: hackers will continue to attack; clients will remain confused; and brokers will need to better understand threats and policies.
It’s a great opportunity…if you know what you’re advising.
One of your biggest threats is your employees. Those unattended devices left to fend for themselves at closing time hold confidential information, and whether or not your employees are the culprits, others—like contractors, business partners or the cleaning crew—can get their hands on sensitive data it. Some will use it, some will sell it. According to Carnegie Mellon University’s 2016 Annual State of Cybercrime survey, nearly half of respondents reported an insider breach, and 30% of respondents said cyber breaches caused by insiders were more costly than external attacks. Daytime infractions happen all too often through innocent (but preventable) missteps involving use of cell phones, spam, thumb drives and unsecure networks. A recent Verizon study noted that 66% of malware is installed through email clicks alone.
How hard are you actually looking at your known (and unknown) vulnerabilities? Are you prepared to deal with them? Do you even know what they are?
According to The Council’s May 2017 Cyber Insurance Market Watch Survey, organizations are still not doing enough from a cybersecurity standpoint. Only 31% of respondents’ clients have a proactive information security program in place with capabilities in four key areas: prevention, detection, containment and response/eradication.
Therein lies the hook. Brokers are integral in educating clients about cyber risk and individual exposures. And most brokers claim (72%, according to our Market Watch survey) that they have a strategic approach to marketing and educating clients about cyber risks. But white papers, PowerPoints and webinars only go so far in arming your clients and your employees with the tools and training they need to make a difference. When’s the last time you considered a cyber audit of your own?
Cyber security has reached new levels across state and government lines. The National Association of Insurance Commissioners (NAIC) is knee deep in efforts to implement a data security model act. Though some in the insurance industry are skeptical about its prospects, if adopted, the model act could provide a path toward uniform state cybersecurity standards for the industry.
And in New York, regulators have implemented a robust financial services cybersecurity rule that applies to every individual and entity operating in New York under the banking, insurance or financial services laws. By the end of August, all individuals, agencies and brokerages licensed in New York have to operate with a lengthy list of technical requirements designed to maximize a firm’s cyber security (with some limited exceptions).
Expect these hefty regulatory requirements to pop up in other states, too. Love ‘em or hate ‘em, these rules and regulations aren’t going away anytime soon. And it’s not just the rules and regulations that provide legal accountability. Past, present and future cyber risks are omnipresent and pose potentially substantial risks to the bottom line by lawsuits, D&O liability, even to M&A transactions. The sooner you get a handle on it, the better.
Get your house in order from the top down and the bottom up. No one has the resources to eliminate cyber risks altogether, but investments in training, education and onboarding for your entire staff can help employees understand what can happen when they aren’t vigilant. Open their eyes to all of the potential exposures and insider threats (and sign up for our Cyber Watch newsletter at www.ciab.com while you’re at it). The better you understand the dangers and vulnerabilities lurking around the corner, the better you can advise your clients with their own cyber risk management strategies.
Who is filling leadership positions? What talent is in place that you’d want to draft to your team? Do you see high-performing individuals who are future-focused, adapt to change and are interested in growth? Or do you see a lot of baggage and an org chart that you’ll be charged to fill with new employees if you buy in?
If you’re like most firms in this industry, people are the most important asset, and human capital is the biggest expense. Ironically, it is also the most often overlooked area when it comes to long-term strategic planning. Insurance firms actively focus on sales—and sales are critical. But what about the individuals who drive and support those sales? After all, any prudent investor needs leaders, producers, account executives and support staff. They need a team.
By managing your human capital now—investing in career development—you can position yourself to be in the decision-making seat when it comes time to either sell or perpetuate.
We know that most firms say they do not want to sell, but they ultimately will because their organizations are not prepared to continue the legacy. People are the key to perpetuation. So, if you run your business as if it is for sale and focus on human capital management today, you will put yourself in a position to have more choices tomorrow.
Here are some talent management focus areas to work on now to create a stronger, sustainable organization.
RUN A TIGHT SHIP. Divide your revenue by $200,000. In most cases that is how many people you should have on staff to run a lean, efficient firm. More people does not necessarily translate to more revenue. It could mean you have extra baggage. So take a good, hard look at your staff today and evaluate how each individual is contributing to your organization. Remember, unproductive employees can become an infection that negatively affects morale and the attitudes of your top-performing employees.
HIRE SMART. Review your recruiting practices. Do you have accurate job descriptions in place so you are hiring talent to fulfill roles your organization needs to grow? Where are you looking for candidates, and what processes are in place to onboard new hires? It is important to have someone own the recruiting process and approach hiring no differently than a producer would approach an active pipeline of new business prospects.
CREATE CAREER PATHS. Don’t be just another stop on a person’s résumé. Be the organization that invests in training and technology. Provide mentorship and ongoing education to advance team members’ career paths. Help your employees see ownership opportunities. Show them how they can be the next generation by using career mapping that illustrates how they can advance and what skills and performance are necessary to achieve the next level.
With these concepts in mind, take another look at your organization through the buyer’s lens. Assess the value, the talent, the potential for future growth. You have a choice: develop human capital today and decide your fate, or keep on with the status quo and let an acquirer help choose what’s next for your firm.
May and June deal announcements this year were up compared to not only April 2017 but May and June 2016 also. There were 38 announced May deals (33 in May 2016), and June saw 42 (37 in June 2016). This year’s pace has now accelerated past 2016’s with 239 transactions, compared to 222 through June 2016.
Acrisure continues to be the most active buyer with 24 deals through June, followed by BroadStreet Partners (19) and Arthur J. Gallagher (17). Hub International is a close fourth with 16.
Combined, these four buyers represent nearly 32% of all brokerage M&A deals so far in 2017.
In late June, USI announced it had won the bid to purchase the U.S. commercial and employee benefits insurance services division of Wells Fargo. It was rumored both Hub and Alliant were in the running for the business. The sale is expected to close late this year and will exclude the personal lines insurance division. USI previously purchased 42 insurance brokerage offices from Wells Fargo in 2014.
May 1 marked the first transaction for the newly formed Alera Group, announced in January as the combination of 24 independent agencies backed by private equity investor Genstar Capital. Alera purchased Pennsylvania-based Striewig Bonding Agency, which specializes in bonding and surety.
Also notable during May, Cleveland-based Britton Gallagher announced its sale to Acrisure. Britton Gallagher, with roughly 50 employees, is a multiline brokerage with niche specialties in several areas including pyrotechnics, life sciences and executive risk. This transaction marks Acrisure’s first entrance into the Ohio market and a departure from its typical approach of not announcing transaction targets to the public.
Trem is SVP at MarshBerry. Phil.Trem@MarshBerry.com
Securities offered through MarshBerry Capital, member FINRA and SIPC. Deal counts are inclusive of completed deals with U.S. targets only. Please send M&A announcements to M&A@MarshBerry.com. Sources: SNL Financial, MarshBerry
If the ransom was not paid within three days, the amount doubled. Payments made to the bitcoin wallets used by the hackers indicate higher amounts, most likely to decrypt more than one computer. @actual_ransom—a Twitter bot that is watching the bitcoin wallets associated with WannaCry—indicates that, at the time of writing, about 337 payments had been made, equaling $134,859.54.
Britain’s National Health Service was crippled, canceling surgeries, chemotherapy and other medical necessities. Other major organizations hit included Federal Express, Spain’s Telefonica and Deutsche Bahn.
The malware uses a vulnerability in Windows’ operating systems that the National Security Agency (NSA) discovered more than five years ago. According to The Washington Post, the vulnerability was so serious the NSA recognized it could cause widespread harm if leaked. The NSA discussed internally whether to notify Microsoft so it could develop a patch for the vulnerability but decided against it to exploit the vulnerability for intelligence gathering purposes.
The malware was revealed in August when a hacking group called The Shadow Brokers disclosed an entire archive of NSA cyber offensive tools it had stolen. The NSA finally notified Microsoft, and a patch was issued in March. But the patch was made available for only those Microsoft operating systems that are “in support,” meaning those maintained by Microsoft with patches or upgrades issued to licensed users.
When the WannaCry ransomware hit on May 12, 2017, companies had only had two months to apply the patch to their systems. Patches are easier for individuals to apply than companies and governments, which have to test the impact on applications and systems before deploying patches in a production environment. It takes time, and at the end of two months, many companies had not yet deployed the patch on all of their systems.
Despite the severity of the vulnerability, Microsoft did not issue a patch for its Windows systems and servers that are still in use but “out of support,” such as the Windows XP operating system and Windows 2003 servers. According to recent reports, Windows XP is still running on millions of computers and is the third most popular operating system. An estimated 18% of organizations are using Windows 2003 servers in their IT environments. Around midnight the day of the attack, Microsoft finally issued a free patch for XP systems (Microsoft usually charges $1,000 per computer for an XP patch) and 2003 servers.
Now, more trouble has been set loose. Shortly after the WannaCry attack, a new variant of the malware, called EternalRocks, was released that contains six additional NSA exploits and targets Windows machines.
EternalRocks may be more dangerous than WannaCry. Researchers have determined that it installs a private networking software on the computer called TOR, which conceals Internet activity. TOR is used by the malware to respond to the controller of the malware and begin downloading and self-replicating on the infected computer. The danger is that EternalRocks currently appears to be in stealth mode and just infecting computers; what is unknown is what it will do when activated. It could exfiltrate data via TOR or take other malicious actions, such as corrupting or zeroing data.
So what does this have to do with IT budgets? Everything. Many organizations are not funded to:
- Fully staff a dedicated information security team
- Develop an enterprise security program consistent with best practices and standards (including robust incident response and business continuity and disaster recovery [BC/DR] plans)
- Keep software and hardware patched and within vendor support
- Replace old legacy applications that require out-of-support operating systems.
Almost every client we work with struggles to get enough money to implement and maintain a robust cyber-security program, and it doesn’t matter if they have revenues in the billions or low millions. The security teams are often small, consisting of only a few people, some whom are IT personnel with added responsibilities for cyber security. Many do not have security job descriptions or hold cyber-security certifications or degrees. They learn as they go, and their companies might not pay for training, certifications or fees to attend cyber-security conferences.
Organizations commonly have Windows XP and/or Windows 2003 servers in their production environments. Sometimes this is because old legacy applications (that businesses refuse to replace) often require the XP operating system, and other times it is because IT and security have not been given the budget they need to replace out-of-support equipment. So security teams hobble along as best they can, juggling priorities and trying to keep attackers at bay.
The lack of adequate IT and cyber-security funding also frequently results in poorly developed incident response and BC/DR plans. These two areas usually have the lowest scores in our cyber-risk assessments. This means companies are likely to have a chaotic incident response when a serious incident occurs and may not be able to fully restore data if erased, corrupted or encrypted.
Cyber-security professionals, by and large, are dedicated and want to build a strong cyber-security program. But executives must understand malware can readily find out-of-support equipment or software and exploit it.
All of these factors converge to create a global network of organizations with legacy apps, out-of-support equipment and systems, insufficient cyber-security expertise, and weak to mediocre security programs with gaps and deficiencies that help enable these attacks. The WannaCry malware just encrypted data; these other NSA exploits can leave the infected computer open to remote commands so it may be “weaponized” on demand or exfiltrate data.
We hear a lot about what needs to be done to curb cyber attacks: better information sharing, more government leadership and funding, improved assistance from law enforcement, and new laws and regulations. But we do not hear enough about organizations starving IT budgets to the point they contribute to the problem.
Agents, brokers and their clients are equally at risk of attack, and the first and best line of defense is a robust budget line for IT and cyber security. From my side, we need to do a better job of educating organizations on the costs associated with cyber attacks so they can be weighed against IT and cyber-security budget requests.
A complex forensic investigation can cost several million dollars, including business interruption costs, equipment replacement costs, remediation consulting costs, and regulatory and legal costs. That doesn’t even include potential reputation and brand damage.
In the end, the organization still had to upgrade equipment, address gaps and deficiencies, and improve its security posture—it just cost more. A dollar in time can stop cyber crime.
Westby is CEO of Global Cyber Risk. firstname.lastname@example.org
Our industry exists in a sleepy corner of the universe where the laws of physics seem to be etched in granite. Perform well in a few basic areas and you can carve out a comfortable living, grow you firm, then select one of a few exit options when you’re ready to retire or move on. The problem is, right next door there are businesses that are bending those finite laws to their own will, in effect changing the entire fabric of business.
Like it or not, we are now playing a different game.
So, what’s happening in the grocery sector, and why is it so important? To truly understand, you have to dive deeper into how major retailers work. The retail industry and especially the grocery industry run off of a tremendous amount of data. In fact, from a data perspective the larger retailers are some of the most technically astute companies around. From a customer experience perspective, this might not be readily apparent. When we buy groceries, we notice things like the length of the lines or how annoying (or convenient) the self-checkout lanes can be. We notice how easy or hard it is to find the five things we need so we can get the hell out of there. In fact, each of these behaviors and the heuristic nature (identifying efficiency, think shortcuts) of our experience are heavily studied and designed.
Tracking the way people buy, identifying their personal desired experience and providing that exact experience is the holy grail of retail. Most of us are fairly cynical when it comes to generally annoying tasks like grocery shopping. We think the placement of products and the paths we are forced to take through the store are designed to create impulse buying. This is true in certain cases, but the major retailers have made a crucial discovery that is far more mature than showing your kids candy when you’ve reached the end. Creating the exact experience you want every time results in your becoming a predictable, consistent spender. This one key insight fundamentally changes everything. In retail marketing, this is known as the Three C’s of Customer Satisfaction: consistency, consistency, consistency.
So, how do you do this? In our industry, any individual agency has any number of clients. Each client has his or her own desires, spending habits and risk tolerance. Our approach so far has been to create the role of a producer—more proficient than just sales but not quite customer service, a hybrid approach to manual relationship development. Modern retailers figure out who is going to buy what and when. Then, they attract the customers to them to make the sale. In contrast, we send our producers into the field to uncover opportunities through traditional relationship development.
Want to grow? Put more producers in the field or take them from our competitors. This works, it has always worked, and unfortunately there’s a long-held belief that it always will. After all, how in the world can we track the individual desires of 100,000 individual clients of insurance, right? Wrong. If there are other industries that have figured this out (for millions), why can’t we?
This brings us back to grocery store. In a single day after the announcement of the Amazon-Whole Foods deal, Kroger’s grocery store chain stock dropped 11%. What do the institutional investors know that we don’t? Let’s start with a few basics. Kroger is the largest grocery retailer in the U.S. and the second largest general retailer behind Wal-Mart. With annual revenues exceeding $115 billion and a tremendous number of sub-brands, this organization is on the forefront of advanced retail technology. In fact, Kroger maintains a massive big data environment that tracks the spending habits and buying behavior of millions of individual customers. These data are absolutely critical to the company’s operations, driving everything from purchasing to placement to logistics. Everything this company does is based on what they know about you.
Now think about Amazon. Their entire platform is based on experience—figuring out how to remove as much friction as possible. When my daughters need shampoo, I send them to Amazon. Their individual, specific needs and desires require us to visit too many separate stores, but Amazon has it all, and you can buy it from your phone the moment you happen to think about it.
And herein lies the problem for Kroger. For as much as they know about your family and the factors that encourage you to buy in a consistent way, they still need you to get in your car and go to their store.
Amazon making a push into groceries in a big way will create a ripple effect that will flow through multiple sectors of our economy. As the power of predictive sales analytics combined with ease of use and on-demand service spreads through more industries, traditional retail sales will become a thing of the past.
So where does this leave us? Everything I’m talking about runs on data. Sure, there’s technology involved to process those data, but this isn’t really a tech play. It’s all about market intelligence. It’s about reducing friction and creating a consistent buyer. But first we have to take baby steps. Agency automation systems need to focus on data collection and analytics rather than focusing solely on transacting business. Agencies need to build capabilities that provide for the analytics and the creation of data-driven insight.
Data literacy isn’t about creating graphical reports from yesterday’s data, it’s about identifying what someone needs and giving it to them every time. When we start to do this, we’ll start to participate in our future rather than watching it from the sidelines.
Gagnon is The Council’s CIO. email@example.com
On the next tier down, we have the ongoing debate regarding whether the Department of Labor’s “fiduciary rule” will take effect and, if so, in what form.
For firms that sell retirement products to individuals or businesses and/or that provide advice related to such investments, the stakes in the fiduciary rule debate are, as the president would say, YUUUGE! The rule imposes a laudable and widely accepted standard requiring advisors to act in the “best interest” of their clients when rendering retirement-related investment advice. “Best interest” is defined as providing advice consistent with what other similarly situated professionals would advise and not being influenced by the advisor’s personal remuneration. But it buttresses that standard with:
- Extensive disclosures (including an affirmative contracting requirement)
- Requisite warranties, which essentially mandate keeping advisor compensation schemes level
- Mandatory policies and procedures to guard against potential conflicts of interest and
- A contracting requirement that subjects advice related to individual retirement accounts (including employer-funded IRA plans like SIMPLE and SEP IRAs) to private rights of action.
Naysayers of the rule, which includes essentially everyone in the industry except those who receive their compensation through fixed-fee arrangements, assert the rule imposes needless expense and uncertainty.
This not only will increase the prospect of extensive litigation but will result in limiting the availability of advisory services and/or increase the price of services and products, particularly to less wealthy households.
In a memorandum issued in February, President Trump directed the Department of Labor to review the rule and to revise or withdraw it if it would result in:
- Decreased access to advisory services, product structures or retirement savings information
- Increased costs for retirement services
- Increased litigation and/or
- Dislocation or disruption within the industry that may adversely affect investors.
In April, the DOL issued a final rule delaying the implementation date of the “best interest” standard component of the rule until June 9 and most of the rule’s other requirements until Jan. 1, 2018. It was widely expected when the new secretary of labor, Alexander Acosta, was confirmed the entire rule would be delayed until the department had the opportunity to review the rule in its entirety (as the president’s memorandum required).
Then on May 23, the secretary changed the plan. Through the simultaneous issuance of frequently asked questions, a temporary enforcement bulletin and a highly unusual op-ed he penned for The Wall Street Journal, the secretary said the June 9 deadline would not be further delayed. However, the DOL would not begin enforcing the rule against any advisor who in good faith is seeking to comply until Jan. 1, 2018. In the interim, he stated, the department will continue the White House-mandated review of all aspects of the rule.
This has been widely received as a death knell to the rule rescission effort. I do not read it that way, though. Secretary Acosta, a lawyer who did a stint at the Department of Justice, argues in his op-ed that the applicable Administrative Procedure Act requirements bar the department from unilaterally delaying or withdrawing the rule at this juncture. At the same time, he noted: “It is important to ensure that savers and retirees receive prudent investment advice, but doing so in a way that limits choice and benefits lawyers is not what this administration envisions.”
And he ended with this: “The Labor Department will roll back regulations that harm American workers and families. We will do so while respecting the principles and institutions that make America strong.”
He is a good lawyer. He is going to respect the normal—and legally mandated—rulemaking process. But if there is a record that shows that this rule does not satisfy the White House edicts, I believe he will revise or rescind it. Our job now is to make that record.
In the meantime, if your firm does engage in these retirement advice activities for anything other than a fixed fee, your fiduciary advisors now must:
- Give investment advice in the “best interest” of their clients
- Avoid making materially misleading statements to their clients with respect to investment advice given and
- Receive only “reasonable compensation.”
Although each of these terms is laden with interpretational questions, the department’s FAQs assert financial institutions and their advisors subject to the rule have leeway to determine how best to comply with the transition period requirements in the absence (for now) of other regulatory obligations taking effect Jan. 1 (e.g., warranties regarding compensation arrangements, disclosures, contracts).
This is not giving many of the broker-dealers and life insurers for whom you distribute these products much comfort, but for your firm’s advisors it should mean they can comply with whatever new process requirements your broker-dealers and life insurers impose. Otherwise, they can pretty much go about their business as usual—at least until January when all the rules will change—or they won’t.
Never a dull moment in our nation’s capital.
Sinder, The Council’s chief legal officer, is a partner at Steptoe & Johnson. firstname.lastname@example.org
Jensen is Steptoe senior associate in the GAPP group. email@example.com
As MIT Technology Review reported, “A heavily promoted collaboration with the M.D. Anderson Cancer Center in Houston fell apart this year. As IBM’s revenue has swooned and its stock price has seesawed, analysts have been questioning when Watson will actually deliver much value.”
Watson is a machine-learning system that gained fame in 2011 by beating other contestants on the game show Jeopardy! by consuming hundreds of millions of pages of content, including the full text of Wikipedia. This form of artificial intelligence is designed to recognize patterns in the data it consumes and become increasingly intelligent the more it consumes.
After Watson’s success on Jeopardy, IBM began exploring the ways in which Watson could have an impact in different industries, one of the first being the healthcare industry. For example, according to MIT Technology Review, in its partnership with M.D. Anderson Cancer Center, Watson was supposed to “read data about any patient’s symptoms, gene sequence, and pathology reports, combine it with physician’s notes on the patient and relevant journal articles, and then help doctors come up with diagnoses and treatments.”
While the specific reasons for Watson’s success or failure on any given project vary, MIT Technology Review boils Watson’s current troubles down to one fundamental issue—it needs the correct information programed into it in order to learn further. “Watson is continually rejiggering its internal processing routines in order to produce the highest possible percentage of correct answers on some set of problems,” the article says. If it doesn’t have those correct answers already in it, Watson can’t differentiate between right and wrong, and thus can’t continue to refine and improve its response.
In the healthcare world, this means that for Watson to be able to sift through large amounts of data and decipher what is needed for a specific patient, a human would need to do it first. For example, “To recognize genes linked to disease, Watson needs thousands of records of patients who have specific diseases and whose DNA has been analyzed. But those gene-and-patient-record combinations can be hard to come by. In many cases, the data simply doesn’t exist in the right format—or in any form at all. Or the data may be scattered throughout dozens of different systems, and difficult to work with,” says MIT Technology Review.
So what does this mean for insurance? Well, as Leader’s Edge reported last year, some insurers and brokers are beginning to employ machine learning in their organizations. Chubb is applying it to workers compensation claims with the goal of closing them faster and at less expense, while improving health outcomes and speeding up return to work. Brokerages like Willis Towers Watson and Aon are using it to better understand their clients’ loss drivers and related insurance coverage needs. And Swiss Re in particular had just partnered with Watson to develop cognitive solutions to help underwriters accurately price risk, thus increasing the company’s life and health reinsurance profits through a more informed understanding of potential loss exposures.
“To compete successfully, insurers and reinsurers need to identify emerging risks and loss trends better than they have in past, spotting operational issues and opportunities at a higher frequency than done before with traditional analytics,” said Leader’s Edge. Watson, as well as other AI, can help achieve this.
While Watson may have some flaws, it—as well as other AI—still seems to hold great potential for businesses across industries to make better use of data. In fact, IBM recently announced a beta test for Watson in cyber security. We’ll continue to keep an eye on Watson as it evolves.
Yep, for many of us, the holiday isn’t complete without fireworks. And if you’re in the niche market of fireworks and pyrotechnics insurance, that’s a good thing.
July Fourth is noted as being the busiest firework time of the year (with New Year’s Eve coming second). And the fireworks industry is growing. According to the American Pyrotechnics Association, consumption of fireworks in the United States has risen from 29 million pounds in 1976 to more 268.4 million pounds in 2016. The association notes there are only three states that maintain a total prohibition on all consumer fireworks.
“States have been allowing more and bigger fireworks so that they don't have to worry about their citizens making their Fourth of July purchases elsewhere,” reported the Pew Charitable Trusts a few years ago.
As Pew notes, the increased revenue is expected to come from things such as licensing and safety fees as well as sales tax.
A Niche Industry
While it may require working on the holidays, fireworks and pyrotechnic insurance is a niche that is fairly multi-facted. As MyNewMarkets.com reported, from the manufacturing of fireworks, to the equipment, to the firework companies, wholesalers, retailers and display shows, the insurance needs are numerous.
There are also a considerable number of regulations to be aware of. “It is a very regulated industry with a lot of government entities involved and every single event and every situation is different,” said Tami Town to MyNewMarkets. Town is a specialist in the market for Ryder Rosaker McCue & Huston Insurance Services. As Towne and others note, the industry became considerably more regulated after the terrorist attacks on September 11, 2001, as it falls within regulation of hazardous materials, which became much more restrictive.
As The Council explains (CIAB password protected), “The significant problems in the individual and exchange marketplaces, and corresponding cuts to the federal safety net of Medicaid, will have consequences for years to come on the entirety of the health care ecosystem—as evidenced by the growing political movements on the left in support of single-payer health coverage.”
Echoing that sentiment is a recent Washington Post article, which notes that the continued healthcare debate at the national level has rekindled calls for a single-payer system among some states. Eyes and ears have been trained on two of the nation’s largest states, California and New York, where legislation has been making its way through the system.
In California, legislation known as the Healthy California Act cleared the state Senate by a 23-14 margin and was pending in the state Assembly. However, state Assembly Speaker Anthony Rendon pulled the bill from consideration by the Assembly on Friday, June 23. As the Huffington Post reported, “Rendon, much to the chagrin of the bill’s supporters, opted to pull it last week despite his support for a single-payer system, calling the plan ‘woefully incomplete.’ He urged the state Senate to ‘fill the holes’ and send the Assembly a ‘workable’ bill next year. So while on hold for now, single payer still seems like a possibility in the state.
In New York, the Democratic-led state Assembly has approved the New York Health Act on a 94-46 vote and sent it to the Republican-led state Senate. If the measure can get through the Senate—a slim but real possibility—Gov. Andrew Cuomo is likely to sign it.
Despite this momentum, major barriers lay waiting in the path of these bills including:
- Opposition from insurers, providers and employers. Not surprisingly, insurance companies oppose the notion of the government (federal or state) taking over their business. And there also is strong opposition from physicians, hospitals and other providers who worry a single-payer system would have far too much leverage over what they are paid. Finally, large employers, especially those that do business in multiple states, also object to the single-payer movement. They worry about giving control over a key benefit for their employees and, very possibly, being stuck with a new tax burden to pay for it.
- Resistance by the federal government. Both the New York and California single-payer bills assume the state can take control of spending for Medicare, Medicaid and veterans’ care in their states. That would require unprecedented permission from Congress and the White House and in the current political climate the odds of that are slim and none.
- Taxes, taxes, taxes. Perhaps the biggest trump card held by opponents of single-payer healthcare is the fact states would need to impose significant new taxes on citizens and employers to pay for it. In California, healthcare spending is estimated at $400 billion a year, more than double the state’s spending on all services in 2016. Single-payer proponents argue half of that spending ($200 billion annually) could come from money now spent by the state and the federal government on healthcare, and another $100 billion to $150 billion would be saved by employers who now pay for coverage. Even with this “fuzzy” math, it still leaves a $50-$100 billion hole to be filled by new taxes. New York legislators are looking at math that looks very similar.
All this is not to say it is impossible for a single-payer plan to pass in 2017. But even it were to be enacted, observers often cite the state of Vermont as an example of a locality that enacted single-payer legislation in 2011 only to drop it in 2014 when they could not figure out how to pay for it. Similarly, the state of Colorado appeared moving toward a single-payer model in 2016 through a ballot initiative that seemed certain to pass. However, on Election Day, the plan went down to an overwhelming defeat, primarily due to the specter of new taxes.
This summer is certain to be full of headlines about the debates going on in D.C. and around the country on which direction the nation should take on healthcare. What is likely, at least for now, is continued status quo. Even if the single-payer efforts in California and New York fail in 2017, the debate won’t go away. Democrats in Congress are increasingly backing a single-payer bill. Moreover, Aetna CEO Mark Bertolini told a private investors’ conference, the U.S. should give the notion serious debate. He cited Medicare, a single-payer program covering millions of American seniors, utilizes insurers to process claims and other key responsibilities. So a debate that has been raging, on and off, since Harry Truman was in the White House, continues.
Editor’s Note: This article was updated on June 30, 2017, to reflect changes in the movement of the Health California Act.
Willingness to share data is a prerequisite for UBI, and Willis Towers Watson found that 81% of respondents said they would be willing or open to sharing recent driving data, and 84% would be interested in or open to having a short trial to determine the discount they could get before buying a policy.
Willis Towers Watson notes that consumers also have to buy into the principle that their insurance will be determined by how they drive. The survey found that only 7% of respondents disagreed with the premise that UBI is a better way to calculate premiums than traditional methods.
Katie DeGraaf, global telematics sales and delivery lead for Willis Towers Watson, believes connected cars are paving the way for the UBI insurance market according to a Willis Tower Watson press release.
In talking with Leader’s Edge about the survey, DeGraaf said the results of the survey show that UBI makes sense to the consumer and is more relevant overall.
“In the past, for example, credit score related to a consumer’s auto insurance. While there are correlations between financial information and risk of driver, it doesn’t seem as relevant to the consumer as information based on where the consumer drives, how fast, when or for how long,” said DeGraaf. “With this technology, it just makes more sense to the consumer.”
And while this survey focused on individual consumers, DeGraaf notes that the technology can be applied across the commercial space as well. “Connections to users’ smart phones can be leveraged to bring prices down,” she said, offering the example of managing a commercial fleet through an app.
The changing behavior in the consumer is important to the insurance industry for many reasons, DeGraaf said, noting that insurance companies need to focus on opportunities that are relevant to a world that connects more and more with technology.
Americans are now generally better positioned for retirement than they were a few decades ago, thanks to the ability to slowly and effortlessly save money through their workplace 401(k) accounts and similar defined contribution plans. But not everyone has benefited. Many workers—more than 30 million nationwide—do not have access to the tax-deferred accounts. And it’s increasingly clear, as surges of baby boomers enter retirement, many others who do have 401(k)s fail to save as much as they need to in order to retire in comfort and security.
By some estimates, America’s retirement savings shortfall is as high as $14 trillion, a problem that is now boomeranging back to employers, who find themselves uncertain about what to do with a graying workforce that can’t afford to retire. Delayed retirements affect the bottom line through increased health costs and strains on productivity and innovation.
Those challenges—as well as other recent trends in the retirement planning space—are tailor-made for benefits brokers who are already working with employers on health plans, life insurance, workers comp and other programs.
There couldn’t be a better time for firms with broad experience to enter the space, according to Joseph DeSilva Jr., senior vice president and general manager of ADP Retirement Services. “There’s a change right now that’s going on in the marketplace where people expect more value at a lower cost,” he says. “A lot of that’s driven by regulation, but a lot of it has been in motion for years now.”
Among those drivers is a controversial rule from the U.S. Department of Labor that has occupied the industry’s thoughts since 2010. The fiduciary rule, championed by the Obama administration, requires brokers and advisors to more clearly demonstrate they’re putting their clients’ interests first. Critics contend the change, which has faced challenges from the Trump administration, will limit investment choices, impose burdensome compliance requirements and ultimately drive up costs.
The Trump administration recently announced the rule will begin taking effect in June but will not be fully enforced until at least January while its review of the potential effects continues. Further revisions are expected. Regardless of the outcome, it’s already changed the industry. Some advisors unwilling to take on the additional rigor as a fiduciary have departed the space, and others are expected to leave rather than compete with firms that have proceeded with the basic tenets of the rule even if the Trump administration significantly changes it.
“I am seeing more of a trend of retirement-focused advisors emerge,” says Allison Winge, executive vice president of retirement at Plexus Financial Services. But Winge, who has been in the industry for 17 years, cautions that the upcoming changes won’t work for everyone. “Assuming the fiduciary rule does pass,” she says, “I would only recommend it if the advisor is wanting to specialize in the retirement plan space.”
Dave Kulchar, director of retirement plan services for Oswald Financial, offers a similar note of caution. “Plan sponsors are not looking for generalists,” he says, “so to be competitive in this space, you must be a specialist.”
Nevin Adams, chief of communications and marketing for the American Retirement Association, says a new regulatory regime—or remnants of it—could be an advantage for new arrivals.
“If you’re new to it, you don’t get so caught up in the way it used to be and the way we used to do things,” he says. “The things that might be considered strange, alien or complicated to the people who have been doing this business for a while—to you, it’s just the way it’s been.”
Eric Poole, a financial planner with Kentucky Planning Partners in Louisville who began handling 401(k) accounts three years ago, says he expects more accounts will come into play as firms depart. “This may be a time where they’re looking to cash out, sell a book, or get out of the business as a whole,” Poole says. “It’s nothing but a huge, huge opportunity for anyone looking to get in.”
DeSilva, whose firm works with 53,000 plan sponsors nationwide, agrees. “Regardless of what the DOL or the Trump administration requires, there has been a huge change in the marketplace,” he says. “The buying expectations have changed. The expectations are focused on a provider that has a lot of knowledge, a lot of value, for a really low cost.”
Amber Lloyd, manager member and owner of Retirement Management Services, a third-party administrator in Louisville, expects most changes to occur with smaller plans as those advisors decide they can’t take on a larger fiduciary role. “I think that’s definitely a market for advisors that want to get into the space,” she says.
The surge of retiring baby boomers is also affecting the business as advisors and brokers join their clients in retirement. The average age of a financial advisor is 50, and more than a third plan to retire within 14 years, according to a recent survey by Cerulli Associates and the Investment Management Consultants Association. As those advisors retire, the American Retirement Association’s Adams says, the landscape will change. New entries into the space could buy or merge with firms, hire their advisors or take over their books.
Adams says the space is ripe for competition, particularly from people who are focused and dedicated. He says numerous advisors can be easily displaced because they tend to bring in a plan, put it into the hands of individual account managers and move on.
“They’re not doing right by the plan sponsors. That’s a sad thing,” Adams says. “That’s why I think there’s a lot of opportunity for advisors who are really committed to this business.”
Partner Up and Start Simple
Veterans of the space and recent arrivals both stress one bit of advice for brokers considering expansion into retirement planning: don’t go it alone. Carve out an initial role for yourself, and find others to complement you.
“If you present yourself as ‘I, I, I,’ you’re not going to make it in the industry, because it’s very complicated,” says Ruth Rivera, vice president of retirement services at Bukaty Companies.
Plan sponsors are not looking for generalists, so to be competitive in this space, you must be a specialist.Tweet
“It’s almost impossible for someone to say, ‘Hey, I’m going to be a retirement advisor now and focus on supporting retirement plans,” says Phil Chisholm, vice president for product management at Fidelity Investments. “The complexity from a regulatory, legal and just structural standpoint requires some experience. Where we tend to see the most success is people who partner with others who bring a skill set as well.”
One valuable entry point is education and enrollment meetings. “It’s a great introduction to the business,” Poole says. For example, explains Chisholm, “an advisor might say, ‘I don’t understand the technical ins and outs of a 401(k) plan, but sitting down in a cafeteria and talking to participants, that’s where I’m really strong,’ or ‘Sitting with a plan sponsor or employer and talking about investments, I’m really strong there, too.’” As for the rest? “We’ll help fill in the gaps,” Chisholm says.
There are three avenues of training that new and established players in the industry mention most frequently:
- The National Association of Plan Advisors (NAPA), an affiliate of the National Retirement Association, offers an introductory online practice-builder course, full training and certification for fiduciaries, and numerous continuing education programs.
- The Retirement Advisor University, a program through the UCLA Anderson School of Management Executive Education, has courses taught by professors and retirement industry leaders available on campus and online.
- The College for Financial Planning offers numerous professional designation programs, including Certified Financial Planner.
“Those three resources probably cover the bulk of the needs of an advisor trying to get up to speed,” Chisholm says. Other options include the International Foundation for Retirement Education, the Center for Fiduciary Studies and the Society of Certified Financial Advisors.
At the outset, advisors will need a Series 7 securities license. Winge, of Plexus Financial Services, says advisors should also consider a Series 65 license to offer co-investment fiduciary services.
Some advisors later choose to pursue a full fiduciary role, taking responsibility for fund selection and monitoring, Lloyd of Retirement Management Services says, while others stay closer to the education role.
“They’re the advisors out talking to employees, helping to explain what the retirement plan is, what the benefits of participating in the plan are, how to accumulate funds over your lifetime, and what that’s going to mean to you,” she says.
“The key is you don’t have to do everything yourself,” says Tobi Alfier, a consulting practice director for CBIZ ACI. “Find people who will help make you shine.”
Key alliances include recordkeepers, who set up the defined contribution plan’s platform and track its assets, and third-party administrators, or TPAs, who oversee plan design and help employers comply with government regulations.
Alfier says developing a solid team will help protect clients—and you. “If you are going to specialize in large plans (more than 100 employees), meet CPA auditors you can refer,” she says. “For any size plans, find a TPA who can do plan design, prepare illustrations, sit shoulder to shoulder with you in prospect meetings, and who has a great staff committed to accurate and timely administration.”
Rivera, a 20-year veteran of the industry who shifted to advising on 401(k)s three years ago, also recommends bringing experienced people to prospect meetings. Use their numbers for assets under management to project confidence in your offerings, she says. “You’ve got to be able to present a team effect,” she says.
Lloyd says TPA firms like hers can ease the transition for new retirement planners. “We’ll help the advisor meet with clients to make sure that we are designing something that is appropriate and tax-efficient for that particular employer,” she says. “It helps to expand their wheelhouse of knowledge and capabilities.”
Alfier says it’s also important to team with a sales-oriented, but not a product-selling, TPA. “Take them on ride-alongs,” she says. “Learn the questions they ask and why. Knowing the goals of a prospect will help you determine the most appropriate plan of action for them and the best place to put their retirement plan assets.”
Good connections with TPAs also can lead to new clients, according to DeSilva, who says linking with ADP means teaming up with 200 sales representatives already engaged in the space. “Working with some firms requires the advisor to do all the legwork,” he says. “Working with ADP, you partner with those sales representatives to go and capture business.”
Chisholm says it’s important to limit partnerships with recordkeepers, who set up the plan’s platform and track assets, in the early going. “Work with a couple of them,” he says. “It’s hard enough to understand the marketplace. The more that you work with, the more you have to learn everybody’s operating model, their product lines, and the complexity to go along with it. If you can keep it to a manageable size as you’re starting out, the better off you’ll be.”
Poole, of Kentucky Planning Partners, says advisors also will help themselves, as well as plan participants, if they keep those recordkeepers’ platforms simple, with a limited menu of choices for account holders. “The majority of our lineups are going to the household names that have a history of good performance and keep the expenses low,” he says.
Alfier suggests getting to know different wholesalers and learning everything you can about their products. “You are going to be responsible for the great retirements of your clients and their employees,” she says.
“They are going to rely on you to put their money in the smartest place for them, based on their demographics and goals. You need to know who to suggest.”
Chisholm says brokers also should assess what they have available in-house. “If the resources exist within your own firm, leverage them as much as possible.”
Associating with a well-established registered investment advisor, such as Global Retirement Partners, is also a good way to “gain access and have ongoing exposure to tools, resource support and intellectual capital,” Oswald’s Kulchar says.
The complexity from a regulatory, legal and just structural standpoint requires some experience. Where we tend to see the most success is people who partner with others who bring a skill set as well.Tweet
Learning the Trade
Training is a necessity, but it’s also an excellent avenue for benefits brokers to explore whether they want to expand into the space. “It’s a good way to look without exposing your bottom line,” Adams says.
Some of the essentials can be gleaned from potential partners. “We do a lot of educational events for advisors,” Lloyd says of her TPA firm. “We do mini boot camps to try to help new advisors in our area to get introduced to this space, terminology and what will be expected of them from companies.”
Poole says it’s important to pursue training and accreditation to help business owners feel confident you will manage their employees’ savings well and select the right TPAs and recordkeepers to ensure compliance.
“Do anything you can do to add an extra little bit of validity to yourself,” he says. “That’s what you’re selling first and foremost.”
Two designations are particularly well recognized in the industry: AIF (Accredited Investment Fiduciary) and CPFA (Certified Public Finance Administrator).
“The AIF designation immediately demonstrates the advisor is working toward the best interests of the clients and is well qualified to do so,” Poole says. “The CPFA reinforces a high level of education and experience.”
Alfier says the AIF will help differentiate newcomers from their competition. “Part of the training will give you clear knowledge of who constitutes a fiduciary and what is required of one,” she says. “It will also give you the knowledge to keep yourself from becoming a fiduciary—some broker-dealers will not allow their brokers to act as fiduciaries. You don’t want to do the wrong thing.”
Chisholm says the education should be ongoing as the practice grows. “Rely on the industry as much as you can and basically absorb as much as you can in the marketplace.”
Whom Do You Know?
Benefits brokers are accustomed to leveraging connections, and the same networking skills will open doors for advisors entering the retirement planning space.
“Cold calling is a very difficult world,” says Chisholm, who says new arrivals will find leads from the usual sources, such as local chambers of commerce, but also from CPAs, auditors, commercial lenders and others with ancillary connections to retirement planning. “These businesses provide other services, so you’re not competing with them; you’re complementing them.”
Poole suggests joining human resources groups to meet the people who are picking 401(k) advisors. “They’re in every city,” he says.
Industry conferences can be expensive, Chisholm says, but they’re an excellent place to build networks with people in and out of your region. NAPA’s annual 401(k) Summit is a popular option for many in the industry, he says. “It’s just a great way for someone who’s in the market to truly start interacting with other folks, leveraging best practices, building contacts and gathering ideas on how they can advance their business.”
Chisholm says he’s also seeing growth in regional, college-style study groups, with advisors and others in the industry gathering periodically to share ideas and knowledge. “Those are usually very helpful for people to get up to speed and learn what other people are doing,” he says.
Networking with NAPA and affiliated groups is also critical to tracking what’s happening in Washington. “With a new administration, obviously the political direction is going to change, maybe dramatically,” he says. “That’s where industry groups will be very helpful for someone who’s less experienced. They’ll help raise awareness of areas that advisors and brokers are going to have to pay special attention to.”
Alfier recommends connecting with college alumni groups and also with ProVisors, a networking group for professionals that is active in California and various regions of the country. “They are very selective about membership in that they don’t allow too many people in the same profession to be in the same group,” she says.
Alfier also suggests getting involved with groups affiliated with plan sponsors. “Determine your niche and learn everything you can about it,” she says. “For example, manufacturing companies have very different personalities and challenges than professional groups, i.e., doctors and lawyers. Just because you specialize doesn’t mean you can’t ever do anything else. You need to grow, but start where you’re comfortable.”
A Ready-Made Niche
Financial wellness programs, designed to help employees take a holistic approach to managing money, are a natural way for benefits brokerages to break into the retirement planning space. Brokers can capitalize on their knowledge of healthcare costs and coverage as they talk to both employers and employees about the best way to meet existing financial obligations and prepare for the future.
Seven out of 10 workers say their financial situation is their greatest cause of stress, according to the American Psychological Association, and studies by the peer-reviewed journal Health Affairs and others have shown that stress drives up medical expenses and drives down productivity.
The number one cost in retirement is healthcare, so bridging that gap is important for us. A benefits broker/financial advisor—someone who can wear both hats—really brings a high level of credibility to the table.Tweet
Financial wellness programs generate a return on investment of $1 to $3 for every dollar spent, according to the Society for Human Resources Management. “The concept of wellness has a great deal of resonance with employers because it’s a cost savings,” Adams says.
Sometimes the assistance can be rudimentary, such as helping individuals learn how to better budget their living expenses so they can save for the future. Other times, the conversation will need to be comprehensive.
“A lot of customers and their employees are really thirsting for knowledge broadly around financial services. It could be their insurance, their disability, college planning or other benefits that they have,” Chisholm says. “People are overwhelmed. People don’t consider themselves experts, and it’s daunting. It’s very difficult to figure out where all the pieces come together.”
For business owners, the conversation can focus on how helping their employees alleviate financial stress helps the company’s bottom line. “That’s another way to show your value, when you’re saying, ‘Hey, this employee is now going to able to retire at 65, which means you don’t have to keep paying this higher salary, these higher health benefits,” Poole says. “You can—over a one-, three-, five-year basis—show the progress that the plan is making. I think business owners place a lot of value in that.”
DeSilva says those education efforts are important for employees, too, because they often fail to anticipate the medical expenses they might face in retirement. “The number one cost in retirement is healthcare, so bridging that gap is important for us,” DeSilva says. “A benefits broker/financial advisor—someone who can wear both hats—really brings a high level of credibility to the table.”
Advice for the Advisor
Not everyone who ventures into the retirement space will succeed, of course. Sometimes it’s because a company’s motives are misplaced. “The business of working with retirement plans is chock-full of brokers—and I’ll use the term pejoratively—who don’t know anything about retirement plans,” Adams says. “They see a pot of money, and, particularly in a commission-based structure, they think it’s pretty easy pickings. They don’t appreciate what’s involved with it.”
But advisors with the right focus also veer off path. Among the most common pitfalls: they overextend themselves. Chisholm says a friend recently departed the space after realizing he’d taken on more than he could handle. “He was trying to offer too many things to his clients because he was trying to build up his business,” he says.
Advisors need to ensure the commitments they make for enrollment meetings and other aspects of a plan are sustainable as their business grows. “Ultimately you have to make sure you’re successful in hitting your profitability targets,” Chisholm says. “You have to be smart about sometimes looking at the business and saying, ‘What kind of services can I provide cost-effectively, profitably, that are going to allow me to be scalable and have a complete book of plans?’”
Again, building strong partnerships with those who do the back-office work and others is critical, as is building a support team within your firm. “Most of the successful groups that we work with tend to have built out teams,” Chisholm says. “You can have 40, 50, 100 plans in your book of business, but that’s going to require you to understand and clearly articulate to your clients what services you do, what you do not do and how you justify the pricing for those services. Obviously, the more things that you do, you’re going to need a team to support you through that process.”
Chisholm says it’s important to benchmark fees carefully. “On one hand, you don’t want to be pricing yourself out of the market,” he says. “On the other hand, you don’t want to be underpricing your own services and selling yourself short.”
Early adjustments may be necessary. “Don’t be afraid to take hits at the beginning, maybe reducing your compensation or whatever, to really position yourself in the industry,” Bukaty Companies’ Rivera says. “Everything works phenomenally when you start getting referrals, to the point where you’re not really working as hard because people know who you are and what you’re doing.”
Brokers should also consider starting with smaller plans. The profits aren’t as good as large plans, but the competition can be less fierce and there are more opportunities among employers who don’t have existing 401(k) plans. “Most retirement advisors are moving up market,” Winge says. “Perhaps focus on plans under $5 million.”
Chisholm says advisors would be wise to ensure they’re tech-ready or team up with people who are. For years, employers eschewed online access, saying most people in their workforce didn’t have access to computers or interest in checking their plans. “I think those days are over,” Chisholm says. “Everybody has a smart phone, everybody knows how to load an app onto their phone.”
As advisors build relationships with clients, they need to remember that humility and honesty go a long way in making inroads, according to recent arrivals in the space as well as industry veterans.
You can have 40, 50, 100 plans in your book of business, but that’s going to require you to understand and clearly articulate to your clients what services you do, what you do not do and how you justify the pricing for those services.Tweet
It’s important to acknowledge “when you don’t know what you don’t know,” Chisholm says. “The last thing you want to do is put yourself in a situation where you are saying something inaccurate because you don’t want to look like you don’t have all the answers,” he says. “People are going to recognize we can’t be experts in 100% of everything. If there’s any area of uncertainty, it’s always OK to say, ‘Let me do a little research on that and get back to you.’”
Projecting confidence is important, Rivera says. So is owning up to a mistake. “The more you own it, the more people will trust you, and the more you have an opportunity to really grow in the business,” she says.
Patience is also critical for advisors and brokers breaking into the space. Poole says it can take 18 months from the first phone call about a 401(k) to the time the plan goes live. “Don’t get discouraged,” he says.
“There’s a long sales cycle to acquire any client. Business owners, HR—they’re doing a lot of different things, so be patient. Just stay at it.”
As brokers and advisors establish themselves, they need to distinguish themselves from their competitors. An advisor may become known for being able to simplify complex plans for buyers, for instance.
“Establishing that brand is what is going to start to differentiate you from the plethora that are out there,” DeSilva says.
“Learn how to listen well,” Alfier says. “People—prospects—love to talk about themselves. Find out what is keeping them up at night, then provide a solution. Anyone can talk about money. Learn how to be different.”
Lease is a contributing writer. firstname.lastname@example.org
This year marks 150 years since the colonies of Canada, Nova Scotia and New Brunswick formed the Canadian Confederation on July 1, 1867. In honor of the sesquicentennial, the country kicked off Canada 150 last New Year’s Eve, launching a year of commemorative events reflecting the history and heritage of each province.
Thirty official city-produced events will take place during Toronto’s 150th birthday party, deemed TO Canada with Love. Many of the events, such as the Multicultural Canada Day Celebration, honor the city’s rich diversity. From festivals to music to art, there is a lot going on, so if you are traveling to Toronto, check with your hotel’s concierge to see what is on the calendar while you are in town.
The big event is Canada Days, which runs from June 30 to July 3 with the main celebration occurring on Canada Day, July 1. The four-day festival will include events at Nathan Phillips Square, where you can take a selfie with the illuminated 3D TORONTO sign in front of City Hall, which is sporting a new red maple leaf by the final “O.” But many events, such as Canada on Screen, a showcase of 150 movingimage works from Canada’s history, are ongoing. You can catch a screening of the features, shorts, documentaries, animation, television, experimental works, music videos, commercials and moving-image installations at the TIFF Bell Lightbox, the hub for the Toronto International Film Festival.
Likewise, the Toronto Symphony Orchestra will perform existing and new Canadian music throughout the year, from indigenous to indie to classical and cutting-edge. The government of Canada chose the orchestra to present Canada Mosaic, a Canada 150 Signature Project. As part of the project, the orchestra has co-commissioned two-minute works, “Sesquies,” from 38 partner orchestras in every Canadian province, which will premiere in Toronto.
While there are no official restaurant events scheduled, homage must be paid to this global foodie city. To quote David Chang, who has five restaurants in Toronto and is widely considered to be among the best chefs in the world, “If people ask me, ‘What do you think could improve in Toronto dining,’ I’d say there’s nothing to improve on.” Nevertheless, Toronto chefs continue to raise the bar. Five of Toronto’s restaurants made the top 10 on the 2017 Canada’s 100 Best (alas, not 150) list: Alo (1), Edulis (5), Buca Yorkville (7), Canoe (8) and Dandylion (9). As the magazine’s editor, Jacob Richler, says, “That is total domination of fine dining.”
Hartford is known as New England’s rising star. It’s a smaller city but has a lot of energy. This is partly due to the number of colleges—UConn-Hartford, the University of Hartford, Trinity College and Wesleyan University— which makes for fun and exciting Friday nights. But we also have a diverse ethnic population that adds richness to our food, entertainment and arts.
We have an extensive choice of cuisines for a city our size. Restaurants range from upscale American to Italian, Portuguese, Caribbean, Asian and Mexican.
Favorite new restaurant
It’s hard to choose, but I’d say Bear’s Smokehouse for southern barbeque, Metro Cafe Hartford for a good breakfast and lunch, and Salute or Firebox, both farm-to-table restaurants, for dinner.
Carbone’s Ristorante. This northern Italian restaurant opened in 1938. It’s old school, with photos of local politicians, celebrities and athletes hanging on the walls. The traditional Italian food is great. I love the salmon, calamari and veal.
Hartford Marriott Downtown by the convention center. It is conveniently located off Interstates 84 and 91 and in walking distance to the Front Street District, a dining and shopping corridor that is home to some great restaurants—The Capital Grille and NIXS Hartford, to name two.
I take clients who are staying at the Marriott to The Capital Grille. They have great drinks and appetizers as well as an outdoor seating area and valet parking. ON20 is a high-end restaurant that also serves good cocktails and has an excellent view of the city.
Real Art Ways in the funky Parkville neighborhood is one of the country’s best contemporary arts spaces. Founded in 1842, the Wadsworth Athenaeum is the oldest continuously operating public art museum in the United States. Within the Athenaeum is the Amistad Center for Art & Culture, which opened in 1987. It houses art, artifacts and popular culture objects that document the experience, expressions and history of people of African American Heritage.
Bushnell Park is the oldest publicly funded park in the United States. It is a great place for a run or bike ride, as is Elizabeth Park, which has a beautiful rose garden in the center. It was the first municipal rose garden in the country and is the nation’s third largest rose garden today.
Of Americans have tried to find out before getting care how much they would have to pay out of pocket—not including co-pays—and/or how much their insurers would pay.
Of insured people with deductibles above $3,000 say they have tried to find price information before getting care.
Of Americans say there is not enough information about how much medical services cost.
Source: Public Agenda, “Still Searching: How People Use Health Care Price Information in the United States”
What makes price transparency so complex is different numbers are important for different stakeholders. In addition to the theory that cost and quality-of-care transparency will drive consumers away from low-value providers, some experts believe that being labeled as low-value on its own could propel providers to improve their quality of care for the sake of their reputation.
So, while consumers may respond more to cost information that is directly related to their out-of-pocket spend or relevant to their particular situation, providers may be more affected by costs that demonstrate a low quality of care. According to a 2012 Health Affairs article, those cost measures should have a clear association with the quality of care. “Examples include re-hospitalizations, costs associated with potentially avoidable complications or ‘never’ events, or use of high-cost high-radiation risk imaging for back pain. All of these might be viewed by providers as potentially avoidable costs that clearly result from poor-quality health care.”
Doctors are seen as trusted sources of price information. In a report about how consumers use healthcare price information, Public Agenda found 77 % of Americans trust their doctors a great deal or some when it comes to finding out about the price of medical care. It also found 70% of Americans think it is a good idea for doctors and their staffs to discuss prices with patients before ordering tests or procedures or giving referrals.
Yet only 28% say a doctor or their staff has brought up price in conversation with them.
The fact is, physicians can use cost and quality information to have a more informed dialogue with their patients. As noted in a 2014 West Health Policy Center analysis, “Some argue physicians can, in principle, use price information to guide patients toward higher-value treatment options and providers. To do so, physicians need to embrace frugality as a value, and they need data on the cost to the healthcare system of the treatments they are ordering and the cost differences between treatment options. They also would, ideally, know patients’ out-of-pocket obligations.”
Employers, health plans and policymakers can use this information to see patterns of patient care, levels of competition, etc. According to the West Health Policy Center analysis, the price transparency discussion usually focuses on providing patients with information on out-of-pocket costs. “That focus is far too narrow. Shopping for healthcare is a multistep process involving five key audiences—patients, physicians, employers, health plans and policymakers—each with distinct needs and uses for price information.”
Some employers and insurers have adopted reference-based pricing as an alternative way to manage healthcare costs. In this approach, insurers offer a maximum price they will pay for specific procedures (which would potentially be based on some percentage of Medicare pricing), especially those that have a wide price variation. Providers who agree to the reference price are “in network” and those who don’t are not. If a plan member chooses an “out-of-network” provider charging more than the reference price, that person is responsible for the price difference. Reference-based pricing operates on the premise that members will shop for providers and providers will lower their prices to be considered “in network” or at least come close.
“The advocates of reference-based pricing would like to be able to bring an even playing field to the table and say, ‘OK, I get that you’re going to charge more than Medicare. But can we have some consistency here?’” Cruickshank says. “Then we’ve got no variation. There’s no more games being played. We’ve got transparency.”
A 2016 investigative report in the Journal of the American Medical Association suggested reference-based pricing could help create a larger incentive to search for lower-cost providers. “Because patients are responsible for the ‘last dollar,’ they may be more cost conscious, even for higher-priced services such as surgery,” the Journal reported. “Bonus programs in which patients receive incentives if they receive care from less expensive clinicians or facilities may also increase patient interest in price data.”
Some recent examples have shown success. The California Public Employees Retirement System (CalPERS) enacted reference-based pricing and found price reductions for certain procedures. According to a Health Affairs blog co-authored by Ann Boynton of CalPERS, the use of reference pricing for inpatient orthopedic surgery “led to significant price reductions from some of the hospitals whose initial prices were above the CalPERS payment limit. These price reductions have increased; the number of California hospitals charging prices below the CalPERS reference limit ($30,000) rose from 46 in 2011 to 72 in 2015.”
The report noted that reference-based pricing helped not merely to slow the rate of price growth but to reduce actual prices. At CalPERS, the first two years of reference-based pricing provided savings of $2.8 million for joint replacement surgery, $1.3 million for cataract surgery, $7 million for colonoscopies, and $2.3 million for arthroscopies.
Some critics question whether those savings have led to a diminished quality of healthcare. In fact, another Health Affairs blog noted, “The CalPERS experiment’s quality metrics were crude, limited to aggregate prospective and retrospective factors such as readmission rates, complications and infections. CalPERS did not apply the most important quality measure of all: Were patients able to walk after surgery? The experiment lacked outcome measures and any individualized assessment of quality.”
The CalPERS response acknowledges the general lack of robust quality-of-care measures in our healthcare system and notes the “reference pricing initiative took into consideration all the quality measures that were available to it. None of our critics’ preferred cost-reduction strategies…have better measures of quality; many of them forgo quality measurement altogether.” What the strategy did do, CalPERS says, was to “encourage patients to use high-volume hospitals and surgeons who benefit from experience to obtain good outcomes as well as lower costs.”
Quality-of-care concerns aren’t the only issue raised by critics of reference-based pricing. Another is the administrative burden placed on both consumers and HR staff. A Lockton white paper details a midsize employer’s successful transition to reference-based pricing, with level premiums, decreasing deductibles and even billing errors uncovered by employees.
Yet Lockton also details the struggles with the move. “A very small staff was responsible for following up on balance bills and working with partners to ensure employees were not left with additional costs.” Employees were also threatened with collections, and preventive care cases had to be negotiated on a case-by-case basis.
With mixed results, reference-based pricing will likely remain part of this conversation, though Cruickshank believes it will take the support of an administration to really take hold. “To force everybody into a consistent compensation system around what percentage of Medicare you’re being paid,” he says, “it’s going to require legislation probably to unmask it.”
If you’re following the money, what does that mean to you?
According to startup research firm Venture Scanner, startups that are designed to help people search for healthcare solutions (including providers and plans) have raised $2.5 billion to date, startups that provide employee benefits platforms have raised nearly $1.4 billion, and startups that focus on health management have raised $2 billion.
These companies perform a variety of services. After all, our healthcare system is complicated, with a lot of pain points that need fixing. One of the most pressing issues is the unsustainable cost trend. According to a PwC Medical Cost Trend report released earlier this year: “In the early 2000s, price and utilization were both major contributors to healthcare trend growth. Since then, the utilization trend has declined while the price trend grew…. Health benefit costs will be unsustainable in the long run.”
Yet while costs rise, most consumers have no idea what they’re spending. “While the escalation of the high costs of large claimants is a major economic problem in the system, still there is too much waste and variability in what things cost,” says Brad Plummer, senior vice president of the employee benefits practice at Cottingham & Butler. “When you connect the consumer to the provider with transparent costs and remove the opaque PPO/carrier system, you get efficient markets.”
How does insurtech propose to help? Price transparency is just a start.
Nothing “Consumer” About It
In response to the healthcare cost trend, employers have begun to shift more of the burden to employees. According to PwC, “63% of employers offer a high-deductible plan with a health savings account, and 25% offer a high-deductible plan as the only health insurance option to their employees.” But as consumers bear more of the upfront, out-of-pocket costs of their healthcare, cries for a more realistic, consumer-like experience are growing.
“With the rise of consumer-driven health plans, the need for price transparency has become even more critical,” says Seth Cohen, vice president of sales and alliances at healthcare tech company Castlight Health. “It’s debatable how important that information is when every member has a $20 co-pay, but when a member has a $3,000 deductible, then that information becomes really critical. And so, a lot of people say there’s nothing ‘consumer’ about a consumer-driven health plan without consumer-like information.”
Consumers certainly have a right to ask. Many research studies, for example, have shown wide variations in prices for the same procedure. And Castlight Health’s own price map shows that a lower back MRI in Miami costs from $714 to $3,164, while prices for a mammogram in Miami range from $96 to $510.
Cohen says it goes beyond medical, with pharmacy pricing playing a critical role.
“Price transparency in pharmacy is really important,” Cohen says. “A lot of people don’t know that the price of a pharmaceutical actually varies pretty significantly depending on whether you’re at Costco or Walgreens or Walmart or CVS.” The amount consumers spent at their pharmacy—while still a relatively small portion of employer health benefits—had the steepest rise in the share of employer health costs (a 21% increase since 2007) in PwC’s Medical Cost Trend report.
Yet according to public policy advocacy group Public Agenda, 51% of those who have not pursued price information before getting care indicate they are not sure how to do so.
Sometimes, even providers are not so sure. When we talk about the healthcare delivery system, says Rod Cruickshank, president and CEO of The Partners Group, “none of the actors know what the price is, nor are they interested. If we are trying to create transparency in healthcare purchases, we have to understand the problem from the delivery side’s perspective.”
The Rise of Value-Based Payments
There is an expectation that, if costs are made readily available to consumers, they will use that information to choose a lower-cost provider. Higher-cost providers will then begin to lose market share and lower their prices.
A lot of people say there’s nothing ‘consumer’ about a consumer-driven health plan without consumer-like information.Tweet
This notion has a considerable amount of buy-in. “About eight years ago…there were very limited efforts by health insurance companies but nothing meaningful,” Cohen says. “We encountered a lot of resistance initially to it. But I think now price transparency has kind of been accepted almost universally as a must-have. I have yet to encounter any employer, any broker, any consultant who would say price transparency is not important.”
Wade Olson, national practice leader of employee benefits for BB&T Insurance Services, agrees. “There’s always been Medicare data that’s given us some basic elements of price and quality transparency but never really on the commercial side,” he says. “Over the last four to five years, there’s been a lot more focused effort from technology companies and technology platforms to align cost and quality outcomes.”
Underlying factors help drive this change. The healthcare community has recognized for a number of years now that our system doesn’t work. Throughout the 1990s, healthcare leaders, policymakers and even the public began to acknowledge the system is costly, inefficient, even potentially unsafe. A 1999 Institute of Medicine report found perhaps as many as 98,000 people die in hospitals each year as a result of preventable medical errors. It called for leadership, measured improvement, and mandatory quality reporting. The report helped catalyze the already burgeoning quality movement, and patient safety and quality care rose to the forefront of industry conversations.
It would have been impossible to truly change healthcare delivery without changing the fee-for-service system, which exacerbates quality-of-care issues by rewarding providers for volume and intensity of services.
Thus began the movement toward a value-based payment system.
At first, the Centers for Medicare & Medicaid Services (CMS) and state governments used demonstration projects, such as voluntary public reporting of quality data, to work toward this goal. But in 2010, the Affordable Care Act put many of those reforms into law, including the Hospital Value-Based Purchasing Program and the Hospital Readmissions Reduction Program.
Those ACA mandates, both of which incentivize quality care through Medicare payments, have been an important part of fostering change in pricing transparency because they help change the focus of payment to value and outcomes instead of the number of patients seen.
“Before the ACA…the discussion among physicians and hospitals and payers to collaborate on quality and risk were really, really rare,” Cruickshank says. “But everybody now is at the table talking, so that’s movement.”
That collaboration among players is critical for change. “The ACA places a focus on wellness and outcome-based results versus discounted fee-for-service activities,” Olson says. “The carriers are adopting fee-for-value payment programs, and the health systems are recognizing the need to have outcome-based incentives as a key part of their revenue generation model.
“So, if I’m paying a provider less on a discounted fee-for-service activity and more on an incentive to deliver value to that membership, it has to be supported by the insurance carriers as well as the health community,” Olson says. “You have companies like Mobile Health Consumer, Castlight, and many others that focus on transparency of cost and quality. That is being integrated into the insurance carrier’s model to incentivize the members to leverage that data and control their own consumption based upon the cost and quality information they see.”
Not Price But Value
While the industry has made improvements in getting pricing information more publicly available, the same can’t necessarily be said for information on quality—and one without the other is useless. In fact, some argue that price transparency itself is not a good thing, because price information alone could do more harm than good.
According to Health Affairs, a leading journal of health policy issues, evidence suggests consumers associate high cost with value in healthcare, believing that more care is better and that higher-cost providers provide higher-quality care. “The potential hazard of only publicly reporting cost data is that consumers will use the cost information to select higher-cost providers,” Health Affairs reported. “Overcoming the ‘more is better’ belief and communicating that lower cost is not compromising on quality are key challenges in publicly reporting cost data.”
“No one wants the cheapest doctor,” Cohen says. “I think this is where insurance companies still have the biggest challenge—they’re really hard-pressed to show meaningful, quality information. “If you are an insurance company responsible for contracting with a network, with a provider, how can you turn around and tell your members that provider you just contracted with is below average? They’re in a really difficult spot to objectively distinguish lesser and better performers.”
The promise of these tech-driven healthcare companies, such as Castlight, is to be that objective third party that can provide that extremely important information on quality of care. “We don’t have a conflict of interest with the provider community,” Cohen explains. “We are able to tell you this provider is really bad and you should stay away from them.” Castlight works with numerous partners to provide more objective information on quality of care, including The Centers for Medicare & Medicaid Services, The Leapfrog Group, the NCQA and other regional groups.
The promise of these tech-driven healthcare companies…is to be that objective third party that can provide that extremely important information on quality of care.Tweet
By adding quality-of-care information alongside pricing information, you can then have a conversation about value. “You don’t know if a lower cost is a good thing or a bad thing unless you know how that ties to the outcomes from a health perspective,” Olson says. “A higher-cost setting with high quality of care, improved outcomes and lower infection rates all factor into the value proposition of that provider. Ultimately, that higher cost setting can deliver much greater value for the member and plan sponsor than a lower-cost, lower-quality facility.”
Government Leads the Way
The Affordable Care Act represented a significant legislative push toward a value-based payment system. How that will continue is uncertain, but as Olson says, “Long term, this change to value in payment is definitely going to be a key component in the revenue model for carriers and healthcare providers. I think the health systems and the doctors offices will have a transition period…but I think as they start understanding fee for value and the outcome-based rewards they receive, they will start shifting more and more of their operating model to those outcomes. This operating focus on value from the providers is ultimately best for the consumers as well as for the financial integrity of the healthcare system overall.”
The government has continued to play a role in increasing price transparency at both the federal and state level. For example, a 2014 West Health Policy Center analysis notes that in April of that year, the Centers for Medicare & Medicaid Services “made a massive Medicare physician claims dataset freely available online.” This was in response to a Freedom of Information Act request by Consumers’ Checkbook, a nonprofit consumer organization. The goal of releasing such a large volume of claims data with physician identifiers is to help stakeholders gain an understanding of “the efficiency and treatment patterns of individual physicians and physician groups.”
For a number of reasons, it’s important that CMS continues to push in this direction. “What has historically happened is that nobody adopts anything unless CMS adopts it first,” Cruickshank says. “As a provider, you know that if something gets installed through Medicare, it’s eventually going to play out in the other lines of business at some point.”
It helps to understand how healthcare is delivered. “Most of the money that runs through the delivery system is coming from the over-age-65 group, and that’s Medicare,” Cruickshank says. “That’s why we’ve got to remember when we’re talking to payers, if we’re only talking about employer-sponsored healthcare, we are not being heard. We are not their number one revenue source. The minute I start talking about Medicare, Medicaid and commercial…now I’ve got their attention, and we can conduct change.”
State governments have also made movement toward price transparency. According to the 2016 Report Card on State Price Transparency Laws, compiled by two independent health policy organizations, “Most states have approached the subject of price transparency at the legislative level, as only seven states have no statutes addressing it. But in 37 other states, the lack of transparency comes from weakness in the design and implementation of their laws.”
The report card, produced by the Health Care Incentives Improvement Institute and Catalyst for Payment Reform, notes a trend in proposed state legislation that directs providers or insurers to give consumers price information prior to care. The report card acknowledges that, while this is a step in the right direction, this type of legislation alone is not robust enough. Pitfalls to this approach include the fact that providers and insurers do not use a consistent approach to calculating and presenting pricing information, “making it very difficult to comparison shop.” Instead, the report card rewards states with a mandated all-payer claims database (APCD) and states that publish those data on a well-designed, state-mandated website. All-payer claims databases collect data on paid amounts for services from a range of sources, from private insurers to Medicaid to self-insured employer plans.
While this information is intended to improve price transparency, consumers aren’t the only stakeholders who could benefit. The West Health Policy Center notes, “Patients may occasionally consult APCD-based hospital price reports, but they are not the primary audience. The more significant audiences for these price reports are employers, health plans and policymakers. Employers can use the price data to identify high-price providers and, with health plans, develop strategies to steer patients away from these providers. Policymakers can use the price reports to assess the level of competition, or lack thereof, in the market for hospital care.”
Another key takeaway from the report card is the importance it places on the presentation of the information—not just the collection of it. As report card contributor Judith Hibbard of the University of Oregon writes, “The benefits of transparency are only realized, however, if consumers attend to and use the information in making choices. We know from years of experience and decades of research with health care quality transparency efforts, that the way in which information is displayed and presented can make a difference in whether it is understood and used.”
This is a critical point—and a key focus of some healthcare tech companies. As many are learning, just because you put the information out there doesn’t mean consumers will use it.
According to a 2016 study in the Journal of the American Medical Association, “Low utilization is the most commonly reported challenge to price transparency initiatives by insurers who offer tools.”
Why? Many find the information difficult to understand or irrelevant to their situation. Or they just aren’t used to shopping around for healthcare providers and services.
If You Build It, Will They Come?
Cohen says Castlight worked hard in its early years to obtain and publicize information about healthcare costs, a process he calls “a really big challenge.” He said the company figured as long as it made that information freely available on a consumer-friendly site, consumers would flock to it. “If you’re responsible for the first $3,000 out of pocket, well, of course you’re going to want to know how to spend that money wisely,” he says. Yet that “hypothesis,” Cohen says, had a “mixed result.”
We have to rethink how we procure and then make the most of this innovation, because I think if we just look at the health plans of health insurance companies, we’re missing it.Tweet
“It’s not just a given people will use this information,” he says. “In fact, it’s really, really hard. Healthcare is a very emotional purchasing decision…. And unwinding those habits…it’s a really hard behavior change.”
Cruickshank agrees. We could create all of the transparency in the world, but ultimately, he says, “Nobody cares about transparency until they are going to be a user in the system. What’s the number one response to a $5,000 deductible I don’t want to spend? I don’t go to the doctor until I have to. We’re delaying care.”
Noting the rapid rise of high-deductible health plans, Cruickshank asks, “Is it good?” He’s not sold on the value of these benefit designs for employers or members, and he questions whether the experiment is working, whether the system itself can yet handle the trust necessary for consumerism to work. And yet, he provides a clear picture of how, once a movement gains momentum—once people trust it—we can, indeed, change.
“Remember when no one bought anything on the Internet?” he says. “And there were the early adopters who said, ‘No, I trust the Internet, and I’ll make purchases.’ But for a while there, it was a big unknown. Will anyone use it? Will they give up their credit card number to this system? And we watched adoption move slowly, slowly, slowly until we jumped over this cliff to where now everybody buys everything on the Internet. As soon as convenience is given without risk, people will do it.”
Incentives and Accountability
One group that has a significant amount of control—and may not be leveraging it—is employers. According to a 2016 report by the Kaiser Family Foundation, employer-sponsored insurance covers about 150 million people in the United States, more than half of the non-elderly population. And, as Olson explains, “the employer has a pretty strong influence over how members consume medical goods and services.”
“Medicare and Medicaid aren’t sensitive to consumerism,” Cruickshank says. “So when it comes to what are we going to do as a country to have more affordability, it probably is going to be that we’ve got to do something that lowers the cost of the employer-sponsored plan. That’s the one that seems to be visible and seems to be absolutely out of control.”
One of the ways employers can influence consumer behavior is with plan design, and this means more than just offering a high-deductible healthcare plan. “I think the future success of employer-sponsored health plans should really focus more on how the employer can position the program to influence the membership as the key stakeholder in driving positive change,” Olson says. He likens it to the auto and home insurance industries, where riskier insureds—e.g., 19-year-old male drivers—pay more. “If you’re a smoker and you become a nonsmoker, you should get a discount on your premiums. If you improve your BMI to a targeted level, you should be rewarded for that behavior and lifestyle change that improved your health and reduced your future risk of incurring claims.”
Obviously, this requires data about employees’ health. And for companies that don’t have the resources to collect, mine and communicate about the data themselves, “It’s really the broker/consultant who should be partnering—either internally or externally—with an effective data analytics company and linking individual member data with an effective outreach program to drive lifestyle and behavior modification at the member level,” Olson says. “[Using] claims data from the insurance carriers in such a way…is the key leverage point for an integrated data system.”
Yet the matter of engagement persists. You can’t tell people that they will be penalized or incentivized for XYZ and then just walk away. At the same time, how do you incentivize healthy people—those who won’t benefit from lifestyle incentives—to engage at all? One possible answer is to meet them where they are.
Building a Community
When Castlight Health realized people weren’t just going to start using their hard-earned pricing information automatically, the company shifted its approach. “What we have to do is really provide a more comprehensive platform to help people engage in their healthcare needs and benefits holistically,” Cohen says. So the company became a healthcare information destination, answering questions ranging from “What is a deductible?” to “How do I lose weight?” The company believes the more comprehensive approach is critical to engaging more consumers.
Cohen says timing also poses one of healthcare insurtech’s biggest challenges. Instead of targeting the generic open enrollment period, he says, “let’s stop communicating a bunch of stuff to people when they don’t need it.” Instead, use the data they have to send timely, targeted messages. That could mean using pregnancy claims data to determine when people may be looking for other labor and delivery information or sending checkup reminders based on doctor visit history.
Olson believes another key part of fostering engagement is helping people become comfortable with communicating via the technology, which could require some incentives.
“With Mobile Health Consumer, we can put a health assessment on the mobile tool and require employees to download the app and take their health assessment to be eligible for incentives for healthy consumer activities,” he says. Once people have taken that step, he explains, you can use data analytics to understand their health needs and communicate personalized information to them on their phone. As they begin to see value in that messaging, they become part of that community, and you can drive lifestyle behavior modification. “This activity will ultimately help members reduce their claims because they’re more engaged in managing their health. Those engaged members know they have a resource they can rely on because it’s been a credible tool in the past.”
One of the arguments against consumerism in healthcare is that only certain procedures are “shoppable.” According to a Health Care Cost Institute study, “At most, 43% of the $524.2 billion spent on healthcare by individuals with [employer-sponsored insurance] in 2011 was spent on shoppable services.” These are services such as colonoscopies, lab tests and imaging tests—procedures you can plan for. And it’s true in a sense—if you have an emergency and are rushed to the hospital, you’ll go where the ambulance driver takes you.
What’s the number one response to a $5,000 deductible I don’t want to spend? I don’t go to the doctor until I have to. We’re delaying care.Tweet
But, as Cohen explains, it’s a long-term process of engaging in your care. Whether it’s gaps in medication adherence or receiving care in a poor-quality setting or just not at all, “catastrophic claims emerge often because people are not managing their preventative care. And that’s a huge priority area for self-insured employers and totally insured companies alike.”
Know Your Clients
For a broker, there’s a lot to know. First, there’s knowing your clients. Olson says good brokers and consultants help clients understand how an employee benefit program design can support their core business strategies. “It’s not so much about short-term cost savings as it is about long-term risk mitigation and risk management,” Olson says. “The marketplace is not placing much value on a broker or consultant who is just placing product annually then going away. Technology can drive efficiencies but not necessarily effectiveness of solutions.
“We spend 95% of our time at a prospect meeting understanding their business issues and their business strategies. We want to understand how they compete in the market, what challenges they are facing, and how their total rewards system is helping them attract and retain talent. Your business focus and technical expertise has to be much broader in the areas in which you provide advice and guidance for your customers than it was five years ago.”
Then, there’s knowing the options and where to find them. “Part of the job of the consultant or broker is to help clients take advantage of innovation, right?” Cohen says. “And to help them adopt new strategies and tools to address persistent problems in the healthcare space. Given that, I would say the focus of innovation is rapidly moving away from the places we used to see it.”
Long term, this change to value in payment is definitely going to be a key component in the revenue model for carriers and healthcare providers.Tweet
Healthcare innovation used to lie in carrier headquarters, such as Indianapolis or Hartford, Cohen says. Brokers would see what the carriers were offering and bring it to their clients. Today, Cohen says, many employers are moving to what he calls “best of breed” models. “Instead of relying on single health plans for all of the capabilities you need, let’s take advantage of the proliferation of innovation that is taking place in Silicon Valley or in Austin, Texas, or in Boston.”
The point he makes is this: all that funding flowing to health insurance tech companies is not going to carrier headquarters; it’s likely going to Silicon Valley—or, as Cohen says, “to 700 app vendors.” That shift also changes the roles of brokers and consultants, he notes, because procuring a pilot with an app vendor is different from procuring health insurance. Communicating these options is also different. “If you have 17 different programs available to your employees, you need a very different communications plan and platform,” he says. “We have to rethink how we procure and then make the most of this innovation, because I think if we just look at the health plans of health insurance companies, we’re missing it.”
But how do you choose? “You don’t want to just have something to have it,” Olson says. “There’s so many different tools and so many different applications of those tools that I think what you really need to do is step back and analyze what is the core problem we’re trying to solve. Then you need to confirm the key objectives and ask what stakeholders in the delivery model this solution or technology brings value to. Key healthcare stakeholders include the insurance carriers, the health systems, employers, employees and their family members, the government and the consultant/broker. How can we have an integrated approach that’s going to bring value to all stakeholders? Once the goals are defined, you start building that integrated model. If you’re building it with that in mind, you will make better decisions, and you go from where you are to where you want to be in a more effective and efficient way.”
Finally, brokers should know the healthcare landscape. Cruickshank says brokers need to learn more about how public entities such as Medicare, Medicaid and CMS operate. As he says, “Be more fluent in the public domain.”
The mandates imposed by the Affordable Care Act, Olson says, helped align different healthcare stakeholders around better outcomes. As a result, he says, insurtech becomes a key to future success. “The more that insurtech can focus on aligning and integrating the various stakeholders in a way that brings value to each of those in their own way and then collectively produces better outcomes for the member, it is absolutely key,” he says. “It needs to be well understood by the insurance community.
Laycox is associate managing editor. Sandy.Laycox@ciab.com
The problem is a double-edged sword for women, who traditionally have become unpaid caregivers when a family member or loved one suffers a long-term care event. Compounding the problem, statistics show, women outlive men, make less money than men and are more likely to need long-term care than men.
Consider the impact of long-term care events on women:
- More than 75% of caregiving support in the United States is provided by family members, particularly women
- 66% of all unpaid caregivers are women
- Unpaid caregivers average 20 hours of support every week
- 75% of all patients in nursing homes are women.
To top it off, some complain insurance brokers and other financial advisors don’t even know how to discuss the topic with women. Pat Foley, OneAmerica’s president of individual insurance and retirement insurance, says financial services professionals have yet to learn how to approach this giant potential market.
“Women tend to be the caretakers in the family, but many times, the financial services community isn’t talking to the women about the insurance solutions that are available,” Foley says. “They tend to talk to the men about the financial situations the family needs…more than they talk directly to women.”
This is important because, according to Wendy Boglioli, a certified long-term care agent and healthy-aging advocate, women are the most likely to need care themselves. “Women take care of everybody else because we are the primary caregivers in this country,” Boglioli says. “We are also the primary recipients who are going to need healthcare in this country. We are going to live, on average, 19 years without our spouse, either through death or divorce. Women have to pay attention.”
Boglioli can’t understand why more professionals don’t recognize the financial opportunity women represent. “The women’s market is not a niche market,” she says. “We are the market. “Women over 50 years old control more than $19 trillion. They own more than three quarters of the nation’s wealth. This is a huge segment that has more spending clout than anyone else, and those are baby boomer women.”
It’s Not Just a Woman Thing
But the shortage of coverage extends far beyond just women. The U.S. Department of Health and Human Services estimates 70% of Americans older than 65 will require at least some type of long-term care. In 2015, there were 47.8 million people age 65 and older, accounting for 14.9% of the U.S. population, according to the U.S. Census Bureau. The 65-and-older population is expected to jump to 74.1 million by 2030 and 88 million by 2050. Yet only 4.8 million people were covered by long-term care insurance in 2014, according to the Life Insurance and Market Research Association.
The traditional long-term care market was primarily based on a policyholder’s health and several pricing assumptions that have turned out to be wrong. As a result, many of the original policies have experienced hefty premium increases and decreased coverage. Many insurance carriers have also left the market.
The women’s market is not a niche market. We are the market. Women over 50 years old control more than $19 trillion.Tweet
Into the vacuum a new type of product has emerged. So-called asset-based policies (also called hybrid policies) are offered on a typical life insurance or annuity chassis with riders attached to allow the policyholder to access the death benefit early for use on long-term care.
“It’s a little bit different than stand-alone because there is a death benefit,” says Dennis Martin, OneAmerica senior vice president for product and business development. “It’s not a use it or lose it. It’s more of a value-driven sale than it is a price-driven sale. People don’t want to pay money for something they think they might not need.”
That “use it or lose it” philosophy contributes to the downfall of the traditional long-term care policy. Dean Harder, an agent focused on retirement at the OYRI Group, likens the growth in asset-based long-term care sales to more consumers becoming educated to alternative approaches to long-term care. “If we go back 15 years ago, long-term care insurance was a very hot topic,” Harder says. “But what happened is that solution was filled with all kinds of fail points, and those fail points have come to fruition.
“Until it was proven that the world was round, it fell on deaf ears. Once it became clear the Earth is not flat, it took nothing for everybody to get on that side. What’s happening is the only story people really know is the health-based or traditional-based long-term care insurance. People don’t know the round world, which is the asset-based. It’s becoming more and more popular.”
The emerging popularity of hybrid policies comes at a good time, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance, but it may not be enough to head off a coming crisis.
“Baby boomers are still aging,” Slome says. “The population needs care. The population doesn’t have a plan for long-term care. Government isn’t going to be a plan for long-term care. While linked benefit products are growing, they are not expanding the market. They are just the new flavor. You’re seeing those sales go up. The more global question is: how will the nation deal with long-term care?
Michelle Prather, OneAmerica national accounts vice president for the bank and credit union channels, says a product known as Care Solutions—a variety of long-term care offerings that can be life insurance- or annuity-based—appeals to men and women. “The asset-based options we offer, where you get something whether you live on it or die and you leave it to someone, make a lot of sense to both males and females,” Prather says. “Males are, ‘Hey, I’m a built guy. I’m not going to need this.’ Well, that’s great. You have lived your life, and you pass on a contract to someone else so you haven’t wasted that investment. But ladies also have the peace of mind knowing that they have something there to take care of them when or if their spouse dies. They know they are not going to be a burden on anybody else and have all the power to make decisions about how they want to be cared for. We provide a lifetime source of income to pay for that care so that they have choices and dignity in how they are being taken care of.”
A recent white paper from Wade Pfau, a professor of retirement income at the American College of Financial Services, and Michael Finke, the dean and chief academic offer at the college, shows the advantages an asset-based policy has over traditional policies as well as self-funding a long-term care event.
The two compared asset-based policies with traditional policies and self-funding to see how a hypothetical long-term care event would affect each approach. What they found was that both comparable health-based and asset-based long-term care policies reduce the net costs of long-term care when a qualifying event has taken place. But the death benefit and the fundamentally high-deductible nature of the asset-based policy allow similar protection at a noticeably lower cost in the event that no qualifying long-term care event takes place. In both cases, knowing there is insurance available to cover major costs may free more assets to be truly liquid rather than serving as unnecessary contingency funds.
“Of course, both end up reducing costs dramatically for an expensive event versus funding for that on your own,” Pfau says. “I guess in some sense I was surprised at how much more effective the hybrid policy can be, especially on the two extremes. With no qualifying long-term care event, you get a death benefit that helps offset some of the cost. But then, with an expensive event, the hybrid policy also helps to reduce costs relative to a traditional policy.
Women tend to be the caretakers in the family, but many times the financial services community isn’t talking to the women about the insurance solutions that are available.Tweet
“It’s going to be this new approach of developing hybrid policies that can really move the needle. With more and more Americans reaching the age of needing long-term care and fewer working-age people to provide that care, anyone who can afford to might feel better off if they can pay for private care versus going into an increasingly strained Medicaid facility.”
Finke says the hybrid policies, particularly the OneAmerica unlimited benefits option, provide financial protection in the event of a long-term care event that lasts for years.
“Compared to traditional long-term care that doesn’t incorporate any life insurance element, it is a comparatively efficient way to fund long-term care expenses,” Finke says. “Particularly if you choose the option to have unlimited coverage; it covers a significant amount of expenses for those who experience a prolonged care event.
“It’ll cover a good chunk of your overall long-term care exposure, and you can often cover the rest with Social Security and other forms of guaranteed income, and it prevents you from having to deplete your nest egg.
For a relatively modest amount of money, it’s a good way to hedge against that risk of a severe long-term care event while still providing a death benefit if the insurance is not needed.”
Woman to Woman
Some suggest the male-dominated financial services community doesn’t understand how to market long-term care to women. Foley says the professional women’s marketplace is underserved by the financial services community.
“Approaching women directly about financial topics is not something that has historically been done,” Foley says. “I think that’s changing as we get more women in financial services roles, but I think we’re leaving a lot of the marketplace untapped because of the demographics of the financial services community.”
Chris Coudret, OneAmerica vice president and chief distribution officer for Care Solutions, agrees. “Some of the professionals have a stereotype of long-term care,” Coudret says. “They view it as nursing home insurance and that the other people who sell that type of insurance aren’t as sophisticated. But today, it is a financial product that is for those who are middle- to upper-income, who have income.”
Boglioli says there is a need for more female financial professionals. “It’s a great opening for financial professionals and for women coming into that career because it is so needed,” Boglioli says. “Women listen differently. They prepare for their client meeting differently. It goes back to education. A lot of advisors too often look at it as a sale and the sale didn’t work out. Women don’t make up their minds like that. We take our time.”
The asset-based options we offer, where you get something whether you live on it or die and you leave it to someone, make a lot of sense to both males and females.Tweet
Tracey Edgar, vice president of national accounts and head of the brokerage channel, says women may be better than men at selling long-term care.
“I think the long-term-care product itself, because it is a heart product and not so much a logic product, is going to be better sold by women in the long run,” she says. “I think women have a unique way of talking about long-term care. I would say that many men are going into the discussion talking about the financial implications, where I think a woman is going to talk more about the impact to a family member. There’s a big need for this message to have more women in financial services.”
Patten is a contributing writer. email@example.com
In a world where brokers face new kinds of competition and risks are emerging, expanding and evolving, what are the characteristics of a leader?
Brokers are now thinking in new ways about the services they provide and who within the firm can best deliver them. Wholesale change is not required, but top brokerages are redefining their business models to build and bolster a competitive edge. To gain leverage from their advantages, leading firms are slowly adapting the way they do business.
“With our clients facing more complex risks, we must be even more creative with our innovative solutions,” says Rob Cohen, chairman and CEO of the IMA Financial Group. For IMA, Cohen says, teamwork and an integrated approach are part of the answer. “Our subject-matter experts work closely with each other, our producers and our service teams to ensure we’re thinking of all the different aspects of our clients’ needs,” he says. “We have to watch everything, from natural disaster trends to our global political landscape, to just keep up with factors constantly affecting the way we work and live.”
Michael Victorson, president and CEO of M3 Insurance, says clients expect brokers to take a team approach when managing their complex risks. He cites Dr. Atul Gawande’s work on healthcare delivery, which stresses primary care physicians are no longer able to be and do everything for their patients by themselves.
“This same concept holds true with our producers and the work they do with their clients,” Victorson says. “In today’s market, the client requires and expects a coordinated team.”
A critical driver is the level of specialization and sophistication required to assist clients in transferring and managing risk effectively and efficiently. “No one person can be an expert in all areas, from cyber to claims, reinsurance, loss control, workers compensation, et cetera,” he says.
This shift to a multiskilled team approach has been responsive. “We have had consulting services in our company for many years, but not as our core approach,” says Dan Keough, chairman and CEO of Holmes Murphy. “This changed about five years ago when our clients needed us to better understand their challenges and search to find or build solutions for them. All we have to offer our customers is our cumulative knowledge to solve their problems and help them manage their cost. Our culture is key to our ability to work together as a team to serve our clients.”
The emphasis on culture is reflected in Holmes Murphy’s approach to helping its clients. The company explores clients’ corporate cultures to gauge how they affect their financial decisions. “We are also looking at ways to simplify complex issues like healthcare, to demonstrate the impact we can have on their business,” Keough says.
Taking the Long Road
Before we had a grasp on our analytics, measuring success meant intuitive assumptions that may or may not be relevant to the results. Now, we use analytics to fine-tune strategies that drive value for our clients.Tweet
Wortham chairman Richard Blades says his company operates in a similar way, acting as more of a consultant to clients than simply as a salesman or a transactional brokerage. “It is important to execute the transaction exceptionally well,” Blades says. “However, you need to take the long-term approach with clients and offer them consulting on the appropriate program structure and to manuscript the coverage to fit their particular needs.”
In Blades’ view, a long-term perspective is critical when designing a risk-management program, since clients buy insurance over many years, not just once. He says brokers should approach the market and negotiate the best program structure, while ensuring that doors are left open for clients in case they want or need to make changes to their program or carriers.
Part of this can entail the development of mutually beneficial relationships between brokerages and carriers that ultimately provide a lower total cost of risk over an extended period of time, Blades says, since this comprehensive, future-oriented approach leads to high levels of client retention.
Victorson says his firm is now behaving like a consultant, even before his people get through the door. “If M3 approaches clients in a transactional way or with a transactional mindset, then that’s exactly how we will be viewed and treated,” he says. “We have made significant progress, collectively, in our consulting mindset and business plan execution orientation.” The types of questions and issues clients bring, he says, act as a litmus test to gauge M3’s progress in this area. “When our clients look to us for advice on critical business matters that may have little to do with insurance but have a significant impact on their business, we feel like we have achieved the level of advisor.”
This change in the nature of leading broking houses is having an impact on revenue streams. M3 has seen a significant growth in fee-based (over commission-based) remuneration. “Over the last five years, our fee-based revenue as a percentage of our total producer revenue has more than doubled,” Victorson says. He expects the trend to continue, both for M3 and across the brokerage industry. “Looking forward, we also believe there will be an upswing in at-risk compensation models which put a percentage of fees at risk based on our performance.”
Diverse Talent Fuels Growth
The move from purely transactional broking to consulting means broking firms must become more complex. One clear reflection of this evolution is the expanding nature of the specialist position, from the front line to an enlarged C-suite. To deliver and manage consulting services requires new skills, which means hiring different types of people who have the appropriate expertise.
TrueNorth was formed in 2001 through the merger of three companies and targeted staged growth. Duane Smith, CEO and president, and his partners have built the company to $70 million from a revenue base of $9 million over the last 15 years.
“Early on, the six original founders realized we were good salespeople but not great at running the operations of our business,” Smith says. “One of the first decisions we made was to add a chief financial officer and a chief operating officer to focus on running the business so we could continue to focus on growing it.”
TrueNorth set six revenue-based thresholds as benchmarks for its growth and development. “What we didn’t realize is that, at each of the additional revenue levels, we would reach another ceiling of complexity that we would need to break through to continue to evolve and grow,” Smith says. “As we reached new levels of complexity, we were forced to step back and reorganize to continue our journey.”
Looking forward, we also believe that there will be an upswing in at-risk compensation models which put a percentage of fees at risk based on our performance.Tweet
They added talent at each level: legal, loss control, HR, IT, training and development, financial analysis, software developers, project managers. “The list goes on,” Smith says. “Without these investments, we could tread water and manage expenses, but the ability to grow would taper off.”
Holmes Murphy also added talent as it evolved. “Diversifying our skill sets has fueled our company’s growth over the past several years. Hiring actuaries and attorneys has become our norm,” Keough says. Most recently, the company employed doctors to help clients understand how to get to the root cause of their healthcare issues and to drive down and manage their costs. “This has become our fastest-growing division,” he reports. “We’ve also brought on an individual who was successful in consumer engagement at a major airline, and we are bringing risk managers on board to better understand our clients’ needs.”
Cohen says IMA tries to stand out through its ability to attack problems and drive client results at “a much higher level.” People are at the core of that ability. IMA was one of the first insurance brokerages to hire a risk manager to help make clients’ working environment safer, he notes. “That tradition continues today by looking outside the traditional scope of insurance,” Cohen says. “We continue to hire people with advanced knowledge in their industries.”
The head of IMA’s energy practice is a former oil and gas company president. IMA has also looked outside insurance to make similar hires in areas including law, consulting, technology and construction. Hiring experts builds the company’s tradition of thinking beyond the customary definition of insurance, Cohen says. “They solve our clients’ complex problems, which also reduces risks that weigh on the performance of their companies.”
Data Are Only (an Important) Part of the Equation
The change has reached the very top, into IMA’s C-suite. The company recently created the entirely new position of chief data officer. “Data will have a huge impact on our industry and the way we do business,” Cohen says. “We’ve invested heavily in the ability to make internal, data-driven decisions. Under the leadership of our new chief data officer, we can run analytics reports in seconds that would previously take a week.” Cohen says the level of insight this analytical function delivers is unmatched by IMA’s peers.
Analytics are also an important tool at Wortham, where data specialists assess exposures and design the most appropriate insurance program for each client, based on the client’s unique risk profile. But Blades is wary of relying entirely on big data analysis. Traditional broking skills remain paramount. “The analytics are only a part of the equation in designing the program,” Blades says. “For instance, Wortham spends a considerable amount of time trending and developing assured’s losses and exposures to quantify the projected loss pick. This enables us to negotiate the appropriate collateral with a carrier and determine the optimal retention.”
Wortham reviews modeling results for catastrophe exposures while also consulting traditional engineering reports for estimated maximum and probable maximum loss figures.
“We use this analysis to assist in determining the assureds’ appropriate property and business interruption limits,” Blades says, “as well as any particular sub-limits for catastrophe coverage.”
Cohen says the ability to tame data has become essential. “Analytics are becoming required for businesses to succeed,” he says. “Customers expect the right product at the right time and at the best price. Before we had a grasp on our analytics, measuring success meant intuitive assumptions that may or may not be relevant to the results. Now, we use analytics to fine-tune strategies that drive value for our clients.” He believes the industry is facing a pivotal time and must “challenge the norm while remaining true to our tradition of excellence.”
As we reached new levels of complexity, we were forced to step back and reorganize to continue our journey.Tweet
Clients are expecting solutions that fall outside the traditional definition of insurance, he says. That demands brokers find solutions to their customers’ biggest pain points. “If not,” he says, “a dot-com, a search engine or a startup will. We have astute customers that expect us to be the beacons of innovation.”
Victorson believes the current wave of new approaches is more than a fad. “Innovation will continue to be a part of our industry, regardless of services that brokers provide or the delivery model and technology they use,” he says. To that end, M3 is closely following the evolving role of insurtech companies and evaluating how emerging technology might allow his brokerage to create a better client experience while making the firm more effective and indispensable to customers. But it will not be a bit of technical wizardry or a special approach alone that will deliver continued success. Another fundamental must underlie all that, as Victorson knows: “As always, the focal point of our evaluation will be our clients and acting in their best interest.”
Blades expects the evolution of the brokerage model to continue, especially in personal lines and for small commercial accounts. To survive, brokers must ensure they add value to their clients’ risk-management practices and insurance-purchasing processes.
“If we are not adding value, clients will start going more directly to carriers and/or buying coverage from an online platform,” Blades says, noting that they may very well return to a broker once they have experienced a claim that has not gone the way they would like.
“Our business model will continue to provide clients with value-added services and a consulting approach to achieving the optimal insurance program while reducing the overall total cost of risk,” he says.
Diversifying our skill sets has fueled our company’s growth over the past several years.Tweet
Amid the changes taking place in the ways brokerages do business, the best firms continue to focus on the traditional traits that make and sustain a leader: they are client-focused, striving to understand each client’s specific risk challenges and opportunities, and remain intent on adding value to their clients’ businesses.
That, they agree, will always be a winning formula.
Leonard is chief of the Foreign Desk.
But it’s a battle many companies are losing because they don’t have the time to figure out what makes their employees tick and how to keep good talent on board.
“The war on talent has never been stronger and more in the forefront,” says Bruce Whittredge, vice president of sales for major accounts at ADP. “This is actually the first time we’ve had a shortage of qualified talent in some of the white-collar industries.”
The challenges of finding and keeping talent provide human resources departments an opportunity to lead. But at many businesses, HR is mired in a day-to-day tactical mode, administering payroll, taxes and benefits instead of engaging in the strategic planning it takes to position their companies for success.
That’s why human capital management, or HCM, is evolving into the next big thing. Companies such as ADP and others can take over the administration of day-to-day HR tasks or provide advice on problems specific to individual companies, which can free HR to work strategically.
Anne Burkett, national practice leader for HR technology at USI Insurance Services, says many clients her company encounters are still struggling with manual entry of data into multiple systems—recruiting, payroll, benefits administration—and the transferring of data that entails is time consuming and prone to errors. The introduction of automated systems such as ADP offers consolidates data and makes it ease through the system.
“What I’m typically getting from a recruiting standpoint is they are either manually handling that or they have all these little workarounds in Excel or whatever they are using that is tied to their payroll,” Burkett says.
“Typically what we see is all of these manual keystrokes. It starts with recruiting, and then you’ve got to get background information and on and on. And then you take a client from a typical picture to here’s what it should look like with all of those being automated, and then there’s very little requirement on the HR staff. It’s certainly fun to watch their eyes light up.
“One of the most important things I hear continuously from HR is ‘I’ve got to be more efficient,’” Burkett says. “I have to automate in every place that I can, in a manner that is cost effective. You can’t be strategic if you are too busy entering data. We hear that from probably every client we talk to.”
Among the top strategic issues needing attention? Figuring out how to find and keep key talent. It turns out there’s a big difference between what employers believe workers think about their job and what those employees actually do think.
The war on talent has never been stronger and more in the forefront. This is actually the first time we’ve had a shortage of qualified talent in some of the white-collar industries.Tweet
A recent ADP Research Institute study, Fixing the Talent Management Disconnect: Employer Perception versus Employee Reality, found several such disconnects in midsize U.S. companies. Among the more crucial: most employers don’t have an accurate handle on how many of their key people are thinking about leaving.
Consider this: 24% of employees said they were actively looking for new jobs, and another 42% said they were passively looking for new jobs. This means two of every three of an employer’s workers are open to leaving. Yet employers overestimate how many of their employees are actively searching (38%), and they underestimate how many are passively looking (21%). For brokerages, helping employers see these risks more clearly could be their new differentiator.
That emphasis on human capital management is new for brokerages that for years have tried to position themselves as a client’s resource for the right technology to remain in compliance with the rules and regulations associated with the Affordable Care Act and other government regulations. Whittredge suggests that, while technology and compliance are still important considerations, today’s clients are more worried about managing their people.
“We are trying to help brokers understand that they are almost a step behind because they are still trying to push technology as the win,” Whittredge says. “We need to get to a place where brokers see how valuable they can be in helping their clients solve for a major gap—finding great talent and putting that talent into roles where they will stay for a long time. Then, the broker’s benefits play becomes even more valuable when coupled with technology, compliance and the rest of the things that we’ve done historically.”
As baby boomers complete their journey through the working years—10,000 boomers retire each day—the number of experienced executives in the workforce dwindles. At the same time, the rise of social media makes it easier for workers to browse for open positions elsewhere, which increases the number of employees actively looking for other jobs.
According to the ADP Research Institute’s Workforce Vitality Report, job hopping/switching is at an all-time high. About half a million American workers left one job for another in the fourth quarter of 2016, up from 406,000 in the fourth quarter of 2015. Key findings from the report indicate employers need a better plan for attracting, engaging and retaining top talent.
The report suggests that employers at midsize companies in the United States don’t realize how important factors such as the work itself, work hours, the cost of the benefits package and flexibility are to employees.
The differences between what employers think is important to employees versus what employees actually value are stark. These data contain vital information that brokerages could leverage to gain business and retain existing customers.
Some of the key findings include:
- Expectations play a key role in employee satisfaction. Of employees who were satisfied with their job, 85% agreed that their expectations were met through their job experience. Of the employees who indicated they were not satisfied, only 49% felt their expectations were met, and 60% said they have walked away from a job that did not meet their expectations.
- Employees also said they are more likely to stay with a company if their experience aligns with the expectations agreed to when they were hired—and if they understand how their role helps to achieve company business goals. The things that attract employees are the same things that retain them.
- Employee satisfaction is also related to a sense of purpose. Some 83% of employees who were satisfied at work indicated they feel purposeful. Of the employees who indicated they were not satisfied, only 36% felt purposeful.
- While employers generally understand the top factors in attracting employees, focusing more on the day-to-day duties of the job and providing work/life balance and a path for meaningful career development will help better capture talent.
The ADP study found that employers almost universally underestimate the importance of the work itself, hours, time off and relationships with direct managers. It suggests employers focus on meeting a broader set of needs targeted at employees’ personal growth. Currently, just one third of U.S. employees give their companies high marks on career performance, compensation or learning management, onboarding, succession planning and recruitment strategies.
Typically what we see is all of these manual keystrokes. And then you take a client from a typical picture to here’s what it should look like with all of those being automated, and then there’s very little requirement on the HR staff. It’s certainly fun to watch their eyes light up.Tweet
Both employers and employees believe workers must leave their current job to make more money or receive a promotion. Company executives need to consider what this means for talent management when even the people in charge say workers need to leave to advance.
Whittredge says these kinds of insights can help brokers redefine their sales tactics. He says changing the way they communicate with prospects and clients about current HR trends and issues helps them become better advisors.
“One of the questions I try to have brokers ask their clients or prospects is, ‘What are their HCM strategies and goals for next quarter or 2017,’” Whittredge says. “Often the brokers were afraid to ask because they didn’t have the answers. But because we have all those tools and resources to support them, now they can ask better questions. They can be more contemporary, and they can be more strategic in the way they go about their sales process, because when the answers start going down the path of talent or the path of recruiting or associate engagement, we have those tools and resources.”
Patten is a contributing writer. firstname.lastname@example.org
The ancient Chinese philosopher Lao Tzu observed that a journey of a thousand miles starts with a single step. But 10,000 steps daily is now the new fitness goal for millions of people.
Fitbit set that goal, equal to about five miles, to remind its users that moving around more can help them get healthier. While walkers seek to trim their waistlines, corporate America has noticed the devices can add to their bottom lines. Healthier employees mean lower healthcare costs.
To that end, more health plans and more companies are seeking to motivate their workers to take more steps to get healthier. About 30% of U.S. companies will offer subsidies or discounts in 2017 for employees to purchase fitness wearables, according to a corporate health and well-being survey from Fidelity Investments and the National Business Group on Health.
Among health insurers, UnitedHealthcare’s Motion program offers financial rewards of up to $1,500 a year to be used toward out-of-pocket medical expenses for enrollees who meet fitness targets measured by a Fitbit or other device.
Aetna announced last year it would subsidize purchases of Apple’s smart watch for some customers and offer monthly payroll deductions to make it easier to cover the remaining cost. The insurer is also providing the smart watches to its own employees. The watches can be used in conjunction with apps to manage care, wellness, medications and bill paying. John Hancock has added a subsidized Apple Watch to its Vitality program that seeks to encourage life insurance policyholders to become healthier.
Sales of the wearable devices reflect the impact of such initiatives. Wearable sales reached a record 33.9 million units for the final quarter of 2016, up nearly 16.9% year over year and up 25% for the full year, International Data Corporation reports. The research firm says the emphasis is shifting from more basic devices to so-called “smart” wearables—that is, devices that can run apps.
Fitbit’s strategy seems to be mirroring that shift. Recognizing the challenge from Apple and other smart watches, Fitbit recently bought smart-watch makers Pebble and Vector Watch. Fitbit says it is emphasizing efforts to build its corporate business by working with insurers, employers and health systems.
As wearables get more powerful, they are going to be making a bigger impact than just getting people walking. More companies, in a variety of industrial settings, are looking to use wearable sensors to improve safety and reduce workers comp claims. Connected sensors are being embedded into safety clothing and attached to workers’ belts to show when they might be in danger of slipping or lifting too much weight. Smart clothing can tell when noise levels get too high or when workers need additional protection, such as for knee impact.
And getting back to steps, be on the lookout for smart shoes—not the kind that TV spy Maxwell Smart used back in the 1960s—but, rather, sensor-equipped and Bluetooth-connected shoes that help runners measure cadence, impact and balance, and even shoes intended to help golfers improve their game.
Tell us about Beam Dental.
Beam Dental is a new dental benefits company founded in 2012. Today, we operate in eight states, but we’re expanding rapidly. We want to provide the world’s highest-quality dental insurance and do it in a way that’s very innovative and technology forward. Our DNA as a company is more technology than it is insurance.
What sets Beam Dental apart from your competition?
There are two things we do that no one else does in dental. We make available to our members a program called Beam Perks that is essentially a dental wellness program at no extra charge. It comprises a connected, sonic-powered toothbrush that comes in three different colors, replacement heads, toothpaste and floss. It comes as a quarterly subscription service.
The second thing is that there’s a Bluetooth chip that connects the brush to our app. It monitors when and how long you use the brush, similar to a Fitbit that measures your steps. At a group level, we provide a premium discount based on participation. Folks who are taking really good care of their teeth should get value for that. Our company is focused on preventive care. We don’t want our members to have to go to the dentist for a root canal.
Where did you get the idea?
I have two co-founders, and we’re actually on our second company together. Our first company was in R&D services in the medical device industry. We had gotten some exposure to the dental industry, and we started thinking about what the future of the dental industry is and how we could get more people access to dental service. There is far more demand for dental service than there is access.
How do you build an insurance company?
We’re taking a sophisticated approach to the technology and underwriting portions of this plan. Most dentists are interested in participating in dental networks, and they participate broadly in them. What other insurers don’t do well is technology in helping to manage enrollments, eligibility, contracting, administration—all of the kinds of nuts and bolts that brokerages have to deal with.
And how does Beam Dental work with its brokerage partners?
We realized that making life easy for our broker partners would create this meaningful support and service differentiator between us and other carriers. We spent a lot of time learning from our broker partners and asking, “What do you need to make your life easier when you’re selling a company on Beam Dental? Or when you’re contracting, enrolling and implementing them? Or post effective date, trying to manage that group over time? That’s how we have added features and continue to evolve the product today.
What data do you collect?
We collect behavioral data. We time stamp when the brushes are being used and how long you’re brushing your teeth. Ideally, you’re brushing two minutes per day. That’s what helps inform what your engagement level is. From our data, we are seeing fewer claims from the people who are brushing the best for things like fillings and crowns and root canals. It’s working.
How do you address privacy concerns?
We are fully HIPAA compliant—even beyond what we need to be legally. We are also careful to show people that we are delivering value to them individually. We emphasize that the premium discounting program is rolled up at the group level. The HR manager is only going to see how the company performs, not how an individual performs, and the discount applies to the group evenly.
What’s the biggest challenge running a startup?
The biggest challenge in doing a startup is that you always have more ideas than time and money. It’s psychologically kind of tough when you have to deliver the simplest and fastest versions of your big idea and then very quickly improve upon it because you’re up against other startups and established competitors. You have to deliver value from day one versus those competitors.
What do you like to do when you’re not working?
My latest obsession is fostering puppies for the humane society. It has been the most ridiculously fun thing we’ve ever done. Chihuahuas and pit bulls are typically the dogs that get abandoned. I’ve kind of become the crazy puppy lady.
Tell me about your family.
My husband, John, and I have been married for 19 years. We met in line buying margaritas at the Union Street Fair in San Francisco. We have a son and daughter. Christopher is 14 and a baseball player. Meghan is 18 and a rower. She’ll be going to Columbia next year. Everything in New York City she loved. She walks taller there. For her it’s like being plugged in.
What’s the best career advice you ever received?
Years ago when I was considering a new position at the firm, my husband asked me if I was still going to get “the buzz.” His question reminded me to consider what really makes me tick. Is it going to be creative? Interesting enough? It’s rarely about the money or the title. Well, sometimes it’s about the money—especially now with Columbia tuition.
Who was your most influential business mentor?
Stan Loar [the former CEO and current chairman of Woodruff-Sawyer] introduced me to the idea of “You get what you give.” This influences how I invest my time, balancing industry activities with my day-to-day responsibilities at the firm.
What would your co-workers be surprised to learn about you?
I think the puppy thing had them scratching their heads a little bit. They’re like, “What? You have what going on?”
If you could have lunch with three people, living or dead, who would they be?
We’ll have to be creative and rotate them in for various courses. They would be my best friends in my Council study group: Chris Nadeau, Kerry Drake, Shawn Pynes, Liz Smith, John Kirke, Lisa Hawker and Tim Byrne. Dave Oberkircher has to be there, too, since I’m sure he would have some thoughts about how our lives have zigged and zagged the last 18 months since we lost him to cancer. Most importantly, inspired by Shawn, it would be a “proper” lunch—lengthy and with a lot of great wine. If I could squeeze him in, then I’d also have Rob Lowe there.
This month you become chair of the Council of Employee Benefits Executives. How do you envision your year in charge?
In such a dynamic time, it’s hard to imagine what new challenges might emerge. I do know that our best shot at success is leveraging the collective talents within our member firms. I’d like to encourage everyone to continue to contribute their time, energy and ideas. Our clients need us to solve big problems, and that will require a high level of engagement.
Do you feel an obligation to mentor other aspiring women executives? I haven’t paid that much attention to it, as about half of our leadership positions and shareholders at Woodruff-Sawyer are women. I will say I experience and witness gender bias routinely in business. I do what I can to create awareness on the issue. You can’t change everything overnight. We need to just keep moving forward.
If you could change one thing about the insurance industry, what would it be? I would want all stakeholders leveraging technology so they are making decisions based on data as opposed to their “spidey” senses based on legacy operations.
What gives you your leader’s edge? I think it’s my curiosity and high energy level. I love meeting new people. I like testing new ideas. That’s led to a really fantastic network of peers with whom I can continually brainstorm and challenge my points of view.
Brené Brown (“She’s got a great TED talk on the power of vulnerabilities. Rising Strong is a really great book.”)
The Blind Side (“It just hit everything for me, and it’s entertaining.”)
Mexico (“New Year’s Eve usually finds us in Cabo San Lucas.”)
Last Broadway Play
Hedwig and the Angry Inch (“An alum of my daughter’s high school was in it. He was fantastic. At the Tony Awards, he did a shout-out to one of his teachers.”)
2012 red Lexus 450h SUV
I’ve found the unease that results from buyer’s remorse is often proportional to a product’s significance or price: the more important the purchase, the worse the feeling. That’s because, with big-ticket items such as a new car, you’ve likely spent hours researching brand and model options, asking questions of the dealer’s sales team and taking numerous test drives. A lot of time and effort went into making a decision you are now stuck with for at least a few years.
Buyer’s remorse isn’t just limited to personal purchases. Clients that make the choice to switch insurance carriers sometimes have feelings of regret and unease after implementing a new program. However, the consequences here are twofold: not only is your client left dealing with empty promises from its new benefits partner, but the wrong choice also could leave your relationship hanging in the balance.
New Approach to Disability Management
As an advisor, your most important role is to help ensure your clients select the right carrier for their employee benefits program. This is particularly important when analyzing disability insurance carriers.
While switching disability carriers might seem like a low-risk change, selecting the right disability carrier can make all the difference to your client. That’s because disability carriers do more than just provide employees with important income replacement if they need to take a disability leave. Today’s disability insurance plans provide return-to-work and stay-at-work support to an employee experiencing a medical condition in the workplace. These programs can help reduce employee healthcare costs and increase productivity, employee engagement and morale.
During the RFP process, many insurers make promises about their programs, including their impact on employee disability durations and how they will aid an employee’s return-to-work or stay-at-work accommodations. From my experience, these assertions can end up being empty promises that leave clients scratching their heads when the reality doesn’t live up to expectations.
Go Beyond Number Crunching
While you need to consider many data points when advising a client on the best disability insurance carrier, it’s especially important to analyze different return-to-work or stay-at-work services and how each could benefit a client’s bottom line.
But doing your due diligence goes beyond just looking at the numbers. You’ll also need to ask the right questions of a carrier to help ensure your clients get the type of comprehensive disability management support they need. These three questions will help your clients avoid surprises down the road:
Are all employees eligible to receive return-to-work and stay-at-work services?
When an employee experiences a disabling illness or injury, the last thing your client will want to do is determine if the employee is eligible for accommodations assistance. It’s easy for a carrier to say it will provide assistance to all employees, but there can often be unexpected red tape for an employer if, for example, the employee is enrolled in a short-term (instead of long-term) disability program. Determining which employees are eligible—and any additional costs associated with coverage for those who aren’t—is important to understand before an employee experiences a medical issue.
Who will be working directly with the employee to develop the appropriate return-to-work or stay-at-work plan?
The most important aspect of a disability carrier’s stay-at-work and return-to-work services is having available an on-site expert skilled in disability management. Consultants from a disability carrier analyze the employee’s workspace, job function and any restrictions imposed by the employee’s medical team, and they work with the employer and employee to find the best solution.
It’s not unusual for national carriers to use contractors from across the country to provide this timely and localized accommodations assistance. What you and your client will want to learn, though, is who manages these contractors, what type of training they have and how the individuals report back to the carrier about what an employee may need or progress being made. Identifying who will provide this assistance will help ensure your client’s employees are getting the right kind of support.
How does the carrier showcase return on investment?
Employee benefits are often highly scrutinized by executive management, which makes a benefits offering’s return on investment an important proof point for your client contacts to report on. Yet success is measured differently for each employer.
Will the board of directors or senior executives want to know their employees’ average disability duration versus the industry average? Or how many temporary or permanent workers weren’t needed as the result of comprehensive disability management? Can they show how they’ve used benefits from other carriers to make the most of an employer’s full benefits offering? While all carriers will report that employees were able to return to work, not all carriers can translate successes in a way that showcases how they impacted a company’s bottom line.
Speaking up during the process and helping your client determine answers to what are often nitty-gritty disability management questions can help prevent surprises down the road. Not only does this translate into success for the client and prevent buyer’s remorse, it helps position you as a consultant who understands your client’s needs.
Jeffery Smith is workplace possibilities program practice consultant at Standard Insurance Company. email@example.com
Carnegie Mellon University’s Computer Emergency Response Team found nearly half (47%) of the respondents to its 2016 Annual State of Cybercrime survey reported an insider breach, and insiders were responsible for 50% of the breaches of private or sensitive information.
Brokers and agents need to be aware of the types of crimes committed by insiders and understand the differences in coverage. “It is important to determine when cyber is not cyber,” says Chris Giovino, Aon’s managing director of forensic analysis and crime claims. “Not all cyber acts are covered by cyber insurance. For example, collusion by an insider with an external cyber criminal would most likely be covered under a crime or fidelity policy, not wholly under cyber insurance.”
The Sony hack, which resulted in the theft of movies, emails and sensitive internal communications and zeroed out large amounts of data on Sony’s servers, was initially blamed on North Korea. Subsequent reports by security experts claimed the attack was perpetrated with insider assistance.
Employers, agents and brokers should consider the range of attacks that might be committed by employees or trusted insiders, such as contractors or business partners with system access. For example, the theft of confidential information, such as pricing and sales data, can lead to the loss of market share if the information should fall into the hands of a competitor who leverages it in the marketplace or if the disclosure results in damage to a company’s reputation. This information often is used by a highly mobile workforce and stored on laptops, where it is easily accessible to sales and account personnel. The theft of this sort of data might result from a lost or stolen laptop, or an insider might sell data to a willing buyer.
The theft of highly valuable proprietary data by an insider is usually easier to detect, since these assets are commonly stored in designated repositories with restricted access and user logs. Nevertheless, insiders often commit serious economic espionage. Google’s spinoff company Waymo, which specializes in self-driving vehicles, has been in the headlines recently over public allegations that one of its top engineers downloaded 14,000 proprietary files and trade secrets and took them with him to his new position at Uber. Waymo has sued Uber for violations of the federal Defense of Trade Secrets Act and the California Uniform
Trade Secrets Act and infringement of patent rights.
One is reminded in this context of Edward Snowden, the federal contractor who downloaded millions of files from the National Security Agency without being detected. Without good log analysis, monitoring and strict access controls, employees can do the same within any company.
Other highly valued types of data that are susceptible to insider theft, misuse or unauthorized disclosure include employee information, health and benefits data, transactional information, strategic plans and customer data. These data have a strong market value and are easily traded in underground markets. Compared to external cyber attacks, breaches involving insiders can have a higher financial impact. In fact, 30% of the Carnegie Mellon survey respondents said cyber breaches caused by insiders were more costly than external attacks.
Customer data held in company systems also can put a company in the bull’s eye for attack. Manufacturing companies that offer products and services to critical infrastructure industries may have plans of customer facilities, custom specifications, and critical data related to the operation of industrial control systems stored in their computer systems. Often, these data are not encrypted, and the company may not be aware of how much or what types of data it has on its servers or employee laptops. Rather than target multiple critical infrastructure organizations, terrorists and nation-states desiring this information may seek out a vulnerable employee who is willing to obtain it for them.
Not all insider cyber events are nefariously motivated. Insiders also make mistakes or unintentionally cause a cyber incident. For example, companies commonly allow employees to use their own devices, such as laptops, iPads, smart phones and USB thumb drives for business purposes. The use of these devices, however, increases the risk that the device will infect the corporate system with malware. Certain types of applications installed on personal devices, such as peer-to-peer software, could enable unauthorized access to company data. Employees might fall prey to social engineering or fraud tactics and be tricked into emailing personally identifiable information, such as employee W-2 files, to criminals. Again, what many might perceive as a cyber crime may actually be deemed computer fraud by insurance carriers.
An employee’s loss of a laptop, CD, thumb drive or smart phone containing personally identifiable information may require a forensic investigation and trigger breach notification laws. This type of loss is covered by most cyber policies. If the employee intentionally provided the data to a third party, however, that could fall under a crime or fidelity policy.
Aon’s Giovino offers a tip from experience: “One of the most important steps any company can take when dealing with a cyber event is to have an internal triage of potential events,” Giovino says, “and then work with the broker to place all insurance carriers on notice: cyber, fidelity, crime, property and business interruption.”
Cyber events, particularly those involving insiders, often unfold in unexpected ways. For example, it is not uncommon for companies to be so disabled from a cyber intrusion that it requires the shutdown of operations to enable a full forensic investigation and system cleanup to be performed. This might trigger cyber and business interruption coverage, as well as property claims.
Brokers and agents face a continuing challenge to stay abreast of the current threat environment and understand the types of insider threats their clients might face. This requires understanding clients’ operations and learning about their cyber security program, including policies and procedures, security controls, use of encryption, restrictions on the use of removable media and personal devices, and logging and monitoring. Companies that think through the insider threat and mitigate these risks through a strong security posture and well-considered coverage will have the best cyber risk management strategies.
Jody Westby is CEO of Global Cyber Risk. firstname.lastname@example.org
Brokerages are all working on technology and data-driven initiatives in different areas, but the challenge is simultaneously focusing on the customer experience while evolving and automating internal workflows and processes.
Direct-to-consumer models are the most obvious to point out, despite mixed results. The carrier direct models certainly can be seen as a warning to brokers, but like everything, the devil is in the (claims management and servicing) details. Any new market entrant that focuses on a service or technology with a direct benefit to the insured is putting serious resources into the customer experience, and that is the main takeaway for brokers.
Companies want to place their offerings as close to the customer as possible. In the last 90 days, there have been 29 insurtech funding events to the tune of $400 million. Total 2016 funding in insurance technology startups was estimated at $1.69 billion. And that figure doesn’t include what is dubbed “healthtech” funding, which grew for the seventh straight year in 2016, hitting a high of $6.1 billion.
These days, lines are very blurry, and it’s difficult to see a border between insurtech and healthtech. But the moral of these numbers is that a ton of capital is being thrown out to show insurance purchasers there’s a better way.
I believe the winning business models in group health insurance will be those that link to the regulatory levers—carrots and sticks for individuals and providers—and move them. They’ll also need to prove they can deliver better outcomes at lower cost, have a viable basis for underwriting and risk management, and demonstrate potential to scale.
Success will be a function of slick software, data usage, and tactical knowledge of regulations and how to motivate behavioral change. It will also be based on what brokers do best: provide advice and counsel when clients need it most.
Reportedly one in seven employees does not understand the benefits (and therefore the value) being offered by employers, and health insurance is by far the biggest piece. Faced with a complex set of choices and dense information in a cost-shifting environment, it’s no surprise many go for the easy option: saving money now. Insurtech is focused on the pain points that can streamline the enrollment process and free up resources to give individual service and advice to the client base, whenever they need it, wherever they are.
“There is no line between digital and broker. In fact, they are one and the same, and clients expect and need trusted advisors,” says Decisely CEO Kevin Dunn in “Q1 2017 InsurTech Briefing,” produced by Willis Re, Willis Towers Watson and CB Insights. Decisely, which provides health benefits, insurance and a technology platform for HR administration to small U.S. businesses, uses a 100% digital model. And Dunn says it doesn’t stop there.
“Others in the space have built technology to solve the problems of small businesses, yet they have only created a self-service front end. This front-end focus is solely a digital distributor…We provide self-service on the front-end, but our back end also understands the uniqueness in the brokerage industry when it comes to pricing, carriers and compliance—all things necessary to run and keep a small business afloat.”
There won’t be a radical power shift in healthcare anytime soon. Change and new don’t necessarily go together well in this climate. But innovators and even more mature companies are demonstrating the capacity to go after the possibilities that data, technology and creative solutions offer to mitigate the pain.
This activity is a bright spot in healthcare reform, and brokers need to study and understand the deeper forces of what’s happening in order to be proactive in determining whether their firm can deliver the proficiencies required by the marketplace. If they can’t deliver those, they need to find a way to use partnerships, joint ventures or acquisitions to shore up absent capabilities.
We’ve seen only the beginning of the amount of talent and money that will pour into this industry. Brokerages with scale and technical capabilities are well positioned to take advantage of the huge potential to do more business and at the same time create a much more customer-friendly industry. It’s only the tip of the iceberg, but the time is now for brokers to get educated and engaged so they can be proactive.
You are in the midst of filtering a wide pool of candidates so you can select the right fit for your firm.
Then, you meet an old colleague for dinner, and he warns you about a certain prospect. “Don’t go there,” he says. “We had a terrible experience when they bought our firm years back. I promise you, the deal will be a nightmare.”
You leave dinner with a bad taste in your mouth about that prospect. Since there are other sellers vying for your attention, you might as well drop that firm from the list. You trust this industry friend—he’s honest and fair. If he said the deal was rotten, you’re sure it must have been. You’re relieved that he waved a red flag now so you didn’t end up finding out the hard way.
Does this scenario sound familiar? You’re seeking out opinions and information about the sellers you’re courting because information is power, right? The more you know, the better prepared you’ll be. It’s called doing your homework. Right?
Maybe not. Press the pause button for just a minute. Before you take those outside opinions seriously, back up and take a holistic view of your situation.
- Is there value you could be overlooking because of a tainted perspective?
- Has someone’s opinion pulled you far away from the facts? (What are the facts?)
- What are the numbers telling you about the deal? Is this a wise business decision?
- Why were you attracted to the buyer/seller in the first place? What is your business gut telling you?
- Do you have a trusted outside advisor who can provide a balanced perspective?
We see many buyers and sellers rely on word-of-mouth intelligence to form their opinions about a firm’s potential, and we believe this is a dangerous road to travel. Beware of allowing your own perspective to be jaded by someone else’s bad experience.
When another’s experience creates a filter through which we perceive a prospective buyer or seller, that muddy lens can actually block the view of a firm’s positive qualities. We can overlook a strong management team, a progressive mentorship program, a track record for producing new business and more. Our vision becomes myopic and focused only on that negative feedback we heard.
Think of it this way: would you let someone else steer the helm of your business? Would you allow an old colleague, former employer or acquaintance to single-handedly choose the next firm you will acquire or sell to? We didn’t think so. So why do we have a tendency to allow others’ opinions to close doors on business opportunities?
Whether you’re in the position to buy, sell or stay as you are, take the time to carefully vet a deal and use a fact-based approach. Consult with an advisor who can tease out opinion from fact, someone who can challenge you with the tough questions rather than interjecting opinions into the matter. If you do receive negative feedback about a firm you’re considering buying or selling, we believe you should log that information in the opinion file. Do not allow that perspective to become the entire case.
In today’s dynamic market, we could all use a reminder to stop, analyze the facts and then weigh information fairly before moving forward. It’s both an exhilarating and nerve-wracking time when you’re in the position to grow your firm through acquisition or to transition by selling. It’s also emotional. But beware of allowing others’ hot air to carry away a potentially great deal for your firm.
Deal announcements in April were down from March, at 19 versus 40 last month. April is also down almost 30% from the 28 deals announced in April 2016, although there are often revisions to each monthly count throughout the year. Year to date through April, buyers have announced a total of 140 acquisitions, which compares to 152 through April last year (down 8.5%).
Acrisure has been the most active buyer year to date, with 12 announcements, followed closely by BroadStreet Partners and Arthur J. Gallagher & Co. at 11 and 10 announcements, respectively. California agencies make up 19 of the 140 deals reported so far, or nearly 14%, followed by Massachusetts and Florida, with 10 targets announced in each state.
On April 19, AmWINS Group and Partners Specialty Group announced they had agreed “in principle” to acquisition terms. The combined entity would further separate AmWINS as the largest U.S. wholesale distributor, with PSG currently the ninth largest nationwide. PSG has 14 regional offices throughout the U.S. and placed about $500 million in gross written premium in 2016 across various specialties ranging from transportation to cyber liability. The transaction is expected to take 45-60 days to close.
Trem is SVP at MarshBerry. Phil.Trem@MarshBerry.com
Securities offered through MarshBerry Capital, member FINRA and SIPC. Deal counts are inclusive of completed deals with U.S. targets only. Please send M&A announcements to M&A@MarshBerry.com. Sources: SNL Financial, MarshBerry