In the seemingly never-ending quest to attract and retain good talent, understanding what employees really care about is crucial. Many reports today indicate that employees want to feel valued by their employer, and that comes across in multiple ways, including the benefits they receive.
Fun Facts About Tenure
Though modern speculation has people believe that older generations held only two or three jobs over their lives, this is false. According to a 2017 U.S. Department of Labor report, baby boomers held on average nearly 12 jobs in their lifetime. In addition, it is important to understand that when the economy is growing, average employee tenure shrinks. More jobs and economic benefits create further opportunities for changing and improving salary and job status. During the 2007 market recession, employees with 10 years or more of tenure increased in percentage while employees who stayed at a job for one year or less declined.
One of the most noteworthy discussions we heard centered on the role of new college grads in an industry that is becoming increasingly technology dependent. Many agreed that students, who have grown up in a tech-driven and interconnected world, will play a crucial part in the industry’s adoption of and adaptation to technology. However, the job opportunities discussed were solely focused on the carrier and insurtech sectors. This was not so much an effort to exclude brokerages but likely due to the proportion of carrier-focused insurtechs at the conference.
Just over two years ago, Crawford & Company acquired a majority interest in WeGoLook, an online and mobile collaborative economy platform headquartered in Oklahoma City. This strategic investment empowered Crawford to revolutionize, automate and expedite its claims handling processes by using a large, mobile, on-demand workforce for automotive and property inspections.
Tina Valdez is currently a senior at St. Mary’s University in San Antonio, TX, where she was born and raised. She double majors in finance and risk management and marketing. She currently serves as the co-president of the Beta Xi chapter of Gamma Iota Sigma at St. Mary’s. Upon graduation, she will start her career with Marsh as part of the Marsh TRAC program out of the Houston office.
It wasn't too long ago that children with disabilities could not go to school. Their parents—their best and sometimes only advocates—would use newspaper ads to find other families grappling with similar issues, and together, they would form non-profit, community-based programs. Their goal was simply to increase the quality of life for their children by helping them more easily engage in the community with various physical and social support services.
Business Insurance has been tracking and publishing reports on the largest brokerages in the United States dating back to 1972. At that time, the top brokerage, Marsh & McLennan Companies, reported $151 million of brokerage revenue.
Taking on an outside capital investment is a significant undertaking, often done in part to boost revenue growth through organic or inorganic means. While such investors are most often thought of as financial partners, great investors are partners in much more than just the economics.
Ending on a mostly positive note, 2018’s healthy growth in GDP and strengthened labor market conditions led the Federal Reserve to announce in December that it would raise its target range for the federal funds rate, the fourth time of the year. That news came despite the fact that capital markets struggled in the last quarter of 2018, with all the major indexes finishing negative on the year despite being positive through September. By the end of December, capital markets fell near bear market territory and even came close to ending a bull market run that started in 2009.
During 2018, it seemed like there was a new headline-making transaction hitting the newswires weekly. Here is a list of our top newsmakers.
The U.S. property and casualty industry’s current financial stability is the result of calm conditions and/or solid construction and good captaining in the face of stormy weather.
Coming off a record-high year in 2017, during which 557 announced brokerage transactions were posted, it was difficult to imagine that 2018 could eclipse such a frenzy of activity. Despite the odds, 2018 saw a new record high in transactions. MarshBerry tracked 580 announced brokerage transactions, which represents a 4% increase from 2017.
While business interruption remains the biggest concern for companies worldwide, it is primarily a concern in Western economies as well as China and Russia.
If you’ve ever picked up Leader’s Edge before you know that culture is always top of mind for me. And how could it not be? Culture is, after all, your organization’s DNA. If leaders don’t promote their own culture, how can they expect their teams to?
The world is merging. Global M&A activity reached a new high in the first nine months of 2018, with deals worth nearly $3.3 trillion, fueled by high share prices and consumer confidence on one side and low interest rates and deal fees on the other.
Mergers and acquisitions and their “synergies” are changing the nature of risk at your clients’ companies.
If a business is purchased and rolled into an existing placement without extreme care, specialty coverage that underpins the business model of the acquired could be lost.
Labyrinthine insurance arrangements may be critical to the success of the underlying transaction.
Mergers and acquisitions in the property-casualty and life and health insurance sectors broke new ground in 2018—and not just in the skyrocketing value of deals. M&A deal value among both P&C and L&H insurers—$40.3 billion—more than doubled in 2018 compared with the prior year, although the number of deals (533 in all) declined by 13%, according to audit firm PwC.
Some atypical factors, such as business transformation, are helping drive M&A
The ILS market has cemented its role as an additional source of risk-bearing capital.
The desire to harness the potential of emerging technologies is also showing up as
an M&A trend.
Brightside is a financial wellness organization that works with businesses like Comcast, its anchor client, to help employees make sound financial decisions, get out of debt and increase cash flow. King discusses how the new field of financial wellness is tied to health benefits and how stress induced by money problems can impact employee health.
Co-Founder and Executive Chairman, Navacord
The Council’s Midyear Board of Directors Meeting & Strategic Work Session will be held in London May 1-4, 2019. For those traveling to this enduring city, Brexit remains a question.
When actor Rami Malek thanked his late father while picking up his Oscar for best actor in Bohemian Rhapsody, it wasn’t just an afterthought.
Companies are starting to learn that it is very important to pay attention to privacy and cyber risks when conducting M&A due diligence.
“I’m not for sale.” Another call comes in from a buyer, just like the last. “The business is not for sale. We’re not selling.”
Tips for complying with New York’s sweeping cyber-security regulation as you acquire.
Brokerage mergers and acquisitions have been at a high level for years, with no sign of significant slowing. According to Optis Partners, 2018 was the busiest year since the financial consultancy began tracking M&A activity, breaking several records.
Private equity funds shape how we think about consolidation in insurance intermediation. PE actors have been instrumental in driving brokerages’ market valuation across the globe and have contributed much-needed capital to ignite recent acquisitions.
People who identify with the sandwich generation, the popular term for middle-aged individuals who care for their aging parents while supporting their own children, understand what it is like to be in a pickle.
On average, black Americans are less likely to be screened for numerous diseases, including colon cancer, making black men more prone to developing the deadly disease.
Stephen Thomas loves barbershops. For him, as for so many African-American men, they are a place of historical and cultural relevance. In the 19th century, some barbershops doubled as abolitionist sites or stops on the Underground Railroad.
The goal is to improve the health of the barbers and their mostly African-American clientele.
One partner in the program is Capital Digestive Care, one of the largest private gastrointestinal practices in the country.
On average, black Americans are less likely than white Americans to get screened for colon cancer and more likely to develop colon cancer.
On Jan. 17, 1994, a 6.7-magnitude earthquake struck the San Fernando Valley region of Los Angeles, killing 72 people, injuring more than 10,000, and causing an estimated $40 billion in widespread property damage. Thousands of homes, buildings and cars were destroyed in what remains one of the costliest catastrophes in U.S. history.
Developed by scientists at MIT, the seismic muffler consists of a V-shaped array of boreholes dug hundreds of feet deep.
The one- to three-foot-diameter boreholes, cased in steel or a comparable composite material, slope away from the protected asset.
The boreholes divert hazardous surface waves generated by an earthquake away from the protected asset.
Being a televised Real Housewife is not all fake eyelashes, cleavage and cat fighting. The girls often have jobs, too, but none as lofty as Vicki Gunvalson, the longest-standing Real Housewife of Orange County, who owns and runs Coto Insurance in Irvine, California.
I’ve always been partial to the saying, “The grass is always greener…” Over the years it has kept me on my toes—especially when it has come to my career.
Wamberg is an advisory firm that provides genetic products and services as part of employer benefit packages. Bellanca discusses how the burgeoning field of genomic testing has the potential to improve employee health and reduce employer medical spend.
It was such a great feeling to say, “I don’t care if I fail.”
During the 1992 presidential campaign, Clinton campaign strategist James Carville famously coined the phrase “The economy, stupid.” That message was reportedly intended to be only an internal note for campaign workers in the Little Rock headquarters to highlight when speaking with constituents (for those keeping track, one of the other talking points was “Don’t forget healthcare.”) As the story goes, the phrase ended up becoming the slogan for the entire election campaign.
In conversations with industry stakeholders—brokers, carriers and others—we often hear how insurance is misunderstood, that the industry needs to do a better job telling its story. Well, they’re right. But it’s difficult to get down to that deeper level—the one that makes the story worth telling—amid the complicated web of relationships, contracts, regulations, markets and capital.
Lots of things happened in 2018 that focused our attention on privacy. Facebook got everyone’s attention in March when The New York Times and The Guardian revealed that Cambridge Analytica used the personal data of more than 50 million Facebook subscribers to help the Trump campaign.
I have a friend who recently decided to invest in solar panels on his roof. By financing the transaction, his fixed monthly payments would be far less than his historical electric bills, and in some way, he is probably helping save the planet.
“Life’s most persistent and urgent question is, ‘What are you doing for others?’" —Dr. Martin Luther King Jr.
Are you as influential as you think? Research says probably not. Ninety-five percent of leaders think they are more influential than they are.
Gig economy businesses are underinsured. But a new niche product that capitalizes on digital connections between service providers and customers is an example of how innovative brokerages can carve out a specialized block of business that may lead to big accounts as gig startups mature.
When Apple first aired its now-famous 1984 Super Bowl commercial it sold us—in a really dramatic and masterful way—the promise that its technology would open the door to freedom of thought, freedom of expression and freedom of innovation. It started the journey that would lead to Apple being arguably ubiquitous in our society.
Your personal technology is vulnerable not only in your hotel room safe but tucked in your pocket walking down a street. We talked with technology expert David Holtzman about the unknown risks you take with your proprietary business information when you travel. —Editor
It is estimated that one in six Americans now wears a fitness tracker or a smart watch and 77% own a smart phone, up from just 35% in 2011, according to the Pew Research Center. In the newest evolution of digital health monitoring in the workplace, these technologies are converging.
The accumulation of personal data on wearable devices has changed the definition of employee wellness.
A key component in the evolution of tracking employee wellness is the ubiquitous smart phone.
Experts view consumer access to medical records via mobile devices as a logical next step in the health app revolution.
Read the Sidebars
In the summer of 2017, Seema Verma, administrator for the Centers for Medicare & Medicaid Services (CMS), spent several terrifying hours trying to access her husband’s medical records after he suffered a heart attack in an airport.
A Trump administration initiative is designed to expand patient access to clinical data.
Proprietary and technical impediments to sharing data reduce patients’ ability to be effective healthcare consumers.
Data sharing enables third-party applications to better track the quality and price of care.
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Once again we asked our Council lobbyists (this time including Government Affairs director Blaire Bartlett) to give us a read on where we are and where we are going. Here’s their 2019 outlook. —Editor
Water is magic. It brings out the best in everybody.
Bartlett discusses how crunching data and tough negotiations enabled her to save the state’s struggling employee health insurance plan.
Having a back fracture and one bum knee is no fun, but when Philadelphia Eagles running back Jay Ajayi tore an ACL in the other knee in October, he was out for the season.
Fear is actually an amazing friend.
I hope everyone had a very happy New Year! For those in the deal-making business, buying or selling, 2018 was likely a very fruitful year for you. The merger and acquisition marketplace ended 2018 strong with a flurry of transactions.
When it comes to healthcare provision, every country offers a different service, though at their core, many of them face similar struggles. Brazil is known internationally as having the largest state-funded health system in the world.
Once dismissed by serious businesspeople as mushy nice-to-haves, so-called “soft skills”—critical thinking, problem solving, communication, leadership, adaptability and emotional intelligence—are in high demand and short supply.
I’ve been in the brokerage business since 1973, and in virtually every year since, I’ve heard that the most pressing issue we as an industry face is the ability to attract and retain talent. Of course, that is likely true for every other industry, too.
The election is finally behind us. Or at least by the time you are reading this, the recounts and runoffs will all finally and officially be over (I hope).
Just a couple of blocks from the hustle and bustle of Union Station and the Capitol Building in Washington, D.C., lies a Starbucks on H Street.
Every theft film has to have at least one insurance investigator, and perhaps the most unlikely one ever is James Corden, in Ocean’s 8.
This year, Puerto Vallarta celebrated 100 years of being a municipality and 50 years of being a city. But 1964 is when this then-remote fishing village made its debut on the world stage.
In an effort to build our industry’s future, The Council Foundation’s scholarship program has again awarded $375,000 in academic scholarships to 75 college juniors and seniors interested in pursuing a career in insurance brokerage. Each receives a $5,000 grant.
Gruttadaro and Conforti discuss what employers and brokers should know about behavioral health and substance abuse coverage, which are costing employers increasingly more.
Graham Forsey is a Senior eCommerce Technical Analyst for Whirlpool Corp, office suite mate of The Council. Graham also is hearing impaired and taught an informal ASL class for the Council staff, including ASL coffee chats.
In the late 1950s, an ambitious young agent beginning his insurance career at Metropolitan Life found himself in the midst of an entirely untapped and underserved market. James Maguire was attending church with his friends and neighbors, Victor and Helen Saggase. The Saggases were deaf, and the service was conducted in sign language.
As a senior at St. Joseph’s University, in Philadelphia, James Maguire volunteered to work with athletes from a nearby deaf school.
Among Maguire’s many gifts to Saint Joseph’s is a namesake Academy of Insurance and Risk Management.
In 2015, Maguire helped establish an RMI program at Gallaudet University, in Washington, D.C., whose students are deaf and hard of hearing.
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Leader’s Edge editor in chief Sandy Laycox sat down with founding editor and game changer Rick Pullen for a conversation on his legacy and future. Rick will be leaving Leader’s Edge at the end of 2018. —Editor
Rick Jensen is chairman of the World Federation of Insurance Intermediaries. Leader’s Edge founding editor Rick Pullen talked with him recently about issues facing brokers in the United States and on the world stage. —Editor
It’s perseverance. It’s the idea that anything’s possible, so you should think big.
Everyone around you is getting bigger.
This year, four firms with revenues between $150 million and $200 million sold—brokerages that were big enough to compete and didn’t need to sell to remain competitive.
It’s around this time every year that I force myself to recite the old adage, “If you always do what you’ve always done, you’ll always get what you’ve always got.”
The question of who owns the data has always troubled me. In our world, the question has roots in the debate over who owns expiration data, which predates our industry tenure by decades.
As companies look to the year ahead, they should make sure they are prepared for the types of cyber attacks they might encounter in 2019. The cyber threat environment is more sophisticated than ever, and nation-states have increasingly played a role, often in coordination with other actors.
The Council also caught up with Chris Downer of XL Innovate this week. Downer is a principal at XL Innovate who focuses on insurtech investments in North America, Europe and Asia. He is responsible for due diligence and deal sourcing. Downer also pens a daily email (signup required) highlighting the latest insurtech developments.
The Council participated in the first-ever Plug and Play Broker Age event in Silicon Valley. Plug and Play, an early-stage accelerator, focuses on technology startups from seed to series B funding rounds.
You’re walking down the hall at work and pass the boss who makes a crack about your gender, race, religion or heritage. You cringe because you don’t want to make a scene, yet once again you’ve been made to feel like you don’t belong.
Lack of consensus about how to approach the complex pharmacy supply chain has prompted debate about the most effective way to lower prescription drug costs. Focusing on the inner workings of the entire supply chain may broaden how costs and solutions are discussed.
In 2010, Boston’s late mayor Thomas Menino launched a plan to turn a stretch of dilapidated piers and underutilized warehouses and parking lots in South Boston into an “innovation district.”
Many a celebrity has had a parent in insurance, but few are more famous than Herman Roth, father of the late Philip Roth. The younger Roth was one of America’s greatest novelists. (Portnoy’s Complaint, Goodbye, Columbus and 15 more).
Financial institutions face a quagmire of federal and state laws and regulations that discourage insurers from entering the cannabis market.
For more than 80 years, marijuana has been illegal due to its classification as a Schedule I drug under the Controlled Substances Act. In 2016, during President Barack Obama’s administration, the Drug Enforcement Administration refused a petition to reclassify it as a Schedule II drug, which includes opioids. The reason: the U.S. Department of Health and Human Services concluded marijuana’s risks outweigh its potential benefits.
The Cole Memorandum in 2013 relaxed criminal enforcement in states that legalized marijuana possession and established regulation governing its production, processing and sale, which encouraged more states to allow its use. Although former U.S. attorney general Jeff Sessions rescinded the memo in 2017, most states are continuing to expand legalization. State legalization is not welcome by everyone. The New Jersey legislature is considering a bill to legalize recreational marijuana—in March the state’s lawmakers postponed a vote on the issue when it became clear that it lacked enough support in the Senate—but 60 towns in the Garden State plan to ban sales within their borders.
Meanwhile, other federal laws and policies discourage banks and insurers from serving cannabis businesses. Financial institutions could find themselves held liable for aiding and abetting an unlawful marijuana business or be subject to civil asset forfeiture laws. And businesses also have the Bank Secrecy Act/Anti-Money Laundering Law and the Racketeer Influenced and Corrupt Organizations Act to worry about.
The U.S. Treasury Department’s Financial Crimes Enforcement Network’s guidance is another concern. Scott Sinder, The Council’s chief legal officer and Steptoe & Johnson partner, says although the network intended to give financial institutions a path forward to service marijuana-related businesses, the suspicious activity reports and broader federal prohibitions are enough to discourage banks and insurers from entering the market.
The Internal Revenue Code Section 280E is also a problem because it prohibits businesses “involved with illegal activities from taking tax deductions,” says Ian Stewart, chair of Wilson Elser’s cannabis law practice team.
Congress has been considering ways to reduce or eliminate federal barriers. Several bills, which are either pending or awaiting reintroduction from previous sessions, fall into three general categories, Sinder says. The first, he says, would “legalize banking and offer broader financial services access for the cannabis industry.” The second would protect states that have enacted laws legalizing marijuana from federal prosecution by exempting them from the Controlled Substances Act. The idea, he says, is not to disrupt the overall federal framework but to “find room for states to do what they want.”
The third approach, which Sinder favors, would remove marijuana from the purview of the Controlled Substances Act completely and regulate marijuana in a manner similar to alcohol. The Food and Drug Administration, Sinder says, “would have little regulatory authority, and it would create an excise tax regime,” similar to what it created for cigarettes.
Retirement planning is part of those benefits, though it’s often misunderstood or even ignored by employees. And with many employees leaving one job for another, often after only a few years, establishing a solid 401(k) can seem like an impossible goal.
But building tenure in your 401(k) doesn’t have to coincide with tenure at your job. That’s where synthetic tenure comes in. According to the Retirement Clearinghouse, synthetic tenure is “consistent participation in more than one defined contribution plan across multiple job changes, with no interruptions or breaks in contributions or premature cash-outs, throughout a participant’s time in the workforce.”
The site goes on to say, “Sponsors and plan providers should be asking themselves what they can do to replicate the benefits of consistent participation, while recognizing the highly mobile nature of today’s workforce. Creating synthetic tenure is the key. Sponsors and plan providers should take the lead in implementing programs that remove the frictions associated with account portability and facilitate plan-to-plan roll-ins, thus enabling retirement savings to follow participants as they change jobs. Broadly delivered, these solutions will create synthetic tenure and the positive benefits of consistent participation.”
While synthetic tenure’s main goal is to prevent leakage of retirement funds when an employee switches to another job, it can also come into play if an employee’s salary changes when taking a new job. If someone earns a larger salary at a new company, that person should be encouraged to give more, if not the same percentage, of their contribution to their retirement savings. Although this sounds like a given, it may not dawn on employees to contribute more to future savings when they change jobs.
Why should an employer care what happens to an employee’s retirement after that person leaves the company? It goes back to feeling valued. Employers who care what happens to their staff regardless of whether or not staff members stay with the company demonstrate their interest in those employees beyond just their current contribution to the business. And who knows how that interest will translate—it may even mean increased “real” tenure.
For benefits brokers who are looking to help their clients with talent retention and engagement, synthetic tenure could be a new angle to an old problem. If implemented properly, the majority of the work force can retire with the same benefits and financial security as those who do stay at an employer for their entire working careers.
Here in Chicago, more than 200 insurtechs, brokers, carriers, students, consultants and venture capitalists are gathering to discuss how emerging technology can enable business processes, while at the same time evolving the inherent nature of risk. From the internet of things (IoT) and telematics, to blockchain and artificial intelligence (AI), the transfer of real-time data can be used to mitigate risk and drastically cut costs across the insurance value chain.
But as a wise man once said, with great power comes great responsibility. While technology presents itself as a ripe opportunity for brokers and risk managers, a constantly evolving risk landscape lacking sufficient historical data can be a very difficult risk to insure, at least for profit.
In a world that’s rapidly changing, insurers and brokers alike need to understand modern risk and how to adapt to a changing industry.
”As the world economy grows, we’ll need a new AIG every year to cover the trillions of dollars of new risks.”
- J. Patrick Gallagher, Chairman, President, & CEO, Arthur J. Gallagher & Co., on how the growing global economy requires more capital to transfer risk
“90 % of all the data we’ve collected has been collected in the past two years. If you ask that same question two years from now, we’ll be able to say the same.”
- Pete Miller, CEO, The Institutes, on the abundance of data and its role in the insurance industry
“Companies are increasing their spend in risk management, but risk management academic departments are downsizing/decreasing,” findings from talent gap survey results."
- Phil Renaud, Executive Director, The Risk Institute, part of The Ohio State University Fisher College of Business
"AI is not magic; it's math, and AI can do the dirty work much faster and much cheaper”
- Phil Alampi, Vice President of Marketing, DataCubes
“We’ll see tremendous change in how we do it, but the essence of what we do stays the same… We take people’s risk.”
- J. Patrick Gallagher, Chairman, President, & CEO, Arthur J. Gallagher & Co, on the evolution of risk transfer
“In 2018, the global cost of cybercrime exceeded $1 trillion for the first time; 43 % of cyberattacks target small and midsized businesses; and more than 52 % of small businesses that suffered a cyberattack in 2018 went out of business by January 2019.”
- Stephen Soble, CEO, Assured Enterprises, on the dangers of cyber crime
Can you speak to WeGoLook’s transition to insurance, and how the gig economy (and independent contractors) has the potential to play a critical role in insurance and claims management?
WeGoLook’s innovative model allows Crawford to deliver many services as rapidly as same day and at a fraction of the cost of traditional offerings. Through our revolutionary integrations like TruLook, a program that uses a triage process to route claims in one of three directions, Crawford and WeGoLook are setting the standards for the next generation of claims handling and loss adjusting services. The gig economy, which includes our ‘Lookers,’ changes the way businesses operate today, and Crawford is unlocking that potential as it provides faster and more secure service to existing and future clients.
WeGoLook’s team utilizes a network of over 46,000 on-demand “Lookers” which includes 2,200 licensed drone pilots, to inspect property damage in high-risk areas after catastrophic events. Can you discuss the use of drones during last year’s historic nat cat season as a game changer for disaster response?
Drones are key to providing a rapid view to our clients of what level of losses they can expect. By comparing images shot by drones prior to a disaster with ones taken post-event, our clients were able to adjust their programs and more accurately plan for recovery. When disasters strike, our response, which includes drones, has been shown to be able to settle claims in an average of 3.7 days versus an industry average of 30 days. Additionally, our TruLook program, which incorporates a triage process that includes WeGoLook, can reduce costs by on average 20% to 30%.
What learnings can you take away from prior years’ hurricane seasons?
WeGoLook performed our first catastrophe (CAT) ‘looks’ during Superstorm Sandy in 2012 for carriers unable to access damage in the New Jersey area. Fast forward seven years and WeGoLook has become one of the most widely available on-demand CAT inspection solutions. We continue to focus on our mission of restoring and enhancing lives, businesses and communities by quickly deploying Lookers to capture detailed data, images, video and measurements in any scenario. For example, in Hurricane Harvey, WeGoLook had a network of over 800 Lookers within 30 miles of the Houston area who were dispatched to perform inspections on property and automotive assets damaged by wind, flood and hail across the gulf. Additionally, in Hurricane Maria, Lookers in Puerto Rico performed business interruption validation on a number of commercial properties across the island and were able to uncover a fraud rate of 67%.
Last year, Crawford began using robotic process automation, or RPA, to reduce repetitive tasks for adjusters, including simple steps like eliminating the need to copy and refill information from one computer screen to the next. How do you anticipate the claims process to evolve in the next year or so?
Crawford established Crawford Innovative Ventures (CIV) as a strategic catalyst to uncover the potential of new innovations that will disrupt the claims handling industry with practical, intelligent solutions. In addition to RPA, artificial intelligence, internet of things, and virtual reality are anticipated to change the claims process.
Lastly, what’s on the horizon for WeGoLook?
WeGoLook launched an assisted self-service app, YouGoLook, which allows customers to report and document claim conditions while being supported by an end-to-end workflow and WeGoLook’s central operations team to ensure the quality of data capture. With the YouGoLook self-service app, homeowners can submit their own claim photos, employers can audit their own fleets, and insurance applicants can capture images and information needed to evaluate risk or to validate assets used as collateral. The possibilities are truly limitless!
Do you think the emergence of technology in insurance will ultimately help attract a younger workforce?
I do believe that the emergence of technology in insurance will help attract a younger crowd to the industry. Technology, to an extent, is a concept with which my generation seems to be quite comfortable. Students that either chose not to study risk and insurance or have simply not had the opportunity to learn about the industry, regardless of their discomfort with the risk and insurance content, may now be attracted by the use of technology in the industry. Many of us students have learned to admire innovation and exploration of the application of newfound solutions. We want to be a part of the solution when we understand the goal.
Why did you choose to study risk management in college?
In some regard, I did not choose to study risk management. I intended to study finance and marketing. At St. Mary’s University however, finance and risk management are a combined major. Before I took a course in risk management, I believed it only to be a supplement to my education in finance knowledge. In some ways that remains accurate; my knowledge in finance has supplemented my knowledge in risk management and vice versa.
Has your perception changed on risk management and insurance?
I had little knowledge of risk management and insurance as a concept, let alone as this incredible industry rich with opportunity for students such as myself. My perception of risk management has completely transformed since I’ve had both formal courses and an immense amount of exposure to the industry, mostly through my involvement with Gamma Iota Sigma. I thought of risk management and insurance as this small, rather simple portion of business, a concept I needed to be aware of, but never more than that. Risk and the mitigation thereof, has become nearly my main focus when tasked to provide analysis, whether I am sitting in a finance or a marketing class.
The insurance industry historically has lagged behind when it comes to the adoption of new technology. What do you think it will take for the industry to get up to speed?
I believe the industry is making strides toward getting up to speed. Between the emerging technologies in the industry and the growing focus on attracting young talent, the industry is on the right track. I do, however, believe that this momentum needs to continue.
What is your favorite thing about risk management and insurance, and what do you hope to do with this skillset you’ve built?
I mentioned having intended to study finance and marketing. That came as a result of loving both the technical side of analyzing company performance and the idea of being stretched creatively. It was not until I took my first risk management course as a junior that I began down the risk management and insurance path. Risk management and insurance paired what I loved most about what I then considered my two majors—finance and marketing. I was required to understand how to make sense of the numbers in front of me, as well as be creative with my solutions. On top of that, by this point I knew that I wanted to work with people—whether that meant I would be in a collaborative space with co-workers or “client- facing,” I was not sure, but significant communication with others needed to be a part of my career. I come to understand that insurance is foremost a people business. Upon graduating, I am incredibly excited to enter a dynamic industry full of passionate individuals. I am both grateful and proud to be a product of the St. Mary’s University Risk Management Program.
Telematics, IoT, and the ability to make decisions based on real time data are changing the way organizations approach risk management. Where do you think the future of insurance is heading as more tech is injected into this space?
Technology will allow the industry to provide more effective service to consumers by streamlining the way insurance is purchased and claims are handled. It will also facilitate the industry’s ability to provide better risk mitigation to help prevent incidents or minimize their impact on consumers. Consumers will look to the insurance industry to not only provide protection against losses, but also provide guidance in effective risk management strategies to minimize incidents and losses.
This is the first Future of Risk conference that The Institutes has hosted. What sparked this decision and where do you hope to take this conference?
We noted that the insurance industry is at an interesting inflection point where technology advancement can enhance how the industry can service customers. As a provider of risk management and insurance education for more than 100 years, we saw an opportunity to help prepare the industry for changes that will ultimately benefit customers. So we decided to pull together our conference advisory board to help us craft a program filled with industry experts in blockchain, data analytics and risk tech.
Speaking of risk management, one could say brokers and carriers are transitioning from a focus on risk transfer to risk mitigation. Would you agree? What key ingredients do you feel winning commercial insurance business models will require?
Yes, I agree. There are two key things. One is to be able to process data, gain insights from the data, and formulate solutions for consumers that will make their lives and businesses safer. The second is that they will need to understand and communicate to consumers in a meaningful way.
Insurers and brokers largely view technology as an opportunity to cut costs, reduce friction and make more informed business decisions. Are there any aspects of the insurance value chain that technology ultimately cannot improve or replace? Do you think there can be an overemphasis on the opportunities technology creates?
There can be an overemphasis on technology. While technology can recognize patterns and draw insights into data it cannot replace human intuition and judgment. Most of the tech today, even advanced tech, is narrow in scope. Broad scope AI, for example, is many decades away. Human involvement is still crucial to understanding customers and conveying solutions to them.
We also need to be mindful of the data we collect so that we are thinking beyond the data collection and to how data will be used. There is a danger of focusing on collecting data without regard to whether or not it will be useful. Data is powerful, but it can also be overwhelming when not approached strategically.
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Today, families with loved ones who have intellectual and developmental disabilities, or IDD, have many more people, organizations and service providers on their side. IDD encompasses individuals with autism, downs syndrome, neurodevelopmental and adaptive functioning disorders, cerebral palsy and other varying abilities.
Caring for a person with IDD is challenging and costly. Traditional government funding sources for human services that assist vulnerable populations remains flat despite the fact that Americans are living longer than ever before and the number of people utilizing community services is growing. As people with IDD live longer, their care management becomes more complicated as they deal with general issues of aging such as dementia and nursing home care.
Obtaining health insurance is also a challenge. According to the National Disability Navigator Resource Collaborative, people with disabilities historically have experienced difficulty purchasing healthcare insurance because policies were prohibitively expensive and some insurers would not provide coverage for people with pre-existing conditions. An estimated 3.5 million people with disabilities did not have health insurance when the Affordable Care Act was enacted in 2010.
People with IDD also struggle to find the work that could alleviate some of these challenges. In its 2018 annual report, the Department of Health and Human Services acknowledged “unacceptable” employment gaps for Americans with disabilities. The Bureau of Labor Statistics reported 8 out of 10 people with disabilities were unemployed in 2017.
“One of our primary goals is improving the quality of life for society’s most vulnerable members: our developmentally disabled,” says Howard Siegel, chief executive officer of Irwin Siegel Agency in New York. “This touches upon everybody in America and their families.”
Irwin Siegel Agency was founded by Siegel's father in 1960. The elder Siegel was a passionate non-parent advocate of a local agency in Central New York called Sullivan County United Cerebral Palsy. In the early 1980's after Howard joined the firm, they provided the first policy to the New York State Association of Retarded Children, now called NYSARC. NYSARC had 60 operating chapters across New York and needed a consistent insurance program. Irwin Siegel Agency put together a set of standards and eventually became the managing general underwriter.
“We learned that service, true service, was important,” says the younger Siegel. More than 50 years since it opened its doors, Irwin Siegel Agency now specializes in intellectual and developmental disabilities, social service, behavioral health, addiction treatment, childcare and non-emergency transit.
Managed Care Making Waves
Over the past decade, several important trends in the human services industry have evolved, not only in how services are delivered, but also in the systemic infrastructure of how those services are managed.
There’s been a significant increase in the number of states moving to a managed care payment system for people with IDD, and that rollout is expected to continue over the next three to four years. As a Medicaid program, managed care implementation is at the state level, with the overarching goal being better quality and coordination of care through a capitated payment system.
But Siegel warns that states whose primary objective for moving to managed care is “cost containment” will struggle with the sustainability of those systems. “Our populations don’t support cost containment because these are lifelong issues,” explains Siegel, referring to the fact that typical wellness cost savers like exercise and regular doctor appointments don’t affect certain lifelong costs a person with IDD has. "And so there is a little bit more risk as you introduce managed care because the occupation speech and physical therapies, for example, don't change depending on the level of disability."
Siegel notes that states are focused on putting more people into supportive employment within their community. And while community integration is a worthwhile goal, it does increase potential claims. The more individuals who are taken out of controlled environments such as day programs, and placed into the community, the more complex the risk and exposure for organizations.
While this trend is potentially giving the end user, the person with the disability, more options, Siegel says it challenges the agencies that are running the programs. "There’s no way to know if they’re going to manage putting the right people into the right situations…These are the challenges that are going to be faced down the road. And those are the things that we really work with our clients on most.”
The total U.S. brokerage revenue of the top 15 brokerages, based on 1971 revenue, was $455 million. For perspective, today, as published in July 2018 by Business Insurance based on 2017 revenue, total U.S. brokerage revenue of $455 million would have equated to the 15th-largest brokerage on the list.
There has been significant movement among the top 100 brokerages over this 46-year period. Although from a deal count perspective consolidation might not be as prevalent in the top 100 as it is for the industry as a whole, there have historically been—and continue to be—many acquisitions of top-100 brokerages. We examined deal activity from 2009 to 2018, based on revenue reported for fiscal years ending between 2008 to 2017. During this time, there have been 154 unique brokerages that have been in the top 100. Of the 100 brokerages included on the 2009 list (based on 2008 revenue), 64 of them remained on the list in 2018.
Overall there has not been significant revenue growth, which is inclusive of organic and acquisitive growth, for most of these spots over the last 10 years, and the variation in who controls the revenue has been fairly consistent.Tweet
Overall there has not been significant revenue growth, either organic or acquisitive growth, for most of these spots over the last 10 years, and the variation in who controls the revenue has been fairly consistent. Further supporting the fragmented nature of the insurance brokerage market, the top 25 firms have controlled approximately 84% or more of the total brokerage revenue of the top 100 firms for the last 10 years, with the bottom 25% controlling only 2%-3%. However, when examining the underlying firms that make up these different quartiles, the prevalence and dominance of brokerages backed by private equity (PE) is significant in more recent years.
Many of the top 100 brokerages rely on acquisitions for growth, especially the aforementioned PE-backed brokerages. Considering the fragmentation that exists in the marketplace, it is interesting—though not surprising—that the top 100 firms account for the majority of the transactions. This percentage has continued to soar as PE-backed brokerages have entered the top 100.
Over the last 10 years, there have been at least 53 top-100 firms that have been acquired by a total of 19 unique buyers (with another announcement in January 2019, for Marsh & McLennan Companies’ pending acquisition of Bouchard Insurance, ranked 74th on the 2018 list). Peeling back the onion on these acquirers reveals a few trends.
- Marsh & McLennan Companies is by far the leading acquirer of top-100 brokerages, acquiring 12 top-100 firms (with, as mentioned, another scheduled to close in early 2019).
- USI has had a history of buying bank-owned top-100 brokerages, with four large bank-owned acquisitions since 2009. USI also acquired two other top-100 firms during this period.
- Gallagher also has six acquisitions of top-100 brokerages over the last decade.
- And last, but certainly not least, considering the relatively small number of public brokerages compared to the large volume of other buyer types, public brokerages have maintained a large market share of the acquisitions of top-100 brokerages.
Consolidation continues to play a large role in the makeup of the top 100 brokerages, and based on recent history, it appears it will play an increasingly dramatic role in years to come.
Unless otherwise noted, all revenue figures and revenue-related metrics are based on information published by Business Insurance in its annual “Top 100 Largest Brokers of United States Business” issue. This information is self-reported by brokerage submission and is not audited or verified by Business Insurance. The revenue reported is generated from U.S.-based clients, and to be eligible for inclusion in the report, brokerages must derive no more than 49% of their gross revenues from personal lines business. As the information is self-reported, Business Insurance publishes only the information that is reported to them.
Unless otherwise noted, all deal counts in this article refer to announced, U.S.-based transactions. MarshBerry estimates that only 15%-30% of transactions are made public.
When will the bubble burst?
This question has been hanging over the last few years’ M&A frenzy like a drone, watching—waiting for signs of a potential crash. Most of us in the insurance industry have at some point blinked and wondered if all this activity is too good to be true. Can these multiples really stick? (They have so far.) Will valuations continue to break records? (They are.) Will private equity continue to invest billions of dollars into insurance distribution? (It looks that way.)
We keep watching and waiting. But M&A transactions grow every year. And, companies we never expected to sell are doing just that.
The activity we’ve seen with low credit cost, high credit availability, private equity investment and impressive multiples seems like a perfect storm. Will the bubble burst as it did with the subprime mortgage and housing market, resulting in the subsequent collapse of market giants (Lehman Brothers) a decade ago? Is this high we’re riding going to nose-dive into the ultimate low? Is the deal pricing irresponsible?
Or, consider the fact that the insurance industry might have been undervalued for years—and private equity could continue to invest because of all the benefits that insurance brokerages know this industry offers: recurring revenue, resiliency in tough economic conditions and predictable returns.
Perhaps this “bubble” is really our new normal.
Betting Against the M&A Frenzy?
The reason we have been wondering about this so-called M&A bubble since about five years ago when activity began to pick up tremendously is probably because it hasn’t been too long since the economic collapse a little over a decade ago. We’re still predisposed to skepticism and caution when we see a market booming like insurance M&A has been recently.
What did we learn from this economic demise?
Lehman Brothers proved that even a very successful company—and in this case, a significant investment bank—can be on top of the world one year and bankrupt the next. From 2004 to 2006, Lehman Brothers’ real estate business made the firm one of the fastest-growing investment banking and asset management businesses. In 2007, it reported $19.3 billion in revenues and $4.2 billion net income. Record numbers. In 2007, Fortune magazine named Lehman Brothers the No. 1 “most admired securities firm.” That was just a year before it went bankrupt, in September 2008. In the end, Lehman Brothers—Mr. Big—was not too big to fail.
The movie The Big Short tells the true story of a group of investors who bet against the U.S. mortgage market after discovering through research how flawed and corrupt the market was. There are some people who are betting against what we’re seeing today in the insurance industry because of the incredibly high multiples, activity levels, and leverage ratios of the acquirers.
Too Sustainable to Fail
Some are saying that the current market is over-valued, and there are questions as to whether we could be getting ourselves into a similar economic situation as in 2008. Considering the flood of M&A activity and pricing we’ve seen in the insurance industry, it’s realistic to wonder if history could repeat itself—and this time, impact the insurance industry and players that seem “too big to fail.”
But a closer look at then versus now shows some stark differences. At the time of this writing, employment numbers are significantly better than they were 10 years ago, with a current unemployment rate of around 3.7%. The stock market is strong. Demand in the housing market is steady because of the healthy economy and robust labor market. So, the overall economic environment is not a mirror image of 2007-08.
But what about the multiples, the valuations, the prices that private equity and insurance brokerage buyers are willing to pay to acquire firms? Is there financial engineering in the works—is this pricing irresponsible?
So, back to that bubble. Will the insurance valuation and investment high we’ve been seeing lately ultimately result in a bust? The concern at a high level is that buyers in the marketplace are paying so much money and layering on so much debt that if the credit markets freeze and the economy stalls, there may be no more debt to have—and ultimately, the heavily leveraged brokers could fail. But here’s why we believe this is not likely to happen in the insurance industry. Say Agency ABC had 7x leverage on their balance sheet couldn’t borrow another dime to make more acquisitions or restructure their debt. The staunch reality is that they could do no more acquisitions and survive (or even thrive) as a viable business. Why?
Assume they hold on to approximately 90% of their business every year because of recurring revenue. The cash flows of an insurance agency are typically so strong that Agency ABC would still likely be able to pay down or pay off its debt in seven to ten years depending on their organic growth. Is this perfect? Of course not. Will the investors get a strong return? Probably not. Does it mean sellers would see less buyer appetite and lower valuations? Most likely. But it’s nowhere close to needing a bailout. Not by a long shot. Given strong profitability and recurring income, even a total “failure” is not going to completely take down a business that is strong, high-performing and running soundly. This industry is not like automobiles and homes where individuals can forgo a purchase or significantly downsize during an economically stressful time.
Now, an insurance business certainly can fail. If an owner runs the operation like a lifestyle business, does not invest in developing talent or technology, ignores complacent producers, has a “why fix what isn’t broken” mentality, and struggles with profitability, then yes, it could fail. This insurance business could fail in the sense that it will not perpetuate, or its business will be vulnerable to competition. It’s not sustainable.
But as for an actual bubble burst, that’s not something we expect to happen, even with the continuing record M&A activity, including last year’s 580+ transactions.
A New Normal
Last year’s M&A activity was the strongest yet in terms of the number of deals closed, and the size of those deals. Insurance business owners are asking themselves, “Should I sell now?” They’ve seen plenty of owners cash out with multiples those businesses would never have realized three years ago. Even average companies are getting higher valuations than the high-quality firms got in 2015. This dynamic is why some are wondering how long this activity will last—and how bad the industry will suffer if large firms that may be aggressively leveraged flop. (But back to our previous example, the fail may look more like a foul, followed by a rebound.)
Perhaps what we’re really seeing in this dynamic marketplace is a sustainable valuation adjustment as investors recognize the potential and stability of insurance businesses. They want some skin in the game. And, because of our industry’s cash flow model, conservative approach to risk, and dependable revenues, these investors know they’ll see returns. We’re not selling subprime loans here.
Rather than the proverbial bubble, what we very well could be experiencing is the new normal.
2019 and Beyond
We don’t have a crystal ball and we are not sure what the canary in the coal mine is to signal a turn in the market. Here is what we do know. Valuations and deal activity are currently at their highest levels on record for the industry.
In the first two months of 2019, we have seen six top 100 brokers announce transactions:
- Patriot Growth Insurance Services was formed on 1/1/19 with the aggregation of 18 organizations into a new company backed by private equity sponsor Summit Partners
- Alliant Insurance Services, Inc. brought on a new capital partner in Public Sector Pension Investment Board (PSP Investments)
- U.S. Risk announced a pending transaction with USI Insurance Services
- Relation Insurance Services has been acquired by private equity firm Aquiline Capital Partners
- AssuredPartners Inc. was reacquired by the private equity firm who founded the organization, GTCR LLC
- AssuredPartners also announced the acquisition of Tolman & Wilker Insurance Services, LLC
These transactions are likely just the tip of the iceberg for more large deals in 2019. Activity in the first few months continue to trend at the same levels of 2018. If early activity is an indication, the year could be another record setter.
As the economy remains strong, we expect valuations to continue at their current levels. It is possible that the economy may very well be the trigger we need to keep an eye on. Taxes or interest rates are often talked about as possible reasons for valuations to faulter. But the economy could be the most important influencer on our current good fortunes. As the economy continues to grow, acquirers are valuing businesses based upon their forward looking profit as opposed to the prior 12 months’ actual performance. There is a predictability in the growth that allows for more aggressive buyer behavior, and it’s likely to sustain at least through 2019.
Beyond 2019, we need to keep a close watch on economists and their predictions for the next recession. More money will likely continue to flow into the distribution space and demand should remain strong. If economic growth slows, demand may be able to keep activities and valuations high. However there is no way to predict how the buyers will react to slowing growth. It is hard to say where we will be 24 months from now but the next 12 look like much more of the same.
Trem is EVP at MarshBerry. Phil.email@example.com
Unless otherwise noted, all deal counts in this article refer to announced, U.S.-based transactions. MarshBerry estimates that only 15%-30% of transactions are made public.
David Schaefer, President and CEO, AHT Insurance
Why has your organization decided to remain independent? What are the most important factors in this decision?
Insurance brokerage is ultimately and fundamentally based on trust and a number of important promises. AHT firmly believes our independence is foundational to the promises we make to every client as it relates to service and our commitments to the partnerships we form with our clients. Losing our independence means a change in control of the business and an unambiguous surrender of the commitments we have made to our clients and our employees. Built to last,
AHT is structured optimally to provide every one of our high-performing professionals the opportunity to participate in the success of the organization. This fact contributes to our unusually high retention and long tenure of our professional staff as well as an unmistakable sense of teamwork and camaraderie. This consistency and professional latitude to always do what is right with absolute integrity is another important differentiator as our deliverable to AHT clients.
As a growing number of our competitors have lost their independence—along with the singular focus on serving the client—and are now also serving stakeholders seeking to take returns and value out of their organizations sooner or later, AHT believes there is a growing opportunity to serve a growing constituency of insureds and great insurance professionals who understand and appreciate the differences between these models.
How do you prioritize investment dollars, which are limited? What services or technology capabilities differentiate your agency from competition?
As a matter of highest priority, AHT’s continued investment in and development of key proprietary tools and deliverables—technology-based and otherwise—provide our clients with effective, efficient services that advance our clients’ related positions and goals established through their relationships with AHT. As with most professional services firms, our staff is our most valuable resource, and the firm devotes considerable resources on an ongoing basis in training and development. Our ownership structure and perpetuation plan, areas of deep specialization, and expertise are primary differentiators for the firm, along with our staff and relationships.
Are acquisitions a significant part of your company’s growth plans? How do you identify potential targets and compete against the most active acquirers?
In a manner of speaking, yes, but not in the classic sense. The competition of well funded, acquisitive organizations for insurance brokerages is intense, as everyone familiar with the industry knows. Through some first-hand experience and from what we have learned from others, regardless of the high-minded approach many sellers begin with as they dip their toes in the M&A market, in the end most sell to the highest bidder or near that, with little regard for the implications for their clients and their employees. The failure of serious, ongoing, sustainable perpetuation planning is nearly always the No. 1 driver to sell an insurance agency, despite the red herring of “more resources for our clients” that many sellers indicate is the primary driver to sell after the fact.
This is in spite of the fact that many of these organizations have survived, even thrived, on the promise of continuing independence and an opportunity for many of their next-generation best and brightest to own a part of the company and have a “seat at the table” at some point as a part of a perpetuation strategy. No wonder the industry has problems attracting and retaining youthful talent! AHT sees this dynamic as a wonderful opportunity to attract those professionals, cast out into acquiring organizations they never planned to join, with now-dead dreams of owning a part of the now-gone company they helped to build. These stranded entrepreneurs in search of a better business model—both individuals and teams from production, service and support—are AHT’s acquisition targets.
By building and continuing to grow a privately held, world-class brokerage operation that has a proven, sustainable perpetuation strategy, AHT has designed the perfect destination for like-minded insurance professionals who understand that this model we embody is an ideal for really serving insurance clients best. Leveraging a variety of connective technologies, AHT is agnostic to geography when it comes to employing these stars; we are about delivering a superior brokerage experience and service model to insureds who understand working with an owner is always better.
What do you see as the future of the middle-market brokerage, given the consolidation that has occurred in the brokerage space over the last number of years?
The future will be bright for those middle-market brokerages who remain committed to—and plan to perpetuate for—the long term and who understand the value that can be delivered through the independent insurance brokerage model. This model presents lasting, substantial and incontrovertible advantages a good segment of the industry’s best talent and many prospective clients understand, especially after experiencing the available alternatives. By focusing primarily on serving clients and not shareholders or debt holders, the sustainable independent agency, owned solely by its high-performing professionals, should thrive for the foreseeable future
Dan Keough, Chairman and CEO/Shareholder, Holmes Murphy
Why has your organization decided to remain independent? What are the most important factors in this decision?
Holmes Murphy was founded in 1932, and we’re currently in our fourth generation of leadership. What makes us unique is, when leadership changes from generation to generation, so does the ownership of our company. Being a privately held firm, we are accountable only to the long-term needs of our clients—that is our No. 1 focus. Our culture of private ownership fuels our passion to provide employee ownership opportunities and serve customers. We take purposeful steps to feed the entrepreneurial spirit within our organization. We believe we owe it to former shareholders, employees, customers and our communities to remain private.
How do you prioritize investment dollars, which are limited? What services or technology capabilities differentiate your agency from competition?
This is a difficult question in a growth-oriented company. Our leaders compete for investment dollars to expand our growth or meet our customers’ needs. Innovation fuels growth. We are always thinking and looking ahead to see what’s on the horizon and how it could be developed to meet or exceed our clients’ needs. Over the years, Holmes Murphy has created many startups, each one designed to fulfill our clients’ needs to drive down costs and/or create efficiencies.
Our captive and clinical capabilities differentiate us, as well as our expertise in several industry verticals. Most recently, we developed and launched SimplePay Health, which will be a game changer in the healthcare space. SimplePay Health eliminates the confusion and frustration with healthcare in America and replaces it with a new way of doing things. One way, in particular, is you can know the total cost of your medical care before you schedule an appointment.
With regard to technology, we are partnering with companies, are investing in companies, and have formed a team to survey the insurtech landscape to find opportunities. We believe innovation within our company provides employees with the opportunity to change the game, create wealth and drive a culture where ideas are welcome.
Are acquisitions a significant part of your company’s growth plans? How do you identify potential targets and compete against the most active acquirers?
Holmes Murphy focuses on acquisitions that include teams of top performers that either fit well within our geographic footprint or expand our capabilities. Additionally, we look for those companies that not only want to partner with us for growth and a love of the business but also fit our culture of being privately owned. Cobb, Strecker, Dunphy, and Zimmermann (CSDZ) is the most recent example of this. This transaction not only helped Holmes Murphy enter the Minneapolis market but also expanded our construction expertise.
What do you see as the future of the middle-market brokerage, given the consolidation that has occurred in the brokerage space over the last number of years?
I feel there will always be firms that are fiercely independent and committed to remaining private, like Holmes Murphy. Reaching a size that allows them to remain relevant and provide all the tools of the larger firms will be challenging. As a result, we may see more consolidation of privately held firms with other privately held firms. The opportunity is enormous and will attract the best talent.
Duane Smith, CEO, TrueNorth Companies
Why has your organization decided to remain independent? What are the most important factors in this decision?
When we formed TrueNorth in 2001, there were six partners who had the opportunity to experience a way of life that we wanted to preserve and pass down to the next generation. We were able to make a good living, build equity and have a quality of life that allowed us to be present with our families. We recognized that, with many of the aggregations that were occurring, the entrepreneurial opportunities that we experienced went away. Our vision statement, “To build a legacy company with an entrepreneurial platform that attracts, develops and coordinates high-performance talent,” has provided us with the ability to stay committed to and focused on remaining independent.
How do you prioritize investment dollars, which are limited? What services or technology capabilities differentiate your agency from competition?
One of the mantras from MarshBerry that resonated with us is: “If you run your company as if it is for sale, you won’t have to sell it.” We have developed an owner’s manual based on four critical indicators that must be in balance: profit, client experience, culture and growth. Profit can be too high at the expense of the other three or too low at the expense of the culture, client experience and growth. We define, measure and manage all four of the KPIs and hold our leaders and people accountable based on these results.
Are acquisitions a significant part of your company’s growth plans? How do you identify potential targets and compete against the most active acquirers?
We hired an individual from our industry three years ago to focus on acquisitions and organic growth. Annually we discuss our growth strategy and decide where to invest. Organic growth is generally preferred over M&A, but there are strategic M&A opportunities that can be attractive. With the high valuation multiples, we are currently focusing more efforts toward organic growth. We have developed a subset of our M&A strategy that is focused on smaller “County Seat” opportunities that are below the radar of many of the PE firms.
What do you see as the future of the middle-market brokerage, given the consolidation that has occurred in the brokerage space over the last number of years?
Consolidation in our industry can be positive. Providing value to our clients and our market partners is at the heart of what we do. Many agencies struggle to provide a value proposition beyond market access. As technology and access to information become more available, we must focus on value-added services beyond the traditional insurance product. Many of the larger aggregators understand this and are helping brokers provide value. What is lacking in many of the consolidation opportunities is an opportunity for equity and a forum to be innovative. Our answer to that is an entrepreneurial platform that allows high performers to have an equity interest in their respective profit center and develop innovative solutions to their clients’ problems.
The responses above are not the opinions or beliefs of MarshBerry and were supplied by each individual named. —Editor
Prior to consummating a deal, agencies and brokerages should evaluate the extent to which they will be able to leverage these partners to help boost the top line or contribute to the business in ways other than just the financial infusion.One of best ways to think about a financial partner is in high-level strategic terms rather than on a daily operating level. Your partners will be on your board of directors and will review the monthly and quarterly operational reports, but they will not typically be focused on daily decisions. Instead, they will focus on long-term strategic moves that increase value over years, not weeks. The right financial partner can link you with vendors or service providers that may be able to add value to your business, or they can help find talent in senior leadership functions that are outside of your core strengths (think of the high-level CFO or the strategic HR leader). But most of all, the partner should bring an analytical rigor and a level of accountability necessary for sustained long-term growth.
For example, let’s think about an investment to acquire revenue, which is inorganic growth. If your strategic plan calls for 10% inorganic revenue growth per year (in addition to organic growth), the financial partner can help fund this but only with a realistic, well-thought-out plan in place. The partner will want to know who is responsible for deal origination and who is responsible for closing. What’s the sales pitch to prospects? What’s the targeted market (e.g., niches, geographic, revenue size)? What’s the integration model post close? And once these are built out and the plan is put into motion, the partner will want to know what the acquisition pipeline looks like on a regular basis. Where talent is lacking, perhaps on legal or financial staffing, the financial partner may be able to connect you with talent in this space but will not be in a position to do the heaving lifting. This financial discipline will help increase the odds that the plan is successful and that the partners—all of them—achieve target returns.
One of best ways to think about a financial partner is in high-level strategic terms rather than on a daily operating level.Tweet
The key takeaway here is to make sure you have this discussion with your potential partners before you take on their investment. Create a list of the things you want in a partner and discuss each one, making sure you understand their skills and abilities. Also, be sure to review the investor’s version of this list so you are clear on their expectations of you as well.
GDP Outlook Still Positive
Despite 2018’s fourth-quarter struggle, strong economic growth is expected to continue into 2019, though at a slightly slower rate. The Federal Reserve Bank of Philadelphia’s survey forecasters predict GDP growth of 2.7% for the year, while the central tendency of Federal Reserve Board members’ projections falls in the 2.3% to 2.5% range (versus approximately 2.9% to 3.0% in 2018).
Real GDP growth is projected to remain above the average pace of the past decade. Economists from Wells Fargo expect growth to be backed by gains in consumer spending—driven by tax cuts and lower oil prices—and government spending, while slowing business investment and declining residential investment will constrain faster growth.
Borrowing Costs Rise
The Federal Reserve acted according to expectations for 2018, raising the federal funds target rate four times over the year. The federal funds rate has an impact on both short- and long-term interest rates. Long-term rates, which affect consumer (e.g., mortgage rates) and business borrowing costs, are impacted by several factors, including economic outlook, inflation expectations, rate expectations, and global demand and supply. If borrowing costs continue to rise, this may negatively impact business valuations. As of early 2019, the Fed indicated it will scale back on interest rates hikes this year.
Labor Supply Tightens
Labor conditions continued to improve throughout 2018, as the unemployment rate fell below 4.0% in April for the first time since December 2000 and finished the year at 3.9%. Industries that most contributed to employment growth over the year included professional and business services, leisure and hospitality, construction, healthcare and manufacturing. The employment rate is expected to further improve in 2019, with forecasters anticipating it falling into the 3.5% to 3.7% range. The labor participation rate—the number of adults in the labor force between the ages of 16 and 64 years old who are either employed or unemployed but looking for a job—registered at 63.1% in December 2018, generally in line with the trend of the past four years.
The unemployment rate is at its lowest point in decades and will intensify competition for key talent. Although labor costs are increasing at a slower pace than expected, there is upward pressure, which could impact agency and brokerage profitability.
Manufacturing Still Strong
Advanced estimates of new orders for manufactured durable goods rose to a seasonally adjusted $250.8 billion in November 2018, while year-to-date orders expanded 8.4% over the previous year. Orders of transportation equipment represented the largest driver of growth in 2018. The impact to the insurance distribution sector is constrained in our opinion.
The Institute for Supply Management (ISM) index, which reflects production and demand in the manufacturing sector, fell to 54.1 in December 2018 from 59.3 in November. This was the largest one month drop in a decade. While this does suggest a slowing pace of manufacturing growth, values above 50 are still indicative of expansion, reflecting that the economy grew for the 116th consecutive month.
Consumer Confidence Wanes a Bit
The Conference Board announced in December 2018 that the U.S. consumer confidence index was at 128.1, down from 136.4 in November. The Conference Board reports, “Expectations regarding job prospects and business conditions weakened but still suggest that the economy will continue expanding at a solid pace in the short-term. While consumers are ending 2018 on a strong note, back-to-back declines in expectations are reflective of an increasing concern that the pace of economic growth will begin moderating in the first half of 2019.”
Housing Construction Rises
Housing starts rose in November from the previous month, driven by a jump in the multi-family segment, up 22.4% (single-family starts recorded a 4.6% drop). The month did mark a decline in total starts year over year; however, on a year-to-date basis, total starts were up compared to 2017.
Tax Reform Bolsters Economy
The tax cuts passed in late 2017 supported increases in consumer and business spending throughout 2018. While the economy will continue to benefit from these tax cuts, the extra stimulus provided by the change will probably dissipate as 2019 progresses, with growth in consumer and business spending continuing at slower rates.
Impact on Insurance Distribution
Several major trends are affecting the insurance market in the near term:
- Rising property-casualty and health premium rates
- Significant increase in P&C annual net premium growth (+10.6% as of June 2018) driven by higher commercial lines pricing plus higher exposure base
- Solid surplus at P&C and health insurers
- Improved P&C combined ratio.
“The composite rate for property-casualty insurance in the United States rose 2.5% in the second quarter of 2018,” according to MarketScout. Rate increases were driven primarily by higher auto and trucking rates due to higher claims/losses. At midyear, policyholder surplus was strong at $749.3 billion. In addition, underwriting discipline appeared to improve with the help of technology and data analytics, resulting in better-contained losses. The combined ratio, a measurement of underwriting profitability calculated as the sum of incurred losses and expenses divided by total earned premiums, improved significantly—from 103.7 in 2017 to 97.3 in the third quarter of 2018.
There is potential for the current strong surplus and combined ratio to take a hit if higher than expected insured losses result from natural disasters. Current estimates on industry losses from Hurricane Michael and the California wildfires—the costliest disasters of 2018—fall in the ranges of $6 billion to $10 billion and $16 billion to $18 billion, respectively. While these losses would be enough to push total 2018 insured catastrophic losses well above the average of the past 20 years, total losses for the year are not expected to surpass 2017 levels.
Unless otherwise noted, all deal counts in this article refer to announced, U.S.-based transactions. MarshBerry estimates that only 15%-30% of transactions are made public.
1. Marsh & McLennan Companies (MMC) announced its purchase of Jardine Lloyd Thompson Group (JLT). JLT was traded on the London Stock Exchange and had revenues of just under $2 billion, adding almost 15% to MMC’s $14.8 billion top line. All in, MMC will end up paying more than three times revenue, assuming total enterprise value of $6.4 billion, which represents a 33% premium to where JLT stock was trading prior to the deal.
2. Brown & Brown announced its purchase of Hays Companies, a Minneapolis-based brokerage with revenues approaching $200 million. With revenues of just under $2 billion, Brown & Brown will add roughly 10% to its top line. Including potential earnout payments based on performance, the total paid for this acquisition could be up to $730 million, or over 3.5 times revenue.
3. MMC purchased Wortham Insurance, a top-40 U.S. agency (2017) with revenues over $130 million. Wortham is based in Houston, Texas, with locations in several cities across the state. The acquisition created a new division within Marsh & McLennan Companies, called “Marsh Wortham.”
4. During December, Acrisure, the most active insurance agency buyer since 2015, announced that several of its private equity partners had increased their investments in the business. The increase in investments from its partners implies an enterprise value of more than $7 billion, or over two times the value Acrisure garnered in 2016, when a $2.9 million management buyout was completed. Revenue has grown on an annualized basis since that time to over $1.2 billion from roughly $650 million, and the firm noted it planned to close more than 100 transactions during 2018. Although the company has several institutional investors, the majority (83%) of Acrisure stock is in the hands of its employees.
5. Hub International entered into an agreement to receive a round of funding from new investor Atlas Partners in October 2018. The transaction reportedly implies a total enterprise value of over $10 billion, which represents a valuation of approximately five times revenue. Hub’s current private equity sponsor (Hellman & Friedman) will remain the largest investor.
6. Crystal & Company, a top-40 U.S. brokerage in 2017, sold to Alliant Insurance Services during 2018. The agency had more than $160 million in revenues in 2017 and 11 locations, with its headquarters in New York City.
7. Ryan Specialty Group was founded in 2009 and offers specialty insurance and risk management solutions to agents, brokers, and insurers and their customers. Onex Corporation became its private equity sponsor in 2018 (Ryan Specialty was previously independently held). Ryan Specialty completed four transactions in 2018, three prior to taking on private equity investment and one following the investment.
8. Propel Insurance Agency, formerly known as Bratrud Middleton Insurance Brokers, was founded in 1923 and is based in Tacoma, Washington. Propel Insurance provides property, casualty, risk management, workers compensation, employee benefits and personal insurance products. Edwards Capital, dba Flexpoint Ford, made an investment in Propel Insurance during 2018.
9. Navacord was incorporated in 2014 and is based in Mississauga, Canada. It provides insurance brokerage and risk management services as well as employee benefits, group retirement and financial services to the corporate sector. Navacord received an investment from Madison Dearborn Partners in 2018.
10. After completing the acquisition of Wells Fargo’s commercial insurance division in late 2017, USI Insurance Services announced in March 2018 that it would be acquiring the insurance assets of another bank, KeyBank. Key Insurance & Benefits Services was formed during the 2016 KeyBank merger with First Niagara Financial Group. The business consisted of 350 employees across eight offices in the New York, Pennsylvania and Connecticut markets.
11. BB&T Insurance Holdings, a division of BB&T Corp., announced its acquisition of the Regions Insurance Group (Regions Insurance), a division of Regions Financial Corp. Regions Insurance included both its retail division and its wholesale division (Insurisk) in the sale to BB&T. Regions Insurance was a top-40 U.S. agency (2017) with revenues north of $135 million across 10 offices in the Southeast, Texas and Indiana.
12. At the end of 2018, Edgewood Partners Insurance Center (EPIC) announced its intention to acquire Integro Group Holdings, a top-25 U.S. brokerage with more than $200 million in revenues (2017). Integro has several specialty areas, including entertainment and sports, professional services, and transportation and logistics, among others. Integro had 22 offices throughout the United States. The transaction is expected to close in early 2019.
13. One regional insurance brokerage, Goosehead Insurance, took on a different kind of investor last year by going public with its initial public offering on the Nasdaq stock exchange in April 2018. The business uses a franchise model and focuses on organic growth opportunities.
For P&C insurers, “storms” take the form of poor underwriting discipline, sizable catastrophic losses, and financial/economic downturns. We are now 20 years from the industry’s last appreciable soft-market cycle of 1997-2001 and 10 years from the global financial crisis of 2008. It is true that the industry has experienced two recessions since 1999 and weathered large shock losses in 2005, 2011 and 2017, but these were managed rather adroitly.
The hard market, which lasted from 2001 through 2004 (and even beyond from an earnings point of view), substantially boosted the industry’s profitability. The resulting surge in surplus, helped also by several periods of strong net capital gains, well outstripped net premium growth, resulting in conservative net premium leverage and thus greater “capacity” to write business.
As is inevitable in such a capacity-rich environment, annual rates came under pressure and hit a trough in 2008. However, underwriting discipline never foundered—as happened in past market cycles—and over the past 10 years, we have witnessed a much gentler undulation in annual rate changes (see Exhibit 2). This has resulted in a sort of Goldilocks environment, upon which a number of brokers have commented favorably. In fact, Pat Gallagher reflected this in a 2018 analyst call:
Since 2004 the industry has notched seven periods in which underwriting profits supplemented net investment income.Tweet
Rate is really not impacting our results much. When you spread it across all that we're doing, some is up, some is down … But it's really a flattish market and it has been for about 8 years. And I'd also tell you, down 3%, up 3%, I would call -- I'd tell you is flat. I'm not going to lose an account, frankly, for 3%. But I'll lose an account for 23%. And I think that when I'm at 3% up, 3% down, which is now 1% up, 1% down, I can sit there with a client and talk about the fact that we've provided unbelievable service beyond the price of insurance.
One of the reasons for the industry’s financial outperformance over the past 20 years is its return to underwriting profitability. Exhibit 3 shows the components of income for the U.S. P&C industry since 2004. Before this period, one would have to look back to the mid-1970s to find an underwriting profit. In contrast, since 2004 the industry has notched seven periods in which underwriting profits supplemented net investment income. This is in part the result of large prior-year reserve releases into underwriting earnings, but attention to adequate rate in most lines of business has also played an important role.
Good Financial Shape
Exhibit 4 shows the ALIRT scores for the personal lines and commercial lines composites since ALIRT began tracking them in 1995. The red line represents the average ALIRT score for all P&C companies during this period (on a scale of 0-100), a level that reflects an average solvent P&C company. Because the ALIRT score is derived from 45 financial metrics that measure individual insurers on a holistic basis, these composite scores can be seen as taking the financial pulse of the entire industry over time.
The volatility that characterized the industry in prior periods has eased substantially over the past decade, with both our personal and commercial lines industry scores indicating average or above average performance since 2006. During this time, the composite scores dropped to average levels only in years with large catastrophes or a financial crisis (2008, 2011, 2017). As of the first nine months of 2018, the ALIRT scores for both composites were again near or above 60, which represents almost a full standard deviation above normal. In short, the financial profile of the U.S. P&C industry is indeed “shipshape.”
Fair Winds in 2019
As we look into 2019, we anticipate more halcyon days ahead. While ALIRT’s quarterly rate monitor (Exhibit 5) indicates that general U.S. premium rates are slightly less than adequate at present, the very gradual firming over the past year appears to be addressing that deficiency. The U.S. economy, despite some scary headlines, remains strong with historically low unemployment and should support continued demand for insurance coverage. Even interest rates have been cooperative, with yields across almost all bond classes rising over the past year, providing some lift to investment income.
Large catastrophic losses and economic/capital market downturns always remain a wildcard, but the industry’s substantial surplus position currently offers tremendous ballast for such eventualities.
David Paul is principal at ALIRT Insurance Research.
For the seventh consecutive year, buyers backed by private equity maintained their leadership status and actually increased their overall contribution to deal activity. PE-backed buyers accounted for 343 of the 580 total brokerage transactions in 2018, or 59% of deal activity. Of the top 20 buyers in the marketplace (which represented 67% of all transactions), only five (three public brokerages and two independent agencies) do not have private equity backing. Other independent agencies represent another 20% of all activity (or 114 of 580 announced deals). That means PE-backed and independent agencies, combined, made up the vast majority (79%) of all deal announcements in 2018. Interestingly, but not all that surprisingly in light of recent U.S. tax reform, public brokerages significantly increased their transaction activity—from 37 deals in 2017 to 61 deals in 2018.
High free cash flow, strong recurring revenue stream, a semi-required product, relatively low risk, and a highly fragmented market place—all fundamental attributes of insurance brokerage—continue to attract PE groups to the space. Coupling these factors with the low cost of capital and easy access to investable capital, valuations and total activity within the merger and acquisition marketplace continued to trend upwards.
The top five buyers in 2018 comprised four from 2017 and three from 2016, with another returning to the top five from 2016. Of these five top buyers, only one does not have private equity backing; however, it does have financial backing as a publicly traded company.
The top five most active buyers accounted for nearly 35% of all transactions in 2018 (200 of the 580).
1. Acrisure was again the top buyer for the fourth year in a row with 65 announced deals, compared to 72 in 2017. Historically, Acrisure has not announced the target name of acquisitions, and 2018 was no exception, with only a handful of target names released. Acrisure has communicated separately that it successfully completed more than 100 transactions during the year, as it has historically not announced all transactions to the marketplace. One notable acquisition was Acrisure’s purchase of London-based reinsurer Beach & Associates Ltd. from private equity group Aquiline Capital Partners, which invested in Beach & Associates Ltd. in 2014. This is Acrisure’s first European target.
2. BroadStreet has been consistently increasing its number of deals over the past few years, with 26 deals announced in 2015, 28 in 2016, 31 in 2017, and 37 in 2018, moving up from third most acquisitive in 2017. BroadStreet has completed approximately 341 transactions, including core partners and tuck-ins, since 2001, with a compound annual revenue growth rate since 2010 of 28%.
T3. Alera reentered the top five in 2018 tied for third with 34 announced transactions, more than doubling its 2017 deal count of 15. Alera was founded in 2016, when 24 independent firms (largely employee benefits focused) from across the country joined forces with help from experienced insurance brokerage investor Genstar Capital. Alera has a defined employee benefits focus; however, it is working to build out the property-casualty side of its business. During 2018, Alera announced five P&C-only acquisitions, which doubled its P&C deal count from inception to the end of 2017.
T3. AssuredPartners posted another strong year, with 34 announced transactions, up from 25 in 2017. It was announced in 2019 that Apax Partners, AssuredPartners’ current private equity sponsor, will sell a majority stake in AssuredPartners to GTCR (AssuredPartners’ former PE sponsor that exited in 2015). The valuation is estimated at $5.1 billion, which represents over 14.5 times EBITDA, based on $350 million of estimated EBITDA. It was estimated that when GTCR exited its investment in AssuredPartners in 2015, the transaction valuation was $1.7 billion.
5. Gallagher reported 30 U.S. deals during 2018, claiming the last spot on the top-five buyers list, sliding down one rung from 2017, when it announced 25 transactions. It was noted on a Dec. 11, 2018, special call that competition remains high for deals and it is anticipated that its blended multiple for 2018 would be between 7.5 and 8.5 times EBITDA, which is consistent with what Gallagher management communicated for 2017 acquisitions. Management also indicated that, as of December 2018, it had an acquisition pipeline of approximately $500 million in revenue either under term sheets or in the process of preparing term sheets.
Breaking the two-year trend of nine PE-backed buyers, 2018 saw “only” eight PE-funded buyers on the top-10 most-active list. There has been (and continues to be) a significant increase in PE-backed buyer activity, which was virtually nonexistent prior to 2007, when PE-backed buyers represented just 7% of total deal activity.
During 2018, four new PE-backed buyers entered the marketplace, for a total of 31 unique companies, compared to 25 in the 2017. With the addition of the four new PE-backed firms, this segment saw an 9% increase in total deals—to 343 total deals, up from 315 in 2017. The top 10 PE-backed buyers represented 46% of the total deal activity in the insurance agency acquisition space and 79% of the total number of deals backed by private equity.
Although there was a slight increase in interest rates during 2018, the availability and relatively low cost of capital (compared to historical rates) continued to drive PE-backed buyers to acquire insurance brokerages at an accelerated rate, pushing activity within the industry overall. With investors continuing to search for strong returns in a low interest rate environment, there continued to be heightened interest and demand among private equity in the space.
We also saw continued interest from private equity firms entering or expanding their portfolios within the insurance distribution space with first-time acquisitions made by the following PE-backed buyers:
Integrity Marketing Group (eight deals) was founded in 2006 and is based in Dallas. It distributes life and health insurance products. Integrity Marketing Group did not make its first acquisition until 2018; however, it received private equity funds in 2016 from HGGC.
Foundation Risk Partners (seven deals) is a Daytona Beach, Florida-based brokerage founded in 2017 with the acquisition of Corporate Synergies Group and Acentria Insurance. Foundation Risk Partners received an investment from Warburg Pincus in late 2017.
Ash Brokerage (two deals) operates as an insurance brokerage general agency based in Fort Wayne, Indiana, offering life insurance analysis and annuities analysis. The company also provides long-term care assistance services. It was founded in 1971. In 2017, it received an investment from Century Equity Partners.
XPT Group (one deal) was founded in 2017 and is headquartered in New York, It offers specialty line insurance brokerage and distribution services. It received a minority investment from B.P. Marsh (North America) Ltd. in 2017.
In addition, the following actively acquisitive firms significantly changed or added new private equity sponsors during 2018:
HUB International entered into an agreement to receive a round of funding from a new investor, Atlas Partners, in October 2018. The transaction reportedly implies a total enterprise value of over $10 billion, which represents a valuation of approximately five times revenue. Hub’s current private equity sponsor (Hellman & Friedman) will remain the largest investor.
Acrisure announced that a group of investors led by funds managed by Blackstone’s GSO Capital Partners and Tactical Opportunities businesses have significantly increased their investment. Partners Group also increased its investment. As part of the transaction, Harvest Partners became a new investor in Acrisure. In total, the three investors now have invested or committed to $2 billion of preferred equity in Acrisure. The investment implies a valuation for Acrisure of more than $7 billion. Acrisure remains more than 83% owned by its management team and agency partners.
It was announced in 2019 that Alliant Insurance Services will receive an investment from Public Sector Investment Board. With this investment, Alliant’s current capital partner, Stone Point Capital, will make an additional investment.
Independent agencies and brokerages completed 114 deals, or 20% of all activity, in 2018, which represents a decline in transactions of 20% from 2017, when independent agencies accounted for 142 transactions (or 25% of total activity). There were 82 buyers (down from 110 in 2017), with approximately 15% (12 total) completing multiple transactions and 44 announcing their first acquisition in 2018.
New Jersey-based World Insurance Associates announced eight transactions in 2018 (up from five in 2017), expanding beyond New Jersey and New York into Connecticut, Maine, Ohio and Pennsylvania. Two of the seven agencies acquired in 2018 were employee benefits only firms, which differs from 2017, when all acquisitions had some P&C business. World Insurance Associates specializes in transportation, hospitality, coastal properties and high-net-worth individuals.
Mechanicsville, Virginia-based Easley Hedrick Insurance & Financial completed its first acquisition during 2018 and ended the year with five acquisitions, all Virginia-based P&C agencies. Prior to the acquisitions, Easley Hedrick had 15 employees. It added 12 additional employees from the acquired agencies.
Needham, Massachusetts-based Kaplansky Insurance Agency announced four transactions during 2018. It completed nine transactions from 2015 through 2018, all of which are located in Massachusetts and have a P&C focus.
Florida-based Ample Insurance Company closed four acquisitions during 2018. Ample Insurance Company is an independently owned insurance agency made up of 19 “family agencies,” all of which have been acquired since 2015 and are located in Florida.
Insurica, based in Oklahoma City, announced four deals during 2018, two of which were in Texas with the other two in Oklahoma. Insurica is a top-100 brokerage, with reported revenues of approximately $97 million in 2017.
Chicago-based Ryan Specialty Group also completed four deals during 2018. Ryan Specialty was founded in 2009 and offers specialty insurance and risk management solutions to agents, brokers, and insurers and their customers. During mid-2018, Ryan Specialty received private equity capital from Onex Corporation.
Two agencies announced three transactions each.
• Utah-based Leavitt Group Enterprises announced three P&C acquisitions during the year: two in Washington and one in Utah. Leavitt is a top-100 brokerage, with revenues of almost $236 million in 2017.
• Houston-based Dean & Draper Insurance Agency completed three deals in Texas.
There were four other buyers that reported two acquisitions during the year.
Public brokerage activity was up 65% in total deal count during 2018 (61 announcements versus 37 in 2017) bringing the overall proportion of deals represented by public brokerages to more than 10%, up from 7% in 2017 and 2016. There were three public brokerages in the market during 2018, down one from 2017, when CBIZ closed a transaction. The public buyer field is down substantially from 2005, when there were nine active public acquirers.
Gallagher announced 30 U.S.-based transactions, up from 25 in 2017, both years’ activity earning it a place among the top five most active buyers. Gallagher also announced 10 international brokerage acquisitions.
Brown & Brown announced 24 transactions during the year, a significant increase from the seven deals announced in 2017. The most notable of these 24 transactions was Hays Companies, which reported 2017 revenue of $198 million.
Marsh & McLennan Companies completed seven U.S.-based transactions in 2018, compared to four reported deals from 2017. Subsidiary Marsh completed the acquisition of John L. Wortham & Son. Marsh & McLennan Companies also announced the acquisition of London-based Jardine Lloyd Thompson Group, which is expected to close in 2019.
As was anticipated based on U.S. tax reform, public brokerages are taking advantage of the reduced corporate tax rate and reinvesting those dollars into acquisitive growth. All indications point to a continuation of this trend.
Insurance and Others
This buyer segment includes private equity groups (not their portfolio companies), underwriters, financial technology firms, specialty lenders and other unclassified buyers. Activity within this buyer group increased slightly from 42 in 2017 to 45 in 2018. For the second consecutive year, the Insurance & Other buyers group represented only 8% of deals, which was fairly consistent with activity in 2016, when it represented 9%. Private equity groups accounted for 10 deals within this category. Insurance company buyers completed 15 deals, compared to 16 the prior year. Non-private equity, non-insurance companies (mostly credit unions, private investors and other undisclosed buyers) represented 20 deals within this category.
Banks and Thrifts
Banks and thrifts completed 17 acquisitions in 2018, down slightly from the 21 announced deals in 2017. This decline represents the third consecutive year that we have seen a decrease in the transactions done by banks and thrifts—part of the overall steady decline over the past decade as banks have either divested their insurance operations to focus on their core business or significantly slowed down their pace of acquisitions. During 2018, there were three notable bank divestitures of insurance operations: (1) KeyCorp’s sale of Key Insurance & Benefits Services to USI Holdings; (2) BB&T Insurance Holdings’ acquisition of Regions Insurance Group from Regions Financial Corporation (BB&T Insurance Holdings also rebranded to McGriff Insurance Services); and (3) Shore Bancshares’ sale of Avon-Dixon Agency to Alera Group. USI also had another notable bank and thrift acquisition that closed in November 2017, when it purchased Wells Fargo Insurance Services USA from Wells Fargo & Company.
There were 13 bank acquirers in the market in 2018 (four of which announced their first transaction), with four also completing multiple transactions. Salem Five Bancorp, Associated Banc-Corp, Eastern Bank Corporation, and FBinsure (owned by Bristol County Savings Bank) each announced two acquisitions in 2018.
The top 10 most active states represented 56% of the total deal volume in 2018. California remained the most active state, with 59 deals announced during the year, which is down 10 deals from 2017. Texas (56), Florida (52), Massachusetts (44), and New York (36) rounded out the top five target states in 2018. Massachusetts moved up from sixth in 2017 to replace Pennsylvania (ranked sixth in 2018) in the top five.
Line of Business
The breakdown of acquisition targets in 2018 by line of business almost mirrors that of 2017, with a slight increase in P&C firms offset by a similar decrease in multi-line firms. In 2018, P&C firms represented just under 55% of all target agencies, while employee benefits and consulting firms remained at 22% of targeted agencies. Multi-line firms represented the remaining 25% of announced transactions during 2018.
U.S.-based buyers were also active internationally, with 53 deals completed and announced, much higher than the 28 deals that were completed by this group in 2017. The majority of these transactions were completed in Canada (55%) and the United Kingdom (36%). Hub represented 24 of the 53 total deals, or over 45% of the total. Hub completed 24 deals in Canada during 2018, up from just five in 2017, driving much of the increase in year-to-year activity from international buyers. Gallagher also completed more transactions internationally in 2018, with 13, compared to eight in the previous year. Gallagher’s acquisition activity in 2018 was largely based in the United Kingdom, Canada and Australia. Notably, Acrisure completed its first international transaction in 2018, acquiring a firm in the United Kingdom.
In 2018, the number of announced transactions involving firms specializing exclusively in employee benefits and consulting (EB) was flat compared to the number of announced transactions in 2017. When looking at historical trends, however, there is a much more exciting story to tell. Five years ago (2014), 74 EB firms sold to a third-party buyer. In 2018, 126 EB firms sold. This number excludes the multi-line firms, which adds another 143 announced transactions involving some type of EB business.
Independent agencies and brokerages remained the top type of acquirer, while public brokerages have been less aggressive in the EB insurance space. Alera Group entered the market at the end of 2016 and quickly became one of the most active buyers in the EB space. In 2018, Alera announced 21 EB deals, which represents 17% of the total EB deals done in 2018. Digital Insurance (OneDigital) was the second most active acquirer of EB firms, with 16 transactions involving EB-specific firms. Acrisure fell from the top most active in 2017 for employee benefits to No. 3 on the chart, down 15 transactions from 2017. AssuredPartners, Gallagher and Hub International all tied for fourth in number of EB transactions. These top six buyers accounted for almost 53% of the total number of EB deals in 2018.
The employee benefits market has seen more change than other insurance markets in the last decade. A large part of this is due to changes in regulation; however, each year presents changes and challenges to all EB brokerages. Plan design, new voluntary products, cost containment strategies, bundling versus unbundling decisions, enrollment guide regulations, benefits administration technology, claim audit procedures, and data analytics techniques are constantly changing as employee benefits insurance continues to evolve into an art more than a science. Rates still play a factor, but more and more EB firms are becoming specialists in the industry. Frequently, human resource experts, nutritionists and wellness specialists, and even doctors and pharmacists, are on staff as consultants at larger EB brokerage firms. The philosophy behind this level of high expertise is that clients want the white-glove treatment with the strength and girth of a larger national firm but at the local level.
What is to come in 2019? On the very first day of the year, 17 independent insurance agencies and TRUE Network Advisors merged. Of those 17 agencies, 16 generate revenue from solely EB products. This newly formed national brokerage, Patriot Growth Insurance Services, entered the market eager to become a top player. We anticipate consolidation will continue and this will be another active year in the EB space.
Specialty distributor M&A activity the last couple of years has catalyzed a phenomenon whereby companies are combining a mix of operational platforms under one roof. (We define “specialty distributors” as managing general agents, managing general underwriters and program administrators—all referred to as “MGAs”—along with wholesalers.) It is an evolving distribution model, compared to historical norms, that may provide several, differentiating competitive advantages, including increased flexibility with distribution. The multi-model company, where several business models (e.g., brokerage, binding and program administration) are implemented throughout a company, has fogged the demarcation of “traditional” specialty distributor roles.
The multi-model approach is primarily a one-directional M&A event, with traditional wholesalers bolting MGA-type operations on to their models. For instance, Worldwide Facilities, a large wholesale brokerage located in Los Angeles, made five acquisitions in 2018 that diversified its product mix between transactional brokerage and contract-binding business.
That said, we are not suggesting that MGAs never consider adding a wholesale function to their model; however, we have observed this is happening less frequently in the marketplace. A multi-model approach that includes a wholesaler operation is a good defensive position because it potentially reduces volatility should an MGA lose its insurance paper.
The pace of reported specialty distributor M&A slowed in 2018, albeit slightly. At year-end 2018, specialty distributors accounted for 71 out of 580 total announced transactions, representing 12% of total announced deals. Compared to 2017, when specialty distributors accounted for 74 out of 557 total announced distributor transactions, representing 13.3% of total announced deals. Despite the slowdown, and barring any significant external events, we expect specialty distribution M&A velocity to continue at or near historical levels for reasons that are tactical, strategic and transformational—or potentially all three.
Gallagher (via Risk Placement Services) and Ryan Specialty Group continue to be leaders in specialty distribution acquisitions. Joining the ranks of leaders this year was Worldwide Facilities, which successfully consummated five transactions in 2018, up from zero the year before. Worldwide’s acquisitions represent excellent examples of not only product and expertise diversification but also measured geographic expansion. Wholesalers have been consolidating and continue to consolidate, and most now have binding authority operations.
Consolidation is blurring the demarcation of “traditional” roles—broking, underwriting, binding—in specialty distribution. The merger of Napslo and AAMGA, two large specialty distributor associations that combined in 2018 to form WSIA, further exemplifies the phenomenon. As growth goals loom large, management and corporate development teams have been forced to reconcile old acquisition strategies with new ones that undoubtedly include the evolved specialty distribution model that consists of a mix of binding and non-binding authority revenue.
Last year, we reported experiencing a shift in buyers, whereby established consolidators started pursuing investments in the specialty distribution sector (as opposed to mostly retail-focused distribution models). For example, Hub International (via Program Specialty Group), NFP, and Risk Strategies all made investments in specialty distribution platforms in 2017, and all three continued making investments in specialty distribution in 2018, albeit at a much slower pace.
Notwithstanding the impact of the recent hurricane activity in the Southeast and wildfires in California, 2018 was a good year for the insurance industry and specialty distributors. However, there are some concerns being raised about an economic slowdown, if not a full-fledged recession. If a recession is on the horizon, it would be prudent for specialty distributors to maintain their growth momentum by continuing to focus on improving operational efficiency, boosting productivity, and lowering costs with new technology and talent transformations, while customizing products and services to meet the evolving demands of a dynamic and emerging digital economy. Moreover, given the potential headwinds, it would also be wise to honestly assess the company’s focus as it relates to customers versus products. An economic downturn would likely exacerbate the already hyper-competitive dynamics of insurance distribution. Specialty distributors—and particularly wholesalers—will need to improve their standing on the insurance-distribution spectrum from transactional intermediary to customer-centric advisor. A customer-focused strategy should enhance their value proposition by giving customers a better understanding of not only what they are buying but also what they are protecting.
Despite the seemingly dark clouds just described, we believe the outlook for specialty distribution is mostly positive and the sector is poised for continued growth. Rates are firming in most lines (or at least holding flat), the exposure base continues to expand from an enduring economic cycle, and there continues to be high interest among market participants to procure insurance cover through the specialty distribution channel. Outside a major shock event that would invariably shake all industries, most specialty distribution should continue to thrive as management teams hone their underwriting savvy and leverage technology to bring new products to market quickly and efficiently.
2018 Valuations Step Up (Again)
Sale valuations from 2015 through 2017 remained historically high, though they had somewhat leveled off. Less than 0.25 times EBITDA separated the average deal values in these three years. However, 2018 saw an incremental move to higher prices paid, despite the belief that prices were stable and would likely remain that way. Compared to 2015, the maximum potential deal value was up more than 6% on average in 2018. Compared to 2012, maximum potential deal value is up nearly 30% on average.
Pricing Structure Breakdown
Two forms of purchase price are generally referenced: multiples of earnings before interest, tax, depreciation and amortization (EBITDA) and multiples of revenue. Here, we refer to multiples of EBITDA. To analyze transaction pricing, we’ll break the price down into three key components:
1. Base Purchase Price—The dollar amount paid at close plus the live-out (if any) the seller will receive.
Paid at Close: The amount of proceeds paid at closing, including any escrow for potential indemnification items.
Live-out: The amount a buyer may initially hold back but which is paid as long as the seller’s performance does not materially decline. This may also be paid at closing but could be subject to a potential adjustment. If the live-out is not paid at closing, this payment is usually made within one to three years, contingent upon delivering on the seller’s pro forma revenue or EBITDA.
2. Realistic Earnout—The amount of proceeds realistically anticipated to be achieved in the future based on a number of factors, including seller historical and expected performance, buyer and seller realistic discussion of earnout metrics, etc.
Realistic Purchase Price = Base Purchase Price + Realistic Earnout
3. Maximum Earnout—The additional earnout above the realistic earnout that, if achieved, would generate the maximum possible earnout payment. In certain circumstances where deals are not capped, this number represents the likely maximum identified through discussions with buyers and sellers.
Maximum Purchase Price = Base Purchase Price + Realistic Earnout + Maximum Earnout
In 2018, the market saw the biggest purchase price shift in the base purchase price paid to a seller. On average, the base purchase price paid in 2018 was 8.58 times EBITDA, compared to 7.97 times in 2017, an increase of more than 7.5%. At the same time, the realistic earnout, or the payment a seller could reasonably expect given its growth history and other deal attributes, was down slightly to 0.72 times EBITDA in 2018 from 0.86 times in 2017. The additional earnout value if a seller were to maximize its value potential did not change much year to year, as it was another 1.55 times EBITDA in 2018, compared to 1.53 times in 2017. All of these moving parts of purchase price yielded an average deal value including all components of 10.85 times EBITDA in 2018, compared to 10.37 times in 2017, or a 4.6% overall increase in value.
Seller-Type Purchase Trends
Agency and brokerage transactions are classified into three major categories: platform, stand-alone or roll-in.
Platform—A platform agency is typically a larger agency that has a well-established territory, brand recognition, seasoned professionals and a scalable infrastructure, among other attributes. The buyer of a platform agency is typically looking to establish a presence in a specific region or niche.
Stand-Alone—A stand-alone entity may be based on size or geographic location. The firm is large enough to maintain its physical presence but likely reports into a larger platform within the given region.
Roll-In—A roll-in transaction typically involves the sale of a small, privately held agency or book of business, which gets physically rolled into the buyer’s existing operations, either at closing or within a reasonably short period of time.
In 2018, purchase prices for both platform and stand-alone agencies increased, driving the combined average purchase price up as previously described, while roll-in agency pricing was down compared to the prior year. Specifically, platform agency transactions saw the largest increase. Base purchase price for a platform agency was up 6.7% during the year, from 9.15 times EBITDA to 9.77 times. Maximum deal value was also up 6.8%, to 12.43 times from 11.64 times in 2017. Maximum deal values for platform transactions were priced, on average, roughly 4.0 times EBITDA higher than a roll-in transaction, with about 2.75 times of this difference in the base purchase price and the remainder dependent upon performance after the close. This reflects the competitive environment as it relates to larger, more sophisticated brokerage targets. Stand-alone agency pricing was about 2% greater in 2018 in total purchase price, with about a 4.5% increase in the base purchase price and an overall decrease in possible contingent performance payments. Roll-in transaction value declined compared to 2017 and was lower than 2016 transaction values in this category as well.
Unless otherwise noted, all deal counts in this article refer to announced, U.S.-based transactions. MarshBerry estimates that only 15%-30% of transactions are made public.
Australia is an outlier, with business interruption ranking second to cyber, according to Allianz’s 2019 Risk Barometer report.
The typical business-interruption (BI) property insurance claim now totals over $3.4 million, Allianz data indicate. “Businesses face an increasing number of BI scenarios,” the report states. “Many can occur without physical damage but with high losses. Events such as breakdown of core IT systems, product recall or quality incidents, terrorism, political violence or rioting, and environmental pollution can bring businesses to a standstill, meaning firms may be unable to provide products and services.”
The main new risk of note—popping up in many sectors for the first time and worthy of a watchful eye at least through this year—is legislative and regulatory change.Tweet
The number-two worldwide concern again this year—by just a hair—is cyber risk, which includes cyber crime, IT failure/outage, data breaches and fines. “Insurers have seen a growing number of BI losses trigged by cyber incidents with industry claims exceeding $100 million,” the Allianz report states. “Many incidents are the result of technical glitches or human error rather than malicious acts.”
Natural catastrophes, changes in legislation, and market developments round out the top five greatest risks globally.
In Africa and the Middle East, measured as a region, market developments rose from fourth place in 2018 to the top spot this year, followed in descending order by political risk and violence (up from No. 3 last year), cyber (up from No. 5), changes in legislation and regulation (up from No. 7), and business interruption (down from No. 1), though South Africa ranked business interruption as the greatest concern.
Rankings by Business Size
While large and midsize enterprises rank business interruption as the greatest risk they face, cyber incidents are for the first time the greatest hazard for small companies (those with less than $283 million in annual revenue), rising from number two last year. Business interruption fell from the top spot to number five for small enterprises. New to the top-10 risk list for small enterprises were shortage of skilled workforce (tied for No. 8) and loss of reputation or brand value (at number 10). Climate change popped up for the first time as a top-10 concern for large companies, coming in at number eight.
The breakdown by industry sector is fairly intuitive, with those in technology, communications, aeronautics and professional services—including healthcare and financial among others—being most concerned about cyber and most others citing business interruption as their biggest risk. Natural catastrophes and climate change were tops for agriculture, while theft, fraud and corruption just edged out business interruption for number-one spot in the transportation industry.
The main new risk of note—popping up in many sectors for the first time and worthy of a watchful eye at least through this year—is legislative and regulatory change. Ranking fourth overall, it appeared for the first time in Austria and Canada and was the top concern in Australia and Nigeria. It also appeared for the first time in five industrial sectors: chemical, pharmaceutical and biopharma industry (No. 2 ranking in that sector); consumer goods (No. 2); engineering, construction and real estate (No. 2); entertainment and media (No. 5); and marine and shipping (No. 5).
For a full breakdown of the top concerns by region, country and industry, consult the Allianz Risk Barometer 2019.
With regard to M&A, culture is consistently ranked as one of (if not the) most challenging “people” issues in M&A…in any industry. So whether you’re a buyer, a seller or anything in between, you better be paying attention to the culture around you.
According to a 2017 Forbes article, “Why Company Culture Is Critical to M&A Success,” when mergers and acquisitions don’t live up to expectations, it’s often because there’s a misalignment between the two organizations’ management teams and cultures. “This friction can wreak havoc as the members of different groups assimilate to drive the performance gains that M&A strategies forecast,” warns the article.
When balance sheets are on the line, organizations of all sizes must understand how company culture plays a role. Failing to do so may be the difference between a great success or a colossal failure. “Organizational culture shapes the employee experience, which in turn impacts customer experience, business partner relationships and, ultimately, shareholder value,” reads a report by the Human Capital Institute. Finding the right fit is a two-way street for both organizations at the table.
Another topic that came to the forefront of our research was the role of technology in our business, and more specifically, its role as a driver of M&A. Take, for instance how tech is changing the game in the on-demand economy and elevating customer expectations. Or how it’s enabling new insights into risk and risk prevention through data analytics. These factors are driving M&A and investment decisions for many varied players.
“Culture is consistently ranked as one of (if not the) most challenging ‘people’ issues inTweet
M&As…in any industry.
The ability for technology to improve the customer experience and ultimately solidify the value proposition for the organizations looking to merge or be acquired is an attractive selling point. Integrating operational enhancements during a deal can help create value for clients in a different context than previously possible, can lead to new tools and products that empower brokers to better help customers along their journey, and can yield cost efficiencies, bigger profit margins and long-term success. These are some of the reasons mergers and acquisitions happen in the first place.
As M&A continues on this torrid pace and increasingly becomes globalized, so too, will the complexity of each deal. So where do you begin? A culture-first approach is a good place to start. Technology will keep changing and improving. At the heart of it all is remembering that commercial insurance brokerage is a relationship business—when working with clients and with potential partners. Whether you’re a seasoned dealmaker or just starting to ponder what your future might look like, be sure to find a reputable leader who will work with you to create a business strategy and shared culture that people are excited about. It’s your DNA, after all; create something you’re proud of.
The technology, pharmaceuticals and energy sectors led with mega-mergers, but few industries have been untouched by the urge to merge. Giants rule some sectors: for example, 60 of the world’s 100 largest shipping lines have disappeared since 1999. Industry and sector convergence are major themes. Valuations are higher than ever.
The ultimate goal of most mergers and acquisitions is the coveted notion of “synergy,” which, in practice, often serves as code for “cost savings.” Reduced expenses may be achieved through bulk buying, staff trimming, location consolidation—in general, by reducing the duplication of services within an enlarged corporation. According to Boston Consulting Group, which has tracked M&A deals since 1990, merged companies’ estimates of synergy savings have been on the rise since 2013. They exceeded the 10-year average of 1.6% of combined sales every year and peaked at 2.1% in 2017. Research by Deloitte has found that synergies are working: 88% of executives surveyed said their M&A deals are achieving expected returns on investment.
Vertical Integration Brings New Risk
Risk management and insurance spending is one of many areas where post-merger savings may be possible. But when the integration is vertical and clients shift their activities up or down their commercial food chain, combining divergent insurance programs is usually much more difficult than it may at first seem. Value in incumbent programs may be lost, new exposure may unsettle existing underwriters, and dramatic changes in risk profile may change a deal’s economics.
Because strategic acquisitions are often executed without thorough due diligence, theTweet
buyer may find out too late that it has gained unanticipated and unfamiliar risk
Consider a typical architectural engineering company. Traditionally, such firms simply developed building specifications and plans, then handed them over. Their risk profiles were relatively simple. In the United States today, however, more than 45% of architectural engineers now get involved in the building process itself, at the behest of their customers. Competition has driven architectural engineers to include additional services in their fee or risk losing the tender.
Increasingly, they are performing some of the hands-on work, including even assembly. They now visit job sites, which changes and extends their risk profile. If the completed construction project is flawed, the newly cast design-build architects may be responsible for rectification costs. Their E&O cover will require a very different scope, since the evolved architectural specialists are now potentially liable for much more. Their insurance must have the wherewithal to put it right, and their broker the foresight to identify the exposures.
The integration can go the other way, too, as a strategic rather than a competitive play. Suppliers within a manufacturing value chain may be (or may look) financially unsound. To secure their lines of supply, customers may simply buy them in an act of strategic vertical integration. That changes each firm’s risk profile, often dramatically for the acquirer.
Take, for example, a manufacturer of component parts for the automobile industry that finds itself in financial difficulty. The chief financial officer of a much larger car manufacturer may decide the most prudent course is to acquire its supplier in order to secure the flow of critical components. Because such strategic acquisitions are often executed without thorough due diligence, the buyer may find out too late that it has gained unanticipated and unfamiliar risk exposures.
In this case, the carmaker may have adopted a subsidiary that manufactures medical components. For the carmaker’s chief risk officer, product recall and liability risk in the medical sector will present a serious exposure and a new insurance challenge. A much larger company with far deeper pockets is also a greater target for compensation. The firm will have to present a very different liability profile and exposure to its underwriters. The CRO must now go to his specialist auto-sector insurance brokerage and ask it to solve a medical manufacturing exposure problem. Is that brokerage agile enough to keep that account?
Carrying multiple programs, even for a short time, may mean forgoing synergies.Tweet
Acquiring Specialty Exposures
Companies frequently acquire specialty exposures through the M&A process. Perhaps an acquired company comes with two corporate aircraft. The buyer now needs aviation insurance. Maybe it has overseas offices, and the buyer’s broker doesn’t do overseas. The enlarged company now needs to purchase and manage an international insurance program. Perhaps the incumbent carrier cannot support international risk, so this new subsidiary cannot simply be tacked on to the existing program. Meanwhile, the executives transported abroad to manage the new operation will need international travel and personal accident insurance and maybe even kidnap and ransom cover.
In this example, the broker must either construct a separate program and placement for the international risk or put the whole program out to tender to find another, probably larger brokerage, that can handle it. A European company acquiring a U.S. subsidiary will need a broker who can cope with U.S. workers comp risk and many other lines of business. The incumbent broker may need to find a partner to guide him through the local regulations and requirements, wherever that may be, or one that can tap into an international network. Even then, servicing issues will remain, alongside requirements for locally admitted policies. In the United Kingdom, employers liability, motor and some engineering coverages must be purchased locally. Britain also runs a national, mutual pool for terrorism cover that brings its own complications. All of these M&A ripple effects have financial implications. It also costs, in terms of management time, a difficult-to-quantify expense that is often overlooked.
If a business is purchased and rolled into an existing placement without extreme care, specialty coverage that underpins the business model of the acquired could be lost. Often the most mature insurance program, one placed with just one or two particular carrier partners, will be superior based on the length of the relationships and the incremental improvements made over the years to the coverage it provides. It can sometimes be critical, for example, to the saleability of an acquired company’s underlying products. Full due diligence is therefore essential, since ignoring special insurance arrangements can have far-reaching implications.
Should the disparate captives be merged? Should the new parent assume the risk?Tweet
Perhaps one or more of the captives should be shuttered, but legacy issues will remain.
Sometimes a merger is known to be heading toward the ultimate spin-off of at least three separate companies following their initial integration. For a period after the acquisition, they will work together under a single corporate umbrella. Risk managers and programs for the individual companies may remain in place up until the ultimate reorganization and division. This approach is particularly common for venture capital and private equity acquirers.
But in this situation the client and broker face choices. Carrying multiple programs, even for a short time, may mean forgoing synergies. One option is to maintain existing policies and programs and make the effort to persuade the relevant carriers that, despite the corporate changes, they should extend their coverage. Another is to create, structure and place a new, overarching program that sweeps in the new subsidiaries and achieves cost savings, knowing that down the road they will be swung out again. But that approach proves a challenge, since it may be difficult to find carriers willing to assume long-tail liabilities in exchange for a one-off premium payment in the absence of a certain opportunity to recoup potential losses. The broker must walk a tightrope. A collaborative approach between brokers, clients and markets is most likely to achieve the best result for all interested parties, including shareholders.
The presence of multiple captive insurers can make large corporate mergers even more complicated. Should the disparate captives be merged? Should the new parent assume the risk? Perhaps one or more of the captives should be shuttered, but legacy issues will remain. The easiest approach is to leave everything as it is and resolve issues through an accounting exercise. But if a new company is spun off and takes a legacy captive with it under a new management, despite having been formed for a different company and launched with different objectives, a new set of challenges may arise.
All of these hypothetical examples are in fact real and fall within the experience of John Eltham, head of North American business at Miller Insurance, the London-based specialist brokerage. The challenges will only multiply going forward, Eltham believes, and that requires brokers to be careful and informed. “We will see more M&A,” he says. “Japan’s economy is all about diversification. China, directly or indirectly through state influence, is looking to secure supply and influence. The Chinese sphere of influence is huge in Asia, and India will not sit back.”
One thing is sure: already brokers are feeling the effect of the huge consolidation trend sweeping industries worldwide and across borders. Larger, better-resourced brokerages may benefit, and the complex, sometimes labyrinthine insurance arrangements may be critical to the success of the underlying transaction.
Leonard heads the Leader’s Edge foreign desk.
Many transactions were based in part on dealmakers’ atypical interest in transforming their organization’s business and operating models, addressing technology (in the P&C sector) and more innovative customer service (in the L&H sector).
In a KPMG survey of 115 insurer CEOs, nearly 37% said they were looking to transform their business models through acquisitions, while 24% said they were looking to transform their operating models through acquisitions.
Other atypical M&A factors included deals to diversify topline income. (Diversification into traditional property-casualty markets has long been a driver of M&A.) Several acquisitions in the P&C sector, for example, involved target companies with reinsurance operations, third-party claims administration, program business and insurance-linked securities (ILS) operations. “Every insurer is looking for ways to grow the top line, which isn’t easy,” says John Andre, a managing director at insurer ratings agency A.M. Best. “What’s interesting is how they’re going about it.”
Pressure to Change
When you have too much money in the system, it ends up artificially depressing prices, commoditizing certain products, and creating a need to compete differently. Companies in both the property-casualty and life and health sectors are struggling with growth and pressured into figuring out how best to use their money.Tweet
In “going about it,” insurers have no trouble digging deeply into their plentiful capital coffers. Tracy Dolin, director and insurance sector lead analyst at S&P Global Ratings, cites an S&P survey saying industry surplus reached $790.7 billion on Sept. 30, 2018, up from $726.7 billion one year earlier. Net income also climbed to $50.7 billion, compared to $23.6 billion during the same period in 2017.
Overcapitalization comes with a price. “When you have too much money in the system, it ends up artificially depressing prices, commoditizing certain products and creating a need to compete differently,” says Mark Purowitz, leader of Deloitte’s insurance M&A and insurtech advisory teams. “Companies in both the property-casualty and life and health sectors are struggling with growth and pressured into figuring out how best to use their money.”
It seems they are diverting less of it toward stock buybacks, which fell from $11.7 billion in the first nine months of 2017 to $4.8 billion in the same period last year, according to S&P Global Ratings. “As capital for the sector keeps climbing and reaching record highs,” Dolin says, “there may be more compelling ways to deploy this capital that adds more value than just sitting on it or buying back shares.”
At the same time, organic growth has been limited in the industry, particularly among more mature insurance companies, says Ram Menon, a partner and global head of KPMG’s insurance deal advisory organization. Since the beginning of this decade, global GDP has increased by more than 20%, Menon says, while global premium volume has risen by a meager 9%.
Many of the M&A deals we’ve seen indicate insurers are looking for deals that help transform their business and operating models. One way to do that is to gain access to other companies’ innovation initiatives and emerging technologies.Tweet
The industry is also challenged by new competitors like reinsurers and investors in insurance-linked securities, in addition to market disruptions from emerging technologies. “Maintaining the status quo in such an environment is not a solution for sustainable growth,” Menon concedes. “Many insurers have come to realize that the traditional strategy of doing more of the same is simply not the best strategy. Many of the M&A deals we’ve seen indicate insurers are looking for deals that help transform their business and operating models. One way to do that is to gain access to other companies’ innovation initiatives and emerging technologies.”
Reaching New Markets
In all industries, M&A transactions can provide ample front-office and back-office benefits—reducing operating expenses, eliminating redundancies and increasing revenues. The thinking is that the combined organization will be greater than the sum of the individual parts, although these hoped-for synergies often look better on paper than in reality.
History shows that synergies are often difficult to achieve. We have only identified synergies as a proven strength to an announced deal 5% of the time since 2000.Tweet
“History shows that synergies are often difficult to achieve,” Dolin says. “In our research, we have only identified synergies as a proven strength to an announced deal 5% of the time since 2000. Quite often the goalposts move or are forgotten in the years after the deals are done.”
While insurers certainly gave high regard to perceived synergies in their 2018 deal making, many acquisitions also departed from more traditional aims. Markel acquired Nephila, an ILS manager that generates fee-based revenue through its management of more than $12 billion in insurance risk-bearing capital from 300 geographically diverse investors. “Platforms with ILS capabilities are attracting M&A attention, which may increase in the future,” Dolin says.
A decade ago, the ILS market was a novel way for carriers to cede risks to third-party investors. This is no longer the case; the market has cemented its role as an additional source of risk-bearing capital. “We’re not even calling ILS ‘alternative capital’ anymore, because we believe it’s here to stay,” Dolin says. “Certainly, this is a factor in reinsurance consolidation and may reduce the number of independent reinsurers standing down the road.”
AIG’s $5.5 billion acquisition of Validus, a Bermuda reinsurer and specialist insurer, also reflects interest in new revenue opportunities. Validus further diversifies AIG business to include a reinsurance platform and an ILS asset manager (AlphaCat).
Even giant M&A transactions like French insurer AXA’s $15.3 billion acquisition of commercial lines insurer and reinsurer XL Catlin (forming new carrier AXA XL) had elements of this trend. While the acquisition complements and diversifies AXA’s existing commercial lines insurance portfolio, it also delivers reinsurance capabilities and access to alternative capital. “The acquisition of XL rebalances AXA’s portfolio,” Purowitz says, “but it also gets them into new businesses, giving them a greater spread of risk and access to revenue through a different customer base.”
Reaching the Customer
Another way some insurers are trying to grow the top line is by gaining access and to new distribution markets and getting closer to the customer. The Hartford’s $1.45 billion acquisition of Aetna’s U.S.-based group benefits business (short-term disability, long-term disability, group life, and lead management) was driven by traditional M&A factors, such as larger market share, although the deal also involves an innovative distribution strategy. “The acquisition makes us bigger and stronger, significantly increasing our market presence,” says Mike Concannon, head of group benefits at The Hartford. “But the transaction also provided a new way to expand our distribution, selling group benefits through Aetna’s medical products sales team.”
On the life and health side of the industry, the bigger financial transactions were primarily in the health sector, where transformative objectives were similar to those seen in the property-casualty industry.
Cigna’s $67 billion acquisition of Express Scripts, for example, gives Cigna the opportunity to offer a more integrated package of benefits to its customers. Likewise, pharmacy chain CVS Health’s $69 billion acquisition of Aetna’s insurance business creates a new type of healthcare entity expected to have greater appeal to consumers. Goals include simplifying how consumers access care by making it local, accessible and less costly.
“Everyone is looking for the silver bullet,” says Deep Banerjee, S&P Global Ratings’ director and lead life and health insurance analyst. “In this quest, we’re seeing all sorts of post-transaction combinations of traditional and non-traditional players. The mindset in these deals is to better assist the needs of consumers through novel concepts like onsite doctors or nurses in a retail environment.”
Activity in the life sector, while fairly substantial, followed more traditional M&A aims, such as a focus on core competencies or building market share. Liberty Mutual’s two-part sale of Liberty Life Assurance to Lincoln National and Protective Associates for nearly $5 billion in capital and other financial components was one of the sector’s largest deals of 2018. (Lincoln Financial cited the development of a more powerful group benefits operation as a primary factor in the acquisition.) Other major transactions included the acquisition of National Teachers Associates Life Insurance by Horace Mann Educators and Resolution Life’s agreement to acquire the life insurance arm of Australia’s AMP Ltd.
The desire to harness the potential of emerging technologies like robotics, machine learning and predictive data analytics is also showing up as an M&A trend. (See sidebar: “Eyes on the Upstarts.”) “More than 60% of insurers now see disruption as an opportunity for growth rather than a threat,” Menon says, “with more than seven in 10 looking to M&A to help transform their organization in some way.”
All businesses and consumers nowadays expect efficient, fast and frictionless transactions. People don’t have the time or inclination to read and understand a booklet-thick insurance policy. They just want to know the basics from their broker or agent and trust in the product’s financial security. If insurers don’t satisfy these expectations, the fear is that some other entity—such as a big-tech company—will. “To bolster their competitive positions,” Dolin says, “we’re seeing carriers making technology-targeted bets in their M&A decisions.”
She points to the AXA XL Catlin deal and the addition of XL Catlin’s data analytics organization, led by chief data officer Henna Karna, to the AXA team. “Getting that data analytics team may have been a deal sweetener,” Dolin says. “It’s often cheaper to poach a top team than build one up from scratch.”
KPMG’s survey affirms this opinion, noting that one in 10 insurer CEOs are looking to acquire “new innovation capabilities” and “emerging technologies” via their M&A transactions. The Hartford’s acquisition of Aetna’s U.S.-based group benefits business fits this paradigm. “The deal gave us access to Aetna’s strong digital capabilities, helping to accelerate our technology strategy while reducing the costs we had anticipated were needed to upgrade our legacy systems,” Concannon says.
Technology is now another “key area of focus” for insurers in their M&A decision making,” Concannon says, and one that is “quickly becoming a competitive differentiator.”
“It’s an arms race out there,” he says. “All insurers are looking for ways to serve their customers with products closer to their needs at less cost. Technology is a way for us to process our transactions more efficiently, at less cost, with higher quality, and less friction for customers. Basically, you have three choices—you build it, rent it or buy it.”
Purowitz agreed the hunt is on among carriers to upgrade their legacy systems—and fast. “Few carriers are holistically using advanced technologies,” he says. “I’ve honestly encountered only a small handful on the front side using these tools to reach the marketplace and on the back side to reach into the plumbing. In today’s competitive environment, timing is essential.”
Nevertheless, Purowitz cautions insurers to be careful when considering technology assets in their M&A deal making. “Too many carriers rush into a deal without fundamentally knowing the problems they’re looking to solve with technology,” he says. “They’re pressured by FOMO”—the fear of missing out—“into feeling they have to do something. Their boards see competitors doing it, and that ratchets up the stress.”
He advises insurers to do “far more R&D” before acquiring a company for its technology capabilities. “The challenge is that the industry historically has not done this type of R&D all that well,” Purowitz says.
The Import for Brokers
As insurers combine in atypical ways to transform their business and operating models, brokers must prepare for the new competitive landscape that emerges. For the most part, observers are sanguine that brokers will continue to play important intermediary and consultative roles.
“The theory is that all these new technologies will disintermediate the middleman,” Menon says, “but the fact remains that the industry structurally has been built around insurance brokers for centuries. Newer generations may want to access insurance directly, but most of us will still prefer to deal with a broker or agent. And it’s not like brokers aren’t innovating. Many of the larger ones in particular are developing very innovative ecosystems to connect their clients with themselves and different carriers.”
Michael Brosnan, a partner and insurance transactions leader at Ernst & Young, has a similar view. “Some commodity stuff may fall off the edges for the brokers, but there will still be a need for the expertise they provide in different classes and for particular products needed in different industry sectors,” he says.
While Dolin agrees the likelihood of broker disintermediation is small at the moment, she is less sure how the different pieces of the insurance business will fit together in the future. “Generally speaking, every participant in the insurance value chain is dipping into each other’s territory, as we’ve seen in the recent M&A activity,” she says. “They’re all trying to protect their competitive position and value proposition, driving them into the offerings of others.”
“Where this will lead will be very interesting,” she acknowledges, “but it’s still too early to tell.”
Russ Banham is a Pulitzer-nominated financial journalist and author. firstname.lastname@example.org
With a doctorate in public health and master of business administration, over the last 10 years Rob Edwards has served in leadership roles in health policy and corporate development for a large health system, leading asset acquisition opportunities and joint ventures as well as developing networks to create access to specialty services for patients. Before that, he was appointed by the governor of Kentucky and secretary of health to various positions to help support modernization efforts in Medicaid, behavioral health and public health. We sat down to discuss M&A from the hospital perspective. —Editor
The basis of hospital mergers has historically been argued as a net benefit to patients because of diversification and scaling resources while consolidating negotiating power with health plans. Does this bear out from what you’ve seen?
First and foremost the thing to remember is, in order to heal patients in the most appropriate environments, hospitals are incredibly capital intensive. And the amount of dollars that it takes to be competitive in the inpatient business and the fact that we’re such a workforce-dependent industry, the perception might not always meet reality when it comes to hospital consolidation.
When hospitals get together, it is most of the time driven by the fact that we need bigger and bigger balance sheets to support the ongoing investment in technology and age of plant to make us competitive with consumers and the clinicians we must recruit to provide care.Tweet
When hospitals get together, it is most of the time driven by the fact that we need bigger and bigger balance sheets to support the ongoing investment in technology and age of plant to make us competitive with consumers and the clinicians we must recruit to provide care. And then the other piece is that hospitals—the inpatient business—are not very profitable. People see these big buildings and a lot of capital being spent, but most hospitals have a low-single-digit margin for their hospital beds. So the only way sometimes to grow is by merging or looking for merger partners of some kind. Some health systems, like UK HealthCare, have pursued a model of collaborating on service lines across broad geographies—such as cardiovascular care or oncology—which is a less capital-intensive model.
There has been a tremendous amount of research done that has looked at whether you can find scale or if scale helps drive down cost. While the evidence is a little bit mixed, I think there are really good peer-reviewed articles out there that say if hospitals merge you can find synergies in cost. You could also rationalize healthcare services a little bit so you don’t have duplication of very high-cost inpatient services. That is where good public policy matches good strategy. Then the question is, what is the effect of consolidation on price? Think about who our biggest payer is. Our biggest payer is Medicare, now, I think almost everywhere, followed by Medicaid. And there’s very little price variability in Medicare. There’s geographic variability, but Medicare is going to, in general, pay at the same rate regardless of if you’re consolidated or not.
So it does then come down to the commercial insurance space or the self-funded space. And there’s no doubt we need a lot more research to happen right there about the effect of consolidation, specifically on self-insured and fully commercially insured contracts. I used to talk about how the fact that, because we’re so heavily regulated, maybe the markets don’t work perfectly and it’s hard to disrupt healthcare. There’s no doubt that there’s more disruption than ever and the traditional margin making activities at hospital systems are being encroached upon by disruptors.
There is also disruption from the standpoint that these large national healthcare systems are starting to make inroads in direct-to-employer contracts so that traditional referral patterns of high-cost cases get disrupted and moved out of a traditional referral region and to a national health system of some kind.Tweet
In primary care, there’s finally some uptick in patients using apps on their phones and iPads to interact with primary care physicians and pediatricians. And those companies that are doing that are managing a greater number of scripts that are being written and then dispensed. And so I think at the consumer-to-physician level there is finally some disruption happening. There is also disruption from the standpoint that these large national healthcare systems are starting to make inroads in direct-to-employer contracts so that traditional referral patterns of high-cost cases get disrupted and moved out of a traditional referral region and to a national health system of some kind. The ancillary space—imaging, ambulatory surgery centers, outpatient surgery—as the certificate-of-need laws change, private practice physician groups and private equity groups are starting to play a bigger and bigger role in that space. Private equity is starting to deploy capital directly in the physician space and in the healthcare ancillary space. There’s all these threads in the healthcare industry where 10 years ago we talked about technology being a disruptor. But it never really showed up, so people stopped believing in it. Then it started to show up…and it’s all being driven by the fact that consumers are directly paying for a greater portion of the healthcare cost than ever before.
Is the effect on hospitals that they are losing some of the market?
If you talk about small, rural hospitals, they are going to continue to struggle and will depend on—in states like Kentucky—Medicaid expansion in order to sustain a margin of some kind. That means they must operate at a low cost. Small, rural hospitals will continue to look for ways to access capital for primary and secondary care because of the workforce and the cost to do it, again driving consolidation. So that is a world where the use of telemedicine for emergency medicine, primary care and psychiatry can work and help hospitals survive and continue to be an important economic driver in their local community. In large urban areas, these factors of disruption on the outpatient side are driving consolidation to try to protect margin and to have income to reinvest in the system. They will also continue to drive large health systems to be more specialty oriented or geographically oriented in order to build the infrastructure necessary to take care of the patients who need hospitalization. And there will always be a population—I think as long as we’re alive—that will need hospitalization of some kind with a lot of support and services.
What do you believe are the most important factors and determinants related to a hospital transaction?
I think this is true for all the industries you’re looking at, but culture fit and leadership. If you don’t know those two things are solid, you’re not going to have a good transaction. Every industry is littered with examples of where the cultures didn’t fit or there wasn’t true leadership on both sides through the transactions and integration of the transaction. I think you have to have a tremendous amount of due diligence in our business because of how much money is at stake and the balance sheet effects of the transaction. You really have to have a two-way due diligence process, because both sides—even if you have a hospital that’s struggling going into a strong hospital—have to really come together to ensure that, from a strategy perspective, there’s a fit. From an employee culture and benefits standpoint, there’s a fit. From a physician medical group standpoint, there’s a fit. We track about 18 different work streams that we do due diligence on. But it works best when it’s a bidirectional due diligence process. Because both sides are setting expectations along the way of how implementation will go and what the long-term fit is. Implementation takes a while, integration takes a while, so you can limp along for, say, the first three years of a transaction. But if you don’t have that true fit and expectation setting and communication up front, you can get sideways pretty easily in these kinds of big megadeals.
Private equity is starting to deploy capital directly in the physician space and in the healthcare ancillary space.Tweet
Do you believe the calculus for hospital M&A has shifted in recent years, and do you believe it will shift in the coming years?
My short answer is no. I think those data show there was a lot of consolidation the several years following the ACA. I think true value-based contracting between hospitals and payers of any kind has been slow to move, but frankly that may be different based on what part of the country the hospital is in. So this idea that we need to have huge IT systems in place and clinically integrated networks in order to manage a population of 8 to 10 million people, it just hasn’t played out like that. And so I don’t think that transactions are being driven by value-based medicine. I think they’re still being driven by the need for access to capital and the opportunity to reduce costs and rationalize expensive healthcare services. There are opinions out there that say the idea of more value-based payment models, more risk-taking payment models, is driving healthcare payers to want to control more of that risk/reward factor. Do you think that falls along the same lines of just not really bearing out yet?
If you look at the transactions that have been happening on the payer side, it has really shifted from trying to increase your risk pool so you have less risk and you’re able to reinsure it better—those types of mergers from an account standpoint have decreased. But the way PBMs and insurers and frontline healthcare providers have merged with payers, I think, is much more indicative of how we might create new ways or reuse old ideas regarding managing the cost equation a little bit better if payers have the ability to directly manage care at the consumer level. When you look at these huge national pharmacy companies all looking at deals with the payers, that’s mutually a benefit. We get so much scale on the PBM side, but we also, from the payers’ perspective, have feet on the front line that we can direct our consumers to in pharmacies for very low-cost care.
Do you believe regulators have built the right rationale in both improving and challenging hospital mergers?
I really think the hospital industry has proven over and over again that having hospital-based health plans is not a successful strategy for hospital systems.Tweet
I think that there’s plenty of regulatory protection out there for consumers and payers and everyone in the healthcare industry. I don’t think the answer is more regulation. But every time the executive branch turns over, there’s probably a little bit different perspective on antitrust, in general. And I think we’re still trying to argue about what is truly monopolistic behavior, anymore, when there are disruptors and when geography doesn’t matter as much as it used to matter.
What do you think the trend will be in terms of vertical integration through payers’ acquiring providers and providers’ developing health plans? How does this change the strategic nature of hospital-centered M&A?
I really think the hospital industry has proven over and over again that having hospital- based health plans is not a successful strategy for hospital systems. And we can now point to some really big-time failures in provider-based plans as qualitative feedback that hospitals can’t build up a risk pool big enough to really compete against the Anthems or Uniteds of the world.
Now, on the other hand, United, Humana, Anthem are all starting to make acquisitions that help them be more vertically integrated, and I think, if you approach that from the standpoint of trying to reduce your risk of urgent-care costs and ancillary costs like imaging, outpatient surgical costs, it’s actually a pretty smart approach if you’ve got the population base in the same geography that matches up.
Do you believe we will get to some kind of end state here, and what would that look like?
I don’t think we will. I think we’re so subject to changes in the regulatory environment that it is a constant state of change with one asterisk: hospitals are extremely capital intensive and for now extremely workforce dependent. Because of that, a lot of disruptors will be scared off from getting into the hospital inpatient business. And the purpose that a lot of the larger tertiary, quaternary hospitals provide, this very high-acuity ICU care, where we have programs like pediatric solid organ transplantation, bone marrow transplant, ECMO [extracorporeal membrane oxygenation] programs, clinical trials in oncology, you need huge scale to be able to deploy those types of resources. I think that space will be very difficult to disrupt. While there’ll be some consolidation there, at some point your ability to grow scale is not as helpful from a margin-making standpoint as the first couple of those are. That’s really for the kind of classic, large, urban teaching or semi-teaching hospitals.
I think the community hospital space, where there are national players and for-profit players, will continue to grow and the disruption will be people exchanging hospital portfolios just like other industries, including insurance, do. Then the small, rural hospitals are going to be the place where, if want to protect them, we have to have true regulatory protection in place to keep them going. But I think it will
continue to unfold as an interesting space to watch from an M&A standpoint. All it takes is a small regulatory change at the federal level or a small regulatory change at the state level to completely reshape the traditional hospital industry, because our margins are so small and we’re so sensitive to changes with the government payers.
Edwards is chief external affairs officer at University of Kentucky HealthCare. The views expressed here are his own. email@example.com
An insurance banker for the past 15 years, Amrit David supports management teams, private equity firms and alternative capital providers across a variety of transactions in the insurance brokerage space. At the forefront of his efforts are supporting management teams and building out their business, which has meant advising them on transactions as well as finding the right capital partner and helping arrange the financing. We recently sat down to discuss brokerage M&A and alternative capital from the capital players’ perspective. —Editor
We’ve talked previously about the growing pool of alternative capital parties who are interested in this sector, in addition to the typical private equity firm. Can you talk a little bit about who those parties are and why they’re so interested in this segment?
There are four broad pools of alternative capital providers outside of private equity. The first two are pension plans and sovereign wealth funds, both of which manage money on behalf of governments, states, provinces, municipalities or other similar organizations. The third is family offices, which manage money on behalf of wealthy families or groups of families. And lastly, there are what I call structured funds. This is a pretty broad bucket but tends to include parties like credit funds, long-term funds and other pools of capital that can generally be flexible in their form, structure or term of their investment. Across all of these, they’re largely managed by investment professionals who have come from the investing industry, and, broadly, they’re all looking for return opportunities where immediate liquidity or near-term liquidity isn’t an issue. As they’ve looked through the landscape of insurance brokerages, there has been a pretty attractive opportunity set.
While they may want some board or governance representation, they are likely to be less active than traditional private equity firms.Tweet
Simply because it’s providing the kind of returns they are looking for, or is there anything else that drives that?
I think there are a few things within that. I think the why is actually more important. First of all, I’d say there is the return dynamic. If you look at what private equity firms have earned, they have an impressive track record of investing, so it’s no surprise that others would actively consider emulating what they have done.
Secondly, the underlying characteristics of their business are highly stable cash flows, recurring product, a mandatory product and strong cash flow generation. I think if you talk to the investment community about it, those are investments people love to find and are looking to consolidate and grow around.
And, lastly, a number of these funds have the opportunity to make direct investments into companies. As a result, it minimizes the fees—or even eliminates the fees in many cases—that they would have to pay as limited partners in private equity funds. So all in all, if you wrap those three together, it’s a pretty attractive opportunity.
Do these alternative capital providers offer something different from traditional private equity firms?
Before I discuss the differentiators, I should probably say that I think each situation and each firm is kind of unique. So while there may be a few general areas of differentiation between the alternative parties and private equity, it really is very situation-specific and the lines do tend to blur a lot. But as I think about the differentiators, there are a few key areas.
As brokers continue to get bigger, the equity checks to basically acquire these businesses continue to get bigger. So finding a partner for the private equity firms to help fund the transaction is a critical element of putting any of these deals together.Tweet
First, many can underwrite a longer hold period and give management teams a longer runway to focus on their businesses than private equity. Second, some are willing to take minority positions or joint control positions rather than full control.
Third, on the whole, they can be relatively passive investors. While they may want some board or governance representation, they are likely to be less active than traditional private equity firms. And lastly, like I said before, they’re open to investing in other parts of the capital structure as opposed to simply common equity.
Not to say these are all benefits. They each come with their pros and cons, and you have to think about them. But you put various elements of those together and, for many of the management teams and brokers in the space, they can be an attractive alternative.
Some reports have indicated that the joint approach to buying—for example, a combination of private-equity backed buyers and alternative capital providers, together—is on the rise. Can you discuss this as an element of the brokerage investment approach.
Absent the need to create some form of ongoing liquidity options for retiring or employee shareholders, there are actually very few incentives for many of the brokers to consider going public.Tweet
I think in selected instances—and I would say primarily in the larger brokers—is where you see them partnering. This has largely benefited both sides, and I expect it to continue. As brokers continue to get bigger, the equity checks to basically acquire these businesses continue to get bigger. So finding a partner for the private equity firms to help fund the transaction is a critical element of putting any of these deals together. On the other hand, the alternative capital providers also like the deal flow, the due diligence support, and other ongoing monitoring and functions that the private equity firms provide. So I expect that to continue.
The other thing I’d also mention: in some instances, some of these alternative capital providers have their own limitations on how much they can invest, whether that be in dollar terms or in terms of percentage ownership of companies.
So it makes for a nice partner in a way.
Exactly. It works well for both. They get good access to information, and it’s a deal that helps from a fee and cost perspective. So I think they marry up pretty well.
We know that valuations have been very strong over the past few years. Do you think this increased level of interest in this sector will keep valuations robust, or do you feel like some of the recent retrenchment in public equity valuation will impact brokerage valuations and the M&A market for larger and smaller brokerages?
I think there are two elements to this. You might call me a little bit of a contrarian here, but I think, aside from a meaningful economic slowdown, valuations in the insurance brokerage industry are somewhat insulated from the broader market volatility that we’ve witnessed. I talked about some of the characteristics of the businesses: the cash flow, the recurring nature, the visibility in the earnings profile. I think all of those things are highly sought after by the market and, in any period of volatility, these businesses are a great store of value for investors—public or private.
Now, your point about incremental capital coming into the industry: yes, I do think that’ll have some marginal impact on valuation. Others have put out studies that talk about how the valuation of tuck-in acquisitions or platform acquisitions has ticked up, so I expect that either may continue or level off. But, yes, that has definitely played an impact on the smaller end of the market.
Do you think we’ll see any of the larger, privately owned businesses end up going public?
It’s a good question and actually one I get asked a lot. My view is, absent the need to create some form of ongoing liquidity options for retiring or employee shareholders, there are actually very few incentives for many of the brokers to consider going public. The disclosure requirements, the compliance, the regulatory costs, the impacts on leverage are all important considerations that I think sway many people on the side of trying to stay private for as long as possible.
Now, that could change. Folks were saying a few years ago that some of the bigger businesses had to go public as they thought about their next evolution. But the sources of capital to fund these businesses has only continued to grow. So, with funds and the alternative capital that comes in, the ability to stay as a private company, as they get bigger, is only perpetuated.
And that’s not just insurance brokerages. It’s across all sectors, these days. You have some very large private companies in other parts of the economy which are private-equity owned because of the ability of capital to back them.
Turning away from the market, when you have worked with these firms, what are some of the primary areas of due diligence they’re focused on as they make these business moves?
There are a few areas that folks focus on. First of all, what are the operational characteristics of the business? What’s the organic growth? What are the margins, cap ex, working capital, etc. Investors really want to understand the historical and forward trajectory of these metrics.
Secondly, what are the operational enhancements that are being implemented to create a long-term sustainable business? How is the management team fostering cross-sell, how is acquisition integration managed, how are they using technology to empower the broker and deliver better customer service?
Third is the acquisition pipeline and capability of the management team. What competence do they have in that pipeline and the sourcing of deals and the ability to execute? This is somewhere people spend a lot of time. M&A is a very important driver of value here.
Then, lastly, there’s a real sense of understanding the fit with the management team—culturally, socially, philosophically. Are they entering into a partnership with a team they can back through thick or thin? Importantly, I’d say this is a two-way street. That’s where management needs to test out their potential partners as well. Can they see them working together?
I would think for some of these alternative partners, where they’re looking at longer holds, that might be even more crucial.
Absolutely. And in there, we end up talking largely about some of the succession issues that these firms need to start thinking about as well.
You mentioned technology as part of the due diligence process. Can you talk a little bit more about what it means to be prepared to address technology advances?
I think we all recognize that technology is drastically changing the way we interact and how we all do business these days. I look across the financial services landscape and at what has happened in banks or what has happened in payment technology. The speed at which this has all moved, and particularly moved to mobile, is somewhat fascinating. I mean, I don’t even walk into a bank branch. I don’t think I’ve actually had cash in my wallet for several months.
But you know what’s just funny? I still have to pay my insurance premiums with a check. So stepping back, I look back and say, “Wow, there’s a huge runway here for the insurance industry and brokers to really integrate this whole technology element into the core element of what they do.”
What do you think they can do to stay ahead of the change, if that’s possible at this point?
I absolutely do think they can. And, look, to be clear, I don’t think the agent or the broker is going away, especially in the middle market, large market or even in market niches. They provide real value in explaining the product, terms of conditions, deductibles, exclusions, advisory services, all of those elements, in addition to the sort of regulatory and legal issues that they help guide people through. As you know in the employee benefits role, that’s incredibly important. Also, they are the face of the businesses. This is fundamentally still a people business.
I do think, however, there’s huge potential to empower producers with better tools and products. Essentially to improve the ability to sell product and, secondly, improve the customer experience and ultimate value proposition to the CFO or the chief risk officer who has to manage this and is trying to figure that out for their organization. So what tools can you give them to empower them as better salespeople? What tools can you give them so the service experience incorporates all the developments we’re seeing in the banks and payments world?
Whether it’s the ability to create tools to use in a customer-facing way or to handle claims, are there certain areas where you think the insurance industry will be upended, potentially for the better, by insurtech?
I think there will be a number of changes across it. I think the place you’ll feel or experience the change first is largely going to be in consumer-facing businesses—personal lines as an example…auto, home and other near adjacencies that touch the individual. I think that is an easier market to first get your heads around than small or midsize commercial insurance, which has a whole variety of complexities to it.
I’ve spent some time with some really innovative companies in this part of the market, and I think they have the potential to build out some long-term, scalable platforms that will be real winners.
I will say, though, it’s very easy to talk about it, but I think we all understand insurance is a very complex product to ultimately get your hands around the risk…any of the victors or companies standing here at the end of the day as true operating businesses will have plenty of battle scars to show for it.
Are there any operational segments, in particular, that you’re seeing getting more attention from private equity capital?
There are very few private equity firms that truly think about insurtech, as most of these businesses are too early in their development for them to invest in. Most of the investments here come from the venture capital world or from insurance carriers that are really equipped to spend either the few hundred thousand dollars or the tens of millions that is required to get these companies up and running and demonstrate proof of concept. I think there is probably to come an evolution where more of the private equity players start looking at them as these businesses start to grow. I think that still remains to be seen. A few folks have dedicated funds or dedicated individuals to think about it, but it’s not as pervasive as it is with the VCs or carriers.
There’s value in brokerage consolidation, whether it’s backed by private equity or otherwise. But there is a view that, if consolidators don’t invest in technology and product, there’s a risk that much of the value of these rollups will prove to be financial engineering and basically someone will be left holding the bag. What are your thoughts on that view?
I disagree with the perspective that this is just financial engineering. While there are many factors that impact the sale of these businesses, this is fundamentally a highly fragmented market which faces a generational business transfer issue that the brokers, private-equity backed or otherwise, are helping to facilitate. But I do agree with the other element of your conversation that the underlying component of what management teams, executives and their capital partners—PE or otherwise—should be focused on is building a business that will last a hundred years-plus.
And in that context, what tools are they giving their producers? How do they foster the cross-sell? How do they deal with acquisition integration? What are they doing to improve finance and reporting? What kind of compliance and regulatory systems are they putting in place? How are they developing a long-term strategy for fostering and empowering the next generation of leadership within the businesses? These are all critical elements in creating a lasting business. I think it’s how the PE-backed folks empower and facilitate executive management teams to do that which is the real value creation they bring to operations.
David is a managing director in the International Investment Bank at Barclays. firstname.lastname@example.org
How did Brightside get its start?
Comcast did a study a few years back to quantify the amount of financial stress to the organization. The data showed that employees’ money-related issues cost the company a huge amount per year. This was spread across a few different inputs, including absenteeism, loss of productivity, healthcare costs and delayed retirement. At Brightside, we think financial stress costs about $5,000 per financially stressed employee across those categories.
Generally, about one fifth of folks in America who have a 401(k) have a loan on it. Lots of people who look at 401(k) balances in the United States find that the amount of assets under management continues to go up, but I’m not sure people are peeling the onion back to see the distribution of those assets. A huge number of folks have 401(k) loans outstanding, and the growth in investments is disproportionate across populations.
Around the time of the Comcast study, I was building out the financial technology investment practice for Comcast Ventures when I met and started working with Shawn [Shawn Leavitt, senior vice president of Comcast’s Total Rewards program]. Shawn was saying then that financial stress is one of the next biggest things in benefits…and something that would reduce healthcare costs as much as anything out there.
What came of that insight?
Originally Shawn suggested finding out more information on the healthcare market and groups like Accolade, a leading healthcare navigation platform for employers, for inspiration. I looked into their model to see how viable that kind of product would be and became convinced that model was needed in the financial health space. I spent two years trying to find a solution that looked like Accolade in the financial health space and didn’t find anything. That’s when we decided to start a company to solve the problem. [Brightside was founded by King, Leavitt and Tom Spann (former CEO of Accolade and current Brightside CEO) and funded by Comcast and Trinity Ventures.]
What’s the significance of a large, telecommunications company like Comcast investing in the employee benefits space?
Comcast Ventures invested in Brightside because there was a major market need. They needed a solution to a really big problem, and there was none out there that solved it. There was no comprehensive, unbiased solution that leveraged technology and people to help employees get to good financial outcomes and reduce financial stress.
Comcast, as an innovator in this market, can be a huge force for good and have a major impact on the benefits market as a whole. And Comcast and our other customers will be regarded as innovators and champions for their employees in the market.
Working closely with early customers is super valuable for companies like ours. Especially with a company like Comcast that is so in tune with its employees’ needs. It helps build the right solution in the market. Instead of an employee benefits company thinking they know the needs and building a solution in isolation, we built trying to understand what an employer needs from the ground up. It’s a purpose-built solution.
What is the relationship between financial wellness and healthcare?
One is direct costs. When people are dealing with financial stress, they are stressed, and you can become physically sick from stress, leading to healthcare costs. There is also other evidence that people can make bad decisions when they are under stress, and that includes in the area of healthcare.
Second is indirect costs. If someone does get sick and wants to use the healthcare system but has a $2,000 deductible—most people don’t have $400 saved in a bank account—they won’t engage in the healthcare system in a timely manner. Because of this, they inevitably have larger healthcare expenses down the road.
Third is the ability to impact utilization of employee benefits. We engage with a lot of employees regularly, and we can look out for early warning signs. If someone is getting, or might be getting, sick, we may be able to identify it through personalized interactions. If someone is chatting with a Brightside financial assistant, they might pick up that the client has back pain. Brightside is integrated with their employee benefits, and the financial assistant might refer someone earlier to whatever benefits the employee has to improve healthcare outcomes.
Have you found there are a lot of people in need of this kind of service?
Seventy-eight percent of this country is living paycheck to paycheck. People need help, and it’s one thing to read about it and another to understand what that means as a day-to-day situation for their employees. Families are struggling to put food on the table more than some people might think.
A lot of employers do know that, though, and are trying really hard to figure out how they can make a difference there. There’s a huge amount at stake, and if we don’t get it right, families can end up struggling even more than they already are. It’s a really important time in the economy right now, and we have to get this right and make sure we do the right thing for American families. That’s why we started this business: to help families. And this is really a unique time to do it. There are amazing solutions out there that can add value, and technology and research that can have a big and meaningful impact.
What kind of options were out there for employers in this space when you started looking around?
Employers basically had two different options. First, if they believed the cost of financial stress to their workforce, they could look to traditional financial wellness programs to solve the issue. They will find things like independent financial coaches. Those are great for a tiny percent of the population. They help folks who need help understanding their situation with education, but the challenge is they don’t have any solutions to implement. If you’re hungry, you don’t need a cookbook, you need a meal. That’s the challenge to a purely coaching solution.
The other thing they can do is go down the path of working with some of the point solutions that are out there. They can go out and curate their own set of services from groups like student loan vendors, savings accounts and personal loan companies. The challenge here is that each of those vendors is motivated to sell their own product even if it might not be in the employees’ interest. And when an employer chooses one, they are saying they are endorsing the one they think is the best. Employers have to get up to speed on a complicated sector and then have to implement and manage 20 different vendors.
How is Brightside different from these other financial wellness organizations?
What we do is have one place to go for all of an employee’s financial health issues. We provide unbiased navigation through financial assistants and combine that with partners on our platform to provide solutions, and we don’t make any money with any solution an employee uses. [Brightside is paid by the employers it works with.] The industry was built on kickbacks, and Brightside is pioneering “kickforwards.” If an employee uses a lender through the Brightside platform, we take what is traditionally considered the kickback and give those funds straight to the employees so they get a cheaper product.
Why is it important to have a navigator who can vet and harness an array of financial vendors?
Because it can be dangerous to implement student loan refinancing or other solutions without an overarching navigation platform.
For instance, student loan refinancing is an amazing option for a certain cohort of the population. They can refinance and can save huge amounts of interest, and it is the right thing to do. But when they do it, they lose that governmental protection [like guaranteed repayment options and protection from harassment or abusive debt collectors]. It can be dangerous to refinance if employees have certain financial circumstances. But when an employer offers it, it’s implicitly saying employees should refinance and use a particular vendor.
One of our clients we found out was contributing 16% of her income to her 401(k) plan and called in because she was getting evicted. It turns out she had $50 in savings. We know it’s a good idea to contribute to 401(k) plans, but it’s not exactly right for everyone at every time. She had received marketing materials telling employees to contribute, so she did. But she probably needed to get $500 in an emergency savings account in case something came up and she couldn’t pay rent.
With all of these options in the financial services space, it’s hard to deliver personalized marketing to an employee base. But having a centralized engagement platform can solve these problems. An employer can see a huge ROI, reduce healthcare costs, and put their hand on their heart and say they have done the right thing for their employees.
Do you work only with employees with financial problems?
Brightside is the one place to go for all of an employee’s financial needs. We are having early success and traction with folks who are vulnerable, though, and that’s where the highest ROI is for employers. The most common issues we help people through are building emergency savings, improving credit scores and navigating debt.
But we work on such a full spectrum of things. We have helped people who are living in their car move someplace stable. We’ve helped people who have been evicted and assisted people in paying for their cell phones. We’ve helped reduce employees’ payday loans and helped people find money to pay for a family member’s funeral services. When someone had a fire burn their house down, we connected them with the Red Cross to get $500 in emergency funds so they could find shelter.
To do this, we work with a variety of partners on our platform, including lenders, banks and a wide range across the financial services spectrum. We help people navigate the right resources at the right time.
What’s your uptake?
We have close to 50% engagement rates in financially stressed populations. We activate employees through a variety of channels, including integrated marketing campaigns, engaging with folks through on-site launches and other communications. We try to engage employees at their time of need. A huge percentage of clients come through word of mouth.
Does this kind of plan benefit all the players in the system?
Yes. For employees, they benefit from an unbiased, comprehensive financial service that delivers real value.
For employers, scale is a benefit beyond ROI. We have a network effect with hundreds of thousands of employees. If you have 5,000 employees and want to negotiate a financial solution deal, you won’t be able to get one like you do when going through a large platform.
There is also some expertise and work required to identify the different solutions—which are best and which you might want to implement.
For the vendors offering solutions, it is good as well, because they can just work with one platform and get access to a huge number of employees.
How do you measure ROI with clients? I’m assuming the information must be kept confidential.
Yes, we retain information independent of the employer. The employer might not want to know if an employee has a gambling problem. And we need independence to engage employees, make them feel safe so the employer doesn’t know they have a gambling problem or a payday loan they are ashamed of. That’s critical to engage the employee base.
We do deliver comprehensive reporting back to the employer, which gives them insight into their population. We give aggregate reporting so the employer knows how Brightside is delivering results.
Providing these services in the workforce is important. Healthcare is driven largely through employers, and financial services is going to be going through the employer channel as well. We are working with innovative employers who want to see what that looks like.
How do you make it as a wholesaler insurance brokerage in 2019? The big guys are BIG, and they’ve been around for a long time. Maybe you can undercut them on commission, but who wants to compete on price? You’re not going to “out-process” them; they’ve been honing their process for decades. And you’re certainly not going to have access to more markets. They have access to all the markets.
Smaller wholesalers aren’t without options for survival, but going head to head with the big guys is going to be tough. You need to find a secret weapon through differentiation. Here are three ways that have worked time and again to help companies succeed.
1. Leverage technology to streamline operations and communications.
At the core of every good wholesale operation is an efficient workflow that delivers results. Established wholesalers nailed this years ago, but guess what? Technology moves fast, and new solutions have come to market faster than old companies can adapt.
Workflow and communications technologies for the insurance industry have arrived to serve carriers and retail agencies, but there are few new options for wholesalers beyond the legacy management systems. Interestingly, both carrier and brokerage software platforms are starting to build connectivity solutions that extend out to the wholesaler. Agent Portal from Duck Creek and Broker Buddha’s new Submission platform are great examples. These platforms help streamline interactions with carriers and retail agencies, respectively. The time saved can be reinvested into quoting and finding markets for the risk.
To survive and thrive, price is no longer the determining factor, so owners must be constantly innovating and keeping a pulse on the latest technology. In an industry plagued by administrative friction, having a technology solution that accelerates quote times is a huge differentiator.
2. Don’t deliver a five-star experience; deliver a 10-star experience and differentiate through service.
The insurance industry operates on relationships, and relationships are built on high-quality service. It’s not hard to deliver “good” service, but it’s hard to be great. The more you understand a client’s business goals and personal motivators, the better situated you’ll be to over-deliver on expectations. To be great, though, you need to have time to invest in getting to know your clients, and few things can save you time outside of technology.
The best services in practice today use a unique combination of technology-enabled self-service, layered with a personal touch. There’s no better service than one that proactively delivers exactly what you want, just before you need it (e.g., reminder services, recommendations). Technologies like that are gold because they do the thinking for you and your clients. Second best are technologies that make information available on request (e.g., portals, chat bots, knowledge bases). These self-service technologies allow your clients to get exactly what they want, when they want it, in an efficient manner—i.e., without bothering you or waiting for you to respond. When you combine technology-enabled service solutions with first-class personal touch, you’ll create a level of brand loyalty that will retain clients forever.
3. Get laser-focused on something: geography, class of business, or line of business.
To compete in a crowded market you need to get only one thing right. Even as a wholesaler, you can’t be everything to everyone if you want to stand out. You need a way to get people’s attention.
One great way of standing out is to find a niche and then become the undisputed leader in that niche. Sear it into people’s brains and build your brand on the back of it. Never let them forget that you are the best at that one thing. Whether you crush it in one geographic area or become the best wholesaler for a particular line or class of business, people will come to you for that one thing and, over time, give you permission to expand into other areas. Brand is a powerful thing. Use it to differentiate from the big guys who “do it all.”
Now is not the time to be complacent as an insurance wholesaler. In an industry that has been notoriously slow to adopt new technologies, the current rate of consolidation guarantees that at least some of the old relationships brokers have come to rely on will disappear as acquisitions continue. So whether you’re looking to increase your multiple at exit or build tools to compete, remember three keys to getting the outcome you want: new technology, 10-star service, and laser focus.
Looking out 10 years from today, what’s a reinvented, successful agency going to look like?
I think probably the most important thing is that the agencies will become less clerical and more advisory in their work. For better or for worse, quite a lot of an agent’s job today is coaching the client through how to complete an application and the types of policies they need. The part where they’re literally just helping a client fill out an application is totally unnecessary. There are tools and technologies that are scalable, which agents can adopt, and those will allow them to offload that work, which is how they become more efficient.
They can then reinvest that time into relationships with clients and advisory work with them and end up having a more trusted relationship with them. It gives agents the opportunity to help clients get exactly the coverage they need…and they may even use technology to help figure out what their clients need.
As technology plays a greater role, do we reach the point where it takes over? Can artificial intelligence and machine learning replace the agents and brokers?
In some situations, yes, but certainly not in all situations. The commercial P&C space I’m very familiar with, and I do think that artificial intelligence and machine learning can be very helpful for underwriting policies at the small, simple risk level. I think over time what’s defined as small will grow. How far that will grow, I’m not sure. What I can tell you is that anybody who is spending, today, $5,000 or more on an insurance policy, is going to want to have a conversation with somebody about what they should do.
So maybe the AI there can help make recommendations and tips, but the anecdotal experience that an agent gives you to say, “Hey, here’s what I think and why,” is critical, and a business decision maker making a choice about what limits to get, what coverages to get, and the buyers don’t have time over the course of their year to figure this out on their own.
Broker Buddha has announced deals recently with wholesalers and leading brokerages. Can you talk about your overall strategy and how those deals fit in?
Our goal is to be an operating system for the entire commercial insurance industry. We’re talking about being an interface for the insured to access their policy information and apply for policies. We’re talking about having an interface for retail brokers to be able to engage with their clients, collaborate on applications, review policy information and then also an interface for the brokers to interact with their market partners—the wholesalers, carriers and MGAs.
So at the end of the day, the end goal is to connect everybody on the same platform at the same time, reducing the amount of time it takes a business to get the coverage it needs. One of the key focuses of our approach is to have a very design-led customer experience. And by customer, here, I mean insured, broker and carrier. So having spent 10 years in the consumer internet space, I recognized how important design was when it comes to building a brand and creating engagement with your users.
When you build a mobile app, you can’t train people how to use it. You don’t have that freedom. It’s got to work intuitively out of the gate; it’s got to look great; it’s got to be addictive. Those are a lot of the lessons I learned at my time at Shazam and Tumblr and building my own businesses. And so we’re using design as a weapon to enter the space and compete with, candidly, what are some pretty poor-looking technology products in the insurance space.
What’s to love
Everyone should visit, or ideally live, in NYC at least once in their life. To me it is the greatest city in the world, with the best parts to be found in the smaller neighborhoods and boroughs beyond Manhattan.
I live on the Upper West Side near Morningside Park and Central Park. I love the multiple parks, tree-lined streets, and views of lower Manhattan. I work in the Columbus Circle area, a lively neighborhood bordering Midtown West and the Upper West Side with great restaurants, views of Central Park, and convenient accessibility to the Midtown corridor and Downtown.
Favorite new restaurant
Leonti on the Upper West Side. It reminds me of a northern Italian bistro with an exceptional and creative wine list, hearty dishes and Milanese influences.
Le Bernardin. In my opinion, this New York institution is one of the best dining experiences in the city. The entire menu is exceptional, but it combines my two favorite culinary segments, seafood and French cuisine.
For cocktails with clients, Manhatta is a great new spot in Downtown that has exceptional views of NYC. The NoMad is my go-to for excellent cocktails and wines and an entertaining scene.
In Downtown, I’d recommend staying at The Greenwich Hotel, a boutique place. It is accessible to the FiDi [financial district] but located in Tribeca. In Midtown, The Library Hotel is another great boutique hotel close to Grand Central. It has an intimate rooftop bar with views of Bryant Park.
Thing to do
My favorite thing to do in NYC is to walk a neighborhood each weekend, people watching, exploring and noticing every changing environment around you. It is the best part of NYC. The city is a living and breathing organism and is always changing.
Off the beaten path >> Visit The Cloisters, a museum in Fort Tryon Park. It has an impressive collection of medieval European art and artifacts in a peaceful and relaxing park with European architecture. A visit feels like a mini-trip to Europe without ever having to leave Manhattan.
I try to utilize the park often in the spring, summer and fall. I love to cycle and walk the park. Everything in Central Park was meticulously planned but feels uniquely natural and brings a sense of calm in a busy city.
You were born and raised in Edmonton. What’s the secret to surviving winter in the northernmost city in North America?
You embrace it. You learn to cross-country ski. It’s not that bad. It’s a dry cold. I would rather be in Edmonton at minus 20 than New York, Chicago or Toronto at minus 10.
What makes Edmonton special?
It’s very Canadian. It’s not a very flashy city. It feels like a small city, and it still has that local charm, but over one million people live in the area.
Where do you take visitors?
If it’s summertime, we’ll go to the Edmonton River Valley to bike, run or hike. Edmonton has the largest urban park in North America—it’s all connected with paths and walkways and bike trails. After that, we’ll go to the Hotel Macdonald for a cocktail on the patio.
You’re competing in next month’s Coronation Triathlon. Have you done a lot of triathlons?
I have, though not in a while. I’ve done the odd marathon, as well. I enjoy the competition. It keeps me focused on a routine of physical activity, especially when I’m traveling.
What’s a typical weekend like?
My wife and I have three children—ages 15, 13 and 11—so right now it’s just shuttling the kids to their activities. They’re in volleyball, basketball, dance, soccer. My wife and I like to exercise, and we play golf in the summer. But it’s really just following the kids around.
Did you always expect to follow your father and grandfather into the family business?
No. My grandfather was the true entrepreneur. He sold his car to capitalize a new brokerage. My father actually bought his own brokerage, then bought my grandfather out. When I finished university, I was introduced to the business accidentally. Once I got into it, I recognized the opportunity, so I took that path and never looked back.
You became a CEO at 28 when you bought your father’s business. Did you feel pressure to succeed in a big way?
We were a much smaller business then. We had 20 employees. I did feel an obligation not to let them down. But I didn’t really feel a lot of pressure. I just surrounded myself with really good folks.
Is there a leader in the business world you most admire?
I’m disenchanted with most leadership today, but I do follow Prem Watsa of Fairfax Financial Holdings and admire his integrity and success.
I just don’t think people are leading for the right reasons. Their agendas are not genuine.
Have you had a most influential business mentor?
Tony Franceschini. He built an engineering firm called Stantec Engineering. He helped me with the original business plan for Navacord.
What’s the best advice you ever got?
Money is infinite, but there are only 24 hours in a day.
What is something your colleagues would be surprised to learn about you?
I don’t think they would know I’m a pianist. My mother made me play every day until I was 14 years old. I just play casually now.
What gives you your leader’s edge?
I hate to lose. I get out of bed in the morning with a lot of drive to do things better today than I did yesterday.
The Sadd File
Favorite Edmonton restaurant: Corso 32 (“It’s all good.”)
Favorite city to travel to for work: New York (“The pulse of the global economy is there. It gives you a lot of energy.”)
Favorite vacation spot: Maui (“We go there once or twice a year.”)
Favorite movie: Dances with Wolves
Favorite actor: Will Ferrell
Favorite musical group: Coldplay
Favorite Coldplay song: “Viva La Vida”
Favorite book: Pillars of the Earth (“I’ve read it three times.”)
As of press time, it is unknown how Brexit will play out—deal, no-deal, a second EU referendum? What is known is that it has been a hellish time for most citizens of the United Kingdom. As the ever-quotable, former British prime minister Winston Churchill once said, “If you are going through hell, keep going.” With the opening of new hotels, the addition of Michelin-starred restaurants and the proliferation of fashionable bars devoted to the national pastime of sipping gin, it appears this is just what Londoners are doing.
L’oscar, a new hotel housed in the high-end neighborhood of Holborn, has just opened. French hotel designer Jacques Garcia has applied the sumptuous aesthetic he employed at the NoMad in New York and La Réserve in Paris to transfigure a baroque-style former church into a posh place to lay one’s head. The Mandarin Oriental Hyde Park London has reopened after the most extensive restoration in its 115-year history. Internationally renowned designer Joyce Wang took inspiration from the building’s Edwardian heritage, the beauty of Hyde Park and the glamour of the Golden Age of Travel to create elegant interiors, befitting the London landmark and its reputation as a hotel for royals.
London’s culinary scene continues to move beyond fish and chips, pies and Yorkshire puddings. The team behind Eleven Madison Park in New York City is hopping across the pond for the first time to open a restaurant in London this summer. But foodies needn’t wait. Shoreditch is the hottest restaurant scene in the city. The former, mainly working-class area has been gentrified by tech, media and entrepreneurial companies that have converted industrial buildings into offices, co-working spaces and flats. Art galleries, bars, restaurants and pop-ups of all sorts are continuously appearing. The neighborhood’s modern British restaurants are serving some of the most lauded food in the city. The Clove Club, one of four restaurants in Shoreditch that have earned a Michelin star (read about two more, Lyle’s and Brat, below), put this neighborhood on the city’s culinary map. As food critic Ben McCormack of The Telegraph wrote in his review, “This restaurant brought haute cuisine to Shoreditch with a swagger of east London attitude.”
With ever-changing special exhibits, even at London’s 1,000 galleries and renowned museums, what is old is new again. “Edvard Munch: Love and Angst” will be on display at The British Museum through July 21, 2019. Tate Britain is presenting one of the largest collections of Vincent van Gogh’s work to be shown in the United Kingdom for nearly a decade through August 11. However, with the 75th anniversary of D-Day being commemorated on June 6, 2019, make time for a visit to the Churchill War Rooms, one of the five Imperial War Museums. Churchill and his war cabinet plotted the Allied victory during World War II at this underground labyrinth of rooms below Westminster. One needn’t look back in history any further to understand how Londoners will always continue to keep going in the finest fashion.
“The Distillers have found out a way to hit the palate of the Poor, by their new fashion’d compound Waters called Geneva.”
Such was the observation of English writer Daniel Defoe about London during the “Gin Craze” of the early 1700s. Last year, gin sales reached more than £2 billion, and almost 50 new distillers opened in the United Kingdom, evidence the country is in the midst of Gin Craze 2.0. London is still home to Beefeater Gin, first produced in 1876 at the Chelsea Distillery. However, many new distillers are making small-batch artisanal gins, thanks to the founders of Sipsmith gin (the Houses of Parliament official gin). They led the fight to change the laws enacted in 1751 to stem the effects of overconsumption, one of which was the requirement to have a 1,800-liter pot still, a challenge for today’s craft distillers. Join in the gin revival at these fashionable gin joints.
The London Gin Club, Soho
This club has been a cocktail bar since 1933, adding a dash of historic charm. The selection of 350 gins from around the world includes micro-distilleries. The signature drink is a gin and tonic. Served in a Copa de Balon glass (better to inhale the botanical aromas) over cracked ice, the tonic and garnish are chosen to pair well with your gin of choice. Gin tasting menus—Old World, fruit, single-estate juniper—are also popular. thelondonginclub.com
The Distillery, Notting Hill
This four-floor shrine to gin is located in a building that has housed drinking establishments since 1867. GinTonica, one of two bars, is dedicated to gin, offering more than 100 bottles of the spirit, including the distilled-on-site Portobello Road Gin. Dive into the history of gin (and a few more cocktails) by taking a master class at the “Ginstitute” gin museum. the-distillery.london
Dukes Bar, St. James’s Place
For a classic martini, head to the place where regular Ian Fleming is purported to have come up with the “shaken not stirred” line used by James Bond. Barman Alessandro Palazzi rinses the chilled glass with English dry vermouth made with a base of English wine, which he theatrically tosses over his shoulder and onto the carpet, before adding one of 15 ice cold gins. dukeshotel.com
His father, a door-to-door insurance salesman who immigrated here from Egypt, had always emphasized to his son that he must do something “special” with his life, Rami told The New York Times. His parents were thinking of law, but—after Rami joined the debate team in high school, where his performances outshone his arguments—a teacher guided him into an acting competition with a one-man play.
“It was the first time I saw my father get emotional,” Rami told Stacey Wilson Hunt in an AFTRA-SAG Foundation interview. His parents then blessed his acting career, and he went on to the theater school at the University of Indiana, Evansville.
Rami and his two siblings were brought up strictly, in the Coptic Orthodox Christian faith, and the California-born Rami grew up speaking Arabic. To reinforce the family’s Egyptian roots, his father would wake his children up at night to telephone the extended Egyptian family back in Samalut. His father died in 2006, the same year Rami made his feature film debut as Pharaoh Ahkmenrah in Night at the Museum, long before his major success.
Rami’s family ties remain strong, and he has rotated through family members as his dates for the numerous award ceremonies that have followed his successes, including in television’s “Mr. Robot” and the 2018 Freddie Mercury role. He has brought all his acting awards to live in a Los Angeles house he shares with his twin, Sami, an English teacher. He is now dating his Rhapsody co-star, the British actress Lucy Boynton, and is pondering a move to London.
In 2017, Verizon became the M&A cyber risk poster child when it learned shortly before its purchase of Yahoo that Yahoo had suffered two of the largest data breaches in history, in 2013 and 2014, affecting 1.5 billion users. Ultimately, Verizon shaved $350 million off the purchase price.
Yahoo had not told Verizon of the breaches. Concerned that Yahoo might have misled investors, the SEC opened an investigation into the matter. The SEC recently settled with Altaba for $35 million for the 2014 breach, the first such fine it has imposed for failure to report a cyber-security breach. (Altaba holds the remaining shares of Yahoo that were not purchased by Verizon.)
The SEC settlement agreement with Altaba noted, “Yahoo’s risk factor disclosures in its annual and quarterly reports from 2014 through 2016 were materially misleading in that they claimed the company only faced the risk of potential future data breaches…without disclosing that a massive data breach had in fact already occurred…In response to queries regarding past data breaches by Verizon during due diligence, Yahoo created a spreadsheet that falsely represented to Verizon that it was only aware of four minor breaches in which users’ identifying information was exposed, but did not disclose the 2014 theft of hundreds of millions of users’ personal data in its response.”
After the close of the acquisition, Verizon revealed that three billion user accounts actually had been breached instead of the 1.5 billion reported by Yahoo. The lesson here is that companies must do their own due diligence on cyber risks. They must demand full access to technical data and reports to ensure they understand the security maturity of the acquisition target’s cyber-security program and have a clear picture of prior incidents.
What You Inherit
An acquirer should not look merely for past incidents, however, because serious cyber events can occur after an acquisition due to unknown vulnerabilities—and the blame and expense will lie at the feet of the acquirer. For example, Marriott acquired Starwood Hotels & Resorts in 2016. In November 2018, Marriott disclosed that Starwood’s hotel guest database had been compromised and highly sensitive personal data on approximately 500 million guests had been exposed. The data included names, addresses, phone numbers, credit card information, passport numbers, family member information, and travel itineraries and dates. In a statement, Marriott said its investigation of the hack revealed that Marriott had learned “there had been unauthorized access to the Starwood network since 2014.”
Wow. The obvious questions are what cyber due diligence did Marriott do and why wasn’t this uncovered before the acquisition. Within a day, Marriott was hit with a securities class action suit alleging that investors had been harmed due to public misrepresentations, failure to disclose material facts, and material omissions and misrepresentations.
Similarly, PayPal uncovered cyber problems after it acquired TIO Networks in July 2017. A few months after acquisition, PayPal notified TIO customers it was suspending service because it had discovered “security vulnerabilities on the TIO platform and issues with TIO’s data security program that do not adhere to PayPal’s information security standards.” PayPal then issued another statement a few weeks later announcing it had “identified a potential compromise” of TIO’s systems “of personally identifiable information for approximately 1.6 million customers.”
Not surprisingly, a securities class action lawsuit was filed against PayPal a few days later. The suit claims PayPal failed to disclose that TIO’s data security program was not adequately protecting users’ personally identifiable information and that those vulnerabilities “threatened continued operation of TIO’s platform,” making revenues derived from TIO services “unsustainable.” The suit also alleges PayPal “overstated the benefits of the TIO acquisition” and investors were harmed by PayPal’s “materially false and misleading” statements.
The case, which is ongoing, begs the question: what due diligence did PayPal do on TIO’s cyber-security program prior to its purchase of the company for $233 million?
The possibility of breaches occurring after an acquisition is a risk that companies buy if they blindly acquire targets without conducting good cyber due diligence. Depending on the circumstances, the costs associated with a breach could exceed the purchase price.
In addition to data breaches, it is important for acquirers to investigate whether any of the target company’s confidential or proprietary data may have been stolen or exposed through a cyber attack. This could include pricing and customer lists, intellectual property or trade secrets, strategic information, marketing plans, personnel data or other sensitive information. These data usually represent a significant amount of the value of a company. It is possible, through good cyber due diligence, to uncover breaches, including the theft of data, that had not previously been detected.
Privacy violations and associated investigations are now costing companies serious money. It is crucial that acquirers examine whether there have been prior privacy violations or whether there is the potential for one, which could result in large fines. Such violations may not yet have been detected by the target or reported to authorities. With the May 2018 implementation of the European Union’s General Data Protection Regulation, followed by Facebook’s Cambridge Analytica data scandal, privacy regulators around the globe have their antennae up, and violations can be hefty, far exceeding the paltry $35 million SEC settlement with Altaba.
In January this year, for example, French regulators fined Google $57 million for failing to clearly inform users how the company was collecting data across about 20 Google services, including Google Maps and YouTube, and using it for advertising. In February, British members of Parliament accused Facebook of “intentionally and knowingly” violating privacy laws and called for investigations and increased regulation of tech companies. Later in February, The Washington Post reported the Federal Trade Commission and Facebook were negotiating a multibillion-dollar fine for privacy infringements at the social media giant that potentially violated its 2011 consent order with the FTC.
The bottom line here is that the green shades in M&A due diligence need to bring in some privacy and cyber-security experts to conduct a thorough assessment of the maturity of the target’s cyber-security program, including technical data and reports that could reveal prior incidents. Breaches, class action lawsuits, regulatory fines and investigations can pull millions—if not billions—from the bottom line of the acquirer.
Not every vulnerability nor every past or potential breach can be detected, but failing to conduct a thorough review of the cyber risks associated with an acquisition target is inexcusable. The information gathered can be used to estimate the costs associated with strengthening a weak cyber-security program, defending against prior breaches or lawsuits, or estimating potential penalties. It’s far better to consider these costs in the purchase price than to hope for the best afterward.
Insurance professionals also should work with their clients to help them manage the cyber risks associated with mergers and acquisitions. Agencies and brokerages can leverage the information obtained through the cyber due diligence process to review policies and ensure their clients have appropriate coverage post acquisition.
Westby is CEO of Global Cyber Risk. email@example.com
Today, owners of insurance brokerages field countless inquiries from prospective buyers wanting to know if they’d consider selling: Isn’t now the ideal time? Why wouldn’t you take advantage of the record-high valuations? Do you think your agency will be worth this much if you wait? How about a meeting?
Then for some reason or another, one of those assertive inquiries pushes a button—a go button. The owner agrees to meet this buyer (a large regional brokerage, a private equity player, you name it). Just one meeting can’t hurt. Why not?
The meeting happens over lunch. Then, lunch turns into golf, followed by more social time and a grand finale of the owner saying, “This feels right.”
The deal moves forward with the owner agreeing to sell the business because there was never a better match. This. Feels. Different. Rather than enlisting an advisor to help vet the deal—or even “shopping around” and considering other offers—the owner basically hands the keys, driver’s seat and wheel to the buyer, who steers the deal to close.
Who actually won in this scenario? Who really got “the deal” and the dream? Was it the owner, who was convinced this buyer felt different just because? Or the buyer who’s clearly a master in the art of mergers, acquisitions and deal closing? After the owner spent years investing in the business, nurturing its talent and beating market challenges, will he actually walk away feeling it was all worth it in the end?
Rewind to the Initial Call
Let’s replay this scene and go back to the phone call when the owner decided, “Sure, why not. I’ll meet you.” What if the owner then reached out to an advisor and shared that the tide had turned on the initial plan to hold on to the business; a sale sounds interesting. The obvious next step would be to consider other buyers, other offers. Find out if the deal this prospective buyer is offering is the best one. Is this buyer actually different?
We’re taught to always get three estimates before hiring a contractor to work on our homes. Shop your vendors to see if you can get a better deal on your cable, phone service, etc. We look for the best prices on office supplies. Why pay $5 more for ink toner at one place if you can get it for less elsewhere?
You get a deal only when you conduct the due diligence to learn whether there is a better offer.
But what’s interesting is we’ve seen a number of owners make the mistake of accepting a meeting on a whim based on “a feeling.” Then after hearing the buyer’s story—and telling the story is an art that talented, successful buyers have—the owner decides this genuine offer is ideal. There’s nothing like it.
But how do you know unless you vet the options? For owners who decide to entertain a meeting, to listen to the story, to learn more about an offer, why not meet with several other prospects so you can leverage the true value of what may be your greatest asset?
Own the Process
In today’s active M&A market, with high multiples and valuations that most agencies never imagined could be a reality for their business, it makes sense that owners who always figured they’d perpetuate are considering the alternative. And there is nothing wrong with that.
But stay in the driver’s seat. You are the owner. Avoid reactively taking a buyer’s call and meeting. You set the ground rules. What do you want to find out about the buyer? You ask the questions. You take the lead. It’s your business; you own it. Own the process.
If you decide to sell your greatest asset, you owe it to yourself, your people and your future to engage in a thoughtful process so you can make the most of the market opportunity. So if a buyer calls and a meeting sounds intriguing, say, “Let me think about that.” Then, get a true process started so you can guide the deal in an advantageous direction.
Deal activity in February produced 34 more announced transactions, bringing the year’s total through February to 102 deals. This is a 13% increase in announced transactions compared to the same time period in 2018 (90 transactions), with press releases continuing to lag behind. There is no suppression of the appetite for acquisition among buyers, and they continue to be as active as ever.
Patriot Growth Insurance Services remains the most active buyer year to date and added one more transaction in February, bringing it to 19 deals. Rounding out the top three buyers through February are AssuredPartners and Arthur J. Gallagher, which have announced seven and six transactions, respectively.
Valhalla, New York-based USI Insurance Services announced in February it is acquiring U.S. Risk Insurance Group, which it expects to close on in the second quarter of 2019. This acquisition greatly bolsters USI’s presence within the wholesale market and is its first venture that provides a presence outside of the United States. Another notable transaction in February was Patriot’s acquisition of Turner Insurance & Bonding Company. This is Patriot’s first acquisition that includes property and casualty business.
Trem is EVP of MarshBerry. firstname.lastname@example.org
Securities offered through MarshBerry Capital, member FINRA and SIPC. Send M&A announcements to M&A@marshberry.com.
After you work through the pro formas and verify (or correct) the projected financials, you work through all of the agency contracts, review fees and commission agreements, verify licensure status, and review a whole host of other business issues and regulatory compliance obligations to ensure you are not buying a pig in a poke or a ticket to an administrative enforcement proceeding.
Verifying that the requisite software licenses are in place and reviewing privacy protections and data protection protocols have been on your list for a while, but the new cyber-security regulatory regimes beginning to take effect around the country will require more. First out of the blocks was the New York Department of Financial Services’ sweeping cyber-security regulations, which took effect two years ago.
Under those regulations, which we have written about extensively, insurance brokerage firms and anyone else licensed by the department are required to establish and maintain prescribed cyber-security programs to protect their systems and data. The precise scope of the program will vary based on the size of the firm’s New York-related business and the firm’s assessment of its cyber-security risks and exposures, which is mandated by the department. (Firms that employ fewer than 10 employees living in New York and that do not generate at least $5 million in New York-related revenue have a more streamlined set of compliance obligations.)
The applicable rules require your firm to assess your business’s cyber risk in light of the non-public information you collect and store, the information systems you use, and the effectiveness of your system access controls. And these risk assessments are not a one-and-done affair; they must be conducted periodically and documented.
Acquiring Cyber Risk
When you acquire another firm, you must step through an analogous risk-assessment process. The department has thus made clear that “when Covered Entities are acquiring or merging with a new company, Covered Entities will need to do a factual analysis of how [the cyber-security] regulatory requirements apply to that particular acquisition.” New York’s Department of Financial Services (DFS) has emphasized that acquirers “need to have a serious due diligence process” and should prioritize cyber-security when considering any new acquisitions. In other words, any due diligence conducted for a merger or acquisition must consider the target’s cyber-security risk profile and must evaluate the extent to which it is in compliance with the department’s cyber-security rule requirements.
This means a prospective acquirer must examine the extent to which the “acquiree” handles non-public information as well as other factors, including the soundness of its data systems and the extent to which those systems are integrated with one another.
If the target acquisition is not in compliance with its pre-acquisition regulatory obligations, the acquirer is getting not just the non-compliant target company with its inherent cyber-security risk but also all the attendant regulatory liability. In the case of New York’s DFS, this means the acquirer could be opening itself up to significant financial penalties and putting its licensure status at risk.
You also should have a post-acquisition cyber integration plan in place to integrate the acquired firm into your business and into your cyber-security program so you do not create new cyber (and related business) risks. The firm should be in full compliance with its pre-merger rule requirements on Day 1. If the acquired firm’s obligations are expanded (or created) as a result of the merger itself—if, for example, it would no longer qualify for the “New York small business” partial exemption—you will have 180 days from the end of the most recent fiscal year in which you ceased to qualify for the applicable exemption to come into full regulatory compliance.
The complexity of the applicable requirements and the challenges of the M&A due diligence process have been magnified by the Third Party Service Party requirements, which took effect March 1. Third Party Service Party companies provide services to the covered entity and maintain, process or have access to the covered entity’s non-public information because of that relationship. The New York rule requires all covered entities to have cyber-security policies and procedures to which each of its Third Party Service Party companies are bound based on the level of access to your systems and the risks that each company presents.
A further complication: last fall New York “clarified” that your firm must comply with the Third Party Service Party requirements even if it is also a covered entity and has its own cyber-security regulatory compliance obligations. Your firm thus must independently assess the cyber-security protocols to which your firm needs each of your Third Party Service Parties to adhere to fortify your firm’s own cyber-security program. And you also must somehow monitor each Third Party Service Party’s compliance with those requirements even if they are directly bound by New York’s cyber-security regime. You cannot, according to the DFS, merely rely on the mandated certificate of compliance with the cyber-security rule of a Third Party Service Party that also is a covered entity to satisfy your firm’s cyber-security program requirements.
A carrier likely will consider all of the firms for which it has made an agency appointment to be Third Party Service Parties under these rules (in part because that is the example the financial services agency used in making its “clarification”). Unless your firm has access to carrier data beyond data related to your firm’s own clients, however, we believe the carriers should be able to rely on your compliance with the applicable cyber-security requirements. Moreover, we also believe a carrier should be able to satisfy any applicable cyber-security program compliance monitoring obligation by relying on a firm’s independent audit process. In other words, a firm should be able to present the results of an annual cyber-security program review to all of the carriers for which it may be acting in a Third Party Service Party capacity.
Our near-term mission is to facilitate an industrywide discussion on the appropriate Third Party Service Party cyber-security program compliance monitoring protocols (those discussions are now under way). In the meantime, it is critical that acquiring companies prioritize these cyber-security policy and program issues during their due diligence and integration processes.
Sinder is The Council’s chief legal officer and Steptoe & Johnson partner. email@example.com
Rigamonti is a senior associate in Steptoe’s Government Affairs & Public Policy group. firstname.lastname@example.org
Acquisition of personal lines insurance agencies is attractive due to the opportunity for quick return on investment that can be achieved with small changes. Where firms have lagged in technology, a simple process improvement can reduce costs and increase profitability. It’s a win-win.
When considering perpetuation, personal lines agency owners may find themselves in a bind for a host of reasons, such as changing technologies, unclear leadership succession and talent acquisition issues. Being purchased may be their best option. However, for owners who have grown their business from the ground up and have close relationships with their clients, it can be a heartbreaking prospect to sell and see the agency culture disappear into a highly corporate and less personal company structure.
According to Deloitte’s Global Human Capital Trends report, 87% of respondents said they consider company culture to be important, and 54% rate it as very important—nine percentage points higher than the prior year. Additionally, 82% said they believe culture is a potential competitive advantage.
A culture focused on being personal is at the core of personal lines agencies—it’s at the core of good business insurance relationships as well. You get to know about your clients and their lives. Despite the success of direct writers today, the vast majority of consumers still value an agency and its people. They want to be able to pick up the phone and speak to a person they know. They want that point of reference, which is why the need for the personal touch will never go away.
In the wake of an accident or a catastrophic event, the last thing policyholders want to hear when they call their agent is a recorded voice or a phone queue. When they have a claim and need help, that is the critical point an agent and insurer make good on the promises of the policy. The policyholder is anxious to connect with someone who can help get things back to normal as soon as possible.
One example of the personal touch in a large agency culture occurred during the 2017 hurricane season. Insurance Office of America’s offices in the Florida Keys, which had come on board with IOA just over a year earlier, were in the path of Hurricane Irma, as were their many clients. When devastation struck the Keys and much of the state, it became evident that the new relationship added value these agencies couldn’t provide previously.
Before the acquisition, these smaller agencies had access to limited carriers. With their new affiliation, they were able to access more carrier partners. Not only were employees proud to be there for their clients, who, in many cases, had lost everything, but they were also able to provide space in the offices for insurance carrier partners to set up shop, perform evaluations, settle claims and set up teams as the devastation unfolded. That personal touch, coupled with expanded services, was vitally important.
The power was out in much of the state, but because the agencies were now part of a larger organization, they were able to provide resources in areas that had the power and technology to get up and running much faster. As a result, clients were able to get their claims processed quickly. Because communications were down locally, it was particularly important that both clients and agents were able to check in on each other to find out if everyone was safe or anyone needed anything.
For those agencies dedicated to a personal culture and to communicating that culture throughout the enterprise, high retention rates are their reward. It’s possible for large agencies to serve clients at a personal level, but it requires an entrepreneurial approach in which agents have the freedom to do what they do best, which is to serve their clients at an individual level.
Agencies that are generational and focused on a personal culture are rare. These characteristics together provide the environment not only to be a family business, a generational business and a big business but also to retain the personal touch over the long haul. That’s the competitive edge.
These factors also make an agency very attractive for business owners who want not only to be acquired but also to exercise their autonomy without the overarching governance of corporate insecurity.
When you acquire an agency that has a niche in which it excels, forcing its team members to offer all lines may annihilate the special relationships they have cultivated with their clients. Instead, determine to keep the personal touch and give them what they need to expand their footprint rather than upending their business model. Keep the relationship-led approach and support them from a central resources perspective to help them become even better.
While the pace of technology today has allowed (and sometimes forced) businesses to increase the use of automation to serve clients, a customer-centric approach is still an imperative. According to a recent consumer behavior report from Bain & Company, “Insurance customers aren’t thrilled with their digital experiences. They find interacting with humans easier and more personalized.”
People want the personal touch, and for insurance agency owners, it’s a constant challenge where technology is required. Creative approaches and consistent review must be part of an agency’s DNA. For example, instead of placing a customer in a random queue, thoughtful agencies create personalized teams where account managers look after a particular group of clients.
No matter the M&A environment, your agency’s underlying philosophy should be simple: purposefully keep the personal touch. That relationship focus must be a cultural commitment that is both transparent and genuine. Done right, you can enjoy the resources of a large agency while also providing the personal touch your customers seek.
McDowell is president of the personal lines and small business division at Insurance Office of America. Brian.email@example.com
The annual report on sectoral mergers by Optis Partners, a financial services consulting firm serving insurance agents and brokers, stressed that private equity fueled two thirds of all transactions in 2018. Leader’s Edge reported last year that private equity was responsible for about half of all acquisitions a year earlier, and experts agree there is no slowdown in M&A activities with PE backing.
PE firms are itching for new opportunities to maximize their investment returns. Insurance intermediaries have been a private equity favorite for a while, as brokerages secure steady returns and operate in “a familiar financial services territory that provides steady and predictable cash flow and requires no material capital expenditures as exists in manufacturing or other industries,” says Optis managing director Tim Cunningham.
In fact, according to Optis, insurance brokerages supported by Blackstone, Hellman & Friedman, Apax, Genstar, New Mountain, Madison Dearborn and ABRY were the most acquisitive players over the last five years. Since 2013, the number of acquisitions by PE-backed agencies has tripled to 424, resulting in 1,487 transactions, a compelling sign of the sector’s enduring appeal.
Getting to Know You
As private equity companies get more acquainted with insurance intermediation, brokerages should also take the opportunity to reflect on how these investors interact with their business. For that, it is helpful to establish a few basic principles.
First, time is money. Private equity invests under the premise that the relationship is finite: when the return on investment slumps, capital will find a better home. A Hales report notes a shorter duration of recent private equity investments in the sector among traditional PE players.
Second, private equity companies are different in their investment strategies: they develop their own specialization in target industries, company size, or level of diversification. Some may single out financial services as their focus, while others keep a more diversified, balanced portfolio and add, say, technology to the mix. For the record, technology and financial services have been among star performers, resulting on average in multiples of two times invested PE capital.
Private equity companies also differ in their level of involvement with a brokerage’s operations. Most maintain control over the brokerage’s board and share equity with the brokerage’s management and key staff. But some PE firms opt for a hybrid ownership, offering lines of credit while the brokerage’s management keeps control of the board.
Finally, funds develop different competencies within a brokerage’s life cycles. Brokerages go through various maturity levels, and while some private equity companies acquire brokerages at inception, others would prefer more mature operations. We have seen companies being passed around by private equity players, with some brokerages even returning to their original investors. According to Bain’s analysis of global private equity, “previous PE ownership generates a reliable track record and reassures buyers that any time bombs have likely been found and defused. Research consistently shows that sponsor-to-sponsor deals have performed at least as well as primary buyouts over time, often with less risk.” Apax’s recent sale of AssuredPartners to its original founder, GTCR, is a good example of a brokerage emerging after each transaction with a higher valuation and increased confidence in growth.
Capital Crossing Borders
As in the United States, brokerages abroad are changing ownership from one private equity company to another, and PE firms are maintaining stakes in several agencies. As capital moves freely across borders, investors find new targets outside their familiar markets.
Aquiline, BGC and Madison Dearborn Partners (MDP) are just a few of the players that facilitated recent big-ticket investments in the London market. Last year, global wholesale and reinsurance brokerage Ed was acquired by New York-based BGC from the private equity powerhouse Lightyear Capital. Prior to this, BGC purchased Lloyd’s specialty brokerage Besso to start its insurance portfolio.
Globally recognized KKR has recently added a large Scandinavian brokerage to its existing stake in U.S.-based USI, while Aquiline, which owns the U.K.-based reinsurance brokerage TigerRisk, agreed to acquire Relation Insurance Services, based in California, in February 2019. MDP has cast a wider net in global brokerage investment by buying stakes in NFP in the United States, Navacord in Canada and Ardonagh Holding in the United Kingdom.
Ardonagh is a fascinating case of a U.K. brokerage and its private equity owner coming together to launch a U.K.-based general and specialist insurance powerhouse with a larger cumulative market share and stronger borrowing power. In cooperation with credit investor HPS Investment Partners, MDP was instrumental in bringing together Ardonagh’s companies: Towergate, Autonet, Chase Templeton, Ryan Direct and Price Forbes. Before this partnership came to fruition, MDP and HPS already had a stake in all companies, even though the brokerages continue to operate under separate brands.
Why go through the trouble of consolidating so many players? In this case, the acquiring private equity firms said in a press release they “intend to explore options to consolidate and optimize the group’s capital structure in the loan and bond markets, including the refinancing of existing debt.” As a result, the biggest borrower in the new company, Towergate, will get a reprieve from its corporate debt obligations, which cost the group $58 million annually. When the new partnership attacks the existing debt, it will be able to negotiate better terms and a lower interest rate as a group, as opposed to Towergate operating alone.
PE Competition Heating Up
We are in a perpetual state of change and disruption, impacted by private equity’s quest for higher returns globally. Experts forecast private equity will continue driving brokerage market valuation up in the near future, albeit at a more measured pace, while the entry cost for new PE companies will become more burdensome. Cunningham sums it up: “For new private equity players the question is: do they have the right management team in place, with deep bona fides and relationships within the industry, to attract the right, high-quality acquisitions?”
As competition heats up, investors are expected to devise innovative partnerships driven by higher efficiency, better technology integration, and the quest for market leadership. Horizontal partnerships, based on existing stakes in companies, push market consolidation boundaries for private equity firms. If this model works well for Ardonagh, there is no shortage of private equity firms with appropriate targets to replicate its success.
This story can potentially be complicated by brokerages’ evolving relationships with insurtech, as both technology and financial services remain the mainstay of private equity companies. As insurtech becomes ingrained in increasing operational efficiencies, will we also see vertical partnerships with insurance agencies, facilitated by private equity? According to Bain, “PE firms are paying closer attention to what might disrupt their carefully prepared value-creation plans. Not only are they running through more robust downside scenarios to pressure test investments, but they are also anticipating other challenges—how to cope proactively with digital disruption or how to negotiate issues like consolidation in the supply base.”
As funds compete to raise money for investment, performance pressures motivate their management to increase profits by crossing geographical and sectoral boundaries. Flexible investment models and expertise in sectors under management seem conducive to setting precedents for PE-driven partnerships we have yet to see.
Gololobov is The Council’s vice president of international. firstname.lastname@example.org
Wedged between two challenging caregiving roles, “sandwichers” often have to juggle many different and difficult responsibilities.
In the insurance brokerage or agency world, a younger generation of owners and partners is experiencing its own version of a sandwich challenge when it comes to determining the future of their businesses. Young partners are sandwiched between the high cost of buying out retiring owners at historically high multiples and a strong pressure to invest in increasingly expensive talent and technology to be able to compete effectively.
Often, current agency owners who bought out their firms from the generation before assume the next generation will do the same. The problem is many fail to consider the unique challenges of today’s mergers and acquisitions environment.
Two decades ago, the typical agency sold for five times earnings before interest, taxes, depreciation and amortization [EBITDA]. Nowadays, in the highly competitive, private-equity fueled marketplace, the usual price is nearly 10x EBITDA. In addition to strong PE interest, a large supply of willing sellers, low-cost debt and the synergies in a growing economy are fueling a sustained run of transactions at exceptionally high multiples.
Also, a low personal savings rate and high personal debt mean many younger partners do not have sufficient financial means to buy out senior partners without incurring significant additional debt.
Given these challenges, current agency owners seeking to divest are forced to decide between structuring a buyout over an extended period of time and asking the junior partner to incur major debt. Either way, the cash flow required to buy out senior partners or repay the loan significantly restricts the ability of the junior partner to make much-needed investments in the business after the transaction closes.
Meanwhile, in the current, highly competitive insurance brokerage environment, the cost of operating a successful agency is substantially higher than ever. Keeping up with the competition requires more than a simple investment in customer service and staff. Significant funds are needed to acquire and maintain state-of-the-art technology and other specialized capabilities. These resource investments are critical especially for agencies aspiring to move “up market.” Amid the fierce competition to acquire new business, producers and account team members are also under pressure to deploy expensive analytical tools that can better address the needs of their sophisticated clients.
Case in Point
The story of the hypothetical Joe’s Insurance Agency illustrates this challenge.
Joe Sr. started an agency in 1960. Through hard work, he built the agency to a formidable presence in the local market. In 1998, the senior Joe and his son discussed a buyout strategy that would allow transitioning ownership to Joe Jr. At the time, the agency had annual revenue of $3 million and EBITDA of $600,000.
Through research, Joe Sr. and Joe Jr. learned that the market value of Joe’s Insurance Agency at the time was 5x EBITDA, or right around $3 million. The two agreed that, since Joe Jr. had been working and contributing for years, he would receive a credit that would allow him to buy out Joe Sr. for a total of $2 million, spread out over five years. Joe Jr. was able to satisfy this cash outflow from agency profit and still have $200,000 left each year to retain or reinvest. The plan worked out well, with Joe Jr. taking over the helm of the business and the senior Joe slipping into a joyful retirement.
Over the last 20 years, Joe Jr. built the agency by acquiring great talent and strategically investing in technology and resources to increase efficiency. The annual agency revenue is currently $8 million, with a 25% EBITDA of $2 million a year.
Then comes Joe III, who has also been working with his father for the last five years and is ready to start taking the reins. Since Joe Jr. and Joe III both pay attention to industry news, they are aware that valuations are at an all-time high. Agencies like theirs are selling for 10x EBITDA, or $20 million, a reality that creates a serious challenge for both father and son.
Although Joe III has some personal savings, he is reluctant to take out such a large loan against the business. He would prefer to do a buyout over time, just like his father did. However, in this case, a similarly structured deal would mean Joe III would allocate two thirds of agency profit toward a buyout and need 15 years to pay off the full value. If Joe Jr. did what his father did for him—granting a third of the agency value to Joe III—it would still take the youngest Joe 10 years to pay the full value, and Joe Jr. would need to give up almost $7 million to make the deal happen.
Meanwhile, Joe III, feeling less enthused at the possibility of this future, realizes 10 to 15 years is a long time to pay off the debt. Under this deal, he won’t be able to take out money for himself or, more importantly, fund new technology he knows the agency needs to grow further.
Over the last five years, Joe III has watched the market consolidate in his town, with most of the local firms he once competed against partnering with large national players to compete against him. Amid the fierce competition, Joe’s Insurance Agency is not winning new business as often as Joe III would like. A major source of frustration is the fact that Joe III’s competitors are using RFPs to search for service providers instead of choosing a local person they like to work with. When the RFPs are sent out, Joe III knows he doesn’t have what it takes to compete.
Joe III feels stuck—sandwiched between a father who would prefer to perpetuate internally and a staff that is desperate for more resources to compete effectively.
This is the reality of many agencies in today’s environment. As a result, many families and partnerships are deciding the best way forward is through carefully selecting an acquiring agency that can provide both a high value for owners and a great pathway for growth for the next generation. This may be the best path for Joe III and for many in the next generation: selling the agency to a thoughtfully chosen partner that will allow you to maximize the value of your hard work and leave a legacy of wealth to your family.
Kate Bang is the vice president of corporate development at USI Insurance Services. Kate.email@example.com
What’s your role at Ryan Specialty Group?
As Chief Underwriter at RSG, I have two main responsibilities—protecting the capital that supports our 22 MGUs and binding authorities, and assisting those teams with developing and managing various underwriting initiatives. My team includes our actuaries and cat modelers which give us insight into underwriting performance but also assist in product development and management.
Our team is also responsible for helping the underwriting and binding teams build tools and best practices, insert automation, monitor underwriting performance and develop our ultimate loss ratios by product and with our different capital providers.
In what kind of technology are you investing?
The Connector is our brand for a digital strategy for small accounts. The technology is designed for retail agents to be able to bind a policy in minutes, without any underwriter involvement. It pulls data from third party vendors like building age, roof age, risk characteristics, crime scores and more which enables a digital underwriting process. The platform offers multiple lines of business from multiple carriers, giving retailers a true small commercial marketplace.
The Connector portfolio will be monitored by underwriters as opposed to underwriters making individual account decisions. They’ll be able to look at the data on submitted and bound data, as well as referred business, which will enable us to keep the products competitive and profitable.
The platform incorporates everything for the retailer including collecting payments, and issuing contracts, electronically. We pulled in all of the available technology that’s out there...So it’s sort of a wholesale binding authority in a digital box.
What is the point at which the human experience has to take over from technology in underwriting?
You can’t automate the larger account underwriting process but you can certainly make those underwriting decisions better informed. We have a data scientist now to sift through the data, triage it, look for any correlations we can draw across all of RSG to lead to product development hopefully, or just uncover insights we can get from that tremendous amount of data.
We also have many initiatives around what we call data enrichment, which looks at all the applications that come in and all the individual underwriting judgments on each underwriting platform. It’s like a predictive list. What is out there that can better inform that underwriting decision? Is the crime score going to be something that is more predictive of property loss? Or even looking at web scraping and other techniques to better inform the underwriting decision.
Do these changes drive your hiring strategy?
Absolutely. I’ll give you an example in our actuarial team. Today, it’s not enough to be an experienced casualty actuary. You have to bring some predictive modeling capability, probably some coding capability. Also, we’re looking for comfort with data visualization so they can present information in a visually relevant way to the underwriters.
What about acquisitions?
We’re always looking for experienced underwriters that have a differentiated underwriting philosophy and approach to their business. And then we try to wrap shared services and technology around them, so they operate as independent underwriting businesses within a larger framework.
What has been one of your biggest takeaways or lessons learned from an acquisition?
The lesson I’ve learned is to pay for quality and then enhance that high-quality, rather than trying
to build quality from scratch.
Step inside and take in the sights and sounds of a Barbershop in Hyattsville Maryland, where health advocates work with barbers to fight colon cancer and other diseases.
In other shops, wealthy white men made business deals while slaves cut their hair. Today, with a clientele that is likely to consist of rich and poor, black and white, laborer and boss, the barbershop occupies a singular station in modern society, the communal gathering place where customers not only get groomed but play games, talk sports, listen to music, watch TV, share stories, and live their lives.
“You can have a judge seated next to a guy who works on a loading dock at Safeway who has a homeless man seated on his other side,” says Thomas, the director of the Maryland Center for Health Equity at the University of Maryland’s School of Public Health. “There is no other venue where you have such a ranging socioeconomic spectrum. A barbershop is a gem. It’s only when you get exposed to it that you can realize how amazing it is.”
And Thomas has figured out a way to harness the power of barbershops to improve the health of their employees and customers, especially those who might not have access to regular healthcare. In 2015, Thomas introduced the HAIR program to the Washington, D.C., area. HAIR stands for Health Advocates In-Reach and Research, an initiative in which healthcare providers work with barbers to improve the barbers’ health and train them to be health advocates for their customers. The goal is to prevent diseases, such as colon cancer, among the shops’ mostly African-American clientele.
While the health outcome data are largely anecdotal at this early stage, Thomas believes HAIR’s experience has proven that a collaboration between academia, small businesses, healthcare providers and insurers can improve people’s health. Surely lessons can be learned from HAIR about improving the health of any high-risk, underserved population.
An Unmet Need
Colon cancer is the third most common cancer in the nation, with more than 97,000 new cases diagnosed each year. It hits African Americans particularly hard. On average, blacks are more likely to develop colon cancer than whites and to develop the disease at an earlier age. And their mortality rate is higher. They are less likely to get screened for colon cancer, even though screening can lead to quicker diagnoses and better outcomes. This means raising awareness is critical among African Americans, says Cara Reymann, chief marketing officer and director of practice development at Capital Digestive Care, one of the largest private gastrointestinal practices in the country and part of the HAIR program.
“We’ve always had a strong interest in advocacy, especially around colon cancer, because it is one of only two cancers that can be prevented through screening,” Reymann says. (The other is cervical cancer.) “We can detect abnormalities that can become cancerous, and if you remove them, you can prevent the cancer from forming in the first place.”
There are a lot of barriers that keep African Americans from getting colonoscopies, including less healthcare access and a fear surrounding the screening process. “They think, ‘Why would a man want to do that to me, even if he is a doctor?’” Thomas says.
In 2001, seeking to reduce health disparities, the Department of Health and Human Services launched a public health campaign encouraging African Americans to establish medical homes for needed healthcare. A number of African-American communities across the nation hosted Take a Loved One to the Doctor days. But Thomas, who worked at the University of Pittsburgh’s Graduate School of Public Health at the time, realized this wouldn’t be effective in communities where a majority of the people weren’t seeing doctors already. So he countered with a Take a Health Professional to the People day. He looked to barbershops because of their trusted position in communities as well as the unique client interactions.
“People in barbershops and salons are there for long periods of time,” Thomas says. “No self-respecting black barber will say, ‘I’ll get you in and out in 10 minutes.’ They are in rest mode, and that hanging out makes it the perfect venue.”
Barbers also have roles as ad hoc consultants on all kinds of issues for their clientele. Thomas was in a barbershop once when a man walked in who had recently left the hospital after suffering a heart attack. After discharge, the customer was given medications, which he pulled from his pocket in the shop and showed everyone.
According to Thomas, the barber looked at the man and said, “If you take those pills, you won’t be able to keep up your obligations.” He was referring to a common side effect of the medication: erectile dysfunction.
“I looked at that man’s face and knew immediately he wasn’t going to take those pills; the barber has that much sway,” Thomas says. “A doctor can write a prescription, but what happens when people get home and talk with these opinion leaders in the community? They don’t have PhDs or MDs, but they have trust that conveys credibility that health professionals themselves don’t have.”
Thomas realized that health information was already being disseminated in barbershops and norms were being shaped—but not always the best kind. He sought to bring an “ecosystem of wellness” to these spaces.
The barbershop program was born after he gave a presentation in Philadelphia about health disparities in the African-American community. At the end of a long line of people waiting to talk with him afterward was Christina Stasiuk, Cigna’s national medical director for health disparities. After talking with Thomas, Stasiuk spent time looking into his work. A year later, the program came to fruition with the help of the Cigna Foundation’s World of Difference Grants, which the insurer gives to nonprofits to improve health opportunities in their communities.
Thomas began with three barbershops in Pittsburgh hosting 10 health professionals who offered screening and information to clientele. By 2008, the program had grown to amass 10 shops with more than 200 healthcare providers. At one point, they screened 700 people in one day. Many of the clients were in such poor health they were sent directly from the barbershop to the emergency room. “That’s how prevalent the morbidity is in these communities,” Thomas says.
Barbers as Advocates
A barbershop is a gem. It’s only when you get exposed to it that you can realize how amazing it is.Tweet
In 2010, Thomas and his entire research team were recruited to the Washington area to launch the Maryland Center for Health Equity. He says they immediately began working on community engagement, research and infrastructure needed for another barbershop program. He reached out to local clinical partners, including the Center for Health Equity and Wellness at Adventist HealthCare and Capital Digestive Care, and received funding and support from Cigna. The D.C. program focused on raising awareness of colon cancer screenings in barbershops and reducing obesity in area salons. There were essentially two parts to the initiative: improving the health of barbers and then training them to provide health information to their clients.
Thomas says when he reached out to local clinical partners like Adventist and Capital Digestive Care, they were eager to get out of their offices and into the community. The first gastroenterologist to go into the shops in D.C. was an African-American woman, which surprised the barbers and their customers.
“They were like, ‘This is what a gastroenterologist looks like?’” Thomas says of the barbers, who proceeded to braid her hair and talk with her about all kinds of health-related issues. “It completely melted away any fear they had of the process.”
The first goal of the program was to work with barbers and improve their health however possible. Roberto Rubio, senior program coordinator and coach for Adventist HealthCare, says Adventist healthcare providers went into the shops each week and offered health screenings and education. They checked each barber’s blood pressure, body mass index and carbon monoxide levels (many of the barbers were smokers). Then they provided information on different topics for them to educate their clients, particularly focusing on colon cancer and other areas of concern for African-American men.
“It’s about building trust in a community of need,” says Marilyn Lynk, director for the Center for Health Equity at Adventist. “These barbers could really be advocates. They could talk about how they did this themselves, how their blood pressure was high and now how eating better or taking medications improved it.”
Rubio conceded that it took a little time for the barbers to get comfortable having healthcare providers in their shops, but they did over time. They even helped the barbers get insurance. Because many are self-employed, they didn’t have coverage and hadn’t been to a doctor in a while.
The providers began by frequenting the shops on a regular basis. Over time, they went less as they saw greater health knowledge and positive health results among the barbers. Many barbers cut back on smoking, and there were improvements in blood pressure and body mass index among them.
“We wanted to prepare the barbers with healthcare knowledge and let them know it was important to talk to clients so barbershops could become health portals where clients could come in and discuss these issues,” Rubio says.
Julia Huggins, vice president of U.S. markets at Cigna, says the simplest part of the equation was teaching the barbers to engage their clients. They already talk about how their kids and family are doing. And it was natural for a barber to engage a client in a conversation about how his health might be affected if the man’s father had recently passed away of something like colon cancer.
“We tapped into a resource that is already viewed as a trusted advisor,” Huggins says. “We didn’t have to teach them to force the conversation; we just had to arm and train the individuals with the right information to provide.”
But the healthcare providers walked a fine line regarding the kind of training that was passed along to clients. Capital Digestive Care’s Reymann says they were careful not to make the barbers surrogates for doctors. Initially, Thomas says, the providers referred to the trained barbers as health advisors but changed that title to health advocates. They didn’t want someone in a health crisis looking to their barber for answers.
A Whole-Body Approach
It was clear relatively early in the HAIR program that health information and screenings had to go beyond colon cancer. The populations in the Washington communities where the barbershops were located mirrored those across the country.
Data show that African Americans are much more likely to die from heart disease and stroke than their white counterparts. They are also more likely to have high blood pressure and diabetes—and all of these at earlier ages. They are also more likely to die younger of any cause than are white Americans.
The healthcare providers ended up screening and educating barbers on issues including alcohol consumption, nutrition and obesity. They also brought in mental health counselors to work on stress management and unresolved trauma.
We’ve always had a strong interest in advocacy, especially around colon cancer, because it is one of only two cancers that can be prevented through screening.Tweet
Lynk says many of the screenings showed the barbers were at high risk for chronic conditions or unknowingly had them already. Lynk’s group provided information on diabetes management and heart disease, got barbers connected with a primary care provider and discussed healthy eating habits and weight loss. “We tried to be culturally sensitive and find ways to align with the cultural norms or resources in their own neighborhoods,” Lynk says.
Pharmacists, Thomas says, were “big hits” in the shops. One shop held a Brown Bag Day during which the pharmacists encouraged people to bring all the medications they were using or were administering to others as caregivers. Participants talked to the pharmacists about side effects and interactions and how to be better advocates for their own health.
A team from the Mayo Clinic visited one of the shops and performed echocardiograms with laptop devices. Nurse practitioners drew blood to check for prostate-specific antigens (used to identify prostate cancer) and performed digital rectal exams (for which the shop had to be temporarily renovated to create a private space).
“Providers are able today to do so much work outside of the office. All kinds of things are possible,” Thomas says. “The miniaturization of diagnostics equipment means they no longer need to be tethered to a hospital or clinic.”
Creating Healthy Partnerships
Huggins says Cigna feels obligated to be part of improving health in communities where its employees live and work. And part of that is working with under-resourced areas and understanding how cultural differences may impact health outcomes among various groups.
“We have to reach certain communities in ways they can understand and take the information and implement it in their own lives,” she says. “Cultural differences are important, and traditional ways of communicating don’t always reach who we are trying to impact. The HAIR program was geared toward the African-American community, where there are some perceptions and misconceptions of illness and the need for screening.”
Huggins sees the role of health service organizations, such as insurers, as conveners for programs such as HAIR. When Thomas’s organization was looking for a partner to help initiate the program, it aligned with Cigna’s desire to promote and deliver screenings and health information in a new and engaging way. Their wide reach and plentiful data can be leveraged to reach out in areas of need.
For example, Huggins says they knew colon cancer was one of the deadliest cancers among African Americans, who were not receiving sufficient education and care.
“We need to make sure we enable partners in the communities to take advantage of our data and tools and knowledge and deliver resources or programs in a way that the communities own them,” Huggins says.
“People won’t be receptive to an entity coming in and telling them what to do. We have to enable them with whatever resources they need because they understand the culture, linguistic barriers and other components that a company is far removed from.”
The success of the HAIR program and others in which Cigna has taken part have reinforced her belief that these partnerships are the right kind of outreach opportunities—and that Cigna’s resources are being delivered where and how they are needed.
Capital Digestive Care has long served as a resource for communities lacking good healthcare services. Reymann says the organization jumped on board because they saw HAIR as a unique way to approach what they knew was a significant issue in the community.
Reymann participated in planning calls to determine the educational materials and other resources necessary prior to the program’s launch in D.C. As part of Capital’s mission, the providers there volunteer for education and community events and serve as a resource for patients who need screening. Barbershop clients they find to be at risk and who have health insurance are further screened in their offices. If clients don’t have insurance, Capital’s providers are able to direct them to local nonprofit healthcare organizations that can provide education and perform the tests.
And it’s not just the communities that are benefiting from providers’ outreach. Health professionals, who are predominately white, can also benefit from working in communities different from their own, learning to educate and screen high-risk populations.
We tapped into a resource that is already viewed as a trusted advisor. We didn’t have to teach them to force the conversation; we just had to arm and train the individuals with the right information to provide.Tweet
“It helps their competency and confidence reaching settings outside of the hospital,” Thomas says. “And it’s my observation that the doctors really like it. It’s a win-win all the way around.”
Duplicating the Efforts
Insurers and public health groups clearly believe in the possibility of population health management to improve health outcomes. Businesses, too, can consider looking at innovative ways to work with their own organizations to improve health and, in turn, better control costs.
Reymann says the most important tool a self-insured employer has is working directly with a provider for preventive services. “It’s a trend we are seeing on a national level, but there’s not enough of it,” she says. “The downstream effects of prevention instead of treatment are so great.”
Employers can engage directly with providers and negotiate for lower costs or bundled rates. They can start by working with whoever holds the data, which could be the insurance company or third-party aggregators, to determine what an employee population looks like from a health perspective. Screenings and personal health histories can help gauge areas of need.
Employers can use creative tactics like giving gift certificates for completing health histories, offering paid time off when employees get a physical, or a day off for a more complicated test, like a colonoscopy.
Lynk recommends working with as broad a group of stakeholders as possible to identify and treat where need and disparities exist in a population. These can include the business community, faith-based organizations or local health departments.
There are likely hospitals in most places with missions and dollars to do outreach, education or screenings to improve their communities’ health. When thinking about investing, she says, most hospitals want to see data to identify issues of concern in the community and work there to improve outcomes. Adventist, for example, partners with groups to deal with community issues like education, housing, air quality and food insecurity.
Thomas has big dreams to expand the barbershop program. His first goal is to create a nationwide group, the National Association of Black Barbershops and Salons for Health, which would enroll barbershops and salons that want to be involved in the health arena.
“We want to make sure they are open, ready and willing to disseminate evidence-based health information and are able to have professionals come in and provide screenings,” he says.
Thomas is using his anchor shop in the D.C. area to test out new ideas. There, flat-screen TVs hang on the walls. On the HAIR wall, the TV doesn’t show sports or Judge Judy, but rotates health information. Nearby is a shoebox where people can submit health questions, which his staff answers and turns into infographics. Thomas wants to be able to deploy the messages to all barbershops taking part in HAIR.
He’s working with a technology company to create a smart phone app called My Barbershop Buddy. The app will provide and track health information of barbers and their customers who are served by HAIR. He even has dreams of creating a smart barbershop chair where people getting haircuts can plug in their phones and download information they have tracked, including their weight, food intake or steps walked.
“This is an innovative, outside-the-box strategy for reaching high-risk populations,” Thomas says. “We can have health professionals available in barbershops, and to get there we need partners like Cigna who are willing to invest in these kinds of crazy ideas—ones who recognize that, at the end of the day, they are paying the bills.”
Worth is a contributing writer and healthcare editor. firstname.lastname@example.org
Whether you’re attending the “Leadership Lessons from World War II” program at The National WWII Museum in New Orleans March 26-27 or headed to the 50th anniversary of the New Orleans Jazz & Heritage Festival to see The Rolling Stones play the Acura Stage for the first time, deciding where to eat is always a challenge. From the elegance of Brennan’s brunch to local institutions like Domilise’s Po-Boy & Bar, there is no shortage of outstanding Creole and Cajun restaurants in New Orleans.
Three James Beard Award-winning chefs in New Orleans—Sue Zemanick, Alon Shaya and Nina Compton—are continuing to expand the city’s culinary horizons with the opening of their latest restaurants, Zasu, Saba and Bywater American Bistro respectively. Located in some of New Orleans’ coolest neighborhoods, they are a good reason to expand your own horizons beyond the French Quarter and Downtown.
Zemanick established her reputation for her exact but subtle upscale fare like foie gras with pear at Gautreau’s in Uptown. Tucked into a former apothecary in a wealthy Uptown neighborhood, with no sign out front, the fine dining restaurant felt like a clubhouse for the well-heeled women in pearls and men in seersucker suits who walked to the restaurant from their nearby homes. Two years after she departed, she has opened the more casual but equally refined Zasu in Mid-City. The menu is an exploration of flavors, mixing local and international ingredients and spices to produce some of the most innovative yet delightful dining experiences you can have in the city.
White walls with azure stripes set a Mediterranean mood at Saba, Shaya’s homage to his Israeli heritage. (This is Shaya’s second foray into this kind of cooking. Chef John Besh’s former restaurant group owns his first restaurant, Shaya. The split is fodder for a restaurant reality show.) This is a place where you want to graze, enjoying the interesting combinations of flavors course after course over a bottle of wine from Greece or Italy. You could make a meal out of the hummus alone, whipped to lusciousness and topped with delightful ingredients like blue crab and roasted pumpkin and served with freshly baked pita.
Compton’s first restaurant, Compère Lapin in the Warehouse District, combines her love for her Caribbean roots and experiences cooking at upscale Italian and French restaurants. Bywater American Bistro, which opened last March across from the New Orleans Center for Creative Arts (art by NOCCA students hangs on the walls), has a sophisticated neighborhood vibe. An open kitchen and exhibition bar anchor the cavernous dining room, with brick walls, wood columns, and hues of blue and green, tempering the industrial bones. The infusion of Louisiana further defines her approach. Many dishes are presented with flair. Pumpkin soup with brown butter is poured into the bowl tableside over croutons and buttermilk sorbet, a lively mix of hot and cold, smooth and crunchy.
The synergy between the inventive cocktails and reasonably priced and thoughtful wines and the food at these restaurants is a nice surprise. Reservations are a must.
Weinfelden is situated about 40 miles northeast of Zurich, very close to the German border and Lake Constance. You can reach our little town by train or car from Zurich in about 50 minutes. About 15,000 people live here. Life is quiet and luckily not as hectic as in the larger cities of Switzerland. We speak Swiss German, which is a dialect of the German language.
What’s to love
It’s worth spending a week in this part of Switzerland. Our area is a wonderful place with lots of little hills. Almost everything is within walking distance (my commute is only 10 minutes). Good food, wonderful wine, breathtaking surroundings and great hospitality impress every visitor from all over the world.
Our cuisine is similar to the rest of Switzerland. A classic meal is roesti (like hash browns) with minced veal in a creamy sauce. Since Weinfelden lies in the heart of the Canton Thurgau, the main producer of apples and pears in Switzerland, many of our dishes contain this fruit. However, as small as we are, we have a large choice of restaurants, from Italian and Chinese to steakhouses and Thai.
Ristorante Pulcinella. The chef has run this Italian restaurant for more than 20 years and still provides the same great quality. Their pasta and all of the food on the menu is prepared in their own kitchen every day. My favorite dishes are scaloppine al limone or saltimbocca with risotto.
The best hotel in the area is the Golf Panorama, a four-star-plus resort next to a wonderful golf course in Lipperswil. It is only a 10-minute drive from Weinfelden.
Our vineyards grow mainly red grapes for Burgundy and Merlot, but they also produce Rieslings and Sauvignon blancs. The best wines are Wolfer Pinot Noir Grand Vin, Sequana (a rich red blend) and Sauvignon blanc; Schlossgut Bachtobel Pinot Noir No. 3 and Sauvignon blanc; Broger Weinbau Blauburgunder Weinfelden (classic Pinot noir); and Müller Thurgau (a fruity, mineral white).
Hike through the vineyards on the Wine Trail for wonderful views. You can see as far as the Swiss Alps. I would also suggest hiking (if you are in great shape) or taking the cable car up to the mountain Säntis, the highest mountain in northeastern Switzerland, an hour’s drive from here.
Lake Constance and the city of Constance. The city is located directly at the lake, and the old part of town is really worth visiting. The thing to do is rent a bicycle and ride on dedicated pathways around the lake.
Telematics devices do drive significant safety improvements for fleets. In a pilot of its GPS monitoring system, Philadelphia Insurance saw dramatic reductions in dangerous driving behaviors. Based on those results, the company is rapidly expanding complimentary access to the PHLYTRAC GPS to its policyholders. More than 20,000 devices are already in use, and the company projects considerable growth this year and beyond.
In the commercial lines space, it’s my understanding that this is one of the largest telematics programs out there,” says Mark Konchan, vice president of risk management services for Philadelphia Insurance.
The results of the company’s 18-month pilot showed a 98% reduction in hard braking, a 97% reduction in hard acceleration, a 69% reduction in speeding overall, and an 89% reduction in speeding in excess of 15 mph over the limit.
“We got 5,000 devices out there to our policyholders, and we benchmarked those accounts,” Konchan says of the pilot that began in July 2016. “At the end of the pilot study, for the bulk of the accounts, we saw improvements, and for those that were struggling along the way, we coached them.”
Technology alone is not enough, Konchan stresses. At the start of a monitoring program, drivers improve their behavior because they know they’re being monitored, in what’s known as the Hawthorne Effect, but without follow-up, they can backslide. That makes enforcement and training essential.
“If you don’t have enforcement follow-up…on the unsafe driving observations, you’re going to see these drivers go back to their old habits,” Konchan says. So far, clients have been enthusiastic.
“The feedback we have received from our policyholders has been exceptional,” Konchan says. “Some of these policyholders would not be able to install this technology based on their budget restraints.”
Going forward, Philadelphia Insurance is looking to enhance the program.
“In the future, we’re looking at including route optimization as a component to what we have now, and that is currently in development,” Konchan says. “I don’t have a timeline, but the route optimization will certainly help from a safety standpoint. They could be scheduling at certain times of a day, taking different routes, as well as the potential for the elimination of left-hand turns.”
Let’s start with your platform—the MGA. How does it fit into the insurtech space?
In my mind, the MGA platform is ideal for a product like cyber insurance. From our perspective at Evolve, we have the ability to go super deep when it comes to cyber exposures, cyber coverage, making our quote-to-buying process as absolutely efficient as it can possibly be. And really, at the end of the day, the MGA model allows us to maximize the amount of value that we can provide to retail insurance brokers.
A number of cyber-focused MGAs are popping up. How do you compete in that kind of market?
I’m confident we have the best cyber coverage that’s currently available. I truly believe there’s a massive deficit in coverage across the industry. It’s really common to see carriers that are excluding or limiting first-party coverage. There’s tons of new cyber policies that will include risk management warranties that will remove coverage in the event of a claim.
To give you an example, if you don't perform something like dual-factor authentication…or maybe you’re not implementing the recommended cyber-security procedures. You’re not going to receive coverage. This is really frustrating to me, because a lot of competitors’ coverage seems to be smoke and mirrors and it kind of discredits cyber insurance as a whole. Beyond coverage, I think our efficiency is unparalleled. We are super focused on going the extra mile to make sure brokers and our insureds truly understand their exposures.
Who are your insureds, and what are the biggest cyber threats they’re facing now?
We work with insureds in almost every industry out there. If I were to break it down to one major cyber threat that really every insured is facing, it’s the fact that everything is getting connected to the internet—your car, your doorbell, your TV, your heat, maybe even your refrigerator. The fact that all these things are getting connected to the internet dramatically increases your chances of getting hacked.
I always tell people you need to focus on what you can control. Make sure you have the right cyber security in place. Make sure you have the right cyber insurance policy in place. You want to make sure your employees have effective training. You’d be shocked at the amount of claims we see that are the result of human error and phishing.
What cyber threats do you see out there on the horizon that people might not be thinking about?
Forbes recently said that cryptojacking is now more prevalent than ransomware. It’s when a criminal will hijack your computing power to mine for cryptocurrency, like bitcoin. It’s a scary thing, because it really, really slows down your systems and will drive business interruption losses and overtime costs. We actually just released an updated cyber form, our new Evolve 4.0 form, that specifically writes in coverage for this type of loss.
There’s a lot of talk about silent cyber. How do you approach that?
Silent cyber refers to potential cyber exposures contained within traditional property liability insurance policies, which may or may not include or exclude cyber risks. They’re silent, right. This is a huge issue when a claim happens, because it can result in finger pointing from different carriers that say, OK, you should pick up the coverage because you say this or you say that. To avoid this issue, we always try to make sure the intent of our cyber policy is to respond primary so we know we are the first ones in there, and we want to be picking up those costs right away. In our minds, affirmative cover and that primary layer is the position we always want to take so there’s no confusion on the part of the insured.
When it comes to underwriting, what’s your philosophy?
We don’t get overly technical with cyber-security related questions. We can gauge a lot from the industry class and the revenue, and we have lots of internal data that helps drive our decisions. We like to know how much an insured is invested in their IT security. You know, if they have a chief information security officer. If they have legitimately thought about their cyber exposures. We like to know if our insureds are compliant with industry-specific standards, but at the same time, we’re fully aware that human error is a huge reason for cyber claims and we take that into account with our underwriting, as well.
What changes would you like to see in the current insurance distribution model?
Insurance is a very old-school industry with a significant age gap. Two changes I would like to see are increased efficiency and increased expertise. I think that a lot of times in the insurance distribution chain you have folks that are looking to add middlemen that are wearing multiple hats to the distribution chain. And it seems completely illogical to me, but it’s very common to see, you know, for example, a wholesale broker who specializes in executive lines. So they’re doing cyber, E&O, D&O, but with a developing product like cyber, I truly believe that retail brokers need a specialist who understands the environment inside and out.
You mentioned insurance being old-school with the age gap. What’s your hiring and talent development strategy to deal with that?
Because most people, even within the insurance industry, are in the dark when it comes to cyber, we created a structured intensive-training program that will significantly boost an employee’s knowledge on everything cyber-related. Our new hires will go through different phases, they’ll pass tests, they’ll do industry-specific write-ups, they’ll review competitor forms, they’ll give internal presentations, etc. It’s a super-detailed process. We really want to make sure our employees are experts when they’re looking at risk or speaking with any of our brokers.
We’re looking to hire people right out of college. We’re looking to hire people that have some experience in the industry. But we’re also looking at people that have had serious experience in the industry. So I wouldn’t restrict it to one demographic or another. But it seems to me that millennials are a bit more attracted to just the overall vibe of cyber insurance and a lot of times, just based on the technology element of the industry, they have a strong grasp on it already.
Your family has a long history in insurance. How did it play into your decision to start an MGA?
My great grandfather was an insurance broker, and I am the fourth generation of my family in insurance. I grew up working for my dad’s agency in Marin County, going into the office in high school. I got my P&C license when I was in college, and immediately out of college I jumped into an underwriting role with Ace in San Francisco. So I got a really broad perspective of the industry, not only from the carrier side but from the retail broker side.
I also saw my brother, who co-founded Evolve with me, at Lloyd’s of London, and I saw the wholesale distribution chain, as well, and how Lloyd’s of London worked. It was a great education in the industry. That’s really what caused us to jump into the MGA model and find the correct mentors in the industry that knew where the market was going and knew how to provide true value to the demographic of retail insurance brokers we’re working with. I think it was kind of a perfect storm of the experience across the industry, the family history, and the emerging product, like cyber, that we could really jump in and actually provide value when it comes to an emerging product.
The Northridge Earthquake, named for its apparent epicenter (later determined to be the nearby community of Reseda), stunned seismologists with its ferocity. Catastrophe prediction models had estimated the probability of a 6.7-magnitude earthquake as a one in 500-year event. Now, just 24 years after Northridge, scientists at the U.S. Geological Survey predict a 99.7% of another 6.7-magnitude temblor in Los Angeles within the next 30 years.
Much worse is the possibility of a mammoth earthquake striking coastal residents of the Pacific Northwest along the 620-mile Cascadia Subduction Zone, where the Juan de Fuca ocean plate dips under the North American continental plate. The fault zone encompasses the cities of Seattle and Portland, which confront an 8% to 20% chance of experiencing a magnitude-8.0 or higher quake in the next 50 years.
Such doom and gloom projections are daunting for anyone living along the western coastline of the United States. The risk is also of great economic consequence to the global insurance and reinsurance industries, which absorb the financial brunt of earthquakes along with local, state and federal taxpayers. The Northridge Earthquake alone caused insured losses estimated at $25.6 billion in 2017 dollars, more than the industry had collected in earthquake premiums over the prior 30 years. According to the Federal Emergency Management Agency, the damage losses add up to $4.4 billion annually nationwide. Across the planet, earthquake losses in 2016 alone surpassed $53 billion.
Limiting the Impact
On average, roughly 500,000 detectable earthquakes occur each year, of which 100,000 can be felt and 100 cause significant property damage. For millennia, people living in regions prone to earthquakes have tried to limit the impact of earthquakes on buildings. Pliny the Elder’s history of ancient Greece includes a reference to the use of sheepskin between the ground and the foundation of a temple to permit the structure to slip and slide with less damage during a temblor. This ancient prevention technique is actually a primitive version of base isolation, a current protection technology. In base isolation, spring-like flexible pads are inserted between a building’s foundation in the ground and the building itself to absorb devastating ground motions.
Now another earthquake protection technology has been developed to do something similar, albeit in a way that stretches the bounds of credulity. OK, it blows the mind.
Developed by scientists at the Massachusetts Institute of Technology’s Lincoln Laboratory, it’s called a seismic muffler, at least for the time being. The concept calls for drilling a V-shaped array of boreholes hundreds of feet deep that slope away from the protected asset, such as a building, an airport runway or a power plant. The array of boreholes one to three feet in diameter is similar in shape and dimension to a set of trench walls.
Cased in steel or a comparable composite material to maintain the structural integrity of the underlying soil and rock, the boreholes divert hazardous surface waves generated by an earthquake away from the protected asset. The bottom aperture of the borehole array allows only higher-frequency, lower-energy seismic waves traveling from the depths of the Earth to enter and propagate. By the time this wave energy reaches the ground surface, it dissipates in much the same way the sounds emanating from a car’s combustion engine are softened by an acoustic muffler.
Tabletop exercises by MIT’s Lincoln Lab, using 3-D supercomputing calculations, indicate the V-shaped array of mufflers can decrease the ground-shaking effects of a 7.0-magnitude earthquake to a 5.5-magnitude earthquake and lower. That’s a vast improvement, given the logarithmic Richter magnitude scale. For the purposes of simple math, a magnitude-7.0 quake is 10 times stronger than a magnitude-6.0 quake but is 100 times stronger than a magnitude-5.0 quake.
Pliny the Elder’s history of ancient Greece includes a reference to the use of sheepskin between the ground and the foundation of a temple to permit the structure to slip and slide with less damage during a temblor.Tweet
Will a seismic muffler work in practice as it does in the lab? The answer appears to be yes. A patent has been issued for the technology, and a 20-page scientific research paper on the muffler was peer reviewed and published in the November 2018 Bulletin of the Seismological Society of America. “We have already received licensing interest in the technology,” says Robert Haupt, the Lincoln Lab staff scientist leading the development of the new earthquake protection system.
Too Good to Be True?
“Wow” factor aside, the technology has yet to be tested in the field. However, the boreholes in their V-shaped array (see diagram) should perform as intended, diverting surface energy away from the protected asset. Questions certainly remain, including the effect of these reflected waves on neighboring structures, the impact of drilling thousands of boreholes, and the overall cost compared to existing technologies, such as base isolation, which is limited to new construction. The effectiveness of boreholes may be greater than base isolation, since the total surface wave energy is diverted. But more analysis, including cost analysis, would be needed to determine the relative effectiveness of each approach for a particular property.
Putting aside these answers for the moment, we sent a description of the new technology to several structural engineers, a leading catastrophe risk modeler, two state insurance regulators, two large reinsurers, and the California Earthquake Authority. Collectively, their interest was piqued, but they were guardedly optimistic. As Dave Jones, then California insurance commissioner (his term ended in 2018), puts it, “The question comes down to what is realistic and affordable. While this appears promising, will it prove to be practical and affordable?”
“I read the piece you sent with an open mind, and it seems perfectly plausible to me,” says Keith Porter, a research professor in the Department of Civil, Environmental and Architectural Engineering at the University of Colorado. “That’s not saying I would recommend its use tomorrow, because it is not quite there yet, much less available. But I get the concept. The fact that it is peer reviewed in such a reputable journal gives further credence to its scientific validity and usefulness.” Porter holds a PhD in structural engineering from Stanford University.
Certainly, there are obstacles in the way of deploying the technology, including the need to obtain site access permits to bore thousands of holes. But Haupt believes the benefits of the solution overshadow its impediments.
“As long as you’re able to drill the boreholes at a distance of 300 meters or so from the asset, you can protect all kinds of structures—from a nuclear power plant to an entire neighborhood of residential homes,” he says. “If a community like Beverly Hills wanted to invest in putting this in to protect their homes on an aggregate basis, the destructive ground motion from an earthquake would be significantly reduced.”
This possibility caught the attention of Janiele Maffei, chief mitigation officer at the California Earthquake Authority, a privately funded, publicly managed organization that sells California earthquake insurance policies through participating insurance companies. Maffei, a registered structural engineer, is responsible for directing the authority’s statewide residential earthquake retrofit program.
“That’s a very interesting possibility, since we’ve been looking solely at mitigation on a building-by-building basis,” Maffei says. “The possibility of protecting more than one structure at a time is an exciting thing, particularly in California, which bears two thirds of the nation’s earthquake risks.”
Maffei cautioned that her opinion is tempered by financial reality—that is, the cost of the new technology. Other experts agreed. “This all sounds very interesting and promising, but we need to consider the real-world implications of the technology, chiefly its scalability and cost-effectiveness,” says Erdem Karaca, Swiss Re’s head of catastrophe perils in the Americas. (Not incidentally, Karaca holds a PhD in civil engineering from MIT.) “We’re talking thousands of boreholes drilled hundreds of meters deep to protect a hospital or a power plant. Is this safe? And how much will it cost?”
The possibility of protecting more than one structure at a time is an exciting thing, particularly in California, which bears two thirds of the nation’s earthquake risks.Tweet
Haupt says the number of boreholes and their dimensions depend on the application. “Say you wanted to protect a kilometer-long airport runway,” he says. “The depth of the boreholes would be approximately 50 meters, the diameter about one foot, and the number of boreholes around 5,000 on each side of the runway.”
He further estimates it would require about 5,000 boreholes to protect a hospital, about 10,000 for a nuclear power plant, 40,000 for a 10-kilometer-long oil and gas pipeline, and 50,000 to 200,000 for a residential community (depending, of course, on its size). That sure sounds like a lot of boreholes, but Haupt countered that drilling with modern technology is “relatively straightforward.”
But what about the cost of all that drilling, compared to the expense of base isolation? According to various estimates, it costs $2,000 to $3,000 to drill a one-foot-diameter well 300 feet into the ground. And that’s just one borehole. Nevertheless, Haupt maintains the aggregate cost of seismic mufflers is much less than comparable base isolation expenditures.
“To build a tall skyscraper today using base isolation costs tens of millions of dollars per building,” he explains. “Based on general calculations from our extensive 3-D supercomputer computations, we estimate we could protect many more buildings at the same cost. So, yes, it would be cost effective.”
A more rigorous cost-benefit analysis will be available following the lab’s field-testing, Haupt says, noting that the lab is looking to drum up a combination of government and private-sector funding to produce a more comprehensive systems analysis. If the test findings are consistent with previous experiments and current cost estimations, former California insurance commissioner Jones says, the technology “could add a new level of protection for Californians. Anything we can do to reduce the potential for loss of life or property from damaging earthquakes we would support.”
Questions on Efficacy
Not all experts are optimistic about the efficacy of the technology. Robert Muir-Wood, the chief research officer at catastrophe modeling firm RMS, who holds a PhD in Earth sciences from Cambridge University, is dubious on several fronts. “This is interesting, ingenious and certainly a novel idea, but my gut reaction is that it’s science fiction,” Muir-Wood says. “Earthquakes are rich in many frequencies of vibration, and this procedure by design cannot anticipate what these frequencies will be prior to an event. It may muffle some frequencies but not all of them. Consequently, I don’t think it will work.”
Apprised of the criticism, Haupt responds that Muir-Wood is correct about earthquake vibration frequencies, which he equated to the frequencies in a broadband spectrum.
“He’s right that an earthquake does not produce a single tone of vibration but many different tones at once,” Haupt says. “But he may be unaware that our system is a broadband defense. By having multiple boreholes surrounding the protected asset, the surface waves approaching the borehole system are reflected or diverted. Any energy coming from below the earth and into the aperture is dissipated, enabling an indifference to frequency. So there is no frequency dependence.”
Karaca, from Swiss Re, brought up another concern—whether or not the V-shaped array of seismic mufflers might divert the energy of an earthquake toward neighboring structures. “Since the technology is designed to deflect surface waves, which are the most damaging aspect of an earthquake, that energy has to go somewhere,” he says. “My question is: where?”
If a community like Beverly Hills wanted to invest in putting this in to protect their homes on an aggregate basis, the destructive ground motion from an earthquake would be significantly reduced.Tweet
“That’s an excellent query,” Haupt says. “He’s right that the energy will be diverted. However, the array pattern is designed to promote seismic wave self-interference, diverting the destructive effects of the waves. In other words, we’ve designed it in such a way that neighboring structures would not experience anything greater than the ground shaking already produced by the earthquake.”
All in all, the unique earthquake protection technology appears to present a viable alternative to base isolation, although Haupt prefers to call it a “supplement” to current mitigations. The next step, he says, “is to go outside.”
The lab is undoubtedly eager to undertake real-Earth scenario testing, which Haupt believes will confirm the findings of the detailed 3-D supercomputer models demonstrating the technology’s effectiveness. Physical tests to date have involved drilling boreholes into thick blocks of plastic topped with scaled-down structures. To approximate different earthquake magnitudes, the blocks were shaken and the effects measured by an accelerometer. “We’re confident that the supercomputer modeling is accurate, but to really prove this works, we need to scale up the testing and experiment with actual boreholes drilled in the earth at different depths, densities, and so on,” Haupt says.
Like all academic laboratories, budgets are tight when it comes to large-scale tests. Is this something the insurance and reinsurance industries might be interested in funding, given the potential for a long-term return in decreased damage losses?
Maffei, from the California Earthquake Authority, is sanguine about the possibility. “Any technology that would mitigate the impact of an earthquake deserves monetary means for further testing,” she says. “When base isolation was explored in the aftermath of the Northridge Earthquake, it was tested first on a single structure. The results were encouraging, guiding its use in additional buildings. Little by little, it has proven itself.”
Richard Quill, expert risk research analyst at Allianz, shares this perspective. “We insure some of the earthquake risks affecting nuclear power plants and large oil refineries,” says Quill, who analyzes and coordinates the large reinsurer’s response to natural catastrophes. “If this technology is proven to work, it would obviously reduce earthquake damage risks to these facilities. From an insurance perspective, it is all very interesting. We’ve invested in the past in new risk-mitigation technologies, including how to make automobiles safer. But we would need more evidence.”
Gunvalson, 56, says she began pondering an insurance career after she found out a girlfriend’s commission on the life insurance policy she sold Gunvalson on a soon-to-be ex-husband. Later, as a single mom of two, she found a firm, got licensed, “and I became the first woman agent who was hitting the numbers out of the park every single month,” she told InsuranceNewsNet Magazine. She eventually started her own firm, Coto Insurance and Financial Services, which sells life, health, auto, home and business insurance.
Besides that, she runs a small production company and a sideline called “Diamonds by Vicki,” which vends $11,000 earrings on Amazon. Last December, she peddled her very presence by inviting fans to join her and her boyfriend on a five-day trip to Mexico for only $1,550.
“I want to control my own paycheck. I want to have full control of what I do and therefore I can go to bed at night knowing that I’m never going to be dependent upon a man ever,” she said.
Surprising statement from a Housewife? Maybe. But Gunvalson is anything but predictable. She is at the forefront of many a party scene, flaunting her favorite expression, “Whoop it up!” and keeping the ladies on their toes.
Twice married and divorced, she is dating former Anaheim policeman and frequent local political candidate Steve Lodge. She vows she’ll marry him—hopefully on camera—if only he would ask.
After obtaining a dual degree in biochemistry and managerial economics, I did a grueling short stint walking the hospital halls and working out of my car as a starter pharmaceutical-device intern. Healthcare business consulting seemed a great alternative to that, and I was recruited by global consulting firm Mercer, within its U.S. domestic HR/benefits practice. But curiosity about what the other side of the world was like eventually kicked in. An international HR/benefits opportunity took me to Aon Hewitt as a global consultant, which launched my expertise in over 45 countries for the next few years with Woodruff-Sawyer.
I flattened my world by taking several multinationals abroad, learning both the business and cultural nuances. That kept my grass green for a while, waking up to firm European narratives, easing into my day with the Canadians and Latin projects, and closing out evenings with the Asian sunrise.
With each experience, I put my consultant hat on. I listened, planned, deployed. Strategies were put in place for each type of client—from those who spoke the global HR language to those who got handed the role out of left field.
• Trouble being competitive? Here are the comprehensive benchmark reports tiered by percentile.
• Want a strategy in place? Here are your customized three- to five-year strategic road maps aligned with your culture and priorities.
• Need a tool to track all your data globally? Let me build a state-of-the-art global data management system.
• Renewal coming up? Here is the OE 101 onsites, negotiations and marketing results with the carriers, and employee communications drafts.
• Want more to retain your talent? Here is a list of perks and unique offerings to distinguish yourself.
Wait. Wow. Look at some of these perks within the tech sector. Do their employees really get it all? Maybe that grass is greener.
Turning the Tables
Almost half a century of countries and what felt like a century later helping all the multinationals worldwide, it was time to test the waters. I went in-house—as the global head of benefits and mobility at Square, officially, and with all sorts of hats unofficially. That’s the nature of a fast-growing startup. They wanted me to expand into 13 countries in one year. I had done that with my team for numerous clients before. What could be so hard about this role?
You see, as a domestic broker or a global consultant, I listened, but it was hard to truly hear it all. I planned, but it was impossible to always anticipate it all. I reacted/deployed but couldn’t get into all the weeds.
My learnings as an HR leader were cultivated as I overcame obstacles in each project that I otherwise had always had a simple answer to:
- Comprehensive benchmark reports tiered by percentile are great, but how does one solve for it all as a small fish competing with the big sharks in Silicon Valley?
- Three- to five-year strategic road maps exist, but how does it map to our business objectives balancing against employee needs?
- Open enrollment help is available, but we need technical experts to do testing, audits, reviews. QLE audits. Unit testing of elections. Case testing of scenarios. Experience testing of the portal. Suddenly my consultative world of ben-admin systems was just one piece of a giant puzzle.
- Communication resources are at my disposal, but my employees won’t even read or listen. There is email overload, intranet information overload. There was a huge noise-to-signal ratio mismatch.
- Compliance support is helpful, but have you seen the back-end beast of its administration?
What now? I realized I had to start from scratch and focus on quality over quantity.
- We conducted an experience survey among our employees—not just asking about satisfaction or feedback but also utilizing a stack-rank and give-and-take approach to dig deeper into employee expectations versus business priorities. What would you be willing to compromise on to get more of something else you demanded? How would you rank and prioritize your asks against each other?
- We reviewed the last five years of data to get to know the trends.
- We partnered with the Diversity & Inclusion and Business Partners teams to conduct culture audits, which is the essence of any strategy.
- We kept the executive and finance teams apprised along the way instead of making one final presentation “asking” for it all at once.
- Data is king, so I became a member of the ever-so-inclusive Silicon Valley Employers Forum, which gave access to benchmarking data and best practices across all the top-tiered tech firms worldwide.
That was just the starting point; we still had a whole journey to get to the end point. And that was the case with each hat I wore: 401(k), healthcare, wellness, immigration, mobility, international HR operations.
It has been a beautiful journey to be able to blend my consultative expertise with in-house skills. You can’t do a strategy plan without cultural awareness. Can’t do vendor change and implementation without full technical support. Can’t improve employee experience without HR information systems and back-end tech support. Can’t be competitive without survey, stack-rank, game plan, communication, and an actionable approach.
Placemats are great. Strategy meetings are informative. But it’s time to look at the entire picture if you want to paint your clients’ grass green.
Rishi is on a brief sabbatical from her role at square to work on hunger relief and children’s education. She is also founder of Global HR Advice. ME
How did the organization get its start?
WGA was founded about a year and a half ago with a team made up of individuals with a background in life insurance, employee benefits, and the clinical and genetic side of things.
There was a lot of interest in this field, but no one had done a good job of bringing the two sides together—genetics and employee benefits. The mission is to make genomic programs affordable and accessible to the masses because we believe genetic testing can improve the overall health and well-being of an individual.
Cancer Guardian is your flagship product. Why is cancer a good space for genomics?
Cancer is a genetic disease and is the most common genetic disease in the country. Anywhere from 10% to 15% of all cancers are hereditary. We test for genetic markers relating to breast, ovarian, uterine, colorectal, melanoma, pancreatic, stomach and prostate cancer.
The first aspect included in the Guardian product was advanced DNA testing of the cancer itself. The value of that is you are looking at a very comprehensive test of the cancer. This can help ensure accurate diagnosis and identify genetically matched treatment.
The normal standard of care doesn’t include this type of testing, and insurance often doesn’t cover it either. If someone wants this type of testing, they have to pay out of pocket, and often the cost can range from $5,800 to $10,000 depending on the specific type of test. We offer it in a more affordable way by having employers pay for the Cancer Guardian on a per-member, per-month basis. They roll it out, and if—God forbid—anyone is diagnosed, they will have access to this when they need it most.
What opportunities are there in genetic testing to improve cancer care?
[Cancer Guardian] is designed as a comprehensive cancer support program. When someone is diagnosed with cancer, we have a team of nurses trained in oncology who guide the person through their journey and give personalized information based on their diagnosis.
It begins with an orientation assessment with one of our support specialists. They find out where the patient is in their journey, and a nurse navigator reaches out to their physician directly to let them know the employee is enrolled in the program and they have access to DNA testing at no additional cost. If they choose to take part, we do the testing and offer a second opinion pathology review through Duke Medicine. We also cover the cost of an on-site nurse who can go with the individual to doctors’ appointments to ensure they are getting all of the information they need. When testing is completed, we can educate their oncologist on their options and let them choose how to move forward. It may show that chemotherapy or radiation is best, but it also may show that immunotherapy is a better option.
We also recently embedded hereditary screening into the program. So an employee will have access to this test through Color Genomics Inc., our screening partner. This product is offered before any kind of cancer diagnosis. An individual provides a saliva sample and gets a report offering information including their hereditary risk for cancer. (We also give information on their risk for heart disease and what their response might be for behavioral health medications.)
Color offers access to licensed genetic counselors to help individuals understand their results. It may show someone has an elevated risk of a certain type of cancer, and that can be scary news. But now that they are aware of it, they can potentially do things to help prevent or delay them from getting it.
How are these programs different from what someone would get by being tested with a commercial product like 23andMe?
Direct-to-consumer tests are very limited by the U.S. Food and Drug Administration because, once the information they provide passes a specific threshold that is clinically actionable (like Cancer Guardian), it requires a physician to sign off on the results. These tests are really more recreational, and about 24 million people bought them in 2018.
There has been such an increase in the number of consumers who have taken genetic tests in recent years. It really goes back to the first whole genome sequencing. Since then, the cost has dropped like a rock and bottomed out (a recent MIT technology review showed sequencing a human genome has dropped from $95 million in 2001 to about $1,100 today). Down the road, the cost of interpreting and understanding how to apply the results will be more expensive than the testing itself.
What kind of companies will these products work for? How are they doled out on a national level?
Our plans range from an eight-life law firm to 10,000-life tree-trimming company. So it works with a wide range of employers.
We are not a lab. We don’t do any of the testing itself. Instead, we have a chief science officer who vets the lab partners we work with for advanced cancer testing. Employees can pick up the phone to talk nurses on the support line and ask any cancer-related questions they have. We also partner with a national network of nurses who take part in the on-site visits with patients and physicians.
How is the benefit paid for?
We learned that, to make the programs accessible and look like other benefits, we had to price them on a per-employee, per-month basis instead of charging one fee. It has to look and feel like every other benefit and be offered seamlessly. It is a voluntary benefit that the employer pays for.
This is somewhat early-stage work. Is there much outcome data in this space?
There are some studies that back up the importance of genetic testing, especially in relationship to cancer. Like with breast cancer, if someone knows they are at higher risk, they might be able to catch cancer earlier, which improves outcomes. If you catch it at Stage 1 as opposed to Stage 4, 98% of people are alive five years later, and 25% have the chance of being alive beyond that.
Another study showed that there’s a 31-month median survival length for Stage 4 lung cancer patients who had DNA testing and then received a targeted therapy. Those without the testing had a median survival rate of just more than a year.
Why should employers consider these programs?
One in every two individuals born today will be diagnosed with cancer at some point. It not only decreases productivity but is a big driver of healthcare spend. It makes sense that they would look for solutions here.
Taking part in genetic testing also increases the opportunity for employees to participate in clinical trials, which can be beneficial to patients and also to employers. If they can have a patient qualify for a clinical trial, the drug sponsor often covers the cost of the drug used for the treatment. And the average cost of cancer treatment is around $10,000 per month.
We heard from Bayer at one point that one of the biggest challenges they face is finding participants in clinical trials for new drugs. A big reason is they often have to find people with a specific genetic biomarker to qualify for treatment. In many cases, if individuals don’t undergo this type of testing, there is no way to know if they can take part. There are some estimates that people have more than double the chance of qualifying for clinical trials if they have genetic testing than those just going through the traditional standard of care.
What’s the ROI?
According to research we found, the annual cost savings for avoiding one cancer misdiagnosis by getting a second opinion is $21,500 a year. This would be per 1,000 employees, assuming there were seven to eight diagnoses in a year. We also estimate that having a support specialist reduces the annual cost per cancer diagnosis by just more than $13,000.
A study presented at the 2018 ASCO [American Society of Clinical Oncology] annual meeting by researchers from the Cleveland Clinic looked at metastatic non-small-cell lung cancer and genomic testing. The researchers analyzed data from more than 2,000 patients and estimated from their records that, on an annual basis, more than $250,000 can be saved for commercial insurance plans if cancers are tested to see if they are amenable to being treated with immunotherapy. Savings could be found in reduced testing costs and earlier implementation of appropriate therapies.
Anything else people should know about how genomics is changing cancer care?
These tests are a lot more comprehensive than ones most insurance pays for. We include upfront and backend comprehensive DNA testing to look at 300 to 500 genes of the individual’s cancer itself. For certain types of cancer, it’s important that this is done. Under the standard of care today, most insurance tests are single-gene and hot-spot tests and are much more limited in nature. These have a high miss rate for identifying genetic drivers of cancer.
Our entire focus is to provide clinically actionable insights that are predictive so people can be proactive and preventive. If someone has the cancer genes, they have a much higher risk of getting cancer than if they don’t. The risk for breast, ovarian and colorectal cancers goes from less than 20% to between 50% and 75%. When cancer is caught early, it increases the survival rate dramatically and reduces treatment costs 50% to 90%.
But people should know that your genes are not your fate. Just because an individual has a higher risk, it doesn’t mean they will be diagnosed. But they do know they are at risk, so now can take steps to reduce that risk.
Are you a native New Yorker?
I am not. I was born and raised in San Antonio, Texas.
What’s the most common misconception about Texas?
Everything is bigger in Texas. It really isn’t. The Alamo is surprisingly small.
What brought you to New York?
Internet advertising brought me to Los Angeles in 2002. I ended up starting a conference for the world of internet advertising called LeadsCon. I lived in L.A. for five years. Everywhere I went in L.A., people would ask me, “Are you from New York?” I said, “You know what? This is the time to try it.” So I took my job with me.
Where do you live now?
In Manhattan. I work in the Flatiron area, east of Chelsea.
And now you have five-year-old twins. What’s it like raising kids in New York?
The joy of New York is that it’s an amazing melting pot. I’m so glad they get the experience of seeing this city and becoming comfortable with all cultures. It creates a sense of unity, and I’m glad our kids get to experience that firsthand.
Mets or Yankees?
“Neither” is the actual answer, which is why I can’t yet say I’m a true New Yorker.
When friends come to visit, what’s one place you take them?
Central Park. I think it is sort of magical to have such peace and beauty in the midst of such activity.
You’ve called yourself an accidental entrepreneur. Why?
It was such a great feeling to say, “I don’t care if I fail.” You leave a job and go for something that hasn’t been built before. It was outside of my knowledge base and comfort zone, and it was the best decision I ever made.
You’ve also referred to your history of “wondering why things couldn’t be a certain way.” What do you mean by that?
I love seeing things improve. I think about why InsureTech is so interesting. You have a commitment embracing what a better industry would look like and how tech might play a role in that.
How did that idea evolve?
It’s really about the insurance industry being able to meet the needs of the world better. Yes, tech is a key. We have an opportunity to create products people want and deliver them in a way people want. Every industry has to become more consumer-centric. If it doesn’t, somebody else will.
Is there a business leader you most admire?
Don Pazour is the CEO of Access Intelligence, which acquired LeadsCon in 2012. It was Don who helped me appreciate what we do and what we can do, to think of an event as more than just an event.
What has been the biggest surprise in running such a new enterprise?
Just how much support there is for innovation and transformation.
Tell me a little about your business.
We have a team of about 10 who work on InsureTech Connect. We’re expecting about 7,000 people in the 2019 edition, which is September 23 to 25, back at the MGM Grand in Las Vegas. One of things we’re most proud of is that it’s a global gathering. In 2018, there were more than 1,000 people who attended from outside the United States, out of about 6,000. The seniority of the audience is something we’re also very proud of: we had 500 people with the title of CEO or founder.
Was the global nature of the conference intentional?
It was. The best way to move the industry forward is to make sure a diverse group of industry leaders get together, especially ones that might not do so otherwise.
What would your co-workers be surprised to learn about you?
Just how many Hallmark movies my wife and I enjoy watching and that it’s not her fault. I’m a willing participant.
How would your co-workers describe your management style?
Encouraging and inclusive. I continually challenge them to tap into their passions and grow as we grow.
Last question: What gives you your leader’s edge?
A combination of our curiosity and our passion. We are a service business. We genuinely care about the people who attend and the people in the industry.
The Weintraub File
Favorite New York neighborhood: Flatiron
Favorite New York restaurant: Maialino (Lexington Avenue at 21st Street) “Dining in New York is probably one of the best things possible.”
Favorite dish at Maialino: Cacio e Pepe
Favorite vacation spot: Portugal
Favorite movie: The Matrix
Favorite actor: James Earl Jones
Favorite musical group: U2
Favorite business book: Crucial Conversations: Tools for Talking When Stakes Are High, by Kerry Patterson, Joseph Grenny, Ron McMillan, and Al Switzler. “Communicating with others is probably one of the most important aspects of life. But no one talks about how we can make it better.”
Wheels: “I love cars, but I don’t own one in New York City.”
When I last wrote in December, my message was for all of us to get creative about solving the industry’s talent crisis. Today, I’m thinking beyond just attracting the talent; I’m thinking, “The culture, stupid!”
This mantra of sorts rang through my head (a lot) last month as I sat through a number of interviews to fill a position at The Council. I kept catching myself instinctively evaluating each candidate from my own generational perspective as an employer and worker and keeper of the culture instead of, perhaps, focusing more on how they might be successful here. Fortunately, I had generational expert Warren Wright’s recent presentation about “second-wave” millennials still in my head.
Wright invited us to throw out all our generational misconceptions. Take millennials, for example, who are cited to hold an average of seven jobs between the ages of 18 and 28. Most of us boomers believe that millennials are impossible to wrangle and understand and that more often than not they leave jobs because the ping-pong table is broken, they didn’t get a gold star on their last report and the coffee is weak. Wright reminded us, however, that those things aren’t necessarily true; millennials leave jobs because of poor management.
It became clear to me after reflecting on this research that our industry’s biggest issue is not the attraction of talent or “getting the word out”; it’s culture. Regardless of our efforts to attract new people to our industry and to be diverse and inclusive, the success or failure of talent in any organization comes down to the culture.
Culture is the single most difficult management challenge there is. Ask the hundreds of leaders who have tried to maintain or redeploy their culture during an acquisition. This is the first time in modern history there are five generations working side by side. There are boomers, Gen X, millennials and Gen Y (those aforementioned “second-wave” millennials). Gen Z is young, but they’re out there too. And with each new generation comes a new workplace dynamic, adding yet another layer of complexity to cross-generational harmony.
The good news is there’s great talent in each generation. The challenge is bringing together their different insights, perspectives, motivations and modes of thinking to accomplish shared organizational goals.
I believe we can learn something by digging into this generational misconception exercise. If you really think about it, employees of all ages are looking for similar things in the workplace: a mission and a company they can be proud of, a sense of community, and leaders they can trust. A strong digital presence doesn’t hurt either (more on that later).
We should be spending less time on the differences and more time on the shared values.
If we don’t get a handle on this, we won’t drive the best of our organizations. Leadership is not only about having a vision and setting the strategic direction; it’s about being a steward of the culture you are keeping. And driving the most out of your organization means understanding who is sitting at the table, what their strengths are and what they value.
Building a culture that works is a journey that is well worth the effort. How’s that for your firm’s 2019 campaign slogan?
(Oh, and don’t forget about healthcare.)
We invite you to spend a few moments in The Shop with us, and as you do, think about the communities in which you live and work, and where this story can be re-told. It’s a story of the lives affected by the transfer of risk in a deeply personal way. It’s the kind of story our industry needs to tell more of. Click here to see the full photo spread.
A former-employee-turned-whistleblower revealed that Facebook never audited the application developers it allowed to access its data to confirm they were using the data according to terms. Facebook subsequently announced it would conduct a thorough review of all application developer use of its data.
The drumbeat on privacy in the United States was enhanced with congressional hearings that probed Facebook on its data-sharing practices. The controversy revealed how 126 million Facebook users might have been played by Russians in an attempt to influence the 2016 presidential election. A few months later, the Times reported that Facebook had allowed numerous device manufacturers, including Amazon, Apple and Samsung, access to user data without Facebook users’ explicit consent, an apparent violation of a Federal Trade Commission consent decree. Then, late last year, the Times obtained documents indicating that Facebook had entered into agreements with at least 150 companies to share its data, including Amazon and Microsoft.
All the attention fueled investigations over how much of Facebook’s data—and other social media data—are shared with third parties. It also raised questions on what and when Facebook knew about Russia’s manipulation of its platform and users. The Times reported in late November that Facebook’s senior leaders were deliberately trying to keep what it knew about Russia’s tactics under wraps. The company’s directors pushed back on that report, claiming they pressed CEO Mark Zuckerberg and COO Sheryl Sandberg to speed up its Russia investigation and calling allegations that the two executives ignored or hindered investigations as “grossly unfair.”
By mid-2018, online users (that is, all of us) were finally beginning to understand the power of big data. Yet they also realized they really had no idea how every digital fingerprint they leave in texts, emails, Facebook posts, tweets, Google searches, etc., was being shared with others. A Pew Center report in September indicated that more than half of Facebook users changed their privacy settings, 40% took a break from Facebook, and 25% deleted the Facebook app on their phone.
Important lesson: privacy expectations can be more powerful than laws, because its hammer is market forces, not fines or penalties. After the Cambridge Analytica scandal, Facebook was forced to report lower-than-expected earnings. Within hours, Facebook lost $130 billion in market value.
Meanwhile, on May 25, 2018, the European Union’s General Data Protection Regulation took effect, forcing companies to focus on what data they have, where they get it and who accesses it. Shortly thereafter, California enacted the California Consumer Privacy Act of 2018, which takes effect next Jan. 1. The law is similar to the European Union’s data protection regulation, but there are key differences. For example, the California law does not require consent to process personal information and does not include the right to be forgotten or to have data corrected—two important features of the EU regulation. Nevertheless, California’s law is as close as any U.S. law has come to emulating EU privacy requirements, a development that thrilled privacy advocates and scared companies.
Ethics of Data Sharing
The Cybersecurity Division of the Homeland Security Advanced Research Projects Agency funded a multi-year project examining the ethics associated with the use of communications traffic data by cyber-security researchers. The resulting report, known as The Menlo Report, published in 2012, was an early attempt to establish parameters for the ethical use of personal data in cyber-security research projects.
Accenture has studied the ethics of digital data and developed 12 “universal principles.”
- Maintain respect for the people who are behind the data.
- Create metadata to enable tracking of context of collection, consent, data integrity, etc.
- Attempt to match privacy expectations with privacy controls.
- Do not collect data simply to have more data.
- Listen to concerned stakeholders and minimize impacts.
- Practice transparency, configurability and accountability.
Companies face real risks and perhaps internal disagreement when trying to balance their customers’ privacy expectations and maximize profits. Remember that Sheryl Sandberg was reported to favor keeping quiet the discoveries of Russian interference and the exploitation of user data while the chief information security officer at the time favored more public disclosure. Two University of Colorado researchers studied the public reactions to the sale of Lyft customer receipts to Uber and WhatsApp’s announcement in 2016 that it would share data with Facebook to improve Facebook ads and user experience. Their conclusion is noteworthy.
Our findings also point to the importance of understanding user expectations when it comes to privacy; whether most users agree that it’s okay to be the product or not, shaping expectations with more transparency could help reduce the frequency of these kinds of privacy controversies.
In 2019, organizations would be wise to analyze the data they buy, share, use and store, to examine their legal basis to do so, and to consider that their customers might have contrary privacy expectations. Legal use may still violate a person’s expectation of privacy and thus be viewed as an unethical use. Agents and brokers should encourage their clients to be forward thinking on this issue and proactively manage potential privacy risks associated with their data or the data they may obtain from third parties.
Westby is CEO of Global Cyber Risk. email@example.com
As he was finalizing the paperwork for this investment, the young 20-something salesperson, who is making a living by hustling door to door selling solar panels, abruptly asked my friend, “So, what are you going to do with all the money you are saving?” A pretty bold and startling question. It seems a bit intrusive but should actually make you pause and think.
In January, the U.S. Treasury issued final regulations clarifying that, other than income from investment or financial planning, insurance agencies do qualify for the full 20% deduction for their 2018 taxes and for years going forward until 2025 under President Trump’s new tax law. This allows owners and shareholders of insurance agencies and brokerages to take up to a 20% tax deduction on qualified business income, no matter their taxable income levels.
Congratulations to each of you that benefit from this ruling. While I am not a tax expert, it sounds like your tax payments will go down. But what are you going to do with all the money you are saving?
Consider reinvesting in your business. Organic growth rates continue to be strong. In most cases, however, it is not because your firm is writing more new business than it has historically. It is primarily backed by a growing economy which results in exposure and employment growth. Some of our best clients have found the ideal time to reinvest in their business is when they don’t have to.
Now may be the best time to bring on new production staff or a sales infrastructure to support the production staff. It is time to free up your leadership that currently has a secondary responsibility for leading your sales team. This setup, which is quite common in the industry, tends to be counterproductive for the leader and the sales team.
Consider hiring new leadership positions in human resources, training and development, data analytics, or customer experience. Focus on roles that you know are vital to your long-term growth and sustainability but that you have rationalized as something you are not quite big enough for—these hires that have long been a good idea but never an expenditure you could quite justify.
This newly found tax savings can help you position your firm to grow 15% and double in the next five years, or you can distribute the savings to shareholders and hope your historical investments can help you remain competitive in an ever-changing marketplace.
Many of you are wrestling with whether you should stay the course or sell in what appears to be the most aggressive merger and acquisition market our industry has ever seen. With more deals completed in 2018 than in any previous year and valuations at levels never seen before, it is easy to get swept up in all the excitement. There was a whirlwind of activity in 2018 within the top 100 brokerages, and the momentum in 2019 is not slowing down. A new national brokerage was formed in Patriot Growth Insurance Services (Patriot) (see market update below for more detail), Alliant Insurance Services just took on a Canadian pension investment manager on as a capital partner, AssuredPartners is rumored to be taking on a new capital partner, and there are more unverified whisperings of at least five other large brokerages that are currently or will soon be in the market for either a new sponsor or a sale to another strategic buyer.
Where does this leave you? In this industry, size does matter. It gives you access to more resources to provide your clients with the best service possible, and the scale gives you some influence with vendors, service providers and trading partners for better terms and conditions. If you are going to stay the course, you have to invest to compete. Your peers and competitors are growing at a rapid pace, and you need to keep up.
Many of you will choose to sell this year. And for that I congratulate you on monetizing an asset you likely built over many years. Just make sure it’s a conscious decision and not a knee-jerk reaction. If you end up selling, have a plan and privately be able to answer the looming question: What are you going to do with all that money?
M&A activity within the brokerage space did not lose pace in 2018 and appears to be continuing full steam ahead in 2019. Even after a record-setting year, with the announcement of 580 transactions in 2018, January of 2019 brought another 63 announced transactions. This is a 40% increase in transactions compared to January 2018, which is likely to increase further as retroactive announcements trickle in throughout the year. If this is a foreshadowing of the year to come, it appears the flurry of deals is bound to continue.
The leading acquirer in January 2019 was Patriot, which announced 18 transactions on Jan. 1, 2019. AssuredPartners and Arthur J. Gallagher & Co. are tied for the second most active buyers, each announcing four deals.
Patriot made a big splash entering the brokerage space with the acquisition of 17 independent agencies as well as TRUE Network Advisors. Patriot received financial backing from Summit Partners and is led by CEO Matt Gardner. Headquartered in Ft. Washington, Pennsylvania, Patriot spans coast to coast with 21 offices across seven states. This is the second national brokerage to be formed in the last two years in which multiple agencies rolled a portion of their equity into a newly formed firm to leverage the scale of their collective offering. Alera Group was formed at the end of 2016 in a similar way. (MarshBerry was the investment banker for the individual firms forming both Patriot and Alera Group.)
Trem is EVP of MarshBerry. firstname.lastname@example.org
What if I told you that you can help the world, support the needs of individuals who are less well off in your communities, and do so while netting a benefit potentially of tens of thousands of dollars (or more) all at the same time? If you (or a client) are doing any sort of home or commercial demolition or renovation project, this one’s for you.
Today, Americans generate over 250 million tons of trash per year, which translates into individual waste generation of about 4.5 pounds per day. And we recycle or compost only about 1.5 pounds of that amount. Needless to say, we are generating a lot of trash. Donating the contents and building materials from a home or commercial space helps reduce landfill burdens and gives a second life to those materials.
The economics of this are compelling, and a cottage industry (complete with formal deconstruction training and certification programs) is being built to help you take advantage of it.
The program allows you to get others to do the demo work. In many cases, they use the process as an employee training exercise and use the materials to support charitable causes more broadly in the community. They also effectively pay you for the privilege of doing that work (as you will be donating everything) and make you eligible for what, in many cases, will be a significant charitable tax deduction (and you will save the costs of doing the demolition work yourself).
What’s Not to Like?
Ryan Mariman, deconstruction manager for Second Chance, a Baltimore-based deconstruction nonprofit that does deconstruction work throughout the mid-Atlantic region and beyond, outlined a real-life example for me.
An individual bought a property with the intent of demolishing the existing home and building a new home. Green Donation Consultants, an independent appraisal firm that now focuses exclusively on these types of charitable deconstruction projects, at its own expense did an initial inspection of the property—a 5 bedroom rental home—and estimated that the building materials and contents had an appraised value of $250,000.
The $250,000 donation was projected to have a net cash benefit to this donator of $100,000. Second Chance will do all of the deconstruction work in exchange for a donation, which also is a tax deductible contribution. Green Donation then charges a fee to prepare the tax appraisal that can be used to support the tax deduction which varies but in this instance was approximately $5,000, which also may be tax deductible.
The net cash benefit to the donator was therefore approximately $60,000 (40% of the $250k plus 40% of the $50k donation less that donation, the $5k appraisal charge and the $5k in saved demolition costs). Naomi Ganoe, a managing director and CPA with CBIZ, cautions that “the IRS has strict rules which govern these donations, so you should obtain your tax appraisal from a ‘qualified appraiser’ under those rules and consult closely with your tax advisor throughout the process to ensure you will qualify for the full tax benefits.”
Bernie Mancuso, president and CEO of Mancuso Development, an award-winning luxury home builder based on the Outer Banks in North Carolina, worked with Second Chance on a recent project. “I was pleasantly surprised with the experience. They showed up the day after the new owners had closed on the property as promised, spent one week as promised, and stripped that house down to the studs. They took absolutely everything. And the process was seamless. They did not disrupt our schedule at all.”
This type of deconstruction opportunity is not limited to complete home demolitions. Jessica Marschall-Newbee, Green Donation’s CEO, says, for example, that Green Donation’s projects have ranged from a $7,000 kitchen remodeling project to a $9 million commercial renovation. In the past eight years, Green Donation has assisted with the complete or partial deconstruction of more than 2,500 properties that resulted in over $275 million in donated materials and an estimated net benefit to property owners of over $86 million. What’s more, millions of tons of materials were diverted from landfills through these efforts.
Mariman explains that Second Chance distributes some of the materials they reclaim to community organizations immediately. Then, they warehouse others to be resold to the public, with the proceeds being used to support the program’s overall efforts and the efforts of other charitable organizations.
Second Chance also uses its deconstruction process as a workforce development and job training platform through which it has provided a pathway to sustainable employment for hundreds of Second Chance associates. Associates who have completed Second Chance training now are employed by a broad array of mainstream employers including, for example, for the University of Maryland Medical School, Amazon and Baltimore-Washington International Airport.
Marschall-Newbee notes, “Obviously there is a financial benefit to the individual or organization that is donating, but we have many clients interested in reducing landfill loads.” Patrick Smith, founder and president of Green Donation, thinks “of the benefits in three tiers: (1) helping the environment by giving a second life to the materials and being good environmental stewards; (2) helping society by helping organizations that support those in need; and (3) helping ourselves through the financial benefits.” Doing well by doing good, you might say.
Mariman says the program’s biggest challenge is awareness. “You are going to throw those things out anyway so why not help the world and get a good tax benefit while doing it?” Sounds like a no-brainer to me.
Sinder is The Council’s chief legal officer and Steptoe & Johnson partner. email@example.com
In January, I went to a workshop on Communicating with Influence. The facilitators videotaped us several times, making for an eye-opening (and a little painful) experience. I thought of myself as an effective and influential communicator. Turns out I’m not. Truth be told, I am not nearly as effective as I could be. I am using what I learned in the workshop to clean up my act. I thought you might appreciate a little refresher as well.
According to Stacy Hanke, author of Influence Redefined, the disconnect between how influential we think we are and how influential we actually are can be traced to two reasons. One is a phenomenon called illusionary superiority, which means people overestimate their positive qualities and downplay their negative ones. The second reason is a misperception of what it means to be influential. Hanke talks about three myths of influence:
Myth One: I feel influential; therefore, I am.
Reality: Influence is evidenced by results. Just feeling confident, credible and knowledgeable when you see your audience members nodding their heads doesn’t mean you really are. Will they ultimately do what you want them to do?
Myth Two: Influence is situational. Some people think you turn influence on for important events—board meetings, product launches, conferences—but that it’s not necessary to be influential in our day-to-day-transactions.
Reality: Real influence is exerted every day, in every exchange, with every supervisor, co-worker, or client. It’s developed through the accumulation of daily actions and interactions.
Myth Three: Title equals influence.
Reality: Anyone has the capacity to be influential if you are willing to do the work. It is not something awarded or mandated. Influence is earned.
Getting Their Attention
A key component of influence is communicating effectively, and that requires getting someone’s attention. If you don’t have their attention, you can’t influence them. In our efforts to capture attention, technology is often our biggest nemesis. We’ve all been in meetings where people are texting or checking emails while we are talking. You could ignore them, assuming they are multitasking. You might talk louder and faster, hoping to draw their attention. You may even be tempted to call them out, which embarrasses them and makes you look like a first-class jerk.
Hanke has some ideas to regain control in these situations:
- Pause. Silence will grab the offender’s attention and bring it back to you and your message.
- Engage listeners by holding eye contact with them through a complete thought.
- Take control from the beginning. Ask everyone to put their devices away to honor the time of everyone in the room, which will allow an on-time ending.
- Be interesting! Don’t read from slides. Make a connection with your audience and communicate with passion and authenticity.
Business communication consultant Ben Decker says building an emotional connection with our audience is critical to inspiring them. Conveying authenticity and warmth through your behaviors and your voice will foster this connection. Decker, co-author of Communicate to Influence: How to Inspire Your Audience to Action, recommends that messages be structured but not scripted. He offers the Decker Grid, which can be downloaded at decker.com. The Decker Grid helps you prepare your message, create and maintain focus, build listener-friendly messages, involve and connect with your audience and move from information to influence. In short, this simple tool can help you increase your effectiveness in all communication opportunities, which are also opportunities to influence.
If my training in January paid off, you’re already thinking of ways to make your messages clearer and more interesting. You may even want to attend a class so you can get an honest look at how you come across when you have a message to deliver. If none of this is resonating for you, then I better keep practicing my influence skills.
McDaid is The Council’s SVP of leadership and management resources. firstname.lastname@example.org
Caught up in the logistics and pressures of being self-employed, many startup entrepreneurs are not fully prepared for injuries and liability damages. While some carriers have started to work with sectors of the gig economy, many self-employed workers still don’t know where to go for insurance or don’t have time to figure out all the logistics surrounding coverage. Tackling that time constraint and making it easy for gig economy businesses to get the right coverage are key to unlocking a growing swath of insurance customers.
Brian Sandy, president of IMA Select, a subsidiary of The IMA Financial Group specializing in small business partnerships, says providing coverage in this new industry is about making things simple and short.
“How can we reduce the number of questions that we ask?” Sandy asks. “Left unfettered, there’s a lot of things they’d [insurance carriers] like to know, and some of their typical, standard applications have a lot of questions on them… How can insurance companies use some of the third-party data sources they have to help better understand the class, better understand the risk, without having the client fill out pages and pages of information—because you’ll lose them pretty quickly when you do that.”
IMA Select recently announced a new partnership with a gig economy company, Lawn Buddy, that capitalizes on the already developed relationship the platform has with its users. Through Lawn Buddy’s app, gig workers can do everything from request information and quotes to purchase insurance through IMA select. Workers can receive confirmation of insurance within one business day of the request.
Lawn Buddy allows lawncare enterprises to connect with people who need their yards mowed. Through its app, Lawn Buddy also lets mowers estimate how much they should charge per lawn size, using Google maps.
“How can you create something that is there for them, tailored for them?” Sandy asks. With a few, easy questions, he says, “you’re really able to reduce the transaction component of that business. That’s what we really like about this partnership.”
Portable and Priced to Sell
Lawn Buddy allows lawn care enterprises to connect with people who need their yards mowed. Through its app, Lawn Buddy also lets mowers estimate how much they should charge per lawn size, using Google maps.Tweet
In the freelance sector, insurance has to become more portable and more affordable. Many gig economy workers move nomadically to find business, working across state—and even international—boundaries.
YouTuber and founder of The Rideshare Guy.com Harry Campbell answers questions and educates fellow entrepreneurs on the gig economy.
“For drivers and other gig workers, flexibility is key,” Campbell says. “I’ve heard from many older drivers who drive between states, particularly if they work in one state and live in another state. How does insurance work for them? Many people are becoming increasingly price-conscious about insurance, and the ability to use insurance anywhere is a big benefit to many gig workers.”
Along with struggling to understand what they are and are not covered for, workers in the gig economy also look for low—very low—insurance costs.
“You get into the cost aspect too,” Campbell says, “particularly when you have somebody that’s doing a side hustle and it’s just a part-time gig. Oftentimes the insurance carriers have minimum premiums… [The entrepreneurs] are so far below those minimums that it becomes really prohibitively expensive.”
According to a 2017 J.D. Power study, although the small-commercial insurance market grew in size, small-business satisfaction with commercial insurance declined 18 index points. Conversely, the satisfaction of commercial insurance for larger organizations rose 13.
“Insurers will have to play a larger role in the gig economy’s future,” Campbell said. “This is particularly important for auto insurance, but I could see all aspects of the insurance market playing a larger part in the gig economy in the future. You can see it now as people start their own companies, become gig employees, etc. The traditional insurance market isn’t there for them, and even the Affordable Care Act is pretty expensive for a lot of people in the gig economy. As this market grows, insurance will have to evolve and grow as well.”
When we began researching healthcare data and workplace wearables, we weren’t necessarily thinking about Apple, yet there it was—leading the adoption of interoperability standards for data transfer; working with leading healthcare institutions to pilot the use of its health records app for patient data; and essentially turning its phone (and watch) into a medical device. These are just a few of Apple’s pursuits (for a deeper dive, check out the Apple in Healthcare briefing put out by CB Insights in early January).
Two of our features this month describe the healthcare universe in which Apple is just one participant. This universe combines legislative and regulatory initiatives, employer wants and needs, and technology-driven consumer behavior. The push for value-based care, the competition for talent, and, well, the smartphone are all converging. And they could, one day, lead to a utopia-like world of personalized, quality-driven, cost-efficient medicine…How’s that for a Super Bowl ad?
They’ll tell you where to go and what to get there. This is your insider list for your next visit (in no particular order). —Editor
Bistro Cacao One of D.C.’s finest and niche French restaurants.
Mari Vanna Serious Russian dishes both bitter and sweet.
Comet Ping Pong Hand-crafted pizza and an assortment of ping pong tables
Penn Quarter Sports Tavern A quick meal before attending a sporting event (or even to watch an event there). I just love their fried Brussel sprouts.
The Source Layer carrot cake with ginger ice cream. Very thinly sliced and plenty to share.
The Smith Grilled chicken sandwich on a sesame baguette with all the works. A meal in itself and absolutely delectable.
Founding Farmers Chicken and waffles with homemade syrup. Must leave room for their kettle popcorn.
Tosca Outstanding scallops and pasta.
Sticky Fingers Infamous bakery treats as well as unforgettable vegan alt-tuna melt and black bean and green chili.
China Chilcano Funky, comfortable, artsy fartsy. Try the yummy citrusy Pisco Sour, Aeroporto (a noodly bunch of stir fired veggies with a bite of garlic and spice) and Passion Fruit Chicha Morada.
Beau Thai Voted D.C.’s best Thai (casual spot with the best drunken noodles).
Jaleo Great Spanish tapas and the perfect G&T.
All-Purpose Pizzeria Go-to spot for gourmet pizza and a glass of wine.
Etete or Chercher Where to dine on D.C.’s great Ethiopian cuisine.
BToo Contemporary Belgian with mussels and waffles.
Barcelona A happening cocktail place with a fire pit on the patio.
San Lorenzo Superb veal cheeks & polenta.
Tryst Best coffee and casual atmosphere with live music in the evening.
Bistro Boheme Authentic Eastern European cuisine.
Doi Moi Modern take on Asian favorites; anything with caramel fish sauce is a must.
Tabard Inn Drinks in front of the fire in the old hotel lobby or dinner in the back.
Estadio Spanish tapas, wine or Europe’s football—you choose.
SEI Best happy hour specials featuring the freshest sushi.
Tune Inn Hands down the best dive bar on Capitol Hill for reasonably priced beer and late night, greasy eats (they have tater tots!).
Indigo Hidden gem in NoMa that may have the best and most affordable Indian food I’ve ever had (don’t tell Rasika).
Biergarten Haus The most dog-friendly establishment in D.C.!
Trusty’s Another hidden gem on Capitol Hill that has the best burgers, board games and craft beer (a Hipster’s paradise).
Rasika For something unique—fried spinach and black cod.
Jack Rose Best bourbon spot.
Oyamel Best ceviche.
Chez Billy For dinner followed by Bar Au Vin by the fire…best date night.
Le Diplomat BEST brunch EVER.
Trump Old Post Office Excellent whiskey and Kansas City steak. And don’t miss the maple-encrusted bacon on a clothesline.
Martin’s Tavern (Georgetown) John Kennedy’s old digs—a historic haute pub that never got old.
Our readers are on the road a lot. What should they look out for?
It’s all risk/reward, you know. In this case it’s risk/convenience. I travel half the year and go to some pretty obscure places. I travel with a lot of computer equipment. So I spend significant time before each trip thinking through what electronics I’m going to bring. And then I think what happens if they get lost or stolen and what the likelihood is that is going to happen.
So if I’m going to Toronto, I don’t worry about it. If I’m going to Beijing, I worry a lot. China’s government is known to have programs to explicitly attack and hack almost any digital device that any foreigner brings in. They don’t want the money. They want the information.
When I went to Beijing this year, I took a second laptop with me. I scrubbed the laptop before I did anything with it. I formatted it, reinstalled the operating system—didn’t put anything personal on it. Everything I needed that was personal I kept on an encrypted hard drive I plugged in when needed. When I got back, I tested the laptop, and it had at least three malware programs that had been installed by somebody at some point while I was in Beijing.
Would they do that remotely, or do you think they got access to your computer?
Who knows? There’s a thing called an evil maid attack. Figuratively, if a maid in a hotel gets five minutes with your computer, you’re screwed. There isn’t a computer in the world that a good hacker couldn’t crack if they get their hands on it for five minutes with nobody looking.
What about leaving it in the hotel safe?
All hotel safes are made by a couple of manufacturers. There’s master key codes to get into them. Half the people in the hotel know what those are. Some of them have little holes in the back that you can press a paperclip in and make the door pop open. Because every couple of hours some guest is forgetting the combo for their safe, all the staff people need to be able to pop the safe open. It’s not secure.
The best way to protect something is to encrypt it—or just don’t bring it on your trip at all.
You also have to worry, depending on your nationality, coming back into the United States. ICE has a renewed interest in taking people’s computers and phones and downloading the contents, looking for who knows what. They’ve even done this to some Americans. This has happened at the Canadian border on many occasions recently. And there are a lot of cases in court right now challenging this.
Even if you’re American, if you have an iPhone with a bunch of encrypted junk and you cross the border into the United States, in theory these guys can grab your phone and try to force you to unlock it. And there are devices that will enable them to read it even if you don’t cooperate.
In Russia you should expect someone to try to take your data. I think that’s true in most countries. I would even worry about France.
At this point, if you’re travelling internationally, I think you should assume anything digital you have on you is probably going to get read. If you don’t want it read, encrypt it.
With Apple laptops, you can encrypt the whole hard drive pretty easily. If you encrypt the hard drive, it’s pretty solid. If they have a really good reason to go after you, they’re going to have to get your password to unlock it and at least you’ll know.
Wi-Fi is another big problem. One of the biggest scams in the world today is free Wi-Fi. Airport free Wi-Fi, coffee shop free Wi-Fi. There’s a device—I actually have one—called a Pineapple, which costs about $150. A Pineapple is totally legal in this country. You plug it into your laptop, you go into an airport or hotel, and it allows you to create a fake Wi-Fi network.
You can pick a name for it. So let’s say you’re in a Marriot Hotel and you create a Wi-Fi called “Marriot Guest Network #2.” Everybody will start seeing that. They’ve got the password from Marriott Guest Network, so they just assume it’s an extension and they type in the password. Since it’s a man-in-the-middle thing, everything you type in goes into that, and then it passes it through to wherever you were trying to go, like Amazon or your personal web account or your bank.
So if you type in your password to get into some website, a Pineapple has copied it?
Yeah. It’s very common. It’s used all over the world. I doubt there’s an airport in the world where there isn’t somebody doing that. It’s just so common. If you see free Wi-Fi anywhere, you should be very skeptical. Try very hard not to use it if you care about what’s in your computer and what you’re typing.
When I got back, I tested the laptop, and it had at least three malware programs that had been installed by somebody at some point while I was in Beijing.Tweet
If you’re surfing the internet, does that leave you vulnerable?
There are things that could be left on your computer if you click certain things. You know they talk about phishing and spear phishing with your emails. There’s stuff like that on websites. Each time you go from page to page, you’re essentially clicking a link. The way browsers are implemented is you’re actually running a small program. So it could be malicious code that tries to install a back door, a Trojan, a virus, a worm, something on your computer. You probably wouldn’t know. In theory, just even browsing could get you nailed. In practice, probably not, but you might.
I would guess at least one of every six computers is hacked and nobody knows. The hacker that put something on there isn’t ready to do anything with it. Or they just nailed a million computers at once and may turn them into a bot net. Or they may start pulling information out next Tuesday at 1 a.m. You just won’t know.
Is that the smart way hackers do it? They go in, don’t let you know, and they’re just taking your information.
The smart ones.
Because they can use that data later?
I got a call from a friend of my sister. She had just gotten an email that was addressed to her by name, and in the subject line it had a password that she used for a lot of her accounts. It said, “Hi, I know your password is blank, blank, blank.” And then underneath it, the text of the message says: I know you’re looking at porn. I took over your computer’s camera and I have pictures of you looking at porn. If you pay me $2,000 in bitcoin, I won’t tell everybody. And by the way, I downloaded your address book. I know who all your friends and relatives are, and I’m going to send them copies of pictures of you looking at porn on your computer unless you pay me.”
She was terrified. That’s called spear phishing because it’s targeted. It looked personal. I talked her down off the cliff and explained what it was. Then I went back and looked in my junk folder, and I had the same email. And it had one of my old passwords.
The theory used by hackers is that most people, if they use a password on this system, may use the same on another site. The truth is most people do. We need so many. I mean, I must have 500 passwords. Most people have at least 50 or 60, and when you have all these passwords you can’t make them up and remember them. Hackers can programmatically go after that.
To protect yourself, there is something called a password locker. You pay an annual subscription, and it encrypts your passwords so you get one master password and you use that to unlock each of the other passwords.
Of course, the problem is if you allow somebody to get your master. Now they have all of your passwords. So that goes back to my original point that there is no absolute security. These are mitigation strategies. Everyone should absolutely use one of these password lockers.
What about your cell phone when you travel?
Depends what you think is a risk, right? There is a device called a Stingray, and this is a problem in Washington, D.C., where we are. A Stingray is a fake cell phone tower. You can build one for a couple thousand bucks, or you can buy a really good one for $100,000.
A Stingray is not a tower; it’s just a box. The way cell phones work is your phone signal goes from cell to cell to cell. It just hands it off. If you walk down the block, you’re probably going to go through three different cells without even knowing it. There are probably 20 cell phone towers my phone could see right now. You put a Stingray down, anywhere, and it looks like one of those towers to your phone. So as you walk down the street, you may very well connect to that Stingray instead of a real cell phone tower.
It’s another variation of the man-in-the-middle concept. So now everything you type is going through that Stingray, which is then going out to the real internet. So if you use a password, guess what? They just got your password. If it’s a voice call, they got your voice call, they’ve got your text messaging. This is very common in congested urban areas like Washington and New York.
The reason this is so common is because law enforcement started using this and when citizens wanted to go to court and stop it, the government stepped in and protected their ability to use it. They want to do it without getting a warrant or a subpoena, which has allowed the industry to thrive. Everybody in the world has these things. I doubt there’s a single government that doesn’t have Stingrays.
This is one of a traveler’s biggest vulnerabilities. I don’t think the average person could tell. As a consequence, you have to assume anywhere you are in the world, anything you’re saying on a cell phone, anything you text, has been taken by somebody and looked at. So that’s a pretty big risk.
Another kind of risk is “snarfing.” This relates to Bluetooth. Bluetooth is a horrible protocol from a security viewpoint. The only saving grace for Bluetooth is its short range, but if somebody gets within 20 or 30 feet of you, it’s not impossible to use Bluetooth and go onto your phone and steal everything. That’s why it’s called snarfing.
Just by being close to you?
Yeah. You read a couple of years ago about celebrities whose nude selfies were published online. That’s how a bunch of them were caught. These guys would sit with snarfing equipment—something that looks like a laptop with a gadget stuck in a USB port. They’ll be sitting outside a movie premiere or the Oscars where you know a lot of celebrities are going to walk by. They just stand there and have this thing in a little bag, and as [the victims] walk within range, this thing is going to attack the Bluetooth on their phone and very likely will get in and take everything on their phone. That’s a pretty big risk.
There are special phones sold that can protect against all of these things. They’re expensive.
I would guess at least one of every six computers is hacked and nobody knows.Tweet
What about using your hotspot on your phone if you’re in a hotel? Is that any safer than hotel Wi-Fi?
It’s better than the Wi-Fi in the hotel. It’s not great, but it’s better.
Could someone still steal everything on your phone?
Not with a hotspot. The way the hotspot works is it’s got two connections: one cellular, going out, and one Wi-Fi going to you. The Wi-Fi is your Wi-Fi. Presumably you know what it is, so you don’t connect to anybody else’s Wi-Fi. But on the cellular side you’re still vulnerable to Stingrays picking up anything on your call. So you’ve got some protection.
If you’re doing something that’s potentially very lucrative and you’re a good target for industrial espionage, bottom line is just think long and hard about putting it on any device that’s out of your control. Don’t allow anybody physical access to your phone or laptop. Minimize the amount of interconnectedness you do. Use your own cell phone hotspot if you have one.
What about airline Wi-Fi?
Airline Wi-Fi uses GoGo. You connect, and then a popup comes and tries to make you pay or put in a password. All of it is open Wi-Fi. It’s basically a legitimized man-in-the-middle attack. They create a fake internet just like in that hotel. So on airlines, you can actually leave the popup and then go underneath and look at your email, even if you haven’t paid for it.
What is your vulnerability at 35,000 feet?
It’s enormous. I mean, you’re up there physically, but your internet traffic is going through this fake internet thing. If you use it too much, you’ll find sometimes your icons get taken over. All of a sudden a program that has an icon is replaced by the GoGo icon. It’s putting this crazy stuff into your computer.
From your perspective, you’re just browsing. But you’re not really, because the program is doing a bunch of complicated things so they can be sure they’re charging you for it. If they weren’t, it would just be a straight pass-through, and you’d be a lot safer. Because they want to make sure you don’t get it for free, they take over part of your computer, which makes you vulnerable.
Vulnerable to other passengers on plane?
There’s a thing called packet sniffing. It’s a software gadget. The most common is called Wireshark. It’s free, and it’s legal. If you run this thing on any network, it will show you every packet that goes across the network.
So I can be sitting three rows behind you in an airplane with this packet sniffer—
And you’ll see everything I’m typing that comes across the network.
I’ve got a couple of hours on a plane and want to look at my corporate financials. What’s my risk?
If you’re just looking at it, you’re a lot safer.
But if somebody emailed them to me?
Then you’re not safe.
Same with the sniffers three rows behind me?
Yeah, they got you. But they can get you through Bluetooth, anyway, or maybe some other way. All email is basically—I hate to sound paranoid about this—but you should assume all email is monitored by someone.
The National Security Agency grabs every piece of traffic on the open internet it can get its hands on—every single email anywhere in the world. They capture and store it in a place in Utah at a data mountain facility called Bumblehive. This is well known. And they’ve been doing this for at least six years.
But they don’t necessarily look at it all?
No, they don’t.
But if it contains pejorative words, they check it right away?
Yeah. It’s a program that used to be called Echelon. It’s a classified NSA program. They’ve been doing this for almost 10 years. It will only go to a human being’s attention if you say words that somebody cares about, like Putin or atom bomb and North Korea or whatever words they care about.
Holtzman is president of Global POV. email@example.com
Life insurers are beginning to link premiums to fitness and health data in an effort to extend the longevity of policyholders.
John Hancock, one of the oldest and largest life insurers in North America, announced in September 2018 that it would stop underwriting traditional life insurance and sell only interactive policies that track fitness and health data through wearable devices and smart phones. The insurer, which is owned by Canada’s Manulife Financial Corp., is applying the interactive life insurance model to all of its life coverage.
Under the program, policyholders receive premium discounts if they hit exercise targets that are tracked on wearable devices, such as a Fitbit or Apple Watch. In addition, policyholders who log their workout information and healthy food purchases in an app can receive gift cards for retail stores and other perks. To encourage use of the fitness apps, John Hancock is giving individuals who purchase policies reduced-price or free Fitbits and Apple Watches.
Consumers still have the option of not logging their activities to get coverage even though their policies are being packaged with the interactive program, known as Vitality, which John Hancock has already been using in South Africa and Great Britain. However, if the Vitality program is not used, the policyholder will not receive any of the offered benefits.
Company officials said it is too early to determine whether John Hancock is paying fewer claims because of the Vitality program, but that data collected so far for policyholders worldwide suggest they are living considerably longer than the rest of the insured population.
In addition, SCOR Life & Health Ventures (the strategic investment arm of SCOR Global Life) and TransAmerica Ventures (corporate venture capital arm of the Aegon Group and TransAmerica) recently announced they are making seven-figure investments in iBeat, a health tech company that makes the Heart Watch, a cardiac monitoring smart watch that detects if a person has stopped breathing and summons emergency help.
Officials from iBeat said the company will use the investments to advance product marketing and expansion for the Heart Watch and to offer the Heart Watch to the companies’ policyholders.
“It’s invigorating to see life insurers recognize the value in investing in technology that advocates for longevity,” said Ryan Howard, founder and CEO of iBeat.
While the incumbents clearly think this is the future of life insurance, it has yet to be determined whether this approach will be successful. True Blue Life Insurance recently conducted a survey to determine which demographic would be the ideal target for these types of life insurance products.
The company found that 77% of respondents were uncomfortable having their insurance premiums fluctuate based on their yearly physical results and that 70% of those 18-24 years old were uncomfortable with it. They also found that 59% of respondents are not willing to wear a fitness tracker that reports to insurance companies, even if it means potentially receiving a better premium. And among the 18-24 demographic, 54% of respondents were unwilling.
That being said, “What we ultimately found was that the 18-24 demographic was the most comfortable with the parameters of these ‘interactive policies,’” the company noted in its report. “Interestingly enough, they are also the demographic least likely to purchase life insurance.”
Using wearable devices to track employee fitness is not a new concept. As long as a decade ago, pre-Fitbit, some employers were using pedometers to track the number of steps their employees took every day and launching fitness programs in hopes of cultivating a healthier workforce.
“If anything, wearables continue to gain popularity,” says Deb Smolensky, NFP’s vice president and global leader for well-being and engagement. “We’ve seen an interest long ago with your basic Fitbit and wanting to track steps. That has exploded over the last four or five years into primarily a personal tool for any type of health monitoring.”
That monitoring might include how many steps an employee takes each day or how many hours of sleep the employee gets at night or even medical data such as the employee’s heart rate and glucose level. Taken collectively, such an accumulation of personal data has changed the definition of employee wellness.
Of course, a key component in the evolution of tracking employee wellness is the ubiquitous smart phone. When you take the ability to monitor and collect data on all different markers of your health, then house that data in a phone with apps that allow you to send that information to others, your wellness becomes much more actionable.
“As a practical matter, we all wear a wearable device today known as your iPhone,” says Robert Hartwig, a professor of risk management at the University of South Carolina. “It knows where we are, it knows where we go, it monitors how much we walk and it has a good sense of what we eat. So there is a potential convergence of technology over time of wearable devices in the workplace and other devices developed in the world of healthcare. All may converge to personal devices we all carry with us everywhere.”
Experts view consumer access to medical records via mobile devices, although still in its infant stages, as a logical next step in the health app revolution.
The number of employers offering benefits packages using health tracking devices is huge and growing annually. Mercer recently partnered with the Health Enhancement Research Organization in a study of well-being best practices that included around 2,000 employers. Of the employers completing the survey, 60% reported using a tracking device. “That may be high, but probably somewhere between 40 and 60% have something in place,” says Steven Noeldner, a health management consultant for Mercer.
In addition to using trackers, employers are increasingly using app-based digital platforms to deliver wellness benefits to their workers. Through apps, employees can engage in everything from tracking fitness goals to competitive challenges with co-workers or management officials.
As a practical matter, we all wear a wearable device today known as your iPhone. It knows where we are, it knows where we go, it monitors how much we walk and it has a good sense of what we eat.Tweet
For most employers, the original goal of fitness trackers was to cut double-digit increases in healthcare costs. While a healthier workforce certainly would seem to be a factor in controlling healthcare claims and overall healthcare costs, it was difficult then—and is difficult now—to actually prove that link.
And a far different reason than cost control is now motivating many employers to offer a robust employee wellness program: the desire to attract and retain a high-quality workforce in a tight hiring market.
“We are seeing these programs today more as a talent and retention tool than in the past,” says Kimberly George, a senior vice president and healthcare advisor for Sedgwick, a third-party administrator for self-insured companies. “If an employer has an attractive benefit package, today it includes some sort of digital platform focusing on the needs of employees. An employer or health plan or companies supporting those benefits are not going at it for just one angle—cost containment. It is the way benefits going forward are going to be.”
“Does a free Fitbit make me more inclined to go to that company?” muses Smolensky. “I’m not so sure. But if the employer cares about me with a whole suite of benefits—my health, my family’s, my training—and cares about me as a person, that human element is very important in helping me to determine whether to take that job.”
For employers, Noeldner says, one of the primary motivations behind wellness programs is simply to engage their employees. “We know that employees engaged in well-being are more engaged with the business and their performance is enhanced,” he says.
Some employers offer free tracking devices and provide financial compensation if an employee achieves certain fitness goals. Others find the challenge of competition, with individual co-workers or teams or even company executives, often gets more employees involved.
“The biggest challenge is educating the workforce as to what is available and then getting them to use it,” George says. “Most of the time we have found that providing financial reimbursement in the benefit space isn’t necessarily driving greater success. The apps that are offering motivation cues—recognition of miles or goals—those tend to be the apps that people stick with and use. If somebody’s not motivated to change, an app is not going to make that happen.”
Cost and Quality Challenges
But, as is the case with wearable devices in the workplace, there is little hard evidence that health apps are actually bringing about the promised results.
“The acceptance of these types of applications is growing,” says Zack Craft, vice president and national product leader at One Call Care Management. “It is exciting but difficult because multiple companies are putting up apps. These kind of health apps need to be validated. A lot of companies are coming in, and there is value around them, but the concern is: is that value of using health apps actually going to improve patient care or quality of care?”
Most of the time we have found that providing financial reimbursement in the benefit space isn’t necessarily driving greater success. The apps that are offering motivation cues—recognition of miles or goals—those tend to be the apps that people stick with and use. If somebody’s not motivated to change, an app is not going to make that happen.Tweet
Risk-management experts say mobile health will make its biggest impact from its capability to monitor a person’s blood sugar level for diabetes or other serious medical conditions, such as heart disease or autoimmune diseases.
“Some of the greatest benefits are likely to occur on the health insurance side of the business because of the fact that continuous monitoring of chronic medical conditions, and preventing those conditions from spiraling out of control, would have immediate and demonstrable benefits,” Hartwig says. “For instance, an individual who is diabetic and monitoring their blood sugar and their weight constantly, to the extent that these things could be monitored over time, could make doctors aware and help make adjustments.
“We know for a fact that an individual who is obese takes much longer to return to work and workers compensation costs could be several times more than for a healthy individual. Individuals in the workforce who have chronic and controllable and oftentimes preventable conditions, such as obesity and diabetes, account for a disproportional share of workers compensation costs.”
In addition to the difficulty of evaluating medical outcomes, there is also a cost barrier for many employers. Although companies of all sizes are involved in the well-being revolution, some employers are struggling with how to meet employee needs, because overall healthcare costs are still rising and the mobile health platforms are not cheap. The National Business Group on Health reported in August that annual per-employee benefit costs are expected to rise 5% in 2019, reaching $14,800, of which employers generally cover around 70%. And it costs employers an estimated $500 to $600 more per worker for employee engagement and well-being.
“While wellness and physical activity and nutrition and stress management are all still important initiatives for all employers of every size, it is difficult to prove that they will result in saving money on healthcare spending,” says Kyle Anthony, director of the human capital practice for Oswald Companies. “This has more and more people wondering if all the time they spent on wellness initiatives is worth it. There is an ongoing struggle to reconcile the relationship between wellness and healthcare costs.”
Smolensky agrees. Cost is an issue, she says, for employers who work with NFP, which she describes as “midsize market companies, not Fortune 500 companies.” While some want to “do the right thing,” she says, others would rather manage their medical expenses. “They are asking us what type of carrier system is providing support so they don’t have to spend money elsewhere,” she says.
Of all the sectors involved in mobile health services these days, insurers are the least likely to have the suite of digital wellness options employers are seeking.
“Major insurance carriers all do have something you would put in the category of wellness or care/condition management,” Noeldner says. “It is often built within, and they manage it themselves. Are they leading the charge? Probably not. But more are extending themselves and recognizing that their clients are interested.”
“If carriers are not in the business of well-being,” Smolensky says, “a lot of times they do not meet the mark in being robust or technologically innovative or engaging, so we come in and help our customers find a way to meet their goals.”
Does a free Fitbit make me more inclined to go to that company? I’m not so sure. But if the employer cares about me with a whole suite of benefits—my health, my family’s, my training—and cares about me as a person, that human element is very important in helping me to determine whether to take that job.Tweet
Budgetary concerns notwithstanding, it is hard to imagine the trend will reverse. Millennials are now the largest generation in the workforce, and they are more health-conscious than their Gen X counterparts. And because they grew up online, they have an expectation they will have programs tailored specifically for them, which is what a digital platform of apps addressing well-being and wellness does.
The market for mobile health services is huge. A recent report by Market Research Engine estimated the global market for various healthcare apps and technologies will be $59 billion by 2020 and around $104 billion by 2022. According to the report, the market includes product lines such as blood pressure monitors, blood glucose meters, chronic care management, healthcare and fitness apps, women’s health monitors, diabetes monitors, various forms of motion trackers, ECG monitors, pulse meters, sleep apnea monitors, digital skin sensors, and weight-loss, fitness and nutrition apps. A 2015 article in Employee Benefit News estimated there were 40,000 available health-related mobile apps, and that was three years ago.
The potential for growth in the mobile health arena is so great, George says. “Everyone is trying to find their play with this.”
Some brokers have created alliances with various digital health tool providers to serve their clients, and some employers are hiring their own health advisors and setting up the systems themselves. Others are using brokers, consultants or third-party administrators to identify vendors that will provide the apps to meet their goals and handle the data that is collected.
At present, the most popular well-being programs involve motion tracking, fitness and weight control, areas that focus on physical health and personal accountability. But other programs are focused on medical issues such as diabetes, mental health and stress.
“Both are huge topics right now, primarily because of the number of people dealing with those conditions,” says Anthony, whose company collects mobile health data for its customers. “Stress is a big factor for a lot of people right now, and diabetes is an epidemic.”
“The medical side is becoming increasingly popular as a way of monitoring one’s own health, own conditions and gaining insight,” Smolensky says. “Those tend to be more complex and expensive based on conditions. It is a condition-management approach versus an overall well-being approach. ‘Mental health’ is the number-one buzzword right now. It replaced last year’s buzz word—'financial well-being.’”
Ben Hackett, a senior director of product management for Accolade, says the opioid epidemic has helped to fuel interest in mental health. Accolade helps employers assist their workers in understanding what benefits are available and finding apps and other medical assistance they need. “There are also challenges around loneliness in a digital world,” Hackett says, “and interest in financial stability. Companies are hiring millennials fresh out of college, and helping people pay down loans is a big component of those programs.”
The Next Evolution
As acceptance of mobile health apps grows, so has the interest in allowing employees to easily access their medical records. Apple is working to bring protected health information (or PHI) to iPhones, iPads and the Apple Watch. Having PHI on mobile devices would give individuals the ability to access, retrieve and share that information without the time-consuming processes of phone calls, faxes and appointments or the physical pickup of records from different providers.
Last year Apple introduced a significant update to its Health app, debuting a feature for consumers to see their available medical data from multiple providers whenever they choose. Working with the healthcare community—a host of hospitals and clinics are making this feature available to patients—Apple created its Health Records based on FHIR (Fast Healthcare Interoperability Resources), a standard for transferring electronic medical records.
Google, Amazon and Microsoft have followed Apple and adopted the FHIR data standard, which means all companies and devices will be able use the same standard to obtain and share medical records and other health information.
“Sharing medical records is still infant and still difficult,” Hackett says, “but Apple is paving the way, and other companies have followed.”
Arvidson is a regular contributor to Leader’s Edge. firstname.lastname@example.org
Trusted Exchange Framework and Common Agreement: The Office of the National Coordinator for Health Information Technology (ONC) is developing a Trusted Exchange Framework and Common Agreement to establish guidelines and principles for how information travels between clinical systems in disparate networks. The goal is to help broaden access to healthcare data from provider-to-provider exchanges of clinical data. In early 2018, ONC released a draft Trusted Exchange Framework for comment. The office also released the United States Core Data for Interoperability, which outlines a road map for the industry that prioritizes which data elements should be released and when.
Quality Payment Program: The Quality Payment Program took effect in January 2017, replacing a formulaic approach to compensating Medicare providers with a system that rewards high-value, high-quality Medicare clinicians with payment increases while reducing payments to those clinicians who aren’t meeting performance standards. The program will require improved patient access to clinical data through application programming interfaces with third-party applications.
The Health Information Technology for Economic and Clinical Health Act: Known as HITECH, this 2009 legislation established the meaningful use of interoperable electronic health records (EHRs) throughout the healthcare delivery system as a critical national goal. “Meaningful use” is defined as the application of certified EHR technology that enables the electronic exchange of health information specifically to improve quality of care. Follow-up reports on successes and challenges must be submitted to HHS. CMS uses incentive payments to and penalties against providers based on their implementation and compliance with standards.
Blue Button 2.0: The CMS Blue Button initiative allows Medicare beneficiaries to download their Medicare fee-for-service claims information. In March 2018, CMS launched Blue Button 2.0, which is intended to improve patient access to and control of health data by offering a developer-friendly, standards-based API that enables Medicare beneficiaries to connect their claims data to secure applications, services and research programs.
CMS is evaluating regulations that would extend Blue Button data exchange requirements to other contracted Medicare Advantage and individual market qualified health plans. CMS is contemplating future rulemaking in this area to require the adoption of such platforms by Medicare Advantage plans beginning in 2020.
ONC Tech Lab: In 2016, the ONC introduced a Tech Lab to organize and promote specific efforts and projects geared toward improving health IT interoperability, including assisting industry stakeholders in developing healthcare standards and policies to improve interoperability. The ONC Tech Lab is focused on pilots, standards coordination, testing and utilities, and innovation.
She recalled her horror last March at an annual conference sponsored by the Health Information and Management Systems Society.
“If it weren’t for the bystanders and the first responders at the airport, my kids would’ve watched their father die,” Verma said. “In the hours it took to get to my family, I tried to answer questions for the doctors over the phone about his medical history, but unfortunately I had few answers. So I desperately made calls to his doctors back home in Indiana asking if there was any information they had that could help save his life. When I arrived at the hospital, the doctors and nurses still didn’t know what was wrong with him or how to treat him. He had a multitude of tests…MRIs, CAT scans, blood tests, ultrasounds.”
While experts ultimately diagnosed and successfully treated his condition, Verma believes no one should have to endure what she did. And she is now spearheading efforts at CMS to increase consumers’ access to their health data. These efforts are part of a Trump administration policy initiative, MyHealthEData, that seeks to improve patient access to clinical data by improving the systemic architecture in place for consumers’ right to access data.
“Imagine a world in which your health data follows you wherever you go and you can share it with your doctor, all at the push of a button,” Verma said. “Imagine if, in turn, your doctor didn’t have to spend so much time faxing records and staring at a computer during an appointment. Imagine if you could track your medical history from your birth throughout your life, aggregating information from each health visit, your claims data, and the health information created every second through wearable technology.”
The fact is, individuals’ lack of access to their medical records in emergency situations is just one component of a larger healthcare data challenge. Limits to clinical and claims data sharing, based on proprietary and technical impediments, reduce patients’ ability to be effective healthcare consumers.
Such information barriers also impede efforts to address spiraling healthcare costs, often by limiting competition on quality and price.
Clearer and more comprehensive records will allow consumers to track their healthcare issues, treatments and outcomes more easily. While consumers may not be able to fully interpret their data on their own, data sharing enables third-party applications to aggregate and thus better track the quality and price of care. Data sharing could also inform patients on optimal care choices.
“Software application access to the data will allow consumers to proactively determine which providers provide the best outcomes at the lowest cost through apps that could help aggregate that data on behalf of millions of consumers,” says Ryan Howells, a principal at healthcare intelligence consulting firm Leavitt Partners. Leavitt manages an alliance known as CARIN (Creating Access to Real-Time Information Now through Consumer-Directed Exchange), whose stakeholders represent hospitals, physicians, large payers, consumers and caregivers promoting health data sharing with third-party applications.
“Improving consumers’ ability to make more informed healthcare choices…will enable them to choose high-quality, low-cost providers, thus helping generate large improvements in healthcare experience and associated costs,” Howells says.
Close at Hand
While this may seem like a distant vision, some say it’s closer than we think. Aneesh Chopra, a co-founder of CARIN and president of CareJourney, an open-data intelligence service provider, says that 2019 could be a transformative year for the impact of health data upon the healthcare system—and one that calls for agent and broker actions.
“By this time next year, a new paradigm for delivering employer-based healthcare insurance will take hold in leading markets,” says Chopra, a former chief technology officer under President Barack Obama. “I recognize that such pronouncements might be construed as hype. But there are now three trends that are converging to empower employers in new and amazing ways, and I hope that employees will start to benefit in the next enrollment cycle.”
The trends are as follows:
- For the first time, there is a movement to standardize the way consumers invoke their right of access to their health information via an application or service they trust.
- A move to value-based care is driving the creation of clinically integrated networks willing to take on responsibility for total cost of care to help employers and employees manage healthcare costs and help consumers make the best use of their health information.
- Digital standards for consumer-directed health exchange are on the rise. These standards enable the rapid exchange of digital information between different software programs via the use of a common language and internet architecture. They facilitate the functionality of software applications, such as Apple’s Health app, that can help consumers understand their health needs and evaluate healthcare options at no marginal connectivity cost.
These three trends, Chopra says, make it possible for consumers to use software applications to access and understand their health records, manage their care, and access value-based medical networks that can help them optimize care and contain costs.
There are two key data types of high interest to healthcare stakeholders, notes David Smith, founder of Chicago-based Third Horizon Strategies, an organization that assists healthcare companies in their strategic planning operations.
- Claims data are submitted by providers and include documents with information on the cost and dates of procedures and billing codes. Payers such as employers, insurance carriers, the government and individuals maintain that information.
- Clinical data are generated at the point of encounter with a healthcare provider and are captured in an electronic health record (EHR). In most of the country, clinical records are the intellectual property of the healthcare provider that captured and authored the information, such as a doctor or hospital. The technology infrastructure of the resident EHR and the contractual provisions between the provider and the EHR company determine access to these data.
Both types of data are important factors in good and efficient healthcare. Clinical data can facilitate population health management because it is specific to an individual and contains the detail necessary to optimize care for that person. (For example, clinical data can help providers avoid duplication by sharing patient conditions, treatments and outcomes.)
Claims data can be useful for generating statistical profiles of a population, Smith notes. That can assist underwriters, actuaries and insurers in pricing risk and learning things about populations or geographies.
Any party that stands to benefit economically from eliminating inefficiency or improving healthcare at the same or lower cost should be mining data, says Jon Prince, president of DataSmart Solutions, a data warehousing and analytics company in Helena, Montana.
Imagine a world in which your health data follows you wherever you go and you can share it with your doctor, all at the push of a button.Tweet
As we look toward the future of data-driven healthcare, it’s useful to understand the current legislative and regulatory boundaries that govern healthcare data. Traditionally, the limited data sharing that has occurred has been under HIPAA (Health Insurance Portability and Accountability Act of 1996). Within HIPAA, payers can access patient-protected health information to evaluate and pay a claim, says Dawn Paulson, director of HIM Practice Excellence at AHIMA, the American Health Information Management Association. Payers also can access and use data for healthcare operations, including population health management and care coordination, says Jodi Daniel, a partner at Washington, D.C., law firm Crowell & Moring and a former policy director at the U.S. Department of Health and Human Services.
A December 2018 article in Leader’s Edge noted that HIPAA’s Privacy Rule includes provisions that authorize permissible data sharing—and mandate it under certain specified conditions (leadersedgemagazine.com/data).
Scott Sinder, a co-author of the article and The Council’s chief legal officer, says the Privacy Rule allows a carrier to share plan data with the employer sponsor without employees’ consent or authorization but there are limitations. For example, carriers can share summary health data (such as anonymous information on claims history and claims expenses) with employers for premium bid purposes or for modifying, amending or terminating the group health plan.
The Privacy Rule permits carriers to share more granular personal health information with employer sponsors for underwriting purposes and with other healthcare operations, Sinder says, as long as certain anti-discrimination safeguards are satisfied. The Privacy Rule also gives individuals the right to see copies of the information in their medical and other health records maintained by their providers and health plans. As
Leader’s Edge reported: “Employees may extend their ‘right of access’ to their own personal health information to their employer and/or the employer’s broker—as designee(s)—and plans must then provide the information as requested by the employee.”
As data sharing expands to include the exchange of information via consumer authorizations to third parties, the duty to comply with HIPAA requirements will be supplemented by the challenges of addressing data exchange ethical and legal issues outside of a HIPAA environment.
In late November, CARIN released a code of conduct that third parties can follow to ensure their applications are gaining consumer consent whenever they handle healthcare information on behalf of the consumer. The code, Howells says, is designed to help third parties follow industry best practices for securing information outside of HIPAA.
Some software company-specific efforts are also under way. “We have done work to include patient education when patient-authorized applications would share information,” says Sasha TerMaat, a director at Epic, a Wisconsin-based software company targeting healthcare providers. “We work with app developers to identify aspects of information sharing significant to them and make that more accessible to patients than if it was hidden in a 20-page terms-of-use document.”
Howells says he anticipates a new “data-sharing ecosystem” that will enable employees and patients to access their health information under HIPAA. Such access, he says, will empower consumers to share their information with any third party of their choice.
Privacy isn’t the only issue to consider in increased data sharing. There’s also the matter of overcoming proprietary interests by parties who currently hold and own electronic health records. Many say healthcare providers and payers can limit access to such data to protect themselves from competition and to facilitate relationships with other parties.
In fact, this may be among the hardest challenges to overcome, though a variety of federal efforts seek to prevent this trend, often called information blocking.
The federal Office of the National Coordinator for Health Information Technology (ONC) is required to establish regulations that improve access to clinical information by parties requesting the underlying clinical data. The statute requires electronic health record vendors and hospitals to confirm they are not engaged in information blocking. The Department of Health and Human Services is expected to provide guidance on information that should not be blocked as well as fines to be imposed for information blocking.
The Centers for Medicare & Medicaid Services is moving to require similar data transparency regarding claims from insurers. In her March speech, Verma called upon all insurers to give patients their claims data electronically. She said over the course of the year CMS would reexamine its partnerships and relationships with health insurers to find ways to persuade them to give patients control of their records.
An executive at a data analytics firm says information-blocking concerns are real and addressing them is critical. “When we get information from large payers for our clients, they require in their nondisclosure agreements that we not do anything with the data that would allow someone to determine provider price or quality decisions, which we think they include because the hospitals make them put those clauses in their contracts,” the executive says. “Yet that is the most important reason to be using the data, because a handful of claims drive all the costs. If you can ensure that that 10% of the population makes the right decisions, that makes all the difference.”
Jodi Daniel, of Crowell & Moring, says information-blocking provisions will likely require data holders to release data “for purposes that are good for patients but may not be in the data holders’ best interests.”
There are also legitimate technical challenges to data sharing—in particular, setting the standards and frameworks to enable it. There are disparities in the types of data recorded. Not all data with value are recorded, and much that is recorded is captured in different formats.
In the past, common electronic standards that would allow the sharing of different types of information from different types of applications did not exist. However, both public and private sector initiatives are said to be achieving remarkable progress in this area. (For details of public sector initiatives, see the sidebar “Setting the Standards.”)
By this time next year, a new paradigm for delivering employer-based healthcare insurance will take hold in leading markets.Tweet
In the private space, Fast Healthcare Interoperability Resources (FHIR), a non-proprietary application programming interface (API) standard for sharing and exchanging health information, is rapidly being adopted as a common industry standard. Several factors are increasing its adoption. The Argonaut Project, launched several years ago, is a private-sector initiative to advance industry adoption of modern, open interoperability standards. Participants in the Argonaut Project are working to rapidly develop an FHIR-based API to help expand health data sharing.
As part of these efforts, Apple has integrated the clinical API standard into its iPhone iOS, including a health record feature within its Health app that was introduced in January 2018. A variety of other tech vendors and providers also support the Argonaut Project, including Cerner, Epic, AthenaHealth, Meditech, Accenture, and McKesson.
A second effort, the Da Vinci Project, is more focused on payers. The project includes Allscripts, Cerner, Optum and Epic on the technology side and many of the country’s biggest commercial payers, including Anthem, the Blue Cross Blue Shield Association, Humana, and United Healthcare. Last August Amazon, Google, Microsoft, Salesforce, IBM and Oracle signed a joint pledge to accelerate interoperability across healthcare by leveraging cloud-based technologies and data standards in pursuit of the common good.
In October, ONC released a study that found 10 certified health IT developers with the largest market share across hospitals and clinicians use FHIR. About 82% of hospitals and 64% of clinicians use these developers’ certified products, which Howells characterizes as unprecedented in terms of the speed in which an open standard was voluntarily adopted by industry.
The Use of Big Data Is Under Way
As the ability to share data improves, it is important to think about what can be done with those resources. For that, we can look to the health data analysis already under way.
“Scientists, clinicians and others have long recognized that large quantities of health-related data…can be analyzed to detect forthcoming health problems as well as to validate superior interventions,” DataSmart Solutions’ Jon Prince says, noting that such information is already used by employers, insurance carriers, hospitals, and other care providers.
Healthcare analytics companies are leading this research, Prince says, together with some university hospital systems, such as the Johns Hopkins Bloomberg School of Public Health. Some large insurance carriers and consulting firms contract with or acquire analytics units to produce useful information from raw data.
“In short, there is great value to be found within data for the field of public health,” Prince says. “In addition to traditional medical and prescription claims history, supplemental data, such as biometrics, vision scans, routine blood panels and even questionnaires, can have predictive value. A striking correlation, for example, has recently been found between consumer data, such as the FICO score, and health-related behaviors such as adherence in taking prescribed medications.”
The study of health data patterns enables many disease states to be foreseen, permitting early intervention and better outcomes. Data are also used to evaluate quality of care, efficiency of care facilities and providers. The performance of individual plans can be carefully analyzed to reveal cost trends upon which corrective action can be taken.
In broad terms, Prince says, the findings from healthcare data research fall into categories of predictive risk scoring (e.g., identifying individuals in greatest need of immediate intervention), improving traditional diagnosis (e.g., providing doctors with a more complete story on a patient) and recommending improvements in plan design and networks.
In all cases, however, to extract value from research, findings must be interpreted and acted upon by experts, Prince says, and that requires action by brokers. “Brokers must ensure that this interpretive, action-taking component is included,” Prince says. “A complete analytics-care coordination ecosystem consists of more than colorful reports that accumulate in someone’s inbox. Brokers need to ask, ‘Who will act upon the findings at the level of my client?’”
The adequacy of data analysis can produce tension between employers and insurance carriers, Prince notes. “Some large insurance carriers assert that they have all of the above—analytics as well as onboard care coordination,” Prince says. “But experienced brokers know that, in spite of these reassurances, in some cases renewal rates can climb significantly, if not suspiciously. Hence, the trend for plans to migrate from fully insured to self-insured continues, along with the search for transparent, end-to-end solutions that begin with data and culminate in better plan performance, lower renewals, higher reserves and healthier members.”
Insurance brokers today are connecting valuable research to employer plans in a variety of ways, Prince says. “Many of the large consulting firms conduct RFPs on behalf of clients to identify the best total solution that includes analytics and care coordination team action,” he says. “These firms constantly vet analytics vendors, care coordination companies, and others from which an effective ecosystem can be built. Other mid-market brokers may hire and organize internal clinical, care coordination and reporting teams of their own and contract with analytics vendors for the underlying research. Smaller brokers outsource all these functions and are still able to deliver effective, economical products to their clients.”
Today, Prince adds, analytics and care coordination services are quite affordable. “The field is highly competitive,” he says. “The addition of this service to a broker’s product line is vital in a market where differentiation is crucial to a successful sales campaign.”
Driving Value-Based Payments
As data sharing increases, so does the potential for creating a value-based healthcare payment system.
“We cannot effectively transition to a value-based system,” Verma said last year, “unless we provide to both the doctor and the patient all of the clinical and payment data required at the point of care to help them mutually make a different and better decision than they could have today.”
President Trump last year reinforced efforts to move toward a value-based compensation system through an executive order aimed at improving access to reliable information that consumers need to make informed healthcare decisions, including data about prices and outcomes.
In addition, Sen. Bill Cassidy, R-La., in early 2018 launched a proceeding to learn why consumers cannot compare the cost of care effectively. In September, Cassidy—who is a gastroenterologist—and several Senate colleagues, members of a bipartisan Senate healthcare price transparency working group, introduced draft legislation to protect consumers from surprise medical bills, often termed “balance billing.”
A complete analytics-care coordination ecosystem consists of more than colorful reports that accumulate in someone’s inbox. Brokers need to ask, ‘Who will act upon the findings at the level of my client?Tweet
There are also data-sharing efforts included in existing value-based care initiatives. In the Qualified Entity Program, established by the Affordable Care Act, organizations approved as qualified entities (QEs) receive access to Medicare claims and prescription drug data for use in evaluating provider performance. QEs are required to use the Medicare data to produce and publicly disseminate reports on provider performance approved by the Centers for Medicare & Medicaid Services. QEs are also permitted to create non-public analyses and provide or sell such analyses to authorized users, such as employers. CMS also publicly releases information about providers through the Medicare Compare website.
Brokers Tie It Together
“If I were an insurance broker focused on the mid-market, I’d like to play the role of general contractor to tie these three key general trends together,” says Chopra, referring to the increased standardization of patient right of access and data transfer and the rise of value-based care.
For example, says Chopra, brokers could include a standardized digital form for employees’ right of access to their data in the open enrollment process, perhaps connected to an app. “The employer’s job might be to curate a set of apps under which, under certain terms and conditions, the consumer designates access to health information, starting with claims,” Chopra says. “Apps might be tied to clinical networks, should employers design ACOs, or to a retailer like Walmart, or to tech-focused online service providers like Apple or Google.”
Regarding the value of aggregated data, Howells says brokers can serve as aggregators and educators of consumers and employers. “They can also act as enablers by encouraging consumers to aggregate their healthcare data using their own platform and third-party applications to make more informed decisions regarding their coverage and treatment,” Howells says.
As we look to see what 2019 will bring to this field, experts warn of potential and patience. “This is still the first inning of efforts to unleash the power of data in healthcare,” Smith, of Third Horizon Strategies, says. “Billions of dollars have been invested in capturing clinical data well, but that doesn’t mean that all doctors and hospitals involved in care have access to it, and it doesn’t necessarily translate into the intelligence that may be possible with greater data quality, interoperability and availability, including intelligence that may benefit agents and brokers. Value-based care and fully integrated delivery systems are still the exception to the rule. Still, with as much as has already happened, the potential is very exciting.”
David Tobenkin is a contributing writer. email@example.com
Well, guys, let us begin on a note of new-year cheer, recognizing two things—first, that commercial insurance brokerage issues generally aren’t partisan, and second, that while extremes on the left and right continue to polarize our politics, there is a great silent majority in the middle who just want everybody to get along and get things done. Can we hope for this, at least?
That’s absolutely right, Joel. I look at the issues facing our members and I look at the incoming Congress, and I’m feeling pretty decent, considering it’s a divided government and not a whole lot is going to reach the president’s desk. What’s even more exciting, is that this really IS a new Congress! 100 new members total. 66 New Democrats and 44 new Republicans. This is the closest we’ve had to a fresh start in a LONG time!
Yea, right. And so much for all your new fresh Democratic leadership. Your numbers 1, 2 and 3 are all over 78 years old and have occupied their same positions for more than a decade. Hope, change and fresh vision?
Ugh. Look. 40% of the Democratic caucus is female. That’s refreshing. We have a record number of veterans in this Congress. More members under the age of 40 than I can ever remember. This is a new day. They were largely ushered in on the messaging of protecting the ACA and preserving protections for Americans with preexisting conditions (by the way, how many Republicans voted 57 times to repeal the ACA and then ran a poll and magically campaigned on PROTECTING preexisting conditions this time around?). But we all know the driving force behind all this is the president. I don’t know where to begin on that note…but we have front row seats for an amazing, historic showdown.
I’m pushing 60, and so I do wonder who all of these children are who are wandering around Congress. Look, save your “preexisting conditions” crap for your stump speech. The reality is that your party barely outperformed historic trends for midterm elections and Republicans expanded their Senate majority.
Sent from Nine
Ha. I love watching the GOP try to minimize everything that’s happening. Yes, it would have been wonderful to take back the Senate, but nobody expected that to happen, and considering Dems were defending 24 seats—10 in Trump country—they did pretty good. And Pelosi, love her or hate her, is going to be a force. I don’t know who better to navigate the oversite and impeachment pressures while pursuing the people’s business than Nancy Pelosi. And watching Trump mansplain things to her in public settings does not bode well for suburban independent women.