Our annual July/August double issue is one of my favorites. That’s because each year we focus the entire magazine on something that has been years in the making, challenging us each step of the way, evolving and disrupting (even though I hate that word) our business models at every turn—technology.
No matter how you cut it, the traditional insurance distribution model is under pressure. Today’s customers increasingly desire new ways of purchasing insurance as they seek to receive the same levels of choice and convenience offered by other industries.
Seth Berkowitz, assistant professor of medicine at the University of North Carolina at Chapel Hill, and Lori Tishler, vice president of medical affairs at the Commonwealth Care Alliance, co-authored a study analyzing whether meal delivery programs could reduce healthcare costs among Medicare and Medicaid beneficiaries.
Steve DeCarlo built AmWINS into the largest wholesaler in the industry. He is an industry leader in data analytics, having started years before any of his competitors. Steve retired in May and sat down with founding editor Rick Pullen to talk about his career. This is an excerpt on his views on data. —Editor
Anyone who has ever been in an automobile accident is familiar with the back-and-forth interactions with the insurance agent and carrier. It’s a worrisome, frustrating and time-consuming process.
Blockchain, AI and predictive data analytics form a triumverate of tech.
RiskBlock Alliance is building a global, holistic ecosystem for insurance-specific blockchain activity.
The alliance is tuning competitors into collaborators and may someday include state agencies and other third parties.
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More than half of the insurance industry expects to add staff this year but not without a big struggle. As older workers retire, many companies are scrambling to find enough people to replace them, especially in claims processing.
As many as one third of insurance professionals will retire this year, a trend that will continue as baby boomers leave the workforce.
An array of high-tech tools is being used to fill gaps in the labor pool.
A 2017 study said the auto insurance sector is facing “a tumultuous time” as the industry struggles to replace retirees.
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In Lloyd’s coffee house in London more than 330 years ago, the property and casualty insurance industry was formed to spread the risks of cargo-carrying ships plying the world’s seas. The industry grew and prospered, with little change in the underlying model. Now, an entirely new structure is taking shape.
Insurers and brokerages must begin to share data to reduce acquisition costs and operating expenses.
If they don’t, a giant technology company might beat them to it.
Data analytics and other technology have created a potential entry point for non-insurance entities to compete against brokerages and carriers.
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Leader’s Edge founding editor Rick Pullen recently sat down with new editor in chief Sandy Laycox to find out just who she is and how she got here. This issue is the first under Sandy’s leadership.—The Editors
These days, disruption is a hot-button issue on a variety of fronts for the insurance industry, and recruiting is no exception.
We are now almost a year and a half into what is, for better or worse, the new world that is the Trump administration. From an employer’s perspective, it’s a little bit of both.
With the European Union’s General Data Protection Regulation (GDPR) having come into force on May 25, companies around the globe have been struggling to ensure their operations are compliant.
It’s a simple question, but one that’s not so easy to answer. Where do you stand in the market among competitors?
We all know at least one, the perennial naysayer. No matter what the discussion, from a great place to go on vacation to a major change in your organization, their response is always the same. “Nope. Not happening. I don’t think so.”
One of the world’s largest sporting events just concluded with France taking the title at the FIFA World Cup held in Russia, and the insurance industry was a heavy participant.
In addition to commercial exposures, Russia is insisting that entry into its borders requires an insurance policy. According to Russia’s World Cup website, insurance for travelers should cover treatment costs for the minimum of €30,000, which translates into $34,822.
Last February during the Winter Olympics in Pyeongchang, South Korea, players from the NHL did not participate in the hockey tournament due to a controversy regarding which organization would foot the bill for player coverage. FIFA, however, has set aside $134 million in coverage for outside clubs and franchises whose players get hurt during the World Cup.
Tighter regulatory supervision, better detection technology and more complex supply chains are increasing the frequency and severity of food product recalls. Contrary to popular belief, property and general liability insurance do not always cover first and third party damages resulting from a product recall.
Editor in chief Rick Pullen sat down with Susan Hayes, principal at Chicago consulting firm Pharmacy Outcomes Specialists and head of Pharmacy Investigators and Consultants. She audits and investigates corporate prescription costs to help employers control medical expenditures.
Although “COLI” (pronounced co lee) is a commonly used acronym, it refers to any company-owned life insurance contract on the life of a company employee.
In the world of benefits brokers, one size no longer fits all. Clients today want benefits packages for workers from five different generations with five different desires.
As compliance issues mount, brokers have an opportunity to separate themselves from the field.
Employers want brokers to assume a stronger role in making decisions about human capital management systems.
HR is evolving into a strategic function that includes change management, company culture and workforce demographic shifts.
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Impressive though it may be, The Broadmoor—host to The Council’s Insurance Leadership Forum and Employee Benefits Leadership Forum during the last decade—is gaining some serious competition when it comes to delivering guest experience.
Inspired by The Council, The Broadmoor has begun donating food to the Springs Rescue Mission in Colorado Springs.
Ken Crerar, The Council’s president and CEO, assigned lawyers Scott Sinder and Josh Oppenheimer to analyze the legal issues.
Crerar brought their research to Jack Damioli, president and CEO of The Broadmoor, who worked with Larry Yonker, president and CEO of Springs Rescue Mission.
The array of voluntary benefits on the market is dizzying. Some are meant to make employees physically and financially healthy.
In today’s job market, companies are becoming more strategic about recruiting and retention. They’re also looking for solutions to rising healthcare costs and responding to changing consumer habits and demands.
Workforce competition demands that employers offer a wide range of benefits, some paid for by the employer and some by the employee.
Some design-build plans cover a broad swath of employees; some look to pinpoint specific groups of needs.
Know what employees want, and get their feedback to make sure benefits are having the desired effect.
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In today’s world, how do you define a brand? By definition, it is a name, a logo, a product or a service that distinguishes itself from others.
Aclaimant started with an app to report workers compensation incidents but realized technology has a much bigger role to play in managing risk in the workplace.
DirectPath recently released its “2018 Medical Plan Trends and Observations Report.” The organization analyzed research from Gartner, looking at more than 900 employee benefit plans to gauge trends in employers’ 2018 strategies. Of particular concern to employers was managing their consistently rising healthcare costs.
It all began in June 2003 when Pirates of the Caribbean first exploded at the box office, Dan Brown’s The Da Vinci Code was creating a buzz and Apple had just opened its iTunes store.
The Killers, the 1946 insurance movie made from an Ernest Hemingway short story, is an overlooked classic that practically invented film noir. It’s in black and white and spookily lit.
The dynamic M&A activity we saw through 2017 is still going strong, and with new private capital players entering the game, there is no shortage of opportunity for brokerages and agencies that are considering a play.
Some say, “Ignorance is bliss.” I say, ignorance is a formula for failure—especially when it comes to creating a more diverse and inclusive culture for your firm.
On May 25, the European Union’s new rules on personal data protection and privacy went into effect. And just what does that have to do with U.S. agencies and brokerages?
Did you know your high-potential employees are twice as valuable as other staff? This might explain why 66% of companies invest in programs to identify high-potentials and help them advance.
About 100 years ago, the last of the 48 contiguous American states were admitted to the Union, reaching from the Atlantic to the Pacific Ocean, and Henry Ford’s Motor Company soon began to pump out automobiles that drastically cut down travel through the country.
Last month, I wrote about the importance—and benefits—of a diverse workforce. That elevating women, people of different ethnicities and abilities, and LGBT individuals, helps deliver a competitive edge when selling products and services to diverse end users.
What’s so hard about building a sandbox? After all, what do you need other than some planks and sand?
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Hawaii Insurance Commissioner Gordon Ito has seen the future, and it includes insurtech sandboxes in the Aloha State.
When it comes to technology, state insurance regulators are definitely of two minds, depending on who’s implementing it.
The German prescription drug system known as AMNOG, the Act to Reorganize Pharmaceuticals Market in the Statutory Health Insurance System, is the country’s program for evaluating and pricing new medications entering the market.
What would happen to healthcare legislation if there were an insurance CEO in charge? U.S. Representative Tom MacArthur, R-N.J., is not quite in charge, but he’s trying hard to make waves in insurance legislation.
A lot has been said about disruption in the insurance industry, but to date, there has been very little in the retail market. Editor in chief Rick Pullen recently sat down with Samir Shah, CEO of Ledger Investing, to talk about the future disruptive nature of insurance-linked securities.
When Michael Rea worked as a Walgreens pharmacist, patients always asked him why their prescription medication costs were always rising. So many asked, in fact, that Rea created a canned response for their queries.
Prescription drug spending in 2016 accounted for about $330 billion, or 10% of the nation’s total healthcare costs.
Prices for common medications are as much as 117% higher in the United States than in other nations.
A U.S. company with 1,200 employees sent employees for treatment abroad and saved $1 million in a year.
We have made a conscious effort to recruit the best person for the job, and that is often a woman.
If you have not yet embraced the ideas of diversity and inclusion in your workforce, here is another reason: boosting your current financial performance. Surprised?
Facebook may become the textbook case on how a company’s poor governance and weak privacy practices cost it more than any breach in history. Congress, regulators (U.S. and international), state attorneys general, plaintiffs lawyers and the public at large have put Facebook in the crosshairs.
A midsize insurance firm sells to a private-equity backed company that is 50 times its size. At the deal table, there is an independent owner—an entrepreneur who worked hard at growing her business and team for a couple decades.
As the reality sets in of all that was and was not included in the generational tax reform legislation that was signed in December, one thing is clear: this is a terrific time to reconsider your agency perpetuation and estate plans.
We have all heard it said: money is king. There’s a song about it, a miniseries about it and even its own Facebook page. But no more. Move over money; there’s a new kid in town: knowledge.
In spite of a piddling 25 out of 100 review from Rotten Tomatoes and a Golden Raspberry “Worst Actor” nomination for its star, Ben Stiller, the 2004 film Along Came Polly was an audience fave.
The Council had the opportunity to attend the annual DC Blockchain Summit, hosted by the Chamber of Digital Commerce.
Private capital is more diverse, more long-term and more interested in the insurance industry than ever before.
Whether we are headed into a hardening market in 2018 remains an open question to MarshBerry for a number of reasons. Overall, the p-c insurance industry remains very strong on a relative basis, with all-time highs for policyholders surplus, which stands at $719.4 billion, and ratio of net premiums written to surplus, which was 0.76 as of September 2017.
When will the merger and acquisition bubble burst? This question has been looming over the rush of activity for the past couple of years—and 2017 showed no slowdown after a record number of deals and growing interest from new private capital players who are entering the insurance brokerage space as investors.
There was no shortage of excitement in the U.S. property-casualty and health insurance markets in 2017. Like seasoned boxers, the p-c markets were tested by several roundhouse punches in the form of large catastrophes in the third and fourth quarters, while health insurance markets continue to weave and bob with every new jab at the Affordable Care Act.
Integration—what does it really mean? This critical merger and acquisition transition process can feel like diving into murky waters for sellers, who often aren’t sure what to expect.
For those of you who have not been paying attention, private-equity backed brokerages have taken over the M&A world. They completed 316 announced transactions in 2017, which represented 57% of the total announced deal activity for the year.
The immediate aftermath of a mass shooting often leaves citizens and politicians in a mass gridlock of gun control versus the Second Amendment.
The most successful insurance companies are those leading the insurtech charge, IBM finds in a survey of 1,200 insurer, insurtech and venture capital firm executives. IBM found 81% of outperforming insurance businesses either have invested in or are working with insurtech businesses.
As he pored over millions of documents, Chris Cheatham decided there had to be a better way. His startup, RiskGenius, applies machine learning to speed policy review.
High-tech wizardry is revolutionizing our world. When insurers began selling auto and homeowners cover directly to clients over the internet long ago, thousands of agents were thrust out of work over a few short years.
New websites enable brokers to buy cover without sending a fax, opening an envelope or picking up the phone.
Ascent Underwriting of London receives tens of thousands of online inquiries each year from 90 brokers.
A process that has taken days or weeks using traditional channels can now be completed within minutes.
Omada Health has developed a 16-week digital behavioral-change program meant to help participants lose weight and reduce healthcare costs. Leader’s Edge sat down with Omada Health’s Rob Guigley to discuss the potential of digital wellness programs for combating obesity and its related health conditions.
It started with Harvey Weinstein. When The New York Times and The New Yorker magazine broke their explosive stories that dozens of women reported incidents of sexual harassment, abuse and even rape by the Hollywood film producer, the revelations lit a fuse that had clearly been waiting for this breath of oxygen to spark.
The business community is suddenly focused on its exposure for managers’ and employees’ atrocious behavior.
Since 1991, the year of the Clarence Thomas hearings, the number of carriers offering EPLI coverage has risen to more than 50 from five.
When cases result in defense and settlement costs, the average bill is $160,000. Jury awards often go much higher.
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Business and trade associations have long argued that companies can manage their cyber-security programs without government interference. Those groups seem perilously close to losing the argument.
While business has avoided government regulation of cyber security, U.S. and European authorities appear ready to prescribe controls.
Last year’s cyber attacks caused unprecedented disruptions and soaring losses.
The NotPetya malware, begun in Ukraine, crippled global organizations, including Maersk, Federal Express and Merck.
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This business is a journey without a destination.
It’s called reps and warranties insurance, and it once was used primarily in mergers and acquisitions between private equity funds. Today, it shows up in all segments of the M&A market, including insurance brokerage M&A deals.
What do an English major, a history major and a biology major all have in common? They can all end up working for an insurance agency.
For children, it’s a chance to explore and create within a confined space. Adults need a similar opportunity—including those in the no-child’s-play, multibillion-dollar insurance sector.
Are you a potential seller in today’s overcrowded M&A marketplace? If so, it is important to understand the market you are entering.
I think one of the fundamental, but not expressly discussed, debates driving our health policy discussions in the United States is this: should the objective be that everyone has access to the same healthcare, or should it be to ensure everyone has access to a minimum necessary level of care?
We find ourselves in a unique time. It’s clearer by the day that the pace of social change in our country is simply not fast enough, and the resulting effects are being underscored in the business world.
Hercule Poirot, Agatha Christie’s brilliant Belgian detective, made a bit of a comeback last winter when yet another version of Murder on the Orient Express hit the big screen, with a deadpan Kenneth Branagh as the detective.
What’s to love
Bogotá is a diverse metropolitan city that has a wide range of gastronomical, cultural and outdoor activities. It’s in the top 10 cities of the world and is known for its urban art scene. It also has festivals such as Estéreo Picnic, which showcases an important lineup of international and national artists.
You can find a vast variety of cuisines, from French, Italian, Mexican, Peruvian and Asian to traditional Colombian food. A hot trend is the invitation-only clandestine dinners and degustation menus. You follow instructions to gather in a particular place, and when you arrive there’s a table set for maybe 20 people and a chef preparing a multi-course meal.
Favorite new restaurant
At the Four Seasons Hotel Bogotá, Harry Sasson, one of the most famous chefs in Colombia, owns NEMO, which fuses classic Colombian and international cuisines. I love the food, the wine selection and the ambience.
Andrés Carne de Res serves excellent Colombian dishes in a very Latin atmosphere. I love the Arepa de Choclo, a traditional starter of corn cakes topped with fresh cheese.
At Apache, on the rooftop of The Click Clack Hotel in the city center, enjoy the great cocktails and beautiful views. Another good option is Gamberro, a Spanish restaurant where you can order tapas with your drinks.
The Click Clack Hotel is an excellent place for someone who loves design, great food and a convenient place to stay. It’s definitely the best hotel at the moment.
We have an exciting art movement going on right now. Every two months you can find different art and design fairs like ARTBO, Feria del Millón, Expoartesanías and BURO, to name a few. These fairs gather curious people who enjoy national design and art pieces.
If you are visiting on a Sunday, check out Ciclovía Bogotá, when the city blocks off some main roads so people can cycle safely with their friends, family and dogs. You can exercise and also see and enjoy the beauties of the city.
Bogotá has many hidden treasures, such as the Gold Museum, which holds the largest pre-Hispanic gold exhibits in the world (55,000 pieces), an underground engineering wonder called the Salt Cathedral of Zipaquirá, and Lake Guatavita, which is known for the legend of El Dorado. If you come to Bogotá, these are places you must visit.
Napa Valley is open for business. While the October 2017 wildfires directly affected the people who live and work in wine country, because the fires burned predominantly in the forested hillsides, the Napa Valley floor between Highway 29 and the Silverado Trail was largely unscathed. According to the Napa Valley Vintners, a nonprofit association, 10 of the more than 400 Napa County wineries suffered significant damage. However, like Signorello Estate, which lost its winery buildings but was spared its 40 acres of vineyards, most were not completely wiped out.
Overall, the Napa Valley wine industry was lucky. Because of a heat wave, vineyards harvested their grape crops early last year, picking nearly 90% of the grapes before the fires started. The first 2017 wines, like Sauvignon Blanc, rosé and other aromatic whites, were released in the spring. And since most wineries store their wines off site, there was not a major loss of inventory. Even Signorello Estate did not lose any wines barreled in 2016 or any of its bottled wines.
The hotels of Napa County were also spared—none were burned. In fact, there are several new and refreshed places to tuck into high-thread-count linens. Vintage House in Yountville emerged from a transformative multimillion-dollar renovation last October. Archer Hotel Napa, a new luxury boutique hotel in downtown, recently opened and will soon be surrounded by First Street Napa, a new complex of upscale shops and restaurants. This month, both the Tuscan-inspired Vista Collina Resort (a destination unto itself with nine onsite tasting rooms and a Food & Wine Center) and Francis House in Calistoga (a luxury inn located in a landmark Second Empire-style building) are slated to make their debuts.
Several new restaurants have also opened. Last spring, chef Charlie Palmer opened Charlie Palmer Steak and Sky & Vine Rooftop Bar at the Archer Hotel Napa. Also downtown, Gran Eléctrica Napa, the second outpost of the Brooklyn-based original, is now dishing up its upscale Mexican cuisine on Main Street. Up north, Calistoga Kitchen has reopened as Lovina after closing for remodeling. The charming, chef-owned restaurant features meat, produce and fruit sourced from local farms, ranches and orchards as well as wines from small producers in Calistoga, which you can enjoy on the patio.
The upshot: if your jam is Napa Valley wine—Cabernet Sauvignon, Merlot, Pinot Noir, Chardonnay, Sauvignon Blanc, Zinfandel, Cabernet Franc—the best way to show your support for the vineyard owners, winemakers and agricultural workers who collectively produce bliss in a bottle (as well as everyone who works in Napa’s blissful hotels and restaurants) is to book a trip to wine country. You can expect rows and rows of neatly pruned vines as you drive along the Silverado Trail, copious amounts of wine to taste and ship home, sublime dining experiences from a Croque Madame on Bistro Jeanty’s terrace to a picnic-to-go from Napa Valley Olive Oil Company, and plenty of exceptional places to stay.
As technology continues to offer innovative resources and new partnerships, it’s important to remember that the client must remain at the heart of our innovation efforts. If there is an overarching idea that runs across the stories in this issue, it’s that technology is consistently changing the way the industry works, enhancing the opportunities it presents to us all.
On another note, this issue of Leader’s Edge represents a turning point for this magazine as it marks the first for our new editor in chief, Sandy Laycox. You’ll get to know Sandy in her Q&A with founding editor Rick Pullen on page 6, but I wanted to welcome you (and her) to this, her inaugural issue.
When it was time to look for a new editor, we underwent an extensive search. We talked with some very seasoned and talented editors who wanted to build upon what we’ve built here. I share this because I believe it’s instructive to all of us.
Sandy put her hat in the ring to be considered for the position. On paper, she may not have had the same years of experience but she was hungry. She asked to be considered so I challenged her to build a business plan for her magazine. I wanted to see her vision for the future, how she thinks about content delivery and the economics of it all. The process allowed us to make sure she understood the depth and breadth of the job. Her plan was comprehensive and made it clear to me that she understood the job and all the challenges that go along with it. The decision ended up an easy one. Sandy is smart, young and passionate, and filled with ideas. This new position will certainly challenge her to put her own imprint on the magazine while continuing to honor its well-respected, well-establish brand in our industry.
And that is what you’re seeing here for the first time.
We pride ourselves at The Council on hiring people and then moving them around and giving them opportunities to grow. Interns have become VP’s over time. In my case, a young government affairs guy was handed an association and told to build it. A former chairman said at the time, “He’s young, he’s smart, he’s hungry. If he fails, we fire him. Simple as that.” In this case, Sandy was an easy pick and we know she is going to do great things with the magazine. She has the complete confidence of the leadership team here at The Council and we look forward to continuing to produce a dynamic, fearless magazine reflecting the energy and success of our members and the firms they lead.
One of Sandy’s tasks will be to grow the magazine’s digital footprint, exploring new ways and new channels to deliver content to you and your clients. We know there are opportunities to evolve what we’re doing in print, expand the conversation and give the content a longer lifespan online, and Sandy is focused on doing just that.
As for Rick, well, he isn’t going too far. He’ll continue to write and advise the magazine in several capacities. But with his retirement approaching, I’d like to thank him for his 14 years of service to both The Council and Leader’s Edge. He created a fun and impactful insurance magazine over the years, winning awards and accolades far and wide, and he guided this publication through one of the most wildly chaotic periods in publishing history. Our magazine survived the shift toward digital and a downturn in the economy when many others did not. We have Rick to thank for that. He has done an incredible job building a foundation on which Sandy can grow with energy and creativity in this new generation of publishing.
How did you come to start an insurtech company?
I have one of those very cliché stories. I’m a serial entrepreneur. I started my first business when I was 12 years old. When I was going to college for business and finance, I started a business that became very successful, and I quit school. Years later, friends of mine purchased a small insurance agency—they’re a top-100 agency now—and they convinced me to come on board and run an agency for them. This was the first real job that I had.
A couple years later, I started my own agency, and I looked at the agency management systems that were available. What I wanted didn’t exist, and based on my prior experience of struggling with the systems, I decided to build one for my company. We built the first agency management system on top of [customer relationship management platform] Salesforce. At the time, people looked at Salesforce as just a CRM, and nobody really understood that it’s truly a platform that can be molded into anything.
Our agency was very successful. We turned it into a franchise company and opened up multiple locations. Because we were a franchise, we built the company to be a business in a box, and the technology had to be very scalable and intuitive. A few years later, Salesforce approached me about partnering with them and bringing that agency management system to market. That was about 2012. I had to rebuild the solution to more of a vanilla one that would work for all agency types, not just mine. I released the product in the third quarter of 2013 live on the Salesforce app exchange. At that point, I walked away from the agency business. I said to my partner, “You keep the agency. I’m keeping the technology.” I’ve been focused on that ever since.
What was that business you started at 12 years old?
I sold pet supplies to all my friends. I got a wholesaler license and the whole nine yards. I didn’t make a ton of money, but it was an official, real business. My dad’s a serial entrepreneur as well, and that’s where a lot of that comes from.
What lessons did you learn from running your own agency?
One of the biggest ones that people are still struggling with today is that revenue from commissions is slimming. They’re getting smaller for a number of reasons. Because of that, it’s so important to streamline what we do and to make our people more efficient—less time doing redundant tasks to focus on things that drive additional revenue to the company. So many agencies are so focused on doing just the day-to-day redundant tasks because they’ve done it that way over the last 30 years.
Another one from owning my own shop, and prior to that managing one, is that everybody sells very differently. Just because they sell something doesn’t mean it’s the right way to do it. Being able to analyze data on sales and how these people are doing, you can fine-tune the sales process to help them sell better. In my industry now, technology sales, it’s very driven by data—who’s doing what, what are they doing, what are they saying, what is their conversion ratio and what is the retention, the attrition? In insurance, overall, people aren’t really doing that.
Was it daunting to enter the agency management arena?
It’s been very challenging as a newcomer in this world because of all the barriers to entry. But you know—just pure tenacity—we have overcome. Now it’s a really great place to be. Since I’ve owned this company, we’ve seen four other companies try to build an agency management system in Salesforce and fail. It’s not easy. There are so many things when you talk about getting traction with the carriers, getting certified for download and things like that. I joke sometimes and say, “Looking back, it would have been easier to build some small little app than try to take on this monster.” Here we are now, and I feel that we have definitely overcome that, which is awesome.
Why is operating within Salesforce important?
It depends on the agency and the needs of the customer. For some people, we’ve told them just because it’s a new, shiny toy doesn’t mean you should buy it. Some shouldn’t because they’re fine doing what they’re doing now, but for the ones that really want to transform their organization utilizing technology, there is no better platform. It’s not because we’re part of it; it’s because of their whole partner ecosystem and all of the other apps that connect to it. The world is on Salesforce. Ninety percent of the insurance industry is on Salesforce already in some way or another. It doesn’t mean that they’re using it end to end. All of the big brokers, all of the carriers, they already have Salesforce in some way or another. There’s a reason for that.
What is your target market, and how is that changing?
It’s changed tremendously. In the beginning, I bootstrapped this company. Our customer was anybody that would buy. As time has gone on, we’ve really found that our customer is probably less about size and more about priorities. It’s somebody who is struggling in certain areas of the organization and they need help streamlining and making it better. They have true management that’s going to make sure the organization adopts this solution. They are shops that can really utilize technology to make them more efficient or drive additional bottom line through sales. That’s our customer. It’s all shapes and sizes. Primarily, we’re agencies and brokers, independents. We’re also in Canada. MGAs, MGUs and carriers use our system. Carriers typically use us for their internal agency or distribution management.
What are the challenges that independent agencies face that technology can address?
Single view of a customer is overall challenging. I’m talking about all of the other systems that they have to use today to do business with a customer. Recently, we worked with one of our customers that had 37 core systems to do business. We consolidated that down to four, saving them millions of dollars a year in tech costs but bringing in millions of dollars in new business because they were able to focus elsewhere instead of all this constant swivel-chairing. Most large agencies are in that same boat. It’s not only the carriers; it’s all the systems. It’s the personal lines rating, the CRM, the lead management system, the marketing automation system, the agency management system—all of this stuff is detached, or if it is connected, it’s connected with duct tape and twine.
How is technology going to change the way agents and brokers work?
In my opinion, regardless of whether we solve this or someone else does, everybody is going to look to a single platform, and they’ll want to build on top of it utilizing the tools that are on that platform. They need the stand-alone technology, but they are going to want to build their own secret sauce on top of it. That’s what our customers do today. By giving people these tools, you’re enabling innovation internally.
Does technology replace or augment relationships?
I’ve heard all sides of this. I’ve heard people say relationships are dead. That’s not true. Relationships are very, very real, but technology can help better the relationship with your customer. Think of a simple example: a customer can call me today and my phone will bring up through my CRM who that customer is and what’s going on. As soon as that phone rings, I’m on their account looking at what their favorite things are and what they like to do, but what’s really important is what’s going on—do we have some case outstanding, did someone not answer an email—and I’m already in front of it. Things like that strengthen the relationship.
For the people that don’t want that relationship and don’t care, you need to offer them the technology to communicate the way they want to communicate. Without those tools, you’ve lost them. With technology for the modern age, people aren’t going to wait around for three days to get a quote. They want to call up, and they want it now, and it needs to be served up very quickly, efficiently and professionally. Technology really helps to give you that edge.
The leading insurer for live entertainment is moving to a different beat in the insurtech space. ProSight Specialty Insurance, which launched its online platform with insurance for DJs earlier this year, stresses that it is taking a different approach from a typical startup.
“We wanted to get the traditional part of a true insurance company right first,” says ProSight CEO Joe Beneducci. “Now that we’ve done that, we have the ability to expand into this insurtech environment much more effectively than anybody else because we have a profitable business strategy.”
Since its founding in 2009, ProSight has grown to become the number-one insurer for live entertainment such as touring bands and DJs, but that’s just one of its nine niches. Based in Morristown, New Jersey, the company also provides coverage in construction, consumer services, marine and energy, excess workers compensation and four other areas. ProSight posted gross written premiums of $275 million in the first quarter of 2018 and $819.5 million for all of 2017.
As it starts up its ProSight Direct online platform, the company plans to expand beyond DJs with coverage for personal training, health and wellness beginning this fall.
“There’s enormous growth potential, but we’re going about it differently. We don’t have to expand it excessively to start,” Beneducci says. “We want to ensure we get the profit model right and the service and value model right for the client. If we do that correctly, we can certainly increase the throttle.”
Darryl Siry, ProSight’s chief digital officer, says the company, having established itself as a successful insurance business, is not under pressure to show rapid growth to raise cash in successive funding rounds.
“We’re not worried about raising that next round of financing,” Siry says. “And we’re sitting on a double-digit ROE. It’s not like there’s a countdown. That’s a distinct advantage. This is really a long-term thing. It’s not about who wins in the next year. It’s about who’s going to lead in the insurtech space in the next 10 years.”
ProSight launched its online platform with DJs because live entertainment is a business it knows well, as it already insures 50 of the world’s top 100 DJs.
“We knew the customer, and we knew the space,” Siry says. “And we said, ‘Let’s build the whole technology platform around this target.’”
DJs want a platform optimized for mobile to handle tasks such as obtaining and providing certificates of insurance for venues. The DJ market also sets the stage for the expanded rollouts in the fall in specific niches.
“The goal is to stabilize that technology platform, to learn with real customers on the platform, to ensure that we can manage the risk online effectively before we launch in the fall with a much larger target market of personal fitness and health and wellness,” Siry says.
DJs, personal trainers and yoga instructors are part of the larger gig economy of non-employee businesses that accounts for a large and growing share of the workforce. Intuit estimated that gig economy workers made up 34% of the American workforce in 2017. Siry says the broader spectrum of non-employee businesses represents a $7 billion market opportunity tailored for an online platform.
“It’s an underserved segment of the marketplace,” Siry says. “They prefer to buy insurance online, and they prefer to buy from a company that is not only selling them the insurance but backs it up with service and claims experience. It’s exactly what we’re offering these folks.”
Start-up Verifly is also taking aim at the gig economy, targeting the more than 60 million Americans expected to be working independently by 2020. The New York-based company has launched on-demand, by-the-job insurance for freelance workers in construction, personal services such as photography, as well as events, entertainment and other areas.
Freelancers often find that clients demand insurance for jobs that may last just a few hours, but insurance is typically sold by the year. The Verifly mobile app enables freelancers to buy “bite-sized” insurance, underwritten by Markel, for single jobs for as little as $5 for one hour and $1 million of business coverage.
“Savvy independent workers view insurance not just in terms of minimizing risk, but as a tool to maximize their income,” says Jay Bregman, co-founder and CEO of Verifly, which launched insurance for commercial drone pilots in 2016. “By radically increasing access to insurance, Verifly is helping to professionalize and institutionalize the future of work.”
Launched in 11 states, Verifly’s app enables freelancers to select coverage from a single hour to a full month and obtain insurance certificates for their clients. Nationwide coverage is expected by 2019.
“The expansion of the gig economy has put the insurance industry on notice — innovate now or risk being disrupted or made irrelevant,” says Scott Whitehead, managing director at Markel Digital.
This—coupled with the advent of new technologies and the proliferation of insurtech startups—is propelling a significant shift across the distribution landscape and the entire insurance industry as we know it.
According to a June 2013 report by McKinsey, the evolution of the distribution channel is “both a challenge and opportunity for carriers and agencies,” which must develop new capabilities and shift mindsets to thrive.
At its core, the insurance industry is about relationships, and the organizations that can strategically leverage technology will further grow and enable those relationships. One such relationship that holds significant promise is between agencies and carriers. A strong agency-carrier relationship is mutually beneficial, as this foundation can weather the storm of a variable market and changing consumer needs and helps drive reciprocal success. With agencies and carriers at the heart of the insurance industry, the benefits of successful collaboration extend beyond their relationship to impact the end consumer.
How should these two groups foster collaboration and work together to respond to customers with efficiency? By streamlining content management and workflow visualization and providing historical and real-time data to drive better decision making.
People are at the heart of the insurance industry, but delivering exceptional customer service can be difficult when also navigating large volumes of work. For agencies and carriers alike, an effective content management and workflow tool helps solve this problem by delivering real-time insights into day-to-day company functions, identifying opportunities to streamline operations and increase productivity. With these tools, agencies and carriers can evaluate:
- How are my teams functioning?
- Where is our time being spent?
- Are we meeting service levels?
- Do we need to adjust staffing levels?
Workflow visualization also helps answer these questions, with benefits ranging from improving visibility to standardizing processes. Establishing roles and workflow through a visualization tool simplifies employee training, streamlines processes and can help an agency with a number of branches feel united as one organization. One of our longtime customers has many smaller branch locations and was struggling to provide real-time backup when an employee was sick or on vacation. Through workflow visualization tools, the main office was able to jump in and help, aiding smaller branches in eliminating backlogs and demonstrating that the full team, no matter the location, was in it together.
In addition to real-time data, visualization tools can also provide insights into historical data. This enables agencies to have a better understanding of seasonal workloads, improve efficiency, and better allocate resources to and strategically plan alongside carriers for the future.
Above all, content management and workflow tools drive measurable results. Agencies often report productivity increases from issuers due to the accessibility and mobility offered with digital documents. Without a delay in finding documents, agencies can also respond to clients more quickly, offering strengthened customer service and enabling long-lasting relationships.
Leverage a Data and Intelligence Solution to Glean Insights and Remain Competitive
Access to timely, accurate data is a necessity in today’s world. A sophisticated data and intelligence solution provides more than just the numbers, though; it enables both agencies and carriers to make smart, informed decisions by providing insights about customers, the market and the entire insurance distribution channel.
For agencies, these tools can also be used to support carrier relationships through engagement, planning and negotiations. For example, data helps producers and account management team members identify markets and assess and price risk at an accurate level to ensure clients are protected. When working with carriers, agencies have the ability to easily gather and share data in a useful manner, often providing carriers with new insights into their own book of business.
With data, carriers and agencies can also gather market intelligence to elevate their relationships and drive profitability. While they may have their finger on the pulse of one or two markets and their appetite for a certain type of risk, data-driven platforms can provide a high-level understanding of risk in new markets and propel expansion. This enables agencies to plan and grow alongside carriers in targeted areas.
With the insurance distribution model in a state of flux, agencies and carriers can set themselves up for success by leveraging the power of data. Data-driven tools not only enhance this crucial relationship but enable both agencies and carriers to strengthen the most important relationship of all: their customers.
In the era of the empowered customer, it is more imperative than ever that carriers and agencies find ways to better collaborate and deliver the omni-channel experience that customers are looking for in insurance. The combination of content and workflow solutions that streamline processes and data intelligence can help drive both efficiency and an overall improved experience for customers.
Ray is senior vice president for product and strategy at Vertafore. firstname.lastname@example.org
What was the point of the study?
Berkowitz: We wanted to find out if home delivery of meals would reduce the use of a handful of healthcare services and medical spending. We looked at three different groups: one received medically tailored meals customized to participants’ healthcare needs (diabetes, renal conditions, etc.); the second received healthy, non-tailored food; and the third received no food. Five days of lunches and dinners were delivered each week.
Who took part in the study?
Berkowitz: Nutritionally vulnerable patients of the Massachusetts Commonwealth Care Alliance, a nonprofit community-based health plan. The organization works with adults who are dually eligible for Medicare and Medicaid.
What were the results of the study?
Berkowitz: People taking part in the medically tailored meals program had fewer emergency room visits and inpatient hospital admissions and used less emergency transportation than those in the control group. People in the non-tailored program also had fewer ER visits and less emergency transportation. They didn’t, however, have fewer inpatient admissions.
When you subtract the program costs from the estimated healthcare savings, participants in the tailored meal program saved $220 per month. The non-tailored program reaped savings of $10 per participant per month.
You chose food delivery. Why that particular solution?
Berkowitz: The association between good nutrition and good health is clear. When people are really sick, they may not be able to go out and shop or prepare food for themselves, so food delivery can help solve that problem.
Tishler: In Massachusetts, between one in six and one in eight people are food insecure. That doesn’t necessarily mean they don’t have food, but they aren’t exactly sure where their next meal is coming from. And that will include people in the commercial market, there is no question on that. Particularly for large employers, their low-income workers may have real challenges. Look at people with children. I would be willing to bet a number of their workers’ children are getting subsidized meals at school or in the summer. Given that, it’s really easy to think about this area.
What do commercial payers need to know about “social determinants” of health?
Berkowitz: Adverse social determinants of health, that is, social circumstances that increase the chance of getting sick or that make it more difficult to manage illness, are very common in the United States even among individuals with commercial insurance.
Tishler: About 80% of things we think about that affect people’s health and illness we can’t fix with a visit to the doctor or an antibiotic. It’s much more related to the neighborhood they are living in, what kind of food they are eating, how much education they have had, what language they speak and if they are socially isolated.
There is also data in other studies showing that hospital readmissions markedly decreased when people got meals delivered to them after a hospitalization. People who are much more likely for readmission and increased cost are exactly the people who aren’t going to have a community that is able to bring them food.
It is so compelling to see what seems like a pretty simple solution and see if it can move the metric on things that are causing us to spend so much money on healthcare.
Most of the work in this space has been done with Medicare/Medicaid. Why do you think that’s the case?
Berkowitz: Medicare and Medicaid are set up specifically to care for more vulnerable members of our society, so the populations they care for often have a high prevalence of adverse social determinants.
Social determinants don’t just affect low-income individuals, correct?
Berkowitz: Social determinants are important for everyone—even individuals historically considered to be middle class are finding it harder to afford housing or nutritious food. People often expect the prevalence of food insecurity or housing instability to be lower in middle class samples than it is. It’s hard to know how common it is unless you ask.
What can commercial payers learn from what Medicare/Medicaid are doing in this space?
Berkowitz: I think it’s really important to realize that a lot of what goes into staying healthy, or into managing chronic illness, occurs outside the healthcare system. Working with other sectors, like social services, makes it much easier to help people stay healthy.
What did you learn from this study’s outcomes?
Berkowitz: I was really encouraged to see the association with lower emergency department visits and hospitalizations. These are outcomes that I think patients really care about—not having to go into the hospital.
Tishler: It surprised me that there was such a significant difference between the medically tailored meals and the non-medically tailored ones. I think that surprised all of us. We would like to say that food is food, but this article suggests that there may really be advantages to certain kinds of food. They both made a difference, but the medically tailored meals actually saved more money in monthly medical costs.
I think their average cost was $843 versus about $1,400 for their comparison group. We would all like to see more research that confirms this or begins to answer that not only that happened but why it happened.
Many of our members live on a fairly low income and in relative food deserts [areas with little or no access to healthy foods because of lack of farmers markets and grocery stores]. One of our medically tailored meals was broccoli and red peppers and salmon. And it would be harder for them to put that kind of meal together on a good day and even more if they’ve been ill or in the hospital.
What kind of barriers do you see for employers/brokers to do work in this space?
Berkowitz: I think finding the right partner agency is really important. People need to be dedicated to making nutritious and tasty culturally appropriate food.
Tishler: Barriers are really about seeing food (and other social determinants) as an important thing to improve health and reduce costs. Delivery of food might seem out of scope for a healthcare organization or health plan, but according to our data and others’, it might be a cost-effective way of preventing more expensive care—at least in certain settings.
How could they overcome challenges?
Tishler: I think there are different ways to do this. There are home-delivered meals that make sense for a population like ours. But in another setting, like after someone is hospitalized for myocardial infarction, you could send people heart-healthy meals so they know what to eat or teach them how to make healthy food. For the commercial market where people have a lot of resources, there would be a lot of ways to think about this.
It will require health plans and companies to think more broadly about what health is and what’s worth paying for. It would be a great benefit but would also benefit people’s health. Especially if the company made its choices wisely.
What other opportunities are available in the social determinant space? Are there areas other than food to target?
Tishler: Stable housing can make a huge difference in someone’s use of the healthcare system, costs and quality of life. And we also see that people live longer with stable housing. I’m not saying that every health insurance company or employer should get into the housing business, but when they think about what they want to work on in employee assistance programs, I guarantee there are homeless people in their workforce.
I was seeing patients at a homeless shelter for women, and it’s amazing. You can’t always tell who is homeless and who the staff are. Some of those women were putting themselves together and going to work. So that’s something to think about for companies.
Improving access to exercise is one thing, and that can be done relatively easily. They can subsidize gym memberships or make sure there are places to walk at work or start a walking program for the company at lunchtime.
They can help people find community resources, which are there in all different kinds of communities. And some people like education about what healthy food is. You don’t have to buy it for them, but you can do some demos at work and people can see a great way to use a zucchini.
Anything that helps decrease chronic stress—whether around social stressors or creating workplaces that are welcoming—all of those really do contribute to health. Helping people understand they are valued helps a lot.
What can employers and brokers expect regarding results when targeting social determinants?
Berkowitz: I think the most important thing is to focus on improving health. It may not be easy, as the consequences of adverse social determinants accumulate over the lifetime, but organizations that just get into this trying to make a quick ROI are unlikely to prioritize the right interventions.
What kind of measurement should be used when seeking population health improvements?
Tishler: While metrics having to do with improving cholesterol or blood pressure are impressive, the cost ramifications of those are much longer-term. Generally, I would look at measures having to do with emergency room visits, hospital costs and readmission. It’s much less expensive to feed people than to pay for three nights in the ICU.
Some payers are beginning to use social assessments along with traditional health risk assessments. Are these a good option?
Berkowitz: Incorporating social risk will likely be important, but there are a lot of unanswered questions—how to collect the data, how often, what questions to ask and what to do with it. Getting too far out ahead of the evidence could wind up leading to disappointing results.
Tishler: There are many different measures that people can use to look at social determinants of health. They can be tailored to specific populations or more general, but I definitely encourage organizations to find out more about their populations. I think there will be some obvious things they find, but they may also be surprised at the level of need.
Where did your love of data get its start?
I started my career as an accountant, so I was always dealing with data. I purchased my first personal computer in the ’80s and used technology as it grew and advanced. We were using Lotus123, not Excel. When we were starting Royal Specialty Underwriting, I was able to buy an IBM AS/400 in the summer of ’88. I hired a programmer because I wanted to take what we were doing in Excel spreadsheets and program that data. So he created a way for us to build a database, and I bought green screens for everybody. We put this system on everybody’s desktop, and all of a sudden, we’re designing software.
Just one programmer doing all this?
One guy—Kelly Walls—the guy who sat next to my office. We would sit there and try to figure out how to do binders and quotes, and then we started thinking about documents and policy issuance and coding and accounting and reinsurance. We designed and built. It helped our firm understand its portfolio.
When did it become important that you could see and use the data you’d collected and then maintain it?
I’ve learned building and maintenance are two different words. Building—whoa! Maintenance—hard. But we have to do maintenance. So we were in the wild period. We had nothing to start with, no legacy systems.
No legacy system is an advantage.
A huge advantage. I’m an accountant brain, but I’m in the insurance game.
How long did this take you?
We worked on it every day from ’88 on. We began attracting capital because our data was so good. They’d say, “I’ll give you reinsurance because I can see my portfolio.” I was a young accountant working with spreadsheets, so for me it was just a tool. But it was analytics, it was data, and it’s one of the things that made our business so good.
How much do you know about actual software?
Not much. I know insurance. It’s just data. To me, it’s linear.
Describe a couple of “aha” moments using your data.
The first time we blew people’s minds was with a limits and attachment point profile. It was so basic, but back then, nobody had it. Nobody had the concepts to be able to do it. Ultimately, you could negotiate better reinsurance terms because you had better transparency in your data. That’s the war that’s going on now. So that was educational. That was foundational.
You never shared this outside the company?
No. We didn’t sell the software to anyone. When dot-coms were coming out in ’97, ’98, people were telling me, “Steve, you need to go do this.” And I told them, “I’m an insurance guy. I know what I’m good at.”
Back in the ’80s and ’90s of course, we were using old languages. So we became a dot-net shop and basically committed to Microsoft. That was an early lesson. We made lots of mistakes. There was no cloud, so you had to buy servers and put them everywhere. You had to have server farms. At AmWINS, when we started partnering with firms, they came with technology that needed to be updated. First you had to control their hardware, then you had to convince them to migrate away from their legacy systems. In the early years that was hard, because we were just getting started and building. Ultimately, we didn’t give them a choice.
We said, “You’ve got to throw away your legacy system.”
Today, if you sell an account in Seattle, it dings in my office [in Charlotte], and people are amazed at that. But if you walk into a 7-Eleven and you buy a bag of potato chips, it tells somebody that you bought that bag of potato chips. And guess what? That night they’re going to deliver another bag of potato chips to that store. It’s called a cash register, and it’s not that big of a deal. But in insurance, the reaction is, “Oh my God, you can see what you are binding?” People think it’s a wow, and it’s not a wow.
So what does that say about our industry?
Lots. But the industry continues to have a lot of legacy systems. I’m now trying to figure out how we’re going to use Microsoft’s Cortana audible digital assistance. This is the way we’re going to work. We’re not going to type on a computer, anymore. Right now, I ask questions. “How much is this?” “How much is that?” “Where do I get this?” And our data team gets me what I want. In the future, I’ll ask for information using these new technologies, and our databases should be able to provide it to me verbally.
I built a “valet” phone app because when our brokers go to lunch with a client and they hand the keys to the valet, they say, “I wish I knew how much volume I did with this client.” That’s the only time they thinks about it—instead of running a report, like we used to.
Now, it’s on their phone. They type the client’s name in and up comes their file. They doesn’t have to run a report. In the future, brokers are going to say to their phone, “I’m having lunch with Joe Smith. Give me Joe Smith’s financial biography.” It’s all going to come out of databases. Nobody is going to print off a report anymore.
So you are in the process of tying your database to the digital assistant right now?
Exactly. Just asking it questions. Just like you ask it what the weather is. “Give me AIG’s premium.” That kind of thing.
The thing about data is that it’s just data. I’m a little frustrated that I won’t see that come to fruition as part of my career, but the young people are working on that. AmWINS’ biggest advantage now is the amount of effort we’ve already put into this easy stuff, which leads to the next level of implementation.
Which is more sales.
More sales, exactly. We’re in the small-business arena now. We’ve invested an amazing amount of money in technology and small business. Everybody talks about small business. It’s easy to talk about it. It’s easy to do it the way you have always done it. You’re just not going to do it in big volumes, and then you’re not going to have the analytics.
How do you make small business profitable?
With better process, data and analytics. Today, we partner with an insurance company that built a small team to implement a small-business strategy. They actually trusted our data. So now, instead of them typing it in and me typing it in, they just analyze me. They trust me. That’s a step forward that most people—that the industry—has got to get to.
Who owns the data?
The insured owns the data. Clearly the wholesale brokers, the retail broker and insurance company all use this data to make decisions. What we don’t do is give carrier data to a competitor. So if I work with insurance Company A on a data structure, I can’t give that to insurance Company B. We receive one million submissions a year. That data is valuable.
What’s the value proposition?
Knowledge. The advantage is analytics—the ability to see how to correlate different subjects. I do business with 20,000 retailers and 500 insurance carriers, so I have a view on a lot of business.
What do you share, and what don’t you share?
I don’t share competitive data. I may say I have knowledge that the Florida marketplace pricing is X because I have a broad perspective, and people are interested in that knowledge. They may say, “Well, show me that knowledge.” I will, as long as I hide the source. You have to be careful with data.
Basically, you’re tech savvy. Your ability to collect data gives you business opportunities other people don’t have.
They have them. They don’t see them. Here’s a great example: an insurer gave us the ability to underwrite on their behalf. They started losing business. They couldn’t figure out why. So they asked, “What are you doing? You’re not giving us business.” We told them their price was no longer competitive. Then, we explained that three new carriers had entered the market and they were pricing their products differently. We told them, “You’ve been around 50 years, and you can’t rest on what you think you know.” So they changed their pricing, and now they compete in the marketplace.
Where are your competitors compared to you?
Well, I try not to know what the other competitors are doing, because I have enough to worry about on my own.
But you still hear. C’mon, you’re out there. You know, a lot of them still use packages, and packages are limited by when the guy can get to it. A lot of them don’t see value in data.
Still. I was at an industry event recently, and they brought in Billy Beane, the Oakland A’s GM who went into analytics about baseball. Michael Lewis wrote a book, Moneyball, and they even made a movie about him. The establishment called him a fool. I sat there thinking, “That’s what they said about me: ‘He’s just an accountant.’” But Billy Beane analyzed the statistics of baseball to look for the hidden gems. I thought to myself, “That’s what we did.”
Everybody in baseball is now following Beane’s example. How about you?
They’re trying to, but they have legacy issues and money issues. It’s expensive. You know, we’ve been doing this a long time. Now, everyone is trying to play catch-up. Catch-up is hard.
Everybody is afraid to share data.
Today, people are in a war to get data. If every insurance company had the exact same data, then it’s the company’s beliefs that change the price, not the data. I think we should share data. I think we should build one database that all insurance companies can share. We’d all have the same information. We’d all pay for it. If we did that, then how we price insurance using the same data would be based on our beliefs, our capital structure and how we buy reinsurance protection.
Do you think that’ll happen someday?
I’ve talked about it enough. AIG believes that they can do small business better than everybody else. Chubb believes they can do small business better than everybody else. I believe both of them. But their confidence is based on their beliefs around risk selection, their capital structure, and their claims-handling ability—actually paying losses.
How difficult is cyber security for a company like yours?
I’ve seen millions of dollars being wired incorrectly because of fraud, so the need for robust cyber-security systems is real. The perception is that all brokers are equal. We’re not. I’m not your mother’s wholesale broker.
You don’t see any drawbacks to sharing data? I mean, as long as you restrict its identity?
Yeah, you have to be careful with that. But, you know, I’m trusted with the insured’s data. They give me their financial information. I have their loss information. I’ve got to be good at what I do. I’ve got to protect it.
Four use cases demonstrating the value of exchanging data in a blockchain platform are under way at RiskBlock Alliance, with one (proof of insurance) already completed as a digital application for use by alliance members. This fall, the other three use cases will similarly result in a digital application.
This is just the beginning. Future use cases in sight by the alliance, based on member brainstorming sessions this year, are listed below in no priority order.
- Certificates of Insurance
- Commercial Trucking Fleet Identification
- Surety Bonds
- Multiple Payees
- Real-Time Regulatory Monitoring
- Tokenization of Titles, Deeds and Liens
- Digital Inspections of Physical Assets
- Internet of Things
- Agent and Broker Licensing
- Policy Cancellation and Non-payment
- Fraud Register
- Commercial Liability
- Foreign Sovereign Identification Linked to Insurance
- Technical Accounting
- Use of Existing Data for Smart Contracts
- Plugging in Data from Third Parties, e.g. Government Agencies
- Life Insurance Valuation
Digital applications for three traditional insurance processes will become available to member carriers of RiskBlock Alliance in the third quarter of 2018—first notice of loss, subrogation and parametric insurance.
As with the first production application on proof of insurance that became available in April, several insurers and brokerages are collaborating in their development. Farmers Insurance, Liberty Mutual and Marsh are among the members of the alliance engaged in developing the first notice of loss application.
Agents and/or carriers typically receive a text, email or phone call from a policyholder indicating who has been in a car accident. The other policyholder does the same thing. This triggers the first notice of loss—the initial report that some sort of loss, theft or damage has occurred, the first step in the claims process.
What occurs next, says Mike Annison, head of global operations for the claims practice at Marsh, is a case study in inefficiency. “Each carrier contacts the other carrier to exchange information related to the accident, resulting in a back-and-forth process that consumes inordinate time and effort,” Annison says.
Since data on each policyholder is already in the blockchain, the two carriers don’t need to formally exchange their data. “Multiple parties eliminate handoffs,” Annison says.
In a commercial lines insurance context, today’s processes for reporting a first notice of loss slow down the flow of information. “An example is a broker that is not notified at the time of a claim because the insured has excess layers of exposure protection across different insurers,” says Matt Lehman, a managing director in the insurance practice of Accenture, a RiskBlock partner. “By sharing information in the blockchain, all parties to an insurance policy are notified simultaneously of the loss.”
With this first step in the claims process now completed, the next one—subrogation, the financial squaring of the net payment of a claim between two insurers—can occur. Marsh is involved in a RiskBlock use case addressing subrogation with Farmers Insurance, Liberty Mutual and other partners.
“With subrogation, carriers are focused on the net settlement of the claims payment, as it may involve some money coming from one insurer and some money coming from the other,” explains Bennett Neale, an enterprise architecture consultant at Farmers Insurance, a RiskBlock Alliance member. “Today, all these details are negotiated between the carriers over the phone and through emails, and a manual check is cut or a wire transfer made to make up the difference. This eats up a lot of time.”
Since the data on the claim are now in the blockchain via the first notice of loss application, much of the information needed to negotiate the ultimate settlement is already there, reducing the interactive interactions between the carriers. “In cases where both parties quickly agree to the settlement, a payment can be made in real-time funds from one carrier to the other on the platform, or an IOU form of payment could be executed,” Neale says. “More protracted cases would proceed on to arbitration, as they do today.”
The third application in development is parametric insurance, in which payment of a claim is tied to a particular weather-related metric. An example is an outdoor concert that has to be canceled because of rain. An insurance policy can be structured to cover the lost ticket income if rainfall exceeds a particular threshold, such as 10 inches of rain.
Another example is crop insurance that hinges on other parametric triggers like rainfall, temperatures or sunshine. Information provided by third-party organizations like the National Weather Service can be made available to alliance members on the Canopy platform. Additionally, data from internet-enabled sensors measuring rainfall, temperature, humidity and other meteorological conditions also can flow to the platform.
“The value of parametric within the blockchain is that it allows a variety of parametric sources to be aggregated into one source of truth for claims purposes,” says Christopher McDaniel, president of RiskBlock Alliance. “Say you have multiple sources providing flood-level information for a given area. By aggregating and creating one source of truth on the blockchain, there is now a single trusted source that multiple claims processes can rely upon.”
In the formative stages of RiskBlock Alliance, The Institutes discussed the importance of aligning a handful of insurer and brokerage members behind the development of a specific digital application for use on the Canopy platform. Proof of insurance perfectly fit the bill, given its relative simplicity.
At present, when two people are in an accident, the social compact is to exchange each other’s insurance information. Each driver typically photographs the other person’s proof of insurance and then presents this information to his insurance agent or carrier in preparation for the next stage in the insurance claims process—first notice of loss.
“We felt it would be a great test for us to undertake, as it isn’t difficult from a technical perspective,” says Seth Flory, vice president of IT strategy and technology innovation at Nationwide Insurance, which co-led the proof of concept initiative with Farmers Insurance. “There was much efficiency to be gained by having a digital alternative on the blockchain. Both insurance companies are alerted of the incident, triggering the first notice of loss.”
Instead of having each party to the car accident email a photo of the other party’s proof of insurance to their insurers, they generate a QR code on Canopy that provides proof of their insurance, which the other party scans. “This is real phone-to-phone connectivity and data exchange,” Flory says. “And it takes anxiety out of the process.”
Asked what he meant, Flory says one never knows if the other person’s paper-based proof of insurance is the real thing. “There’s a lot of emotion produced in the aftermath of an accident,” he adds. “Perhaps someone is hurt. Maybe the person is at fault. The car is damaged, and it might be the first time this has happened.”
Aside from the value to policyholders, carriers benefit by improving back-office efficiencies, says Vishal Garg, senior enterprise data architect at Farmers Insurance. “By putting this on the Canopy platform, the typical back-and-forth emails and phone calls that occur between carriers to verify the policyholders’ proof of insurance is eliminated,” Garg explains. “It’s typically a five- to 10-minute phone call just to get basic data. Now that information is right there in the blockchain.”
Down the line, Flory can see other value accruing to the proof of insurance application. “What happens when law enforcement pulls over a car today for some infraction—the police officer asks for evidence of insurance, which is typically stored in the dashboard,” he says. “The driver now reaches into the glove compartment, creating a moment of anxiety for both parties, particularly if the incident occurs on a dark night. By syncing up the law enforcement community on the Canopy, they can immediately have proof of insurance when they run the person’s license plate.”
In November 2016, we introduced blockchain in Leader’s Edge, unsure of where it was headed or when it would take off. Since then, we’ve added to our blockchain dialogue in various columns and briefs. Now, we’re taking a deeper dive to see how groups of industry stakeholders are applying it to standard insurance processes. Please visit leadersedgemagazine.com and search “blockchain” to read more of our work on this topic.—Editor
Anyone who has ever been in an automobile accident is familiar with the back-and-forth interactions with the insurance agent and carrier. It’s a worrisome, frustrating and time-consuming process. Policyholders aren’t the only people aware of these miseries—so are brokers, carriers, reinsurers and other parties to an insurance contract.
In a world where transactions occur instantaneously, the business of insurance—sales, underwriting, distribution, claims and so on—remains unduly sluggish. That’s about to change for industry players and their customers, thanks to the convergence of three technologies: blockchain, artificial intelligence and predictive data analytics.
Four consortia have been created to leverage blockchain technology for the purpose of sharing policyholder data and other insurance-specific information. When people think of blockchain technology, they typically consider its use in the development of crypto-currencies such as bitcoin. While true, this is only a small piece of the value the underlying blockchain and distributed-ledger technologies will provide for the insurance industry.
Blockchain is a live network of distributed ledgers used to record and verify transactions. A ledger is distributed to participants or members in a transaction network, each having the ability to store a copy of the ledger on a computer called a node. The members don’t need to trust each other to know that the ledger is accurate. That is because transactions are validated prior to inclusion on the blockchain, are unable to be changed after they are posted, and are highly secure because the distributed, immutable nature of the network makes it very difficult to attack.
Among the most promising blockchain consortia in the insurance industry is RiskBlock Alliance, a not-for-profit consortium of 27 insurers, brokerages, reinsurers and third-party industry participants collaborating to make the repetitive, manual process of insurance more efficient. Its goal is to develop a blockchain-enabled platform in the cloud to gather, store and automatically exchange a wide variety of information from insurance brokerages, carriers and third parties to create an insurance ecosystem, allowing for more cost-effective insurance processes to the ultimate benefit of policyholders.
The alliance is the brainchild of The Institutes, the insurance industry’s venerable professional education organization. It is owned by alliance members and administered by The Institutes, with assistance from a roster of well known partners like Accenture and Deloitte.
“This is an industry-driven effort—our members decide what is being built,” says Peter Miller, president and CEO of The Institutes. “For several years running, we’ve seen AI, blockchain and other technologies come on-stream, all of them proclaimed as the industry’s savior. Separately, they provided some value, but now we are at an inflection point where their convergence puts us at a watershed moment. What we’re doing has the potential to transform the industry.”
The Institutes is seizing the moment, retaining a veritable “Who’s Who” of consulting and technology partners—Deloitte, Accenture, IBM, EY, Amazon Web Services and Capgemini—to create the RiskBlock technology platform called Canopy. With help from these partners, the 27 (and counting) members of the alliance are collaborating on more than two dozen use cases involving different aspects of the insurance transaction.
“If you think about the various processes that occur in insurance, they are all part of a supply chain,” says Bennett Neale, an enterprise architecture consultant at Farmers Insurance, an alliance member. “Each use case, like proof of insurance and first notice of loss, represents a link in this supply chain. Proof of insurance, for instance, leads into the first notice of loss, which leads into subrogation (another use case). The data related to these processes is not shared at present. Each carrier does their own thing, resulting in tremendous inefficiencies and costs.”
Other alliance members agree. “All too often, we in the insurance industry go off and do our own thing,” says Mike Annison, head of global operations for Marsh’s claims practice. “As a result, we’re plagued with multiple processes that don’t align with a common agenda. You’ve got all this data that sits with the broker and all this data that sits with the carriers, but none of it syncs up on behalf of the client.”
Synchronizing the disparate data is the blockchain. As a secure, decentralized way to register and store digital data online, the technology presents a way for industry participants, as well as third parties like state motor vehicle departments, weather stations, auto repair shops, utilities and the ever-expanding array of internet-connected sensors in the internet of things, to automatically process insurance payments and transactions through prearranged “smart contracts.”
Miller provided the following example. “Suppose I have a water sensor in my basement,” he says. “On the blockchain is a rule that says if the internet-enabled sensor measuring moisture reaches a certain threshold, all the water will be shut off in my house. Otherwise, a pipe may burst. The sensor instantly sends this information to Canopy. A smart contract is automatically executed to signal the utility to turn off the water, since I may not be home to do it myself. Another smart contract automatically contacts a plumber to check the situation.”
This is an industry-driven effort—our members decide what is being built.Tweet
What might have resulted in a substantial property loss for the policyholder and its insurer has now been avoided. “In my example, no longer is insurance purely a risk-financing activity for brokers and insurers,” Miller says. “It’s risk mitigation at its best.”
Under the Canopy
Three other industry-driven blockchain initiatives also are simultaneously under way—B3i, R3/ACORD, and Hashed Health, the latter involving health insurance. Each are engaged in proofs of concept. Taken as a whole, these efforts indicate that the outmoded processes inherent in insurance transactions will change dramatically in the years ahead.
This is certainly the expectation of Christopher McDaniel, the former lead of Deloitte’s insurance blockchain practice whom Miller recruited as RiskBlock’s president. “I’m the one driving this crazy bus,” McDaniel says. “Originally, I got involved with The Institutes in doing the strategy engagement on the platform. The value proposition was so good I threw my hat in the ring. It’s much better to be a driver than a consultant.”
McDaniel brings a varied career to the task, including stints as a chief information officer and chief operating officer in both the insurance and insurance technology industries. He believes what The Institutes is piloting will result in an insurance ecosystem—a holistic community of interacting parties—as opposed to today’s disconnected processes and dissimilar data.
“From the beginning, The Institutes wanted to build the world’s first true enterprise blockchain framework,” McDaniel says. “The goal was to create a reusable insurance ecosystem that could support multiple applications, such as proof of insurance, first notice of loss, subrogation, and so on,” he says. “We think the Canopy framework will become the ubiquitous source of insurance information over the next few years. And we can see even more creative use cases emerging in the future that are not possible in today’s disparate data environment.”
The first use case to commence, conclude and go into production is proof of insurance. (See Sidebar: Proof of Value.) Alliance members collaborating in building out a digital application to verify evidence of policyholder insurance include Nationwide, Chubb, Marsh and Farmers Insurance. Although the app is now available for use by members, these businesses continue to meet and discuss other possibilities to enhance the process.
Nationwide was one of the first insurers to join the alliance. “Early on, it was decided that proof of insurance would be the initial use case, as it involves the relatively straightforward exchange of insurer data by two policyholders in an automobile accident,” says Seth Flory, Nationwide’s vice president of IT strategy and technology innovation.
This process is paper-based today. The objective was to create a digital application on Canopy that member insurers would provide to their respective policyholders.
“Using their respective Canopy applications on their smart phones, each party to a vehicle accident would generate a QR code that the other party would scan for insurance verification purposes,” Flory explains. “This information is simultaneously captured in the blockchain, triggering the next link in the insurance value chain—first notice of loss. We wanted to make this as digital and frictionless as we could.”
Alliance members and their automobile insurance policyholders can now use the proof of insurance application, which recently became available in Version 1.0 of Canopy. Carriers are expected to rebrand the application with the names of their respective claims systems.
Three additional digital applications will be provided to members once Version 2.0 of Canopy becomes available in the third quarter of this year. The apps address first notice of loss, parametric insurance (the use of weather-related data in establishing coverage and loss) and subrogation (the financial adjustment of the net payment of a claim between two insurers). (See Sidebar: Three for the Money)
Nearly 20 other use cases are in the works and will be part of Version 3.0. All the use cases (and future ones) are predicated upon enhancing the efficiency of processes for alliance members, thereby lowering their transaction costs for the benefit of policyholders.
Down the line, McDaniel sees Canopy as a trusted platform for insurers and brokerages to develop new insurance coverages and bespoke products. “Right now, 80% of the use-case work is focused on efficiency and 20% on new-product development,” he says. “In the next several years, as more data enters the platform from the industry, third parties and especially the IoT, this percentage ratio will reverse.”
There is also a level of data ownership that still exists in Canopy. “Only the members will be able to use the applications that eventually reside on Canopy, which is a private-permission blockchain,” Miller notes.
You’ve got all this data that sits with the broker and all this data that sits with the carriers, but none of it syncs up on behalf of the client.Tweet
And if member Marsh were to want to look at specific data owned by member CNA Insurance for a particular purpose and period of time, the brokerage would request permission, which CNA could allow or disallow. “Each member would receive a notification to accept or deny another member’s request for information,” Miller explains.
Laying Down Arms
What’s interesting (if not revolutionary) about this industry-driven effort is that the alliance members compete against each other in the real world but are putting that aside in this collaboration.
During World War II, Boeing, Grumman, McDonnell and other competing aircraft manufacturers put aside their competition and joined forces to make planes for the war effort. While this initiative doesn’t carry the same historical heft, there is a sense of that sort of collaboration for the mutual benefit of alliance members and that of policyholders. For example, Farmers Insurance and USAA, two personal lines insurers in intense competition, are collaborating to develop a digital application in the first notice of loss use case.
Most alliance members are involved in more than one use case. Marsh, for example, is engaged in four: first notice of loss, proof of insurance, parametric insurance and subrogation. Many members were already working on internal blockchain initiatives when The Institutes knocked on the door.
“We’d been discussing blockchain opportunities and had the technological capabilities to build something on our own,” says Flory, from Nationwide. “We were investigating the various insurance consortia formed to leverage blockchain technology and discovered a lot of alignment in the industry around what The Institutes was looking to do.”
This alignment, he says, is needed for a blockchain platform to succeed. “The nature of the technology requires developing a network of participants that trust each other,” Flory explains. “The Institutes’ reputation made the decision very straightforward. Ultimately, we felt the alliance was the fastest path to market to deliver the value the industry was after.”
Ted Epps, leader of Deloitte Consulting’s insurance blockchain practice, agrees that the strategic value of RiskBlock is its creation of a network connecting diverse insurance industry stakeholders and third parties. “This is a fairly universal consortium of members launching a broad range of use cases that will culminate in actual production applications,” he says.
In good part, the speed of development of applications is attributable to the sophisticated expertise of The Institutes’ partners. Deloitte is the primary strategic partner and Accenture the primary technology partner, with other partners engaged in mainly security and applications development. Nevertheless, all the partnering firms are working together to develop the Canopy platform, the various use cases and the digital applications. “It’s an all-hands-on-deck approach to partnership,” Miller says.
In making the decision to partner with The Institutes, Deloitte and Accenture pointed to its sterling reputation. “If we were going to collaborate with one of the consortia developing an insurance blockchain, it had to be at the center of things,” says Deloitte’s Epps. “Since blockchain technology is all about trust—different entities sharing data in a network—it was critical for us to have major industry players involved. The Institutes’ reputation guaranteed that would happen. That said, I don’t see the other blockchain initiatives as competitors but as complements.”
Only the Beginning
RiskBlock began its work in earnest in 2017, creating the strategy and business model for the Canopy platform. An early goal was to make the platform “blockchain agnostic,” meaning it could run on all three available blockchain technologies—Ethereum, Corda and Hyperledger Fabric, as well as newer distributed-ledger technologies coming down the pike.
Another goal was to create an indeterminate number of digital applications addressing all insurance-related processes. Consequently, the use cases extend beyond personal lines and commercial lines property and casualty insurance to include life insurance, annuities and reinsurance. “Unlike other consortia, we’re not involved in proofs of concept or science experiments,” McDaniel says. “We’re developing real production applications that members can use as soon as they’re up and running.”
Yet another objective was for Canopy to be global, ultimately used by the insurance industries within Asia Pacific, Europe and Canada. A year or two from now, McDaniel predicts as many as 50 applications will be ready for alliance members’ use on the Canopy platform.
“Through our partnerships with Deloitte, Accenture, IBM and Capgemini, we’ve set up a virtual software factory to build as many as 20 apps per year both offshore and onshore,” he says. “As soon as a use case is completed, we’re able to scale very quickly.”
I’m the one driving this crazy bus. The value proposition was so good I threw my hat in the ring. It’s much better to be a driver than a consultant.Tweet
Not surprisingly, RiskBlock Alliance will be a growing, living ecosystem for some time. Matt Lehman, a managing director in Accenture’s insurance practice, says the firm’s involvement is expected to be long term. “Chris McDaniel is doing an unbelievable job generating interest in the industry in developing a wide-ranging set of use cases,” Lehman says. “The Institutes has a comprehensive vision and an endless amount of insurance processes to improve.”
Ultimately, the platform will be “all things insurtech” for the global insurance industry, McDaniel says, with data flowing into Canopy from countless sources outside the insurance industry, such as the IoT. “The combination of the IoT and blockchain technology, in addition to the use of predictive analytics and AI, will transform the insurance industry, creating new business models and revenue streams,” he projects. “Canopy will be all that is needed in the future for carriers and brokers to do what is best for their customers.”
If McDaniel is right, this future cannot come too soon for insurance-buying businesses and consumers and the industry as a whole. Time will tell.
Russ Banham is a Pulitzer Prize-nominated business journalist and author of 26 books. He writes frequently about insurance and technology. email@example.com
Millennials are expected to make up 75% of the U.S. workforce by 2025, but so far, it doesn’t appear many of them want jobs in the insurance industry.
Rohit Verma says he hasn’t taken a formal survey when he visits college campuses, but his show-of-hands questions tend to mirror industry research: fewer than 5% of students are interested in a career in insurance. Ask them about a career in claims, he says, and the interest dwindles even more.
Verma, global chief operating officer of the claims management organization Crawford & Company, is among industry leaders determined to get more hands in the air on college campuses—and more young people in the offices of insurance brokerages, agencies and TPAs.
“If I look at the insurance industry today, one of the disruptors that always gets talked about is technology,” he says. “But there is another disruptor that we’re not talking about, which is the lack of talent. Unfortunately, this gap in talent is only increasing.”
Crawford is in the early stages of developing new apprenticeship and internship programs and exploring ways to introduce insurance-related courses in community colleges in Georgia and elsewhere. Verma says the industry needs to bolster education programs, in part to ensure there’s a sufficient workforce when a crisis hits.
Last year’s busy hurricane season illustrated just how dire the labor shortage is in the industry. If Hurricanes Maria or Irma had taken paths over more land, Verma says, many companies would have been at a loss to find enough adjusters to handle all the claims. Crawford, with more than 700 offices in more than 70 countries, was able to redirect adjusters from the United Kingdom, Canada and elsewhere and had adjusters on standby in India. But the outlook was grim across the industry.
“It would have been a much harder event if there had been just a slight change in either of those hurricanes,” he says.
Crawford is working with the Technical College System of Georgia to create a registered apprenticeship program. A partnership is under development with Gwinnett Technical College to leverage existing business management and marketing management curriculum to add specific content on insurance fundamentals, property/liability insurance principles, personal insurance and commercial insurance, Verma says.
Specializations in property, casualty, liability and disability may be added later. Apprentices will be hired as benefits-eligible employees and split time between job training and the classroom.
“We’re also targeting different disciplines where you work a lot with hands, such as construction, auto mechanics and engineering, and seeing how we can take those disciplines and orient those individuals to have an apprenticeship with us,” Verma says. “One challenge we have had in the past is recruiting from risk management programs. Usually these programs are small, and competition for recruiting from brokers and carriers is very strong. While the earning potential in adjusting is quite comparable to the other areas, initial years in adjusting may require significant outdoor work in some cases. So we purposely are targeting associate degree programs that relate to construction and auto maintenance training. We believe individuals from these programs would be more receptive to adjusting work.”
Crawford is also looking at partnering with carriers and brokerages in existing apprenticeship programs at universities and community colleges across the country, as well as helping to develop insurance-related courses in those schools.
Growth in insurance-related curriculum could be critical in responding to the talent shortage. Degrees or certificates in insurance and risk management are currently offered at 74 universities, colleges and community colleges in 34 states, according to the Association of Insurance Compliance Professionals.
In the meantime, Crawford’s global TPA, Broadspire, is sponsoring 58 internships in 17 offices around the United States. The 12-week paid internship program can lead to full-time positions. Three returning interns are graduating this year and will be offered full-time positions.
“Our goal is to start partnering with colleges that are local to offices where the internship opportunities will be held,” Verma says. “We’re also participating in national virtual career fairs, which allows us to reach students at 30-plus colleges throughout the U.S. We’re also participating in veteran career fairs.”
Others in the industry, including InterWest Insurance Services, are actively promoting careers to college students. The brokerage recruits at campus career fairs and sends speakers to financial and business classes at several regional colleges in California.
Jennifer Weathersbee, vice president and director of claims at InterWest, says the brokerage had four interns last year, including two who received scholarships from the Council of Insurance Agents and Brokers Foundation. Three of them later accepted jobs with the company. “This year, we’re doubling the internship program, and next year, we’re quadrupling it,” she says.
The CIAB Foundation awarded 75 scholarships for college students around the nation to work as interns at member agencies during the 2017-18 school year. More than $1.45 million in scholarships have been awarded since the program began in 2006.
InterWest has started having its interns talk to students during campus presentations. “We need to share the excitement and show these new folks why this is a good industry,” Weathersbee says.
Interns and recent recruits to the insurance profession could be the best way to spread the word about the vibrancy of the industry, according to a survey of millennials last year by the technology firm Vertafore. The survey found that 82% of young people who work for insurance companies would recommend jobs in the industry to friends and family members. Respondents cited career opportunities, compensation and work/life balance as the chief appeals.
Sedgwick Claims Management Services tells prospective employees the claims profession has evolved significantly in recent years, according to Jason Landrum, global chief information officer. “Once thought of as a process-oriented, administrative position, a claims career today offers meaningful work and a chance to care for others during a critical time of need,” Landrum says. “At Sedgwick, we believe that helping people is at the heart of everything we do. By focusing on advocacy and care, Sedgwick has become a more attractive option for those looking for a meaningful career path.”
To encourage young people to join the industry, Verma says, Crawford has established a goal of promoting from within its organization to demonstrate that insurance careers are dynamic with potential for growth.
“We are a very traditional industry, a highly regulated industry, so the perception is that we’re going to be slow, we’re going to be boring, that we probably don’t provide as attractive a career path as banking or consulting,” he says. “By creating a dynamic workforce, where we are pushing for growth—not just growth of the business but growth of the individual—we create an attraction in the marketplace to come and work with us.”
Despite welcome growth in the insurance business and the economy, the industry “continues to face an unprecedented talent recruitment environment,” according to the annual Insurance Labor Market Survey by the Jacobson Group and the Ward Group.
“Today’s increasingly challenging labor reality,” researchers found, “is being impacted by increased staffing demands, a growing mid-level talent gap, impending retirements, virtually non-existent industry unemployment and a shallowing talent pool.”
As many as one third of insurance professionals will retire this year, according to a McKinsey and Company study, and more departures lie ahead as baby boomers leave the workforce. “In the next three to five years, I think this is going to be a significant challenge for the industry. I think it is going to be a huge disruptor,” says Rohit Verma, global chief operating officer at Crawford & Company, the Atlanta-based claims management organization.
Jennifer Weathersbee, vice president and director of claims at California-based InterWest Insurance Services, says the effects are already evident among carriers that her brokerage works with nationwide. “From our relationships with our various insurance partners, I know that the aging workforce, that knowledge gap, is a challenge for the industry,” she says.
Yet innovative companies are finding promising solutions through technology that can lengthen the life of the current claims workforce.
An array of high-tech tools are being leveraged with elements of America’s gig economy to fill gaps in the labor pool. These innovations are also helping to improve efficiency and customer satisfaction—and boosting the insurance industry’s appeal to younger workers eager to dive into new technology.
“It’s an exciting time to be part of the claims industry,” says Jason Landrum, global chief information officer for Sedgwick Claims Management Services. “We expect to see more technology advancements and a greater evolution of the business itself.”
Like others in the industry, Landrum says technology is becoming a greater part of the workday for claims professionals. “Web-based communities, mobile applications, internet robots, drones, satellite imagery and AI are quickly becoming everyday tools of the claims professional,” he says. “Social media, data integration and AI are also being increasingly used to assist with activities such as triage of loss assignments, strategic decision making, and improved allocation of resources.”
Using Gig Workers
A year ago, Crawford & Company purchased WeGoLook, then known as the “Uber of inspections,” to help bridge the talent gap. The company, founded in 2009, primarily used its online platform to dispatch “Lookers” to check out used automobiles for prospective buyers, but Crawford saw greater potential.
“We have been keenly aware of the fact that the world around us is changing, and we have to be sure to continually relook at our model to see how it needs to evolve,” Verma says. “That’s how we came across WeGoLook, which we believed was doing some transformational work.”
With the acquisition, Crawford can now deploy 40,000 independent contractors in the United States, the United Kingdom and Canada to respond quickly to claims and other client needs. The operation is expanding to Australia soon.
WeGoLook’s team includes licensed adjusters and appraisers, certified mechanics, registered notaries, professional photographers and others who are selected through a rigorous vetting process. About one third of applicants are accepted, according to Verma, and contractors receive training and continuous assistance from an online app that explains the details and needs for each assignment.
Lookers can be sent to notarize a signature at a home or business, pilot a drone to inspect roof damage, pick up products subject to a recall or handle other time-consuming duties to ease the workload for WeGoLook’s clients. “Because we have such a diverse, on-demand workforce and we track them based on their skills and geography, we can figure out who is the best person to do a task,” Verma says.
His work life was extended by a good eight to 10 years because he no longer had to manually climb these stockpiles and risk injury. The drone could now fly overhead, collect data and enable all the biometric measurements and analysis of inventory. I think a similar narrative will play out in the insurance industry.Tweet
Other innovators, such as Snapsheet, are also helping the industry fill the talent gap. The Chicago-based company, founded in 2010, uses cloud-based software to help insurance providers gather photos and other information from their customers about auto claims. More than 60 carriers, including USAA, Liberty Mutual, The Hartford and MetLife, are now using Snapsheet’s mobile app to process claims.
CJ Przybyl, Snapsheet’s co-founder and president, says many carriers are struggling to replace retirees on the adjusting and especially the estimating sides of the business. “Snapsheet is able to help with that because we augment the staff as needed,” he says.
In its Future of Claims study last year, LexisNexis Risk Solutions said the auto insurance sector is facing “a tumultuous time,” with auto claim frequency and severity increasing and the industry struggling to replace retirees. “Questions are starting to arise as to who will ‘work’ the increased amount of claims going forward,” the study found.
Technology is helping to ease the auto claims workload, and the increased automation should ease the training process as well. “From a carrier perspective, you can hire a younger work staff that won’t require as much training to backfill as people retire,” Przybyl says.
Extending Work Life
Not all older claims professionals are ready to retire. But certain requirements get harder with age. Drone technology is helping ease the labor shortage among adjusters inspecting damaged roofs.
All of the top 20 insurers in the nation now have some form of a drone program in place, according to George Mathew, CEO and chairman of Kespry, a five-year-old company based in California that provides a variety of aerial intelligence for insurance carriers and other industries. Its clients include 12 of the top carriers in North America, Europe and Australia, including Farmers Insurance, which added drones last year.
Drones can extend the careers of older inspectors, who often must leave the workforce if their mobility declines and they can no longer climb onto high roofs. Mathew recalls an inspector for a client in the aggregate industry who was facing an early retirement because of hip replacement surgery.
“His work life was extended by a good eight to 10 years because he no longer had to manually climb these stockpiles and risk injury,” Mathew says. “The drone could now fly overhead, collect data and enable all the biometric measurements and analysis of inventory. I think a similar narrative will play out in the insurance industry.”
Those extended careers and safety improvements are significant gains for the industry, according to David Tobias, COO and co-founder of Betterview, a San Francisco-based provider of aerial imagery from drones, satellites and command aircraft for claims and underwriting and for the real estate industry. “You can still lean on the experience of these folks who don’t want to get out on roofs anymore,” he says.
Betterview has flown for more than 115 companies, including Munich Re and Maiden Re; Nationwide recently became a client and investor. Drones will drive down workers compensation claims, according to Tobias.
When he speaks to groups of adjusters about drones, he asks how many have fallen off a roof or a ladder at some point in their career. “Everyone’s hands go up,” he says. “Absolutely everyone. That’s a real problem.”
Drones, artificial intelligence and other technology are also helping the industry combat a negative impression among younger workers. The Hartford 2015 Millennial Leadership Survey found that only 4% of millennials thought insurance offered an attractive career, with many describing it as “boring.”
That’s an especially troubling view as technology takes on a larger role in the offices of brokerages and carriers—and younger, skilled workers are needed to introduce and manage those innovations.
Web-based communities, mobile applications, internet robots, drones, satellite imagery and AI are quickly becoming everyday tools of the claims professional.Tweet
“The insurance industry—traditionally cautious, heavily regulated, and accustomed to incremental change—confronts a radical shift in the age of automation,” a recent study by the McKinsey Global Institute said.
“With the rise of digitization and machine learning, insurance activities are becoming more automatable, and the need to attract and retain employees with digital expertise is becoming more critical.”
Kespry’s Mathew says embracing technology would help the industry draw younger people. “I think the generation that came up with mobile technology, Facebook and other social media is delighted to have very capable technology in their hands to get work done,” he says.
Przybyl at Snapsheet agrees. “We’ve gone through this little bit of a revolution where a lot of cool stuff has come on the market pretty quickly, and it’s got the whole market really excited,” he says. “When estimators come to work for our organization, they’re excited because they’ve got a whole suite of new technology tools that make their job a lot easier. It’s absolutely helpful for recruiting.”
The use of technology in claims is doing more than just easing workforce issues, it is creating efficiencies and streamlining work in a way that is changing the profession and consumer engagement. Take drones, for example. “With the drone-assistive approach of collecting this data, analyzing it, and adjudicating the claim, you can just get more work done than when you were manually climbing that roof surface, manually collecting that data and manually processing the claim,” Mathew says.
Traditional inspections require at least two employees, including one to climb the roof and inspect and another to steady and hold the ladder, but an adjuster piloting a drone can work solo and inspect the entire roof, rather than a sample, and do it more quickly.
“You have enough detail to adjudicate and close a claim within that day,” Mathew says. “Now we’re looking at ways that we can do it within the first hour of the drone flying, whether that be a residential roof or a commercial roof.”
Przybyl shares a similar view. “Once we get photos, it’s going to take us about three hours on average to have an estimate, and that’s pretty much independent of the severity of the damage,” he says. The average cycle time for a traditional auto claim is 10 to 15 days, with a fast-track process considered to be four to six days, according to LexisNexis Risk Solutions.
Rapid turnarounds lead to greater customer satisfaction. The added transparency, through mobile apps and online tools, also pleases customers, particularly younger ones.
Przybyl says his company’s mobile app enables the person reporting a claim to track progress at each step along the way. “It’s in their hands in the way they’re used to consuming information—on their phones,” he says.
Tractable, which uses artificial intelligence to help insurers process photos from auto claims, is also helping the industry streamline work. The company, founded in 2014 with offices in London, California and Texas, counts the Belgium-based insurer Ageas and three of the top insurers in the United States among its clients.
Using proprietary algorithms and a web-based platform, Tractable taps into an extensive database to provide estimates from photos—in minutes, in some cases—and help prioritize claims that need further human involvement, according to Ahmed Zifzaf, the company’s AI engagement manager.
Zifzaf says Tractable’s software can save time and money by discerning whether a damaged panel on a car must be replaced or can be repaired instead. “Questions like that can be answered by a machine or the artificial intelligence algorithms, therefore saving both time and money for the insurer,” he says. “We can review thousands of claims in minutes, as opposed to an expert, who might need to spend 30 minutes or so per claim.”
AI is expected to take on a larger role in insurance and other industries in the years ahead, as new technology is developed to automate many labor-intensive processes. “The great thing about artificial intelligence is that it learns,” Zifzaf says. “The more that we use it, the better and smarter the tool gets.”
Everything seems very cool when you see it in PowerPoint or when you see it on a demo, but when you try to implement it inside of a really large organization, the change management can be extremely complicated.Tweet
Zifzaf also notes that younger workers tell his company that “this is the most exciting technology they’ve worked with in their role.”
Insurers are swiftly adapting photo technology for auto claims, either from third-party providers or by developing in-house capabilities. Allstate, for example, closed its drive-in repair estimating centers last year and is now using its QuickFoto mobile app to process claims.
Other efforts are under way to streamline tasks. Last year Crawford & Company began using robotic process automation, or RPA, to reduce repetitive tasks for adjusters. The changes include simple steps like eliminating the need to copy and refill information from one computer screen to the next, but Verma says the company is looking at AI for more involved tasks like scoring and prioritizing claims for supervisors to review as part of the company’s quality assurance process.
At Sedgwick, which has 21,000 employees in 65 countries, similar steps have been taken to maximize claims resources. “Automated file setup has reduced the time commitment required of the traditional, manual setup process and enabled the claims professional to spend more time with the person experiencing the injury or loss,” Landrum says. “Business and data analysts now monitor the automated process and assignment activity.”
Technology hasn’t fully alleviated the shortage of adjusters, according to Landrum. But, like Crawford, Sedgwick is using it to help streamline work and maximize the use of time. “For example, we have introduced new decision optimization models into our process that help analyze data within a claim and then prescribe and automate the most appropriate path to take,” Landrum says. “Tech innovations like these help free up claims professionals to be available when a higher level of care is needed and allow them to focus more on the impacted individuals and businesses at the heart of their actions.”
Nat Cat Testing Ground
Last year’s busy hurricane season turned out to be a testing ground for new technology in the insurance industry, with innovators able to demonstrate how the use of drones and mobile apps can improve efficiency and response time while holding down costs.
When Hurricane Irma struck the East Coast, Crawford & Company was able to dispatch its team from WeGoLook to the scene for drone flights and other visual inspections within a matter of hours, according to Verma. Ordinarily a claim in a disaster scenario might take a month to adjust, but WeGoLook’s turnaround time is an average of 4.7 days for a catastrophe claim and 3.7 days for a non-catastrophe claim. “The advantage of having a Looker workforce is that it’s a 24-by-7 workforce. There isn’t a specific time of day they’re working,” he says.
The rapid turnaround reduced the potential for further damage and for fraud, according to Verma. “We thought it was a win-win situation for us, the insured and the carrier because they move on with their lives much faster as well,” he says.
Drones were a critical part of the response for WeGoLook and other companies, a point that wasn’t lost on federal officials monitoring the scene. “I don’t think it’s an exaggeration to say that the hurricane response will be looked back upon as a landmark in the evolution of drone usage in this country,” FAA administrator Michael Huerta said.
Mathew says Kespry was able to take advantage of a ready team of drone pilots who lived in or near hurricane-damaged states. Kespry flew more than 700 missions around Houston and many of the impacted areas in Florida.
“As soon as it was safe to fly, we had them out flying, collecting imagery,” he says. “Some of our clients couldn’t get their claims folks from Texas to Florida because they were either still working on claims in Texas or travel was difficult. We were able to start getting imagery back before they could even get boots on the ground in the state, let alone out to insureds’ properties.”
The experience was similar for Betterview’s drone operations. “We would fly things in the morning, imagery would get uploaded in the field, and checks were getting written that night,” Tobias says. “The roadblock is not the technology usually. It’s the carrier or the TPA or the members utilizing the technology.”
What the Future May Hold
Despite the speed and efficiency their services bring, high-tech providers acknowledge limits to AI and other innovations. Verma, for one, doesn’t expect technology to replace adjusters or underwriters any time soon.
“While it may be possible in the future, I don’t see it as a possibility in the next three to five years,” he says. “Claims is a very emotional experience, and when you have an emotional experience, you want to rely on people, not just machines.”
At Sedgwick, Landrum says technology is creating more time for claims professionals to care for the client and the consumer. “We don’t envision the human touch being replaced by machines,” he says. “When health and well-being are impacted or when property losses are significant, people want to know someone is working for them and that their issues are not solely being addressed by a machine.”
Weathersbee at InterWest agrees. “When you get into the human aspect of claims—the tort aspect, bodily injury and things like that—you can’t lose touch with how to deal with that human being from a psychological standpoint,” she says. “I still think there’s a component of hands-on both for our carrier partners and on the insurance brokerage side.”
Yet technology will inevitably be applied more broadly across the industry. Mathew, whose company is expanding into the commercial sector, says he expects drones will be more heavily used there, as well as in risk and underwriting. As more drones fly, the bigger and better photo libraries will become, enabling the greater use of artificial intelligence in analysis. “It’s not a limitation of the algorithms,” he says. “It’s a limitation of the data sets available.”
Tobias at Betterview also thinks drones will become commonplace across the industry soon. “I come from the commercial loss control world, and I saw the transition from film cameras to digital, and I’m starting to see a lot of the trend markers with drones,” he says. “This is another tool in the adjuster’s tool belt.”
Sedgwick, which has used aerial imagery to assist with property damage assessment, also expects drones will take on a broader role. “While the practicality of drone utilization has not yet been perfected for daily claims handling, we expect drone usage will increase as costs for hardware drop, regulations relax, and the technology continues to improve,” Landrum says.
The industry is likely to invest in more data tools and forecasting technology, according to Landrum. “In the property world, leveraging AI to determine pre-loss exposure will help us with resource assignments, projected loss figures, and assembling resources for post-loss restoration,” he says. “If we can be ahead of what is needed after a loss, it will decrease the loss period altogether.”
Weathersbee expects data analytics, particularly for regional firms like hers, to grow more widespread in the years ahead, along with the use of technology that employees wear in the workplace. The health side of claims is already using devices to track fitness, but she and others believe there’s greater potential for so-called wearables in improving workplace safety and reducing claims and insurance costs. At tech conferences in recent years, companies have demonstrated the use of wearables in hardhats and safety vests to track workers in hazardous areas and alert them as they approach machinery and other risks.
“I’m excited about the technology that our carrier partners are going to be utilizing,” Weathersbee says.
Some insurance companies have been slow to adapt technology, but once an innovation catches on, the changes can be swift industrywide. At Snapsheet, much of that acceptance has come in the past year. “In 2012,” Przybyl says, “when we first started talking to insurance carriers seriously about doing estimates through a mobile, self-service app, pretty much every carrier said it was not possible for a human to write estimates from a photo. And now here we are in 2018, and everybody is asking when artificial intelligence is going to write an estimate by photo.”
Przybyl says he expects technology will become pervasive in the industry, which presents its own challenges. “Everything seems very cool when you see it in PowerPoint or when you see it on a demo, but when you try to implement it inside of a really large organization, the change management can be extremely complicated. I think a lot of insurance carriers are now realizing that they’ve got to focus on how to implement the technology, not just having the technology. I think over the next few years that’s what a lot of the carriers that succeed are going to be focused on.”
Tobias thinks companies would be wise to accelerate the change. “They need to start moving a little faster because there are companies out there who will eat their lunch if they don’t,” he says, pointing to Amazon’s forays in health insurance and perhaps other sectors. “If that happens, they’re going to use whatever the newest and best technology is. As a whole, our industry needs to start not just testing things faster but actually putting them into production faster so they don’t get left behind.”
Weathersbee says brokerages and carriers would be wise not to resist technology that can help fill the talent gap and enhance services. “Organizations that are nimble and embrace it and use it to innovate and create efficiencies are going to succeed,” she says. “I think those that view it negatively or view it as a disruption or ignore it are going to get passed by.”
The industry’s struggle to replace retirees—and the subsequent need to embrace technology more quickly to help fill the gap—may be a blessing in disguise.
“While some see this talent gap as a crisis, we have seen it lead to some very positive developments,” Landrum says. “The claims work we do has evolved from a series of process-oriented administrative tasks that sometimes led to adversarial positions to our industry, to now being focused on providing very meaningful assistance to those experiencing an unexpected loss or injury. It’s forced us to take a look at technology as a means for supporting and streamlining the work our colleagues take on every day.”
Lease is a contributing writer. firstname.lastname@example.org
In the electronic equivalent of a giant convention, 380 insurers and managing general agencies gather on a daily basis with more than 30,000 independent insurance agencies to streamline their business dealings. The means of this extraordinary sharing of information is an industry exchange launched by IVANS, a division of Applied Systems.
The exchange gives the MGAs and agents a real-time way to transact electronically with the carriers, from identifying markets to quoting and servicing insurance business. The carriers share their data with IVANS, which in turn shares it with the agencies on the exchange.
Previously, agencies using their agency management systems needed to log on to one carrier’s website to download an insurance policy and then on to another carrier’s website to do the same—obviously not an efficient process. “By automating the process of sending information from the carrier system to the agency management system, we’re helping agents to spend more of their time on servicing their customers and growing the client base,” says Thad Bauer, vice president and general manager of the IVANS division.
The exchange is averaging about 700,000 daily transactions between agencies and carriers. While the exchange focused initially on standard lines of insurance business, it’s now expanding its scope to more complex lines like surety and employee benefits.
Applied also expects to use the exchange to create statistical and benchmarking data to be shared internally and with the broader industry. For example, IVANS Index can use the data to measure the year-over-year premium difference for a single insurance policy.
Other opportunities that emanate from connectivity and data sharing also are being explored. “We have developed a new search tool called IVANS Markets, where agents and brokers can see which carriers have an appetite for a particular type of risk and carriers can see in real time when agents are searching for markets to assume a particular risk,” Bauer says. “Just by moving data back and forth, risks can be rated and policies can be issued in one, fast, comprehensive process.”
Five years ago, the sharing of data in the industry was disdained, he adds. “The various parties did not want their data touched for reasons of trust,” Bauer says. “By creating an exchange in the middle of these transactions, trust is no longer an issue. We’re helping carriers streamline their workflows and agencies receive client and policy information instantly. And we’re providing data-driven insights on the state of the industry, like premium renewal pricing, which benefits all parties. Now, no one disputes the value of sharing data.”
A group of partnering organizations from the insurance, technology, management consulting and shipping industries has announced the introduction of the world’s first data-sharing platform for the marine insurance sector. The blockchain-enabled platform connects shipping clients with brokers and insurers to more seamlessly transact marine insurance.
Partners in the revolutionary venture include Microsoft, consultancy EY, insurance data standards company ACORD, broker Willis Towers Watson, global insurers XL Catlin and MS Amlin, software security provider Guardtime, and Danish shipping conglomerate A.P. Møller-Maersk A/S. Following a successful, 20-week proof of concept phase in 2017, the platform, which is built on Microsoft Azure global cloud technology, went live in a phased rollout earlier this year.
Data on a wide variety of exposures from multiple parties are integrated on the platform with information about insurance contracts. The goal is to remove the friction between these parties to speed up the insurance process. By having all the data involving a risk transparently available on the blockchain—and all the parties needed to transact insurance in this secure ecosystem—traditional manual data entry and rekeying of information are eliminated, speeding up insurance processing times and reducing related costs.
“This first-of-a-kind effort has the potential to dramatically reduce time, cost and risk across the entire insurance value chain,” says Bill Pieroni, ACORD’s president and CEO.
Simon Gaffney, chief data officer at Willis Towers Watson, says, “The initiative has the potential to streamline and simplify insurance transaction efficiency using new technologies—an essential development for the insurance industry.”
As the novel data-sharing platform is rolled out across the rest of this year, the partners anticipate a learning process that will guide the development of additional blockchain-enabled platforms for other lines of insurance. “We look forward to deploying this technology across the marine insurance industry,” says Shaun Crawford, EY’s global insurance leader, “and are exploring how these findings and insights will be applied to other specialty insurance markets and beyond.”
The interest in developing a new model for insurance based on data sharing is not confined to brokers and carriers. Institutional investors like pension funds and hedge funds that have long invested in catastrophe bonds will soon have the ability to make similar investments in a range of other property and liability exposures, trading insurance risks much like they currently trade stocks.
This opportunity will be available when a new and completely novel reinsurer launches a one-of-a-kind trading platform this summer for capital markets investors. Will Dove, chairman and CEO of Extraordinary Re, the reinsurer behind the platform, says it creates the means to free up more than $20 trillion of liabilities currently held on insurance company balance sheets, which would be available to investors interested in diversifying their portfolios with an uncorrelated asset class.
“Why should a single insurer handle underwriting, marketing, distribution and servicing, given the costs this eats up,” Dove says. “A trading platform offers risk-bearing capital in a vastly more flexible, efficient and less costly way, especially one like ours using blockchain technology.”
Unlike a catastrophe bond that investors acquire and must hold until the bond’s multi-year duration has elapsed, the trading platform markets so-called liquid insurance contracts (LICs), which enable investors to trade in and out of the insurance liabilities. The absence of liquidity was a problem with catastrophe bonds. Dove says the opportunity to sell an investment in one insurance risk to buy an investment in another insurance risk will be of great interest to the capital markets.
Here’s how this unique facility, which uses technology created and hosted by Nasdaq, works: a broker, insurer or reinsurer electronically submits a particular risk or different elements and tranches of a risk to the platform; underwriters at Extraordinary Re review the submission to make sure it suits its guidelines; and investors review the exposure-related details of the submission with an eye toward a return and portfolio diversification objectives. If interested, they invest in the risk.
The risks are priced much the way insurers currently underwrite exposures. “The market value of each LIC is set by the collective opinions of the market participants, who take into account the loss activity observed to date, plus expectations about future loss activity,” Dove explains.
In return for taking a share in an LIC, an investor would receive a premium and be obligated to participate in the payment of losses up to a set amount—much like traditional insurance. “When loss payments plus market expectations of future losses exceed premium received and the investment income, the investor would be in a loss position,” Dove says. “At any time, investors can sell their LIC shares to other investors to eliminate their exposure to future adverse developments.”
Good news for the capital markets, but what’s in it for traditional insurers and reinsurers? “We’re offering a way for insurers and reinsurers to spread their risks more widely at less cost overall,” he replies. “These risks include marine, workers compensation, cyber, terrorism, aviation, product liability, and life and health exposures in addition to both long-tail and short-tail liabilities.”
With regard to the impact on brokers, Dove says Extraordinary Re provides another way for reinsurance brokers to access capital markets capacity for their clients. “Because risk comes into our market in reinsurance contract form, we will depend on brokers for distribution and getting access to the types of insurance risk that Extraordinary Re’s investors are looking for,” he explains.
Bottom line: Remarkable innovations are underway disrupting the traditional model of insurance, requiring all parties to rethink how they will transact business in the future.
In the United Kingdom, roughly 3,000 independent insurance brokers place about 90% of the country’s commercial insurance risks. Brokers tend to dominate the commercial market, since complex commercial risks typically require professional advice. To write the risks, U.K. insurance markets conduct most of their business through these intermediaries.
Broker Insights is about to change this dynamic, solving a problem that has long daunted the London insurance market—the inability of insurers and reinsurers that would love to interact with the regional brokers but cannot get their attention.
“All these insurers are running around prospecting for opportunities and knocking on broker doors, but brokers tend to have their favored markets—even though these insurers may not be the best option for their commercial clients,” says Fraser Edmond, Broker Insights’ CEO and co-founder. “It’s just so inefficient. We figured there had to be a better way.”
Broker Insights was designed to be just that: brokers share data on their clients’ exposures on the platform, and insurers cull through these exposures to determine whether or not to insure them.
“The platform has a unique searchable database for insurers to look for business,” says Edmond. “Because it is searchable, insurers can look for criteria on risks that suit their underwriting appetites. We’re pulling data from many different sources to provide this information.”
In addition to the exposure, these data include the type of business, where it is located, number of employees, and financial information—to scratch the surface. “Say a carrier wants to write marine insurance for a particular client during certain months of the year in a specific geography within a particular premium band,” Edmond says. “For the first time, the carrier can search these words in the database to find which brokers have this type of business available. This creates tremendous efficiencies from a sales and marketing standpoint.”
Broker Insights flips the traditional model of insurance on its head. Instead of a broker reaching out to insurance markets, the insurers reach out to the broker. In doing so, the platform creates competition among carriers to provide optimal coverage and higher financial limits of protection at the best rate. “We’re promoting more choice, which is great for the broker’s customers,” Edmond says.
For insurers, Broker Insights offers a way to achieve more balanced risk portfolios. “Instead of wasting resources, brokers and insurers each achieve endless efficiencies through a simple data-sharing experience,” Edmond says.
What’s in it for brokers? Broker Insights will pay brokers an undisclosed fee to share their information with carriers on the platform, although this is not the main attraction, says Edmond, former head of broking at Aviva, a large U.K.-based global insurance company with 33 million customers in 16 countries. “The platform puts a far wider range of brokers on the insurers’ radar, enabling more informed and timely sales,” he explains.
The platform, which went live in June, has lined up 30 brokers accounting for nearly $203 million of regional commercial business. The company recently signed its first contract with Hiscox, a large U.K.-based insurer. “We’re also in advanced discussions with Zurich, Axa and Allianz and are going through the contract phase at the moment,” Edmond says. “The demand has been nothing short of fantastic. We’re bridging the customer information gap between insurers and brokers.”
The compelling reason for building this new model is the existential threat of keeping things as they are. If insurers and brokerages don’t begin to share their own and client data in novel ways to reduce acquisition costs and operating expenses, some other entity—like, say, a giant technology company—might squash them like a stack of yesteryear’s CDs.
“The cost base from which we all are working is fast becoming unsustainable,” warns Alastair Burns, chief marketing officer at London-based insurance holding group Navigators International. “A war on cost must be waged in the insurance marketplace.”
This cost base is predicated on the traditional ways of providing insurance to businesses that have not changed much since Edward Lloyd ground his first cup of coffee. Companies from the largest corporations to the smallest Main Street businesses rely on an insurance broker or agent to understand their risks and transfer them to an insurance carrier willing to absorb these exposures. The insurer then spreads these risks through global reinsurance markets.
This system has worked pretty well for centuries. Then along came data analytics—the ability to search through massive volumes of data to discover useful information for decision-making purposes. This technology and others—machine learning, robotic processing automation and artificial intelligence—have created a dangerous entry point for non-insurance entities to potentially compete against brokers and carriers, leveraging capital in some cases from institutional investors.
Other industries have collapsed from such incursions. The new insurance model under discussion would fortify the barricades. By sharing client data, brokers and carriers can reduce the cost of insurance, pave the way toward the development of innovative new types of insurance, and, most important, keep non-insurance entities at bay.
“Whoever has data is king,” says Jonathan Prinn, group head of broking at Ed Broking, a wholesale insurance and reinsurance brokerage company based in London. “If this data isn’t shared amongst us, we will fail to provide value to our clients. And if we fail, someone else will provide this value.”
Need for a New Model
One of the clear concerns facing the industry is client acquisition costs, which are much higher than the acquisition of new customers in other industries. Prinn blames high acquisition costs for Lloyd’s of London’s dismal 114% combined ratio in 2017, meaning the venerable insurance marketplace paid out more money in claims than it received in premiums.
“The cost of underwriting and broking commissions at Lloyd’s was about 42%, which is unacceptable and untenable in the world going forward,” he says. “No intermediary model I know of is anywhere close to 42%.”
In the United Kingdom, Prinn says, “real estate agents charge around 2%, credit card companies like Mastercard charge around 1.3% and moving $2 from a bank account to buy coffee using Apple Pay is free.”
The 42% figure he cites is composed of 30%-plus broker commission levels and the carriers’ administration costs, which last year ranged between 10% and 12%.
One could argue these expenses are less in the United States—according to A.M. Best, incurred broker commissions/expenses plus underwriting expenses are between 30% and 31%—but that’s beside the point. “Too much of the money that comes into the system is now consumed by acquisition and operating costs,” says Jamie Garratt, who heads the digital underwriting strategy at Talbot Underwriting, a London-based underwriting services provider.
The culprit, the interviewees contend, is the traditional linear process of transacting insurance, whereby a business goes to a broker who goes to a carrier that goes to a reinsurance broker who goes to a reinsurance carrier. The alternative is the sharing of data among brokers and carriers in a free marketplace. “If brokers share client exposure data with all and not just some insurers, everyone’s cost base reduces,” Burns says.
Garratt agrees. “If we can move data quickly and with much less friction between a client and the end risk bearers,” he says, “we can remove the replication of work up and down the value chain, reducing the high cost this produces for all of us.”
The cost base from which we all are working is fast becoming unsustainable. A war on cost must be waged in the insurance marketplace.Tweet
An Architecture Emerges
How might this new model look and operate? Instead of the customary linear progression, clients would share operating, financial and other data with brokers; the brokers would evaluate and package these data into discrete elements of risk; these elements would be submitted to the global insurance markets for their review; and insurers and reinsurers would decide whether to assume these risks based on their underwriting appetites and portfolio diversification objectives.
Prinn provided the example of how this might work in the commercial aviation insurance market, which is currently divided between one set of carriers that provide insurance to smaller courier-type aircraft and another set that services large commercial airlines.
“The reason for the split in the market is risk—smaller aircraft take off and land a lot to drop off freight, and the biggest risks in flying occur when landing and taking off,” he explains. “Consequently, the risks for the smaller air carriers are significantly higher.”
Assuming all aircraft owners provide their altitude, speed, turbulence and other data to a broker, cost theoretically would come down. “Airplanes produce an extraordinary amount of data coming off sensors that could be dropped into a blockchain or other type of distributed ledger technology,” Prinn says. “If the data from every airline was available in this platform, there would be many thousands of data items related to every step of the journey, fundamentally changing how insurance is structured.”
The job of the broker would be to gather and assess these granular levels of exposure data and present them to the insurance markets for consideration. Were this to occur, Prinn describes what might happen next: “An insurance carrier might say it will insure this many planes taking off to 1,000 feet in particular regions of the world; this many planes going from 10,000 feet to 20,000 feet across the Atlantic; and this many planes going from 25,000 feet to 35,000 feet across specific land masses.”
The carrier might also decide to insure similar elements as the plane makes its descent to the ultimate landing. “If this happened,” Prinn says, “the need to separate the aviation insurance market into two sectors would be eliminated.”
What he has just described is a far cry from the current model of providing commercial aviation insurance, in which a broker representing a specific airline submits that company’s breadth of risks to an insurer with which the broker often does business. The new model would democratize the process to offer pieces of risk to all aviation insurance carriers in a free marketplace.
Can the risks of other industries be similarly sliced and diced by brokers and offered to the insurance markets? “Absolutely,” says data scientist Henna Karna, chief data officer at global insurer XL Catlin. “We’re continually looking at data that exists in our environment and creating ways to measure it.”
These data are not limited to a company’s internal financial and operating data. “Exogenous credit data, political risk data, cyber risk data, and unstructured data can all be part of the picture,” Karna says. “The goal is to model the risk by considering every available and quantifiable factor that may affect it. We’re getting closer and closer to mining, analyzing, modeling and managing all this data for insurance purposes.”
Better Data, Better Risks
The sharing of detailed client exposure data in a digital platform provides the opportunity for insurers to diversify their risk portfolios by reducing exposure accumulations in specific areas. Karna provides the example of a global manufacturing plant that operates 9 a.m. to 5 p.m. Monday to Friday.
“Say the data coming from the sensors attached to factory equipment indicate the company makes most of its products on Tuesdays and Wednesdays, with the bulk of these items coming off the production line between 9 a.m. and 11 a.m.,” she says. “A blackout or machine glitch during this period on a Tuesday or Wednesday would cause a much bigger business interruption risk than other times of the day the rest of the week.”
Today, the company’s insurance policy from a single carrier does not distinguish these risk factors. By breaking up the risk into difference pieces, and bringing in other quantifiable data like seasonal weather and machine maintenance, other carriers have the opportunity to choose which exposure elements they may want to bear. In turn, this helps the insurers balance their risk portfolios with exposures that are uncorrelated, Karna says.
Burns agrees. “By modeling and sharing risks, carriers can avoid aggregating too much of a single risk,” he says. “Insurers have a finite amount of exposure they can take. Their balance sheets are only so big.”
If this data isn’t shared amongst us, we will fail to provide value to our clients. And if we fail, someone else will provide this value.Tweet
The new model would present a way for brokers to spread risks among different insurers to their clients’ benefit. “If we have a system where brokers share client risks with all the insurance markets in a centralized shared services model,” Burns says, “this would be a far more efficient way for insurers to spread their risks and for clients to receive more competitive premiums.”
Current expenses up and down the insurance value chain would wither, Garratt says. “If clients share their data with brokers, and brokers share this data with insurance markets, it will result in reduced costs for all parties,” he explains. “All those inputs, calculations and equations that each broker and carrier must do on their own would be removed from the process. There would be no more need for rekeying all this data as it’s passed along the value chain. Instead, the exposure data would move seamlessly and transparently from the client to all potential risk bearers, dramatically reducing acquisition and operating costs.”
This would certainly be a positive development for business clients. “If a broker presents a good commercial risk to all the insurance markets—which is apparent in the client’s exposure data—carriers can compete to charge less in assuming this risk, based on their respective underwriting appetites,” Garratt says.
Although the new model would produce less traditional income for brokers, the loss of revenue would be offset by heightened efficiencies. “Brokers have significant operating expenses that are a reflection of the current inefficiencies in the market,” Garratt explains. “If you remove these inefficiencies, brokers can reduce their costs to maintain current profit margins.”
Moreover, the broker’s enhanced knowledge of clients’ exposures presents the opportunity to become more involved in mitigating clients’ risks. “If a broker comes to us with a client whose exposure data indicates is risky, we would charge more to assume the risk or not take it at all,” Garratt says. “But crucially for the client, the broker and the underwriter now have the ability to help the client manage these exposures, working to reduce the activities and behaviors that resulted in the company being perceived as a higher risk.”
This creates value for the client and possibly a new revenue stream for the broker, while furthering the closeness of the relationship brokers enjoy with clients. “Less money is consumed by process and transaction, and more is used to pay claims, provide value-added services and develop new products,” he adds. “The outcome in all cases is better, quicker and cheaper service for our clients, which is what we all must focus on.”
Customized, Complex Products
By participating in the proposed data-sharing model, brokerages and insurers will be in a more opportune position to create bespoke insurance products. “All that exposure data in the hands of a carrier or a broker can be an engine of innovation,” Karna says.
She provided the example of a large retail chain caught in the crosshairs of a reputational disaster. By mining social media data, the company’s broker may learn that flash mobs are forming to protest the business in a variety of store locations.
“For the sake of argument, let’s assume the organization has comprehensive property insurance absorbing losses caused by vandalism that occur in its stores’ parking lots, which generally have 300 to 400 cars parked per lot,” Karna says. “Now let’s assume the financial limits on this insurance policy are $1 million. Would this amount cover the potential vandalism of cars in the aggregate?”
Possibly not. Even if it did, how much of the total limit would be left over to absorb additional property losses throughout the remainder of the policy duration? “The opportunity now exists for the broker to craft a bespoke insurance policy absorbing the one-time property damage losses caused by vandalism and present it to carriers for their consideration,” Karna says.
Prinn cites similar value. “Brokers and carriers have the ability to take a very complex commercial insurance program like one sees in the oil and gas sector and ferret out comparisons across different oil and gas companies,” he says. “You now can take a common look at these risks, which wasn’t possible before, allowing complex (insurance) products to be packaged.”
There is even the opportunity for brokers and carriers to share customer data with other industries, assuming the owners of the data opt in for this use to avoid privacy regulations.
“Wouldn’t it be great if I bought travel insurance and the carrier shared this data with a rental car agency to set up a vehicle for me when I landed?” Prinn says. “Or the pension side of my insurance company knows I have children and recommends setting up a college plan at a local bank? The future broker or carrier might well be able to help with these things, which is very exciting. And we’re still really at the beginning of all this.”
Nevertheless, he is confident the current model of insurance will be relegated to the trash bin of history. “I was a street broker at Marsh placing Fortune 500 risks for 20 years with carriers that I knew from pure personal experience alone could take on these risks,” he says. “I can tell you unequivocally that this art form is dying. The broker of the future will know how to use data and analytics to find the right insurance markets for their clients, as opposed to relying on experience alone. The model of tomorrow will be a blend of art and science.”
If we can move data quickly and with much less friction between a client and the end risk bearers, we can remove the replication of work up and down the value chain, reducing the high cost this produces for all of us.Tweet
Whenever he talks on the subject, Prinn frequently mentions his 10-year-old daughter’s interest in playing the online game Minecraft. She listens to the YouTube videos of a young man in his 20s named Daniel Middleton, a professional gamer who plays Minecraft and comments about the game’s intricacies to his online listeners.
“I mention Dan because last year he made something like $16 million,” Prinn says. “If you told me five years ago that some guy who sat in his home commenting to kids on a video game would make this kind of money, I would have fallen over laughing. In no way could this have been predicted.”
He feels the same way about the new model of insurance. “Ten years ago, if you told me the traditional model would change so the customary parties to the transaction could share data, I would have dismissed it out of hand,” he says. “And now it is upon us.”
The Tools Are Here
Change is tough for any industry, but the alternative is stark. Just look at the many industries that failed to heed the disruption caused by a technology interloper. “If a broker believes its future value remains as a middleman, where it is being paid merely to access an insurance market, it is dead before it knows it,” Prinn says. “The entire industry is under siege by technology companies that will create better models unless we do it first.”
Down the line, as the internet of things becomes ever more mainstream, millions of sensors will produce an abundance of data, sharpening the ability of brokers to analyze complex risk exposures to a fine point—if they take pains to make this happen.
Yes, there are obstacles to be overcome, including the need to structure data into common formats. But these are relatively easy hurdles to surmount, and organizations like ACORD are already tackling the problem. “Once we have structured data, the entire ecosystem can move in sync to share information and bring down costs,” Burns says. “There’s no going back to the ways things have been.”
Others agree. “We now have the tools to do things we’d only dreamed about before,” Karna says. “Much of our work here now with data is focused on seizing these opportunities.”
The future is as bright as the industry allows. “There’s a tremendous amount of excitement now why the traditional insurance market must change and how this can occur,” Garratt says. “And that can be a catalyst for needed change to occur at a really fast speed—to the benefit of the insurance market and our clients.”
Banham is a Pulitzer Prize-nominated business journalist and author who writes frequently about the intersection of technology and insurance. email@example.com
Community health is a pretty important topic, the whole issue of heath inequity.
You recently became chair of the CIAB’s Council of Employee Benefits Executives advisory committee. What has been the biggest benefit you’ve taken away from your time on CEBE?
Some of the smartest people in the industry make up the CEBE advisory committee. I’ve always been impressed with the depth of knowledge and the understanding of their clients and the market. That’s pretty important to have at a time of change and disruption.
You’ve lived near Chicago your whole life. Where did you grow up?
I was born in the hospital where Ernest Hemingway was born, in Oak Park, Illinois. Right now I’m re-reading For Whom the Bell Tolls. My father’s parents were the first generation of our family from Ireland. They worked on the canal that was part of the project to reverse the direction of the Chicago River. It used to flow into Lake Michigan. Now it flows from Lake Michigan.
OK, let’s get this out of the way—Cubs or White Sox?
I’m a huge Cubs fan and Blackhawks fan. One of my sons is a White Sox fan, like my father was.
How did that happen?
My younger son took to the relationship he had with my dad and just followed suit. Sometimes I mention that I dropped him on his head as a small child.
I guess that would explain it.
My father served in World War II. I have a letter he sent home to his parents while he was in France. The note starts: “Dear Mom and Dad, I’m doing ok. I understand the White Sox beat the Yankees in a doubleheader.”
As a Yankees fan, I can appreciate that.
I think my son was well into his teenage years before he realized Damn Yankees was actually two words.
Who have been your most influential mentors?
My father, Patrick. He came back from World War II and went to school on the GI Bill. He became legally blind in his late 30s from a rare eye disease, yet he worked and supported our family through various jobs. He found a way to hit fly balls to me based on feel. I’d say he’s probably my biggest influence. I also had a great debate coach in college, Dr. Jack Parker. I went to school on a scholarship for intercollegiate debate. I think many things—how I execute in business, how I drive processes in business—really can go back to Dr. Parker, who was just a really strong influence in my time in school.
I didn’t know there was such a thing as a scholarship for debating.
I went to a boarding school in Wisconsin. We took a class called Extemporaneous Speech. They give you a topic, and 15 or 20 minutes later you give a speech. My Irish gift of gab probably helped.
Have you used those debating skills in your business life?
I’d say the most significant thing is having a critical-thinking focus. You would walk through arguments from start to finish, and the most important work in business has involved step-by-step logical thinking. It also helps you build passion in others around the vision you have.
You’re the immediate past chair of Community Health Charities. Why have you been so committed to that group?
"Some element of my career from the start has involved healthcare, so it was a group I had an affinity for. They organize worksite giving campaigns for health charities, with both the federal government and private employers. Community health is a pretty important topic, the whole issue of heath inequity. Your zip code might be more of a determining factor of your health status than your genetic code.
How would your co-workers describe your management style?
Strategic. Collaborative. Process-oriented. Outcomes-driven.
If you could change one thing about the insurance industry, what would it be?
To be able to reach more people more fully. Folks like myself, who have been in the business for more than 30 years, have been providing coverage, advising retirement, etc. Yet some people still don’t have adequate coverage and are not prepared for retirement. There is more we can do.
Last question: What gives you your leader’s edge?
Demonstrating an obvious passion for my vision and relying on and supporting my team.
The Finnegan File
Favorite vacation spot: The Southwest (“Anywhere in the desert.”)
Favorite place to watch a game at Wrigley Field: “There’s nothing better than a hot day in the bleachers.”
All-time favorite Cub: Don Kessinger. (“I was a shortstop as a kid.”)
Favorite movie filmed in Chicago: Ferris Bueller’s Day Off
Favorite Hemingway book: For Whom the Bell Tolls
Favorite musician: Stone Temple Pilots (“But I enjoy any concert I can attend with my sons. Music has been and is a great point of connection for us ever since they were very young.”)
Wheels: 2010 Lexus 350 (“It doesn’t have 50,000 miles on it yet. I drive to the airport basically.”)
So Sandy, tell us about yourself.
I grew up in Miami, Florida, and ended up in Washington, D.C., by way of North Carolina. I studied history and philosophy as an undergrad and decided I loved writing and wanted to get better at it. After a few years out of college, I went back to school and earned a master’s in fine arts in creative non-fiction writing. Since then, I have been trying to meld all those skills into one job, which has proved interesting along the way.
I’ve worked as an editor. I worked for a tiny publisher, in Charlotte, North Carolina. I also worked at a heritage management company, where we dug through archives of companies and created histories of their organizations. It was a talented team of archivists and curators.
Eventually, I went to work for a hospital association, where I began a digital magazine with one of my colleagues. I loved the way we were able to create really compelling stories about people and tie them with the business of how hospitals operate. They were stories through the eyes of the patients.
I eventually found my way to The Council, where I’ve been working with you on Leader’s Edge and expanding my knowledge of insurance, which was limited to healthcare, before coming here. It’s been a great learning experience.
When did you first really understand in your head you wanted to write?
I was working after college for The Princeton Review, which is a test prep company. It was a great job. I learned a lot. I ran some of the programs they offered, and it was a great group of people. But, you know, I reached a point after a few years where my boss said to me, “You’re doing a great job and this could be a career for you. But you’re going to have to want to go run a small office in the middle of the country and go from there.”
So you’re kind of either up or out, basically. I just knew that wasn’t what I wanted to do. And it had never left me how much I enjoyed the way of thinking and writing and recording that I learned about when I studied the new journalism in college. I just decided I wasn’t anywhere near where I needed to be as a writer, but I knew it was what I wanted.
At that point, I left that job and started looking at grad schools and did a lot of really odd jobs for a while. That was the point at which I decided I’m going to try this career path and I might fail miserably at it. If I do, I’m going to be a really good lawyer instead.
But how did you fall in love with journalism?
When I was in college, I was studying history and philosophy. As a history major, you had to take a deep-dive course before you graduated. There was one topic, and it was a very small class and there was a thesis-style paper at the end, and it was a big deal for a history major.
So I kept looking at the offerings each semester as I moved on in my college career. Nothing ever really interested me enough until they posted the topics before my senior year. There was a new course, and it was “A Study of Countercultures.” I was like, OK, this looks really interesting. And it was bohemians and beats and hippies, all the way through roughly the 1980s. I loved it. It was so interesting to read about these groups of people in American society and how they changed some things. And I ended up focusing on the rise of the new journalism for my thesis.
So you must be a fan of the late Tom Wolfe?
I was, but he’s not the only one. It was Norman Mailer’s reading of The Armies of the Night that I found so compelling. I also loved Wolfe’s Electric Kool-Aid Acid Test and In Cold Blood. The writers were there, and they were in it. I found it interesting how the story and the outcome changed because of their presence in the story. It was just so compelling to me, from a writer’s perspective and from a philosophical perspective.
Try that at Leader’s Edge?
A little gonzo journalism?
You never know.
Are you a Hunter S. Thompson fan?
Oh, absolutely, yes.
What’s the best thing you’ve ever written?
I don’t think I’ve done it yet.
Up till now.
Up till now. I guess some of the work I did for the digital magazine we developed at my previous job at America’s Essential Hospitals. The magazine was called Walls Down. We were trying to take down the four hospital walls and show what happens inside. We interviewed some patients—some incredible people—and I think some of the writing I did there is probably some of the work I’m most proud of at this point.
How do you go from writer to editor?
I was always good at editing, but I didn’t love it the way I love writing. I had to work much harder to be a decent writer. At this point, I think writing is an ongoing journey. Editing was the opposite for me. It came naturally, and I could do it fairly easily.
What makes you a good editor?
For me, I know the rules of grammar, but I pay attention to them only some of the time.
Good writers break them all the time.
I worked with someone, years ago—she was a great editor, and she always said, “You know, style and grammar are tools that you should use to make writing more digestible and easy to read, but you should not be bound by those tools.”
It’s something that I very much agree with. So, for me, I hear it. I hear it in my head, and if it sounds right, it usually is.
Every magazine has a voice. What voice will you have for Leader’s Edge?
I think you’ve done a great job of creating a voice for the magazine, and I think I would be somewhat in error to trample on that. I think over time my voice will trickle in, and I hope it’s thoughtful.
When it comes to securing a workforce for the future, the industry had been particularly challenged to move from the stereotypical insurance executive of days gone by, but members are now working to fold thoughtful diversity and inclusion initiatives into their recruiting best practices.
Progressive industry leaders can take action by building on some of the work pioneering organizations have undertaken in recent years, moving beyond the diversity dilemma of just pink and blue issues. An older work force is bringing the retirement equation into the mix. A rising minority population makes racial and ethnic diversity an increasingly important factor as well.
The Cool Factor
Research shows companies now are exploring diversity at different levels of the organization and are considering a broader understanding of the issue beyond gender. That’s partly because the industry’s employees are getting older. In the next five years, 25% of the people now employed by the insurance sector are expected to retire. That makes recruitment of the next generation a top priority.
In the past, the insurance industry has been slow to make a concerted effort to recruit talented young professionals out of college. Not only do we have to be present on campus to be competitive in luring top talent, we have to find ways to sell a career in the industry. One way to do this is to show how insurance can wield positive influence in the world. That means promoting some of the unique aspects of the business. For example, do they know that coral reefs have their own insurance policies or that women in emerging markets use insurance to protect their crops? Closer to home, insurance protects local communities, and the data we collect on a variety of sectors—manufacturing, technology, medicine, food and more—helps these businesses adapt to global change.
Many people, including myself, end up in insurance by accident. I once aspired to be a politician and work at the United Nations before falling into insurance as a risk analyst in Washington, D.C. I quickly discovered insurance is the oxygen for building societies and economies. I fell in love with a business that allowed me to engage in different societies around the world and see how everything is interconnected.
From my own experience, I’ve seen how recruiting becomes easier when there’s something exciting to sell. Insurance has it, but we have to do a better collective job of promoting the industry to the next generation.
An Industry Charter
While work still needs to be done in terms of diversity and inclusion, there has been a shift. That momentum is continuing.
Earlier in my career, I was raising young children and spent far too much time working—admittedly for fear of losing my position. I now know I’ll never get that time with my children back. Women and their spouses with young families shouldn’t feel pressed to make a choice between work and having children. Industry leaders can—and, I know, will—continue to establish and promote flexible work policies to appeal to a broader and younger workforce.
At AXA, it is the responsibility of every one of our CEOs to infuse diversity and inclusion into the business. There’s an open communication policy around diversity and parental leave and how all groups should operate around issues such as extended family matters. Personal experience has shaped me as a leader who stresses to my junior colleagues the importance of feeling comfortable taking the time to introduce a child into the world without the fear of damaging their career.
Strategies like these are being discussed in every boardroom these days because of the link between diversity and improved financial performance. There are volumes of research showing that diversity is tied to above-average profitability across a variety of industries. This demonstrates the need for the industry to draft and implement a tangible industry commitment that’s based on proof points tied to diversity and financial performance.
Companies that voluntarily engage would make a commitment to embrace diversity best practices and foster policies that boost inclusion and diversity commitments. Verna Myers, a nationally known speaker and consultant on diversity and inclusion issues, has said, “Diversity is being invited to the party; inclusion is being asked to dance.” I want the industry to go beyond patting itself on the back for new diversity and inclusion policies, which are often perceived to be the domain of human resources departments, and shift to something that is owned and embraced by an entire business.
With broader recruitment strategies coming to the fore, there are some blueprints the industry can look toward to move diversity discussions into something tangible.
The Insurance Supper Club is a business network for women operating in or involved with insurance. It has formed a groundbreaking partnership with the Chartered Insurance Institute, a professional body dedicated to building public trust in the insurance and financial planning professions. The two groups are working in tandem to make insurance more visible to aspiring females and are showcasing a variety of women who are working across the industry. Together, they have created the Insuring Women’s Futures Program, which is working to reinvent insurance for women by promoting and enhancing the role of insurance and financial professionals regarding women and risk.
The Insurance Industry Charitable Foundation also does tremendous work to raise awareness about diversity in the industry and in recruiting. This past June, I presented at the Dallas forum of the Foundation’s Women in Insurance Conference Series. There, I shared my personal experiences in the industry—experiences that have taken me all over the globe in transactional risk, government relations and energy sector roles.
The truth is the insurance industry is being disrupted on several fronts. There’s the pace of digital change, new technologies like artificial intelligence, and different ways of working that will need to be adopted to attract younger workers. As the industry continues to tackle these, it will need to do a better job of reaching out to the next generation—which, as we all know, is inclined toward innovation and access to information.
Creating another mentoring program isn’t the trick. It will take higher-level solutions to meet the challenges ahead. That means making an investment in articulating the value of a career in the industry. Change agents will work to buck the insurance sector’s staid image as they reach out to the next generation. They’ll also use data to make the case for diversity, continue to tout the industry’s importance and value—and of course, empower us to recruit those who will champion for innovation and disruption.
Miller is president and CEO of AXA Insurance Company (US), AXA Group’s Property & Casualty Company in the United States, and global lead for AXA’s Women as Entrepreneurs initiative.
First, the good. The National Labor Relations Board overturned the Obama administration’s definition of “joint employer,” under which one business can be held liable for the workplace violations of another business. Critics of the administration’s position claimed it disrupted the normal corporate control rules. For example, it would have allowed franchisee employees to bring employment actions against franchisors (think McDonald’s) and employees of small firms that contract with larger companies to bring such actions against those larger companies.
In a perhaps even more impactful development, the United States Supreme Court ruled in May, in Epic Systems Corp. v. Lewis, that employers can—through arbitration agreements requiring individual proceedings—lawfully require employees to waive their rights to pursue employment-related class actions. There had been an open question as to whether such employment-related arbitration requirements violated the National Labor Relations Act.
In light of this decision, your firm and your clients might want to revisit your employment agreements to determine whether mandatory employment-claim arbitration and class- and collective-action waivers make sense for your businesses. Such waivers can provide significant risk-mitigation and cost-savings to employers. For example, thousands of wage-hour class actions are filed each year, including some prominent cases in which insurance agencies/brokerage firms are defendants. Many of them, in the words of the Supreme Court in Epic, “unfairly ‘plac[e] pressure on [employers] to settle even unmeritorious claims.’”
Plaintiff’s lawyers undoubtedly will attempt to pivot to attack waiver requirements under state-specific contract unconscionability principles. Your firm and your clients will need to review state-specific legal assessments to determine how much you can rely on the ability of the waiver agreements to survive such attacks.
The extent to which you may compel or want to compel arbitration and waiver of class-action rights under ERISA plans raises some interesting questions. The ERISA statute itself allows breach of fiduciary duty claims to be brought by a plan participant on behalf of the plan itself, effectively expressly authorizing collective class-type actions for such claims. The Department of Labor also has a long-standing regulation in place that prohibits group health plans from requiring mandatory arbitration of adverse benefit determinations.
The Epic decision is grounded, however, on the Federal Arbitration Act’s strong federal policy in favor of arbitration, including agreements requiring arbitration of disputes using individualized rather than class- or collective-action procedures. The Epic opinion therefore holds that congressional intent to bar such requirements must be expressly stated. In the words of the court, Congress cannot be presumed to “hide elephants in mouseholes.”
Under Epic, it appears that ERISA cannot be read to bar mandatory arbitration of any claims, because it does not include any express statement to that effect. The Department of Labor regulation barring mandatory arbitration of adverse benefit determinations thus appears to violate Epic, and there likely will be efforts to encourage the department to withdraw that regulation.
Plan sponsors and their benefits providers will have choices to make in deciding the extent to which they want to require arbitration of plan participant claims, and they need not necessarily impose a single rule for the resolution of all claims. For example, there may be sound reasons to allow (or even require) breach of fiduciary duty claims brought on behalf of the plan to be litigated in court. And some plan sponsors might not want to take on the litigation risk associated with compelling arbitration of adverse benefit determinations unless or until the Labor Department withdraws its regulation purportedly barring such arbitration requirements.
The Not So Good
Many employers have not been aware that all employers—regardless of size, industry, location or workforce composition—must verify the employment authorization of all their employees through the use of the U.S. Citizen and Information Services Form I-9 documentation process. As part of its overall immigration policy under President Trump, the Department of Homeland Security has committed to increasing immigration enforcement activity fourfold to fivefold, primarily through the use of raids and unannounced Form I-9 audits. The president’s 2018 budget also includes a provision that would require mandatory use of DHS’s E-Verify employment eligibility verification system by all U.S. employers.
Penalties for violating the I-9 requirements range from $216 to $2,156 for failing to properly complete or maintain the I-9 forms and from $539 to $4,313 for knowingly hiring, recruiting, referring or continuing to employ unauthorized workers. Egregious violations also can result in criminal felony prosecutions. Penalties are assessed on a per-error or per-omission basis, not on a per-employee or per-form basis. A single Form I-9 easily can contain multiple violations, each of which can result in a separate penalty, increasing the overall penalty exposure exponentially. The Second Circuit has ruled the failure to properly fill out or sign the I-9 form is a violation, even if all of the requisite documentation has been collected and the employee is legally authorized to work (so even if there is no harm, there can still be a foul).
The applicable regulations require employers to produce their Form I-9s and the requisite supporting documentation within three days of receiving a Notice of Inspection from Immigration and Customs Enforcement. Unprepared employers can find this short time frame to be very burdensome, disruptive and costly.
To best prepare for an audit and to minimize any penalty exposure, there are some actions your firm and your clients should consider.
- Have procedures in place for the proper collection and maintenance of I-9 forms and the requisite supporting documentation, including E-Verify reports if they are collected. These procedures should include properly calendaring employment authorization expiration dates for Form I-9 reverifications.
- Train staff responsible for the I-9 and E-Verification process on a regular basis to ensure they are kept current on the ever-changing form and process requirements.
- Audit the procedures and collected forms on a regular basis to ensure the procedures are being properly followed and the forms accurately filled out and maintained.
Sinder is The Council’s chief legal officer and Steptoe & Johnson partner. firstname.lastname@example.org
Wheeless is chair of Steptoe’s labor and employment practice group. email@example.com
LaRocca is chair of Steptoe’s immigration practice group. firstname.lastname@example.org
Serron is a partner in Steptoe’s employee benefits and ERISA practice group. email@example.com
In doing so, they have come face to face with a huge reality check: although it has been more than 20 years since EU privacy laws went into effect, very few companies know what data they have, where it all goes, or what protections they are supposed to have. This is because (1) many companies do not have data inventories and (2) privacy compliance requirements are not thoroughly integrated into cyber-security programs.
Digital asset management is one of the cornerstones of any cyber-security program: an organization has to know what assets it has in order to secure them. Internationally accepted best practices and standards for cyber-security programs require (1) asset inventories of hardware, applications and data with assigned asset owners and (2) the designation of information classifications for data based upon risk and magnitude of harm. Common classifications for data are Top Secret, Secret, Confidential, and Public. Although some organizations may have more or fewer classifications, asset management experts discourage organizations from establishing too many classifications, because compliance becomes more difficult and information may be inconsistently classified.
Where Oh Where Is My…Data Inventory
The risk posture of any company is weakened if it does not have a data inventory with formally assigned business owners and information classifications. Even with basic data inventories, very few companies have mapped data flows so they know which users access sensitive data and the jurisdictions involved. As a result, it is difficult for cyber-security personnel to know what data are subject to privacy protections or to determine effective privacy and security controls.
Let’s take this apart. Companies need to know:
- What data they have and the data classifications assigned
- What software applications use the data
- What users access the data and where those users are located
- Where data are collected and stored.
IT departments and cyber-security teams focus on inventories of hardware and software applications because these assets have to be maintained. Many companies do not have formal data inventories because they assume data used by a system will be protected as part of the application controls. Thus, they develop and maintain only software application inventories. Companies commonly assign application owners, but not data owners, making the application owner the de facto owner of the data that are generated and maintained by the application. For example, the chief financial officer may be designated as the owner of an organization’s financial application and, as such, is the implied owner of the financial data that are used and maintained by the application.
Under this approach, the application owner approves access to the application and data used by it. Application owners know what the application does, but they generally are not well informed about the various data that the application may use or know the data classifications of these data. The problem, of course, is that an application may use data owned by other business units. For example, a financial application may use employee data that are owned by the human resources department. When access is approved for the financial application, access to the data it uses is also approved.
Disconnect Between Privacy and Cyber Security
If an organization does not have a data inventory, data classifications often are not formally assigned and documented. Some classifications of data may have been established as part of a records management process, but these classifications might not have been extended to electronic forms of data and recorded in a data inventory. At the core of this problem is a disconnect between privacy and cyber-security personnel.
Privacy personnel attempt to identify personally identifiable information (PII) and data subject to privacy laws and regulations or contractual requirements. They develop policies and procedures and train personnel on privacy requirements and proper data handling, but they are seldom responsible for an organization’s data inventory.
One must remember that organizations have lots of data that are not considered PII and aren’t under the purview of a chief privacy officer, such as pricing and customer lists, intellectual property (IP), trade secrets and other business know-how, customer data, strategic plans, etc. It is equally important for these data to be protected and have adequate controls in the cyber-security program, because these data are highly targeted by cyber criminals and insiders.
As organizations increase in size and operational complexity, problems occur when data ownership and information classifications are not formally specified. Without proper owner control over data, access may be granted to personnel who do not have a need, or the access may be broader than necessary, increasing the insider threat.
Best practices require the owner of an asset to determine data classifications, approve access to the system and data, and approve change management. It is critical that privacy personnel understand how privacy controls are integrated into a cyber-security program. Controls to protect data are supposed to be based on the information classification and the risk categorization that is assigned to the application. These controls should be jointly determined by the company’s data owners and cyber-security and privacy personnel. All too often, however, controls are determined solely by the IT and cyber-security teams.
When an organization suffers a cyber attack that impairs its IP and business data, the company will be not be able to demonstrate to regulators and investors that it is in alignment with best practices if it doesn’t have data inventories, information classification, and data mapping. The company won’t even be able to show it was controlling access to the data, because it was controlling access to applications only. With the EU GDPR effective only since May 25, it is uncertain how the regulation will be enforced, but many privacy experts expect some stiff penalties will get levied against infringing companies to set an example of enforcement under the GDPR.
“The identification of data in an organization and inventorying it is a critical element of review in a risk assessment,” says Tom Smedinghoff, a privacy and cyber security partner with Locke Lord in Chicago and former chair of the Science & Technology Law Section of the American Bar Association. “Whether a control is required by GDPR, the New York financial regulations, HIPAA, Massachusetts breach laws or any other regulation, if a company doesn’t know its data and how it flows through the business processes, it cannot adequately assess the risks,” he adds. “Many of the activities in cyber-security programs are also compliance components of privacy laws, so there has to be better coordination between privacy and cyber-security personnel if organizations hope to manage their compliance risks.”
Coordination between legal, IT, cyber-security, and privacy personnel is not very mature in most companies. Although these personnel are generally aware of each other’s activities, they lack coordination on controls and risk management. Performing a risk assessment is an excellent first step in getting them to work together, and it enables them to engage with the risk manager on cyber risk insurance and risk mitigation.
Insurance agents and brokers can play a role in helping their clients understand their data and compliance risks and develop effective risk strategies. “There is great interest now in insuring against GDPR violations. Insurers offering these policies may require companies to have mature data inventories and other optimal privacy practices in place so they can better manage the risk,” says Jeffrey Batt, vice president of Marsh’s cyber practice.
Westby is CEO of Global Cyber Risk. firstname.lastname@example.org
How are you positioned to grow? What’s your angle, the edge that will attract clients and candidates to your business?
How do you fit in?
If you haven’t stopped to strategically consider where your firm stands in the market as you plan for the future, now is the time. With the influx of private equity investors and new private capital showing interest in the insurance industry, if you’re like most agencies, you’re in a landscape where mergers and acquisitions are a theme. Maybe your competitors have partnered with a larger national organization, maybe they got bought out by a major regional player, or maybe—like you—they are holding on to hope. The misperception that many owners have in a market where everyone is “selling out” is that their status as an independent is the ultimate advantage. They think they’ll attract people from those selling businesses—that the acquired firms will shed talent and their client base will diminish. That’s just simply not the case.
The reality is that people usually don’t leave firms that have undergone a successful acquisition. Most typically recognize opportunity. They see personal and professional growth for themselves, and they’re excited about what this means. However, in the instance where key employees aren’t sticking around for career growth and new opportunities, the selling shareholders will buy their loyalty and lock them up with new restrictive covenants.
Leadership is usually hyper-motivated to grow in a way they never did historically. They can leverage their new partner’s resources and become stronger, more efficient, more influential. They can bring better service and ultimately value to their client base.
Now, how does this picture change where you stand in the market?
Stop. Look. Listen. Get real about your surroundings. Here are some areas of focus to consider as you get a grip on the market and your place in it.
How are you addressing growth? In MarshBerry’s State of the Industry analysis, we found that the three-year compound annual growth rate of the 14 most active private-equity funded brokerages is 28.4%. Insurance firms posted an average 5.8% growth in 2017, with the top firms growing at a rate of 14.9%. What does this mean? If you aren’t growing by 6% or more, you’re shrinking. And most agencies are not exceeding this average—they’re kicking the can down the road.
Are you taking the meetings? I wonder how many calls you have received from a buyer in the marketplace who wants to just get together for an introductory meeting. Do you blow off the voicemail, or do you take the call? Even if you have no plan to sell your business, there really isn’t harm in saying yes to a meeting. How often do you get a chance to sit down with a peer or competitor and learn what best practices they’ve adopted to succeed? Use your time to find out what they think about the market and determine where they fit in. This will help you better understand your position. Personal meetings with owners who want to get to know your firm provide an opportunity to ask questions and get a real, honest snapshot of how another business is positioned and where you stand relative to your peers in the marketplace.
Are you self-aware? Be honest about what you are doing today to grow. When you stand on the pulpit and scream to anyone who will listen that you are going to remain independent, is it a hollow promise? Step back and take stock of how you are truly investing in your firm’s growth. Are you recruiting production staff and spending your hard-earned profit on reinvestments in value-additive resources? Are you focused on coaching and mentoring? Do you have a plan for succession? What are you doing today to position yourself for tomorrow? All great questions that will help you be honest about your position in the marketplace and determine whether you can honestly accomplish your goals.
Where are you going? Once you nail down where you stand in the market, you can plan for the future. You can determine what steps are necessary to drive growth, attract talent, increase value and create a competitive advantage that will serve you well whether the end game is to perpetuate or sell.
As spring heated up, so did market activity among buyers, with 36 deals announced in May 2018 compared to 29 announcements in April 2018. While the market appears to be slower than last year, with 168 announced deals through the end of May compared to the 230 deals announced over the same time period in 2017, several pending transactions of top 100 brokers, along with the expectation that there are more to come, give a sense that the market is as active as ever.
After announcing four deals in May alone, Alera Group is now tied with Hub International at 13 deals announced through May this year. AssuredPartners is in second place with 10 announced deals but is followed closely by BroadStreet Partners, NFP and Gallagher, which have all announced nine deals thus far in 2018.
The Hilb Group, which published 14 deals in 2017, announced its first transaction of 2018 with the acquisition of a New York-based property-casualty agency, The Bentson Insurance Group (May 1, 2018). This acquisition bolsters Hilb’s presence in the New York/New Jersey region, making this Hilb’s fifth office in that region and bringing its total office count to 58 across 17 states.
Trem is EVP of MarshBerry. email@example.com
Well, these folks have a name. They are CAVE dwellers (Citizens Against Virtually Everything). Unfortunately, they are not as much fun as Fred Flintstone or his pal Barney Rubble. They cause disruption in your organization, and their attitude is contagious. So how do you handle this dangerous species?
The first step when dealing with CAVE people is to understand what type of naysayer you have. Yes, they come in different flavors. Writer Susan Milligan broke down four types of naysayers in a blog post for the Society for Human Resource Management titled “The Whiner, Know-It-All and Naysayer Can Make the Workplace a Drag.”
The Whiner, Milligan wrote, engages in a steady stream of complaints. They complain about everything from the boss to the color of the paint in the break room. What to do? Here are three pieces of advice from Mike Rogers, president of The Teamwork and Leadership Company:
- Ask questions. When they whine, ask them what they are going to do about it. This shifts the responsibility back on the employee.
- Help them see the bigger picture.
- Create team dos and don’ts and put “No Whining” at the top of the list. Create a “No Whining Jar” and use the money to treat the group to lunch.
The Negativist, Milligan wrote, can be counted on to rain on the parade. Negativists have a dozen reasons why something can’t be done. Susan Heathfield, in “How to Manage a Negative Employee” on The Balance Careers website, offers these coping tips:
- Inform these employees that their negativity is having an impact on co-workers, bringing everyone down.
- Ask them what is causing the negativity at work. Actively listen to the response.
- Focus on creating solutions. Look for options for how these employees can create positive morale.
- Focus on the positive aspects of their performance and potential contributions.
- Try to compliment them in future interactions.
The Excuse Maker, Milligan wrote, substitutes excuses for results. Nothing is ever their fault. The Excuse Maker accepts no responsibility, instead placing blame on colleagues, clients, the computer—and sometimes even you. Anne Loehr, in a Huffington Post blog titled “How to Effectively Manage Difficult Employees: The Excuse-Maker,” offers the 5Cs when working with such an employee:
- Commit or quit. If you decide to try to salvage these employees, you must remember that you are making a firm and serious commitment to their future.
- Communicate. Have a frank and open conversation in which you come to an agreement on a definition of the problem. Determine how you will work together to solve it.
- Clarify Goals and Roles. Don’t assume these employees know exactly what is expected of them. Have a detailed discussion on responsibilities and goals.
- Coach. These employees will need your assistance if you want a long-term change of attitude. Coaching is your most powerful and flexible tool.
- Create Accountability. To avoid any backsliding in behavior, create a system to hold them accountable for their results.
The Gossip, according to Milligan, can be the most dangerous CAVE dweller of all. The emotional damage that workplace gossip can cause destroys trust, the foundation of high-functioning teams, resulting in a loss in productivity. In a Forbes article, “5 Ways to Stop Negative Office Gossip,” Lisa Quast offers the following tips:
- Address the perpetrators, face to face, in a confidential location. Help them understand the impact their behavior is having on the team and the consequences if their behavior continues (from a written warning to a demotion and job loss).
- Meet with the entire team and let them know you will not tolerate gossip.
Zane Safrit, in his blog “Beware the C.A.V.E Dwellers in Your Organization,” tells us, “These are the…nattering nabobs of negativity, the expert marksmen who shoot down every idea with a question or a snark or sarcasm or a poignant pause. They are expert in all the reasons things don’t work, won’t work, never will work.”
While you can’t change them, you can inspire them, offer them resources and remove obstacles. If they insist on remaining in the CAVE, you might need to remove them from your group. They will only lead your team into unhappiness and failure.
Safrit offers ideas on how to entice them out of their caves.
- Offer them food. No, not literally (unless you think that would work). Offer incentives that are meaningful to them. Reward the right behavior.
- Entice them to take small steps toward change and reward each step with meaningful incentives.
- Create a safe environment for change, which is excellent for everyone but especially important to risk-averse CAVE dwellers. They learned somewhere along the way that mistakes are bad and are punished. You need to teach them a new process.
With time, patience and some of these tips, you will be on your way to helping your CAVE dwellers channel their heart and their positive energy to the benefit of your firm.
McDaid is The Council’s SVP of Leadership and Management Resources. firstname.lastname@example.org
Coverage could be spotted everywhere, protecting players, tourists, sales promotions and construction.
According to FIFA, 2014’s World Cup racked up 3.2 billion viewers. While Russia provides a venue for the rest of the world to compete, such a large audience also provides a prime opportunity for terrorist groups and mounting safety concerns.
History has shown that major sporting events are not immune to acts of terror, and some have been devastated by them. For example, during the 1972 Summer Olympics in Munich, eight terrorists from a Palestinian terrorist organization known as Black September breached the apartments of Israeli athletes in the Olympic Village. After a 20-hour hostage crisis, 11 Israelis had been killed, along with one Munich police officer and five of the terrorists. More recent incidents include the 2013 Boston Marathon bombing that killed three people and injured more than 260 and the 2015 attack outside Stade de France in Paris, in which suicide bombers detonated their vests in three different areas around the stadium. This was part of a coordinated set of shootings and bombings around Paris that left 130 people dead and hundreds wounded.
According to underwriters Chris Parker and Chris Rackliffe at Beazley, the key to covering terrorism exposure is to take into account the location and assets that are being insured. “Whether there will be any high-profile or controversial individuals or companies present at the location to be insured; the physical security that an insured has in place at the locations to be insured; and their previous loss record—all of these factors have an effect on the premium rate that would be charged.”
With 64 matches played by 32 countries across 11 different cities, all within a month’s span, security and safety are a high priority for the host country. But Russia’s participation in the Syrian Civil War and policies across its Caucuses have heightened terrorist tensions inside its borders, and the last few years in Russia have seen a number of terrorist attacks, including a 2017 bombing in the St. Petersburg subway that killed 11 people and wounded more than 40. These attacks have not gone unnoticed, and premiums for covering terrorist attacks have risen almost 10% since Brazil’s 2014 World Cup. Beazley estimates that kidnap and extortion coverage runs about $25 million while policies for terrorism and loss of attraction total $250 million. For cyber attacks and data breaches, coverage can cost over $200 million.
With Russia dealing with high costs and stakes, the post-Soviet country has ordered its authorities to withhold from the media information regarding murders, thefts and police investigations. This blackout will be carried out until July 25, 10 days after the World Cup ends.
“From a terrorism and K&R [kidnap and ransom] perspective, we assess each risk on its own individual merits and would not take into account the fact that information might have been withheld by the Russian Interior Ministry—unless there was another sporting event in Russia, of course,” Parker and Rackliffe said. “We would ask for the same information that we need in order to assess any exposure, and if the answers to the questions are unsatisfactory, then this would have an effect on our risk appetite for that particular event.”
While insurance companies have certainly done their homework for covering this year’s soccer tournament, it could pale in comparison to the plans and underwriting needed for the 2022 World Cup being held in Qatar. News of corruption, poor working conditions and terrorism could escalate premiums even higher when compared to today’s standards.
“We would say that there has actually been a much more recent turning point,” Parker and Rackliffe said. “Over the past 18 to 24 months, attacks at music and sporting events have changed the nature of risks and now mean much greater exposure for event organizers.”
Denver isn’t a fly-over city anymore. We have an exciting downtown, great public transportation, four major sports teams and a zeal for fun, activity and wellness. The city is booming with construction and jobs across diverse industries. New restaurants and shops are popping up all over town, and there’s a thriving arts, culture and nightlife scene.
What’s to love
Denver is one of the healthiest cities in the country. We have four seasons, 300+ days of annual sunshine, and the largest public park system of any U.S. city, providing year-round activities for people to enjoy. It is truly a great place to raise a family.
Zagat ranked Denver No. 4 on the 2017 “Most Exciting Food Cities in America” list. Our dining scene is continuously growing, offering a diversity of cuisines, craft brews and spirits. We’ve embraced the market-hall food trend with The Denver Central Market and The Source.
Favorite new restaurants
Stoic & Genuine for caviar and oysters. Tavernetta for Italian food and great service. Tamayo for modern Mexican with flare (conveniently located next door to our office!).
You’ll find locals dining downtown at Cholon, an Asian fusion restaurant known for its delicious soup dumplings, and Guard and Grace, a steakhouse that offers happy hour specials and small plates. But to experience a true Denver classic, check out the Cherry Cricket in Cherry Creek. Go for the burgers and stay for the beer.
Williams & Graham is a favorite (be sure to make a reservation). From the front, it looks like a bookstore, but once you’re inside, it feels like you’ve passed through a time machine into a 1920s speakeasy. Ocean Prime has a fun martini selection. Dry ice makes for a crowd pleaser.
The Brown Palace Hotel and Spa in downtown is a must-see historic hotel. The surrounding area has so much to offer that is within walking distance or a quick ride share away.
Thing to do
Catch a Colorado Rockies baseball game. Coors Field is one of the most beautiful ballparks in the country. There’s not a bad seat or view in the house. The selection of beer and food is excellent and affordable. The Rockies are an exciting, up-and-coming team. Home runs fly out of the stadium, ensuring drama from the first inning to the last.
Everyone should experience Red Rocks Amphitheatre. Attend a concert, or just hike the actual amphitheater and surrounding areas. It is beautiful!
Industry titans, socialites, glitterati. Rockefellers, Vanderbilts, Astors. U.S. presidents, European royalty. The tony town of Palm Beach, Florida, has been attracting a wealthy, powerful and connected crowd ever since Standard Oil Company executive Henry M. Flagler leveraged his millions to buy and build railroads in Florida and develop the coast. He opened his first resort for the monied class in 1894. The Royal Poinciana in Palm Beach was a six-story, Georgian-style hotel, which eventually became the world’s largest. As the story goes, the hallways were so extensive that the bellhops delivered messages and packages from the front desk to guest rooms by bicycle.
Flagler opened The Breakers, one of the grandest of grand hotels, just after Christmas 1926, which then and now is the start of the Palm Beach season. The Florentine Fountain near the entrance to the hotel is reminiscent of one at Boboli Gardens in Florence. The twin Belvedere towers on either side of the Italian Renaissance building are a nod to the Villa Medici in Rome. The Great Hall of the Palazzo Carrega in Genoa inspired the intricate paintings on the ceiling of the expansive lobby, to which 75 artisans from Italy applied their talents.
For more than a century, Palm Beach has never gone out of style for society folks and the well heeled, but this island enclave has certainly received a lot more attention over the last couple of years. In case you have just awakened from a Rip Van Winkle nap, President Donald Trump spends about half of his weekends at his Palm Beach club, Mar-a-Lago, aka the “Winter White House.” So, if you haven’t attended a meeting at The Breakers or vacationed at this charming seaside village, there’s no time like the present to check it out.
While you can enjoy fresh ocean breezes, shop on the beautifully landscaped Worth Avenue, play golf and tennis, and lounge by the beach year round, plan to escape the cold by arranging your Palm Beach escape during the winter season (the end of December through April), when you can take in a Sunday polo match at the International Polo Club Palm Beach. The caliber of polo (it hosts the largest field of high-goal teams and the most prestigious polo tournaments in the United States) and people watching (it is truly a jet set gathering) is outstanding. With the champagne pouring freely, it is also an awful lot of fun.
Instead, specialist product recall insurance has evolved significantly in recent years and can provide better financial protection and a more effective crisis response.
Product contamination and recall is the central risk facing food manufacturing and distribution companies. There were nearly 450 food recalls in 2017. Trends toward stricter regulation and advancing analytics have continued as the FDA and USDA, in conjunction with the Centers for Disease Control and Prevention, use whole genome sequencing to assist in identifying the source of food and beverage contamination and outbreaks.
Whole genome sequencing reveals the DNA makeup of an organism, enabling precise differentiation between organisms. The FDA performs whole genome sequencing analysis on samples taken during inspections of food manufacturing facilities and food products in the market. During foodborne illness outbreaks, the CDC compares clinical isolates from sick patients against the FDA database, which helps identify the source of the outbreak and the responsible companies.
The 2011 Food Safety Modernization Act (FSMA) has shifted food safety focus from reaction to prevention and covers all parts of the supply chain. The FDA now has the authority to stop production and distribution of products. Improved analytics can trigger a cascade of secondary results if the contaminated ingredients are traced to other products. These developments have occurred as the food supply chain has become increasingly global and has, therefore, added complexity. From 2004 to 2014, U.S. foodstuffs and animal and vegetable product imports nearly doubled—from $66.9 billion to $126.6 billion. Although it may be economically sound to make products in regions that afford lower labor and ingredient costs, product quality can be critically affected. Moreover, food safety protocols and regulatory oversight may be very different, particularly in developing countries.
COUNTING THE COST
Product recall is costly. The financial consequences range from the immediate costs of the recall and the value of condemned products to damaged brand reputation that may continue for years. Those at risk include importers, manufacturers (including contract manufacturers and private-label companies), distributors (including storage warehouses and transportation) and retailers.
The cost of contamination depends on the nature and extent of the contamination; the regulatory response; the level of negative publicity; and whether the product is an ingredient or final manufactured good. Ingredients, such as spices, can contaminate a large number of third-party products. The aggregated cost may far exceed the value of the contaminated ingredient.
Expenses include clean-up costs, consultancy testing and analysis, product replacement or repair, and product recall and/or destruction. And don’t forget the distribution costs for replacement products. There may also be third-party property damage and the associated defense costs.
Food contamination and recalls are particularly susceptible to common exclusions and coverage limitations in property and general liability policies. There may be limited, if any, property insurance coverage if the damage If direct physical damage is absent, recovery against typical property or general liability insurance becomes problematic. The pollution exclusion and impaired exclusions may also bar general liability coverage.
A vast majority of food manufacturers rely on supplier or contract-manufacturer indemnity to cover product contamination and recall losses. But contamination often occurs during the manufacturing stage. Even if the loss is attributable to third parties, indemnity is far from certain. The vendor may crash under the weight of multiple claims and limited coverage. A recent spice recall triggered recalls affecting more than 100 brands and nearly 800 products with different packages. A similar sunflower seeds recall affected more than 100 products.
Specialist product recall insurance has evolved significantly in the last two decades. This provides first-party coverage, thus removing the uncertainty associated with third parties. The insurance contains the key building blocks of a property policy:
- Property damage: replacement of contaminated (recalled) product and recall expenses
- Clean-up costs: removal of the contaminant from the site
- Business interruption: loss of gross profit plus expense to reduce loss resulting from the recall of product or reduction in manufacturing output. The most significant development in recent years is the emergence of coverage that includes thirdparty losses resulting from the recall of a contaminated product—typically a private-label product or ingredient. For bulk ingredient manufacturers in areas such as sugar, flour and whey powder, third-party coverage may be the most important. The coverage has been increasingly broadened to protect against third-party costs not covered by general liability. As many manufacturers have found, the nature of food recalls and the sensitivities around consumer safety mean a significant share of third-party claims fall outside general liability.
Most policies provide crisis consultants’ services. Typically, these services help companies understand the nature and severity of an incident and make decisions about a recall or communication with customers and regulatory bodies. In particular, smaller companies stand to benefit from this advice. The nature and extent of the contamination must be quickly understood together with the health risk to the public as well as any potential damage affecting commercial customers. Prompt response to food contamination incidents is critical since social media has accelerated the speed and breadth of communication. Information and misinformation can be quickly transmitted to a wide audience.
A company’s response within the first 24 hours is, therefore, crucial.
Alexandru is U.S. head of crisis management at Aspen Insurance.
Susan is currently working on her Ph.D. at the world’s leading center in healthcare fraud, the University of Portsmouth in the United Kingdom. During her career, she has seen a lot, including her share of fraud, while saving her clients millions on prescription drugs. Her biggest concern today in the pharmaceutical sector of the healthcare industry is the lack of transparency in prescription drug pricing, and she is not shy about sharing her views. —Editor
Explain what you do.
We help benefits plan sponsors find pharmacy benefits managers, monitor their performance, review their clinical programs and review their contracts. I have a second firm, Pharmacy Investigators and Consultants, which essentially does fraud, waste and abuse analysis. We help managed-care organizations and some small PBMs uncover corrupt practices.
Describe the PBM landscape.
It’s dominated by three large PBMs that have 80-100 million lives covered under each one of them: Caremark, Express Scripts and Optum. Then there’s a second tier that includes MedImpact, Envision, Navitus, Marken Healthcare, WellDyne and Magellan. There’s probably a total of a dozen in this category. Finally, there are the tiny PBMs, which are basically resellers.
If I’m a corporation with 1,000 employees, how many PBMs do I have to choose from?
Realistically, probably 15 to 20.
CVS is about to buy Aetna. Cigna is about to buy Express Scripts. What does this hold for employers and the insurance brokers who represent them?
I don’t think it’s a good thing. The lack of transparency that is already in the industry will just get murkier. We now have an insurance company owned by a PBM, with the Caremark-Aetna deal, if it goes through. So you can underwrite a medical plan, keep all the rebates and it’s all within one company. You really have no ability to understand what the rebates are in the prescription drug plan.
Is the medical loss ratio meaningless in this case?
Exactly. The same thing has happened already with Optum merging with United Healthcare. That was the writing on the wall. Cigna’s claims processing system is owned by Optum. That meant Cigna had to find its own claims processing system not owned by a competitor. They needed to buy a PBM, so Express Scripts was something that was inevitable. It doesn’t bode well for employers or consumers, because there will be a lot less transparency.
How does CVS buying Aetna fit into this?
CVS is really two companies—a pharmacy chain and the PBM Caremark.
Anthem will be using Caremark while Caremark owns Aetna. There are geographic markets where Anthem and Aetna compete. I don’t see this relationship lasting long.
One reason reported for the Express Scripts deal was it would keep Amazon out of the PBM business. What is the threat?
Amazon announced it’s getting into the PBM business last year. The scuttlebutt is they’re now looking for a backbone claims processor.
The Affordable Care Act is not what it used to be when Obama was president. Amazon’s thinking is we have all of these young millennials in high-deductible plans. They’re going to want to purchase drugs cheaply, and they’re going to want them delivered next day—just like they get their groceries and everything else from Amazon.
I think that’s Amazon’s play. But it will need a claims processing system to adjudicate that and tie into other PBMs. The question is will other PBMs play nice with Amazon?
I know from experience with my PBM that they’ll say a prescription has been shipped, yet it takes a week or 10 days for it to arrive. Are PBMs high-tech at all?
No. They can’t get the drugs out the door because of their legacy systems.
You’ve got all these different legacy platforms and huge 70,000-square-foot mail order facilities, which are just nothing but overhead. You don’t need to house these medications in one central location. That’s how Amazon gets things to you quickly. It has the product out in the field, and it never really takes possession of it.
I ordered a book on a Saturday, and literally it was in my mailbox the next day. That’s what millennials are expecting from their prescription drugs, and that’s what Amazon promises to deliver.
When we help an employer with a pharmacy benefit plan, if it’s a traditional or spread contract, it’s difficult, if not impossible, to figure out what the PBM is going to make.Tweet
What do you predict will happen?
About 10 or 15 years ago, when the whole concept of banking went online, people said, “Who needs tellers? We can just have an online bank. We’ll keep your money, and you just do transfers over the internet.” Fifteen years ago people were skittish about that, but now it’s caught on. I think the same thing will happen in the prescription drug industry. Which kind of begs the question: what happens to the role of pharmacist? If you’ve been on a drug for a period of time, you don’t need a pharmacist telling you how to take it.
Does that might mean pharmacists will be working in PBM warehouses instead of at your local pharmacy?
I think so or a lot of retail pharmacies will go to dispensing and delivering in their area. Amazon will transfer the prescription to the local Walgreens, which will deliver it to me within hours. They’ll use Whole Foods or some variety of retail pharmacies they can get to deliver things quickly.
Brokers are complaining about transparency. Where is the lack of it, and where does it exist?
Everywhere within the cycle of a prescription drug there is lack of transparency. I think most notably when people say there’s lack of transparency what they’re talking about is a lack of understanding of prescription drug pricing.
Here’s an example. You buy your Lisinopril. You have a $10 co-pay, and you pay the pharmacist. She gets another $2. It’s a $12 prescription. And then your employer gets charged $25. The PBM takes the $13 spread and does not disclose it to the plan sponsor or to the pharmacy. Neither understands where the money went. Who made $13 on that prescription? They just never tell you.
When we help an employer with a pharmacy benefit plan, if it’s a traditional or spread contract, it’s difficult, if not impossible, to figure out what the PBM is going to make. You also don’t know what fee they’re going to take behind my back on claims.
I’ve read examples where the consumer pays “x” amount, which is actually more than the actual cost.
Yes, that’s right.
Let’s say it costs $5 for a prescription and the sponsor is paying $25. Where does the money go?
In your example of a $25 co-pay, say the member has paid the entire co-pay based on the contract between the PBM and the plan sponsor. That contract allows them to take the entire co-pay, even if the cost of the drug is lower. Certain contracts allow that. That’s one side of it.
And then you go to the pharmacy and they’re not being told what’s going on. The pharmacy’s arrangement with the PBM is to be reimbursed a lower price—or the lower of the cost of the drug and the co-pay. Then the PBM claws back the amount that the pharmacist has already taken as part of the co-pay.
The pharmacist gets what?
The pharmacist gets $5 or whatever. He initially collected $25, thought he was going to get $25, and then he gets $20 taken back, or $5, or $2 or whatever it is, taken back.
What kind of profits per prescription do PBMs make?
It’s estimated in the research that we’ve done that it’s about $15 to $20 a script. Some may only be $1 or $2—like a generic—but the brands may be $40 or $50.
PBM salespeople’s commissions are based on profitability. They know exactly what the profitability of each new sale is going to be. The PBM salesperson plays a delicate game. If he sets the price low enough to obtain the business, he then faces the conundrum that he must get the margin as high as possible so he can be compensated.
What kind of profits do PBM companies make?
It depends on each individual PBM. There are probably some making 3% to 5% profit, but then they’ve outsourced everything. The more insourcing, the more ability they have to make profit.
Express Scripts now even owns a wholesaler. Do you realize how bizarre that is? Because wholesalers are the ones that establish pricing. When your PBM owns a wholesaler, think about that. They buy drugs from that wholesaler. That wholesaler sets the price. You’re buying from a wholesaler you own and control and you tell what to do.
It’s fair to say they raise the price of drugs.
Absolutely, it’s fair to say that.
And pharmaceutical companies can charge anything they want in there.
When your PBM owns a wholesaler, think about that. They buy drugs from that wholesaler. That wholesaler sets the price. You’re buying from a wholesaler you own and control and you tell what to do.Tweet
If the insurer is independent, it would be on the other side of this equation.
And it would be fighting for better pricing.
Absolutely. But when they’re buying PBMs there’s no incentive. In fact, their incentive now becomes to play the game with everybody else.
Are smaller PBMs more transparent?
You have smaller PBMs that have their own retail network contracts, and those can be transparent because they own the contract between their company and the pharmacy chain. They know exactly what they’re going to be reimbursing the pharmacy chain.
Some smaller PBMs resell other PBMs’ networks. A small PBM may go to Magellan, for example, and Magellan owns their own contracts. Magellan will then sell them the retail network. At that point, the PBM that’s using Magellan does not know what Magellan’s spread is. So, yes and no. Some of these smaller PBMs are transparent, and some aren’t.
You’ve got to ask some really deep questions. Do you own your own retail network? Are you leasing another PBM’s retail network system? Do you know what spread the networks are taking? And then do the same thing with rebates.
How can everyone be satisfied: consumer, sponsor, pharmacy, PBM, carrier? People need to make a profit.
I totally agree. I want that on the record. PBMs need to make a profit. We want them to make a profit because they provide a very good utility in the industry. We want them to be viable, we want them to be profitable, but we don’t want them to have undisclosed spread where you can’t evaluate how much they’re taking on your pharmacy bill.
Are mergers with insurers a conflict of interest?
Absolutely. In my view of the world, I think it’s absolutely a conflict of interest. When you’re hiring your medical carrier or you’re hiring a PBM, you don’t think the two are in cahoots. There’s no separation of duties here, where the PBM says, “Maybe you don’t need all those high-cost drugs.”
Isn’t the PBM supposed to be representing the corporate client and the consumer?
I think originally in 1985 that was their mission. I think their mission today has become much murkier. They changed their allegiance somewhere between 1985 and now—depending on the company—to the drug manufacturers and insurance carriers as they merge.
If you are a very large health plan and you want to have a PBM relationship, you don’t have many choices. There’s not a middle tier that’s going to have the ability to take on five million or two million lives. That’s probably why Kaiser does it themselves. But others don’t have that ability.
For most employers between 1,000 and 10,000 lives, you don’t want to go to those big PBMs. Big PBMs are already serving 80 million lives. They’re not going to love a client with 5,000 or 1,000 lives. They’re not going to give them attention or account service or be beholden to them.
If you’re a 1,000-life employer, you’re going to probably go to the middle tier and get very good service. And then it’s going to depend on you and where you are and who’s your account rep. If you’re a hospital, you probably would go to American Healthcare. They excel in that line of business. If you want to go with Magellan, you’re probably some kind of government. You know, they do really well with government plans.
Each one of these middle-tier PBMs has a personality. You can’t really say who the best is. It depends on you and who you are and what your baggage is.
What excuses do PBMs give for not being transparent?
They say it’s none of your business. I contract with you for a certain price— you, in this case, being the corporate client. You either like that price or you don’t. And I may contract with a pharmacy for another price, and that’s nothing to do with you.
What can brokerages do to help clients with this?
Most of the national brokerages have PBM experts. They understand this. Smaller brokerages need to be able to plug into some kind of expertise. This is an extremely complicated industry with extremely complicated contracts, and you need to know all the little angles within the contract to advise your client.
A lot of states are digging into PBMs. What do you think they find?
That is a whole can of worms. The state of Arkansas passed legislation that basically told PBMs they couldn’t reimburse a pharmacy less than what you could buy that drug for. Arkansas is pretty unique. Arkansas has a lot of rural pharmacies. You don’t have a lot of big chains buying in huge bulk. The state is saying PBMs can’t reimburse anyone less. The trade association representing PBMs sued Arkansas to stop this. I think they will prevail.
They are a utility we desperately need in America, and they ought to be regulated like a utility where there aren’t these gross and excessive profits. That’s the kind of thinking we need to evolve around.Tweet
South Dakota has similar legislation. Alaska has talked about it. It is nuanced because it is so spread out. One of the things PBMs forbid their pharmacies in network to do is mail prescriptions. They don’t want competition with their own mail order facility. But in Alaska, where you have to go an hour and a half to get a prescription drug—that’s the local pharmacy—a lot of the local pharmacies there mail drugs, and PBMs want to kick them out of the network. I mean, how else are these people living in small villages in Alaska going to get their prescriptions?
Connecticut is considering legislation promoting transparency, saying you need to be able to understand prices. If you ask your PBM, they have to explain the differentials in pricing as well as you may choose an auditor of your choice. I don’t know where that’s going in Connecticut, but Hartford is the insurance capital of the world. Will that affect transparency?
What about the feds?
I think the feds have missed the boat. I think when President Bush passed Medicare Part D, the federal government could have required they negotiate pharma pricing. They did not. That’s unfortunate because now we’ve got Medicare Part D where you’ve got the same thing going on with spread pricing. Allegedly, there’s not supposed to be spread pricing in Medicare Part D, but there are all kinds of other games that are being played.
The federal government had the opportunity to negotiate drug prices, just like Canada, just like England, just like every other first-world country. Instead, they let the market compete, and that was a mistake. Can the feds ever catch up now that the cat’s out of the bag? I don’t think so.
What’s the biggest problem we face with PBMs that we can do something about?
I think when PBMs became publicly traded entities where they had to make Wall Street earnings every quarter, all of a sudden they had perverse incentives. They are a utility we desperately need in America, and they ought to be regulated like a utility where there aren’t these gross and excessive profits. That’s the kind of thinking we need to evolve around. We have seen where 25 to 30 years of market pressure has done nothing to control costs.
As a consultant, how much money can you save your clients?
Probably 10-15%, easy. And, you know, like for one of my clients, we have been auditing them and their PBM for 12 years. You would think that by this time the PBM would be aware that we were auditing and that we’re going to have findings every year and that they would do things the right way. And every year we have money coming back to our clients because we audit.
To give the PBMs credit, this is a hard business to come up with a financial projection. Because you have a bunch of employees on January 1 and even after a completely transparent pass-through arrangement, you don’t know where those employees are going to go. You don’t know if they’re going to go to Walgreens or independent pharmacies. You have to bet on where they’re going for their prescriptions and then come up with a discount off average wholesale price that’s going to meet that.
PBMs are not always accurate in their forecasting. They’re going to make mistakes. They’re going to make projections that they know they can’t meet just to get the business. That’s where we come in to audit these programs. And that is a major problem right now of auditing.
How do PBMs charge their employer clients?
In a transparent arrangement, they have an administrative fee where they may charge $5 per member per month for services for account management and their eligibility maintenance and their rebate negotiation. We audit performance guarantees. If they don’t meet them—maybe because the retail brand claims aren’t at 15% as projected but come in at 14.76%—that 0.25% difference we’ll get back for our clients.
And that’s substantial?
Even a half a point or a quarter of a point is substantial when you’re spending $100 million a year.
Do most businesses of that size hire someone like you to do this?
No. Probably less than 1%. And the PBMs are making it harder and harder to audit. Four of them decided about a year ago they were not going to let audits proceed. And so they came out and said my firm and other firms like mine— independent, small auditors—would not be allowed to audit them. Now, they can supposedly give clients fantastic discounts off average wholesale price and they’ll never be held accountable.
Can we operate without PBMs?
No, not in the current healthcare system. The government isn’t going to get involved. We don’t have a national health service like the United Kingdom. So we need PBMs, but we need them to operate similar to the 401(k) fiduciary role. That’s what’s going to change PBMs. When they have to act solely for the benefit of the member—the beneficiary—that’s when the PBM industry will change. And I predict that will be the demise of some of the biggest in the business.
Is there any movement to put pressure on PBMs?
I think there is within the Department of Labor. I think there’s more of a move than I saw four or five years ago. It was under the Trump administration that ERISA, what’s called the fiduciary rule, got implemented for 401(k) plans. I’m hopeful that within the next three years that happens to PBMs.
Brokers are trying to lower costs for clients, and they’re really frustrated with the current system.
I guess if I was to advise consultants, fellow consultants and brokers, I would say educate yourself, get expertise. These contracts are really complicated. These are 40-50 page documents full of “I gotchas” and “get out of jail free cards.” They’re very complicated. I think attorneys who work in this area often don’t understand the nuances of these contracts. I’ve had top-shelf attorneys look at a contract and read right through where it says, “mutually acceptable auditor.” That seems like nice language. Yet you don’t want an auditor who is somebody’s brother-in-law that’s never been in the PBM industry. But if you have 22 years’ experience in the PBM industry, a PBM can still block you from an audit.
What’s one of your most interesting cases?
We’ve done some really interesting work with hospitals. A lot of the rural hospitals in America are small and typically contract for pharmacy benefits with Blue Cross/Blue Shield and whatever PBM comes along with a big carrier. What we’ve done is carve out those PBM relationships. In one case, we eliminated the spread pricing at the hospital pharmacy for its employees. That did two things: it eliminated spread, which was about 15%, and it enabled better bulk purchasing because we’re driving all that volume from the employees into the hospital pharmacy.
When a bank owns COLI, it is referred to as BOLI (bank-owned life insurance), and when an insurance company owns COLI, it is often referred to as ICOLI (insurance company-owned life insurance). No matter what terminology is used—COLI, BOLI or ICOLI—it is simply life insurance owned by and payable to an employer on the life (or lives) of one or more of its employee(s). In this context, we use “COLI” to mean any type of employer-owned life insurance on one or more of its employees.
Businesses purchase COLI for a variety of reasons. These are the most common.
It is common practice among closely held businesses to have the company purchase life insurance on each owner to fund a buy-sell agreement. When an owner dies, the company receives a tax-free life insurance death benefit that is used to purchase the decedent’s share of the business from his or her heirs. Using cash value life insurance may also provide the company with a source of tax-free income to buy out an owner when he or she is ready to retire.
Key person protection
The death of a key employee can be disruptive to the business, and it may take a long time to be able to find a replacement. Life insurance can provide cash to the business to ease the financial stress while recruiting and training a new employee to replace the decedent.
Economic benefit (endorsement) split dollar life insurance
To help executives obtain personal life insurance coverage, as well as provide the employer with key person coverage, companies often purchase COLI on their key employees and then “endorse” a portion of the death benefit to the employee, usually for only as long as the employee is employed. Each year, the employee must pay tax on the value of the death benefit that would be paid to his/her personal beneficiary. That value is measured either by the IRS Table 2001 rates or by the carrier’s annual renewal term rates.
Nonqualified deferred compensation plans
COLI has long been a financial asset used by companies of all sizes and industries to informally fund a nonqualified deferred compensation plan (NQDCP). The employer owns and is the beneficiary of life insurance contracts on the lives of the executives who are eligible to participate in the NQDCP. Most plans permit participants to allocate their NQDCP balances among a variety of notional investment options. The employer chooses those options from among sub-accounts in variable universal life COLI and allocates the COLI cash values to match the participants’ balances so that the NQDCP liability and the COLI cash values move in tandem on the company’s balance sheet. In addition, the COLI cash values can be withdrawn or loaned to the employer on a tax-free basis and used to pay benefits to employees in future years. Finally, tax-free death benefits can be used to recoup some or all of the costs of the NQDCP.
Funding other employee benefit plans
COLI is also purchased, primarily by banks and insurance companies, to fund the costs of other employee benefits, such as a 401(k) matching contribution, employer-provided medical and disability insurance, among others. When COLI is purchased for these purposes, the employer asks employees who fit within the categories outlined in Code sec. 101(j) (discussed later) to consent to being insured.
Funding an ESOP’s repurchase obligation
Companies that are wholly or partially owned by an employee stock ownership plan have a responsibility to purchase stock that is distributed to ESOP participants upon the participant’s termination of employment, death, disability, when the participant diversifies his/her account balance and when the participant is due an in-service distribution or required minimum distribution from the ESOP. There are a number of ways in which companies fund to meet this obligation, including the purchase of COLI on the lives of key executives. Similar to when COLI is used to offset the costs of a NQDCP, the tax-free withdrawal and loans from cash value along with tax-free death benefits make COLI, either alone or in conjunction with another asset, an appropriate and cost-efficient method for funding the repurchase obligation.
The owner of a life insurance contract must have an insurable interest in the person who is insured when the policy is purchased. This means that the policy owner (or the owner’s named beneficiary) would suffer a financial loss in the event of the insured’s death. Any individual is permitted to purchase a life insurance contract on his/her own life and designate the beneficiary.
Each state has its own statutes regarding insurable interest in the life of an insured individual. There is no federal statute specifically addressing this issue, so it is important to know and understand the statute of the state in which a life insurance policy is issued. In some states, a policy issued to someone who lacks insurable interest and where the insured did not consent, may be paid to a person who is equitably entitled to the proceeds and who is someone other than the named beneficiary, if a court so orders.
Code Sec. 101(J): Make Sure Death Benefits Are Income Tax-Free
Under Code section 101(j)(2)(A), death benefits paid to an employer will be free of income tax if notice and consent were obtained from the employee and that employee falls into one of the following categories:
- The insured was an employee at any time during the 12-month period before death
At the time the contract is issued, the insured is
o A member of the board of directors
o A highly-compensated employee
o One of the five highest-paid officers
o A shareholder who owns more than 10% in value of the stock of the employer
o One of the highest paid 35% of all employees.
When determining if an employee falls into one of the exempt classifications above, the date the contract is issued controls, not the date a consent to insure is signed. In this context, “issued” means the latest of: (1) the date of application for coverage; (2) the effective date of coverage; or (3) formal issuance of the contract. If an employee signs a consent form but terminates employment prior to the issue date, that individual does not fall into one of the exceptions above.
The employer’s notice to the employee must state the maximum face amount for which the employee can be insured, that the employer (or policy owner) will be the beneficiary and that the coverage may continue after the insured is no longer employed by the employer.
Every taxpayer that owns one or more COLI policies issued after Aug. 17, 2006, must file a Form 8925 with its tax return showing the number of employees insured at the end of the year, the total amount of insurance in force at the end of the year, and stating that each insured consented to the insurance.
COLI products are specifically designed and institutionally priced for the corporate market. These products generally have lower upfront loads, high early cash values and lower insurance costs than products designed for the individual market.
COLI is a valuable asset to companies that have a long-term need for protection against financial loss due to the death of a key employee or owner of a business; to informally fund nonqualified retirement plans; to recover the cost of those plans through the receipt of tax-free death benefits; and to provide a source of tax-free income through cash value withdrawals and loans to the company. COLI products are specifically designed to provide the purchasing company with income on its financial statements in the early years to satisfy the needs of shareholders, partners and potential creditors. When designed properly, a COLI program may help mitigate losses due to the death of key person or because of costly employee benefit plans.
Companies that integrate their HR technology can make better use of their data to gain insight into what their employees want. By being able to analyze reports and learn from benchmarking, brokers can offer clients actionable insights that can help:
- Find opportunities to improve their benefits strategy and allow their people to take control of their options
- Bridge the gap between perception and reality by strategically addressing employee engagement and communication
- Understand how they compare to other companies and take action to stay competitive.
ADP believes a benefits technology solution should allow clients to streamline employee eligibility, benefits calculations, communication and workflow management within a safe and centralized digital environment. One way brokers can help advise clients on what their employees want is to encourage the client to review HR and benefits technology systems to determine:
- What information is available and how current it is
- What reports can be pulled and what they can tell someone
- What kind of functionality there is for integrating data and automating those reports
- What actionable insights the people-data suggest
- What’s missing and what can be done to get it
- What the employee experience is like
- If an intuitive enrollment experience and tools are in place to help employees select the plan that best meets their needs
- If there is a mobile app for easy access to benefits information for employees.
That can be good news for brokers: the increasing amount of regulation and compliance issues that HR departments must deal with gives brokers an opportunity to separate themselves from the field.
As human capital management matures from leading edge to must-have for many clients, employers want brokers to assume a stronger leadership role in gathering information and making decisions about HCM systems. That’s according to the “ADP Employer & Employee Benefits and Human Capital Management Study,” conducted by SourceMedia Research in 2016.
Bruce Whittredge, ADP vice president of channel sales for major accounts, says the workplace is evolving at a rapid rate and brokers increasingly are asked to lead conversations regarding their client’s HCM strategy, systems, people and resources, strengthening the broker’s position as a trusted advisor.
It’s a trend Darren Brown, executive vice president for employee benefits at ABD Insurance & Financial Services, has seen developing over the past decade.
“Over the last 15-plus years, we’ve seen an emergence of the employee experience and how technology can play a key role in the retention and recruiting of employees,” Brown says. “Procurement of insurance programs is probably the easiest part of the job today. It’s the strategy, buildup and delivery of the programs that provides the most value today to people managers and requires the most thoughtful work. Today’s leading brokers and consultants understand how technology plays a prominent role in this cycle and are right in the middle of how to improve this experience for HR and the employees they support.”
For many clients, HR is transforming from an administrative role that operates in silos and is tactical in nature to a strategic function that includes change management, company culture, workforce demographic shifts, process improvement and more. Benefits brokers are recognizing the need to extend their ability to add increased value around this HR transformation.
“Brokers have always been front and center on the benefits administration process for employers,” Brown says. “The great news is that technology over the last 20 years has replaced paper and improved this process for all parties. The trend over the last 15 years has been identifying and introducing software-as-a-service-type product to the rest of the employee life cycle—onboarding, recruiting, performance management, etc. This is the challenge of the business but also the most rewarding, because as a trusted business advisor, you are addressing much broader themes for the clients you serve.”
It’s the strategy, buildup and delivery of the programs that provides the most value today to people managers and requires the most thoughtful work.Tweet
A company’s benefits package can be a tool to separate it from its competitors to find and retain the best talent. Because there are many options and clients have different needs, brokers increasingly must create more specialized packages. Today’s workers aren’t only switching employers for higher wages, they’re considering other factors like ﬂexibility, meaning in their work, philanthropy and company environment. Keeping workers happy can be the difference between retaining them and losing them.
A 2016 study by Guardian Life Insurance found 84% of employees who have high satisfaction with their benefits also have high job satisfaction. That means the brokerages that stand out from competitors will be the ones that can help employers create benefits options specific to the client’s workforce.
“What’s the cost of not having a great benefits package?” Whittredge asks. “It could be more turnover or losing the war on talent. What your benefit package says is a direct reflection of the culture you are trying to build as more people look at benefits as a huge play for them.”
Determining what is a good benefits option for the client is challenging. But big data can offer brokers precise insight for helping craft a benefits program. It can help them understand more about what a client’s employees need and want and then begin to tailor a package. One of the leaders in compiling workforce-related data is ADP, which administers benefits for one of every eight private sector employees in the United States.
ADP is the largest provider of HR services in North America, Europe, Latin America and the Pacific Rim. It pays 26 million workers in the United States and 13 million elsewhere. In 2016, it processed nearly 60 million W-2s within the United States and electronically moved $1.7 trillion in client tax, direct deposit and related client funds in the United States. It has more than 650,000 clients worldwide and access to 30 million people-records.
These data can provide employers more clarity into what benefits their workforce wants. That can be critical as employers try to manage five generations of workers.
THE SILENT GENERATION consists of workers ages 71-89 and makes up less than 1% of the U.S. workforce. According to the Society for Human Resource Management, these workers place a strong emphasis on rules, lead with a “command-and-control” style and prefer face-to-face interaction but communicate best formally.
What your benefit package says is a direct reflection of the culture you are trying to build as more people look at benefits as a huge play for them.Tweet
BABY BOOMERS, ages 54 to 70, make up 27% of the U.S. workforce, but their numbers are declining. Baby boomers are retiring at a rate of 10,000 per day, yet many can’t afford to retire and want to work part-time or seek contract work.
The ADP Research Institute notes baby boomers are delaying retirement, making it more difficult for workers in subsequent generations to reach senior-level positions and key leadership roles. However, baby boomers have an immense amount of knowledge and skills and are looking for a way to share them before they retire.
GENERATION X, ages 34 to 53, make up 35% of the workforce. Data indicate they prefer independence and fewer rules and want to balance work and family. These workers are sandwiched between a large population of baby boomers and an even larger population of millennials. This group is starting to focus on future-oriented areas like retirement, while also climbing the career ladder and looking for ways to continue advancing. Coaching and leadership development are critical for these workers.
MILLENNIALS, ages 20 to 33, make up 37% of the workforce. They tend to take an entrepreneurial approach to work, prefer direct communication and feedback, and want a social, friendly work environment. Data from the ADP Research Center indicate these workers want opportunities to learn, grow and advance their careers. Their reputation for changing jobs often reflects the failure of organizations to train them.
GENERATION Z workers, under 20, are just entering the workplace and make up 1% to 2% of the workforce. According to SHRM, they are likely to use Twitter to find jobs and communicate best by smart phone/email. They came of age during the recession and put money and job security at the top of the list.
A 2017 study found few senior executives and HR professionals can translate human capital management data into predictive insights. According to the Mercer 2017 Global Talent Trends study, nearly one in five is generating only basic descriptive reporting and historical trend analysis. Brokers who can analyze big data can help their clients identify emerging trends and make better-informed business decisions.
ADP, the largest provider of HR services in North America, Europe, Latin America and the Pacific Rim, pays 26 million workers in the United States and 13 million elsewhere.Tweet
Whittredge says brokers who can dig deeper into data will be able to identify areas where clients should consider changes. For example, he says a company may think employees want a high-deductible plan with certain options but the data indicate only boomers are using the plan as intended. Upon examination, the data may indicate that millennials require different healthcare options and that segment is growing by 10% a year. Brokers who are armed with these numbers can make plan recommendations that will better serve their multi-generational employee population in the years to come.
Just a few miles away from the five-star luxury resort in Colorado Springs, the Springs Rescue Mission endeavors to treat those experiencing homelessness with dignity, respect and honor. That might mean they sit down to dinner at a table adorned with tablecloths and flowers. Or it might mean they get to use high-end towels to dry off after a shower. Or they receive a delicious banquet-quality meal.
The mission, home to Mission Catering (the organization’s for-profit social enterprise) and a culinary arts program for men in addiction recovery, recently added a rich new source of meals and ingredients. Local hotels, led by The Broadmoor, have begun donating banquet extras to the mission in significant quantities.
The initiative has taken almost a year to pull together. The Council provided help in dealing with legal issues. The hotel worked to garner community support. And the mission was able to secure donations for a new refrigerated truck for deliveries. And it all began with a question posed at a Council event.
Making It Work
Molly Cohen attended the June 2017 Employee Benefits Leadership Forum at The Broadmoor with her husband, Rob Cohen, then chair of The Council. She noticed the considerable amount of leftover food prepared for the meeting and spoke with her husband about it. As a pediatric nurse who worked for 31 years at Children’s Hospital Colorado, Cohen had long taken an interest in issues of global hunger and poverty. “It’s something I’m mindful of every day,” she says. She has volunteered with Denver-area food banks, making sandwiches with her church group for residents of low-income housing, and was bothered by the waste.
Rob Cohen, chairman and CEO of The IMA Financial Group, in Denver, mentioned it to Ken Crerar, president and CEO of The Council. Crerar previously had seen food recycling efforts work through the DC Central Kitchen—a community kitchen that works to reduce hunger and poverty. Crerar had casually mentioned the possibility of food recovery to the hotel before, but the conversation hadn’t gone far; there had been many unknowns, including concerns about potential liability. Now, however, the time seemed right to revisit the opportunity with a more formal, researched approach.
This time he decided to dive in headfirst and brought a small legal team on board to explore the possibilities before presenting the idea to The Broadmoor.
“We go to Colorado Springs twice a year for meetings, and this was our 16th meeting in eight or nine years,” Crerar says. “We’re invested in the community, and people were excited about giving something back.”
On the surface, it would seem to be a no-brainer: people are hungry, and others have food to share. But it’s not so simple. Packaged donations are one thing; excess prepared foods are another. Restaurants and hotels often have been reluctant to donate these items, concerned that they might result in food poisoning due to improper handling.
We were able to meet the needs of the more than 300 guests that we shelter every night with this extraordinary food. There was a lot of protein. A lot of vegetables. And it would have been thrown away.Tweet
That’s where Scott Sinder and Josh Oppenheimer entered the picture. Sinder, a partner in the Washington, D.C., office of law firm Steptoe & Johnson, is chief legal officer for The Council. He previously joined Billy Shore, founder of Share Our Strength, a nonprofit that aims to end childhood hunger, in working on the 2004 John Kerry presidential campaign. That experience, Sinder said, provided a “conceptual perspective” of food rescue efforts.
But it wasn’t until Crerar approached him about the legalities of making it happen at The Broadmoor that Sinder learned about the multitude of laws in place. He discovered Good Samaritan legislation that protects donors who give without malicious intent or knowledge of contaminated food.
“I’m an American lawyer, so the idea that, if something goes awry, people will sue you does not surprise me,” he says. As there are interlocking state and federal laws in place, one being more straightforward than the other, “we had an internal process in working this out.”
When Oppenheimer, an associate at Steptoe & Johnson, performed much of the initial legal analysis with Sinder’s assistance, they discovered a distinct lack of case law. It’s possible people haven’t sued because restaurants and hotels have not been willing to take the risk in the first place. It’s also possible the beneficiaries of such programs don’t want to bite the hand that feeds them.
In 2016, the Food Waste Reduction Alliance reported 25% of retail/wholesale respondents to a survey—and 39% of restaurant respondents—were concerned that food donations would expose them to liability. The FWRA also reports that up to 40% of the food grown, processed and transported in the United States will never be consumed and that nearly 50 million Americans, including 16 million children, are short of food.
And yet, Sinder and Oppenheimer were able to do what Crerar asked. They found a way to make it work. “It reminded me why I love working for Ken,” Sinder says. “It was another example of how he gets you into good things.”
Crerar brought the team’s research, combined with strategy from DC Central Kitchen, to Jack Damioli, president and CEO of The Broadmoor. He asked about donating surplus food items to an area organization during The Council’s next meeting. Damioli, already familiar with the good work of the Springs Rescue Mission, contacted Larry Yonker, the organization’s president and CEO. The Broadmoor confirmed it would be able to certify the food for donation to meet health requirements and even volunteered to deliver it.
“It’s such a wonderful thing to be able to do,” Damioli says. “I just wish it hadn’t taken so long to implement. I’m a resident of Colorado Springs, and I see what happens in the city on a daily basis. I see the need.”
Teamwork, Recovery and Growth
Springs Rescue Mission, founded in 1996, provides about 600 meals a day, seven days a week, to those experiencing homelessness. That’s nearly 220,000 meals a year, not counting special events at Thanksgiving, Christmas and Easter. The organization has seen the need rise significantly since 2014, when it provided 104,000 meals.
Less food waste is going to the landfill and, in turn, helping those in need—a true win-win situation for all.Tweet
“The number of people experiencing homelessness here has doubled in the last few years,” Yonker says. “Everybody wants to blame the legalization of marijuana. I do think that has an impact on the behavior of our guests and the hopelessness they feel. It has brought transients to town, but I don’t think it has affected the chronically homeless.”
Yonker points instead to the fact that Colorado Springs is a “big military town,” with Fort Carson, the U.S. Air Force Academy, Peterson Air Force Base, the North American Aerospace Defense Command (NORAD) and Schriever Air Force Base all nearby. Recent expansions and increases in housing prices have had a significant impact, as have the number of veterans challenged by post-traumatic stress and alcohol or drug addictions.
As part of serving its community, Springs Rescue Mission offers a behavioral, trauma-based residential recovery program in addition to job skill training in facilities management, warehouse management, customer service and culinary arts.
As for the meals, however, the mission spends between $100,000 and $120,000 annually on its food budget in addition to receiving items from the area food bank and other organizations. Receiving banquet excess, then, could mean an extensive drop in costs and the ability to expand.
In several trial runs last fall, starting with The Council’s Insurance Leadership Forum in October, The Broadmoor donated more than 3,500 pounds of food to the mission. The resort’s traditional practice is to prepare extra food for banquet buffet meals to ensure various items won’t run out, so none of the food donated had been previously served—or even taken out of the kitchen.
These donations, however, are not just about quantity; they’re also about quality. Beef tips and leg of lamb, for example, may be served as prepared or, more importantly, repurposed in other recipes to feed more people. Some guests, Yonker says, have tasted asparagus for the first time.
“You would expect the food from The Broadmoor to be great,” he says. “From the standpoint of the impact it had on us, with that first trial, for four days we were able to serve our homeless guests with these items.
We were able to meet the needs of the more than 300 guests that we shelter every night with this extraordinary food. There was a lot of protein. A lot of vegetables. And it would have been thrown away. It was an amazing experience.”
An Awesome One
But Damioli wasn’t finished. In early January, he met with the Pikes Peak Lodging Association, which includes hotels in the Colorado Springs area. He explained the program and asked for assistance, and four additional hotels immediately stepped up to participate. “I’m still working on other properties,” he says. “It’s still early, and it’s taking everyone a little while to work through the logistics and figure out this is a good thing for everyone. Less food waste is going to the landfill and, in turn, helping those in need—a true win-win situation for all.”
According to the Food Waste Reduction Alliance, nearly 50 million Americans, including 16 million children, are short of food.Tweet
A refrigerated truck has now been purchased with a combined $50,000 donation from the El Pomar Foundation and Anschutz Family Foundation. The Denver-based Anschutz family owns The Broadmoor; the foundation is the charitable organization co-founded by Spencer Penrose, the Philadelphia-born businessman who settled in Colorado Springs in 1892 and opened The Broadmoor in the summer of 1918.
There have been other collaborations, too. Guests from Springs Rescue Mission and other local nonprofits helped serve hot chocolate at an event at The Broadmoor’s Seven Falls attraction during the holidays and received proceeds from admission. The resort’s owners have contributed to a current expansion project at the mission to accommodate increasing demand. And Damioli hopes for further collaboration and training opportunities between the culinary staff of both organizations.
“This was just a great example of teamwork, where one person comes up with an idea and somebody else jumps on it and then somebody else takes it to the next level,” Rob Cohen says. “We get together as an industry, and the meeting is phenomenal from the standpoint of us exchanging ideas and information. But if you think about the fact that we can affect and change the world at the same time, that takes an already great meeting and turns it into an awesome one.”
Yonker, always happy for additional resources and compassionate hearts, knows that stereotypes and misconceptions still exist about those experiencing homelessness. In whatever way possible, the mission works to meet people where they are and help them get back on their feet. In the last two years, 40 men have graduated its addiction recovery program gainfully employed. Even on the mission’s campus, there’s a focus on optimism with bright colors and well maintained facilities—with all of the cleaning and facilities work performed by those the mission serves.
“You see smiles,” Yonker says. “Sometimes they’re toothless smiles, but they feel like they have a purpose again. They feel like they have value. And serving really nice food like this, it’s kind of over-the-top as far as giving people the sense of being just like anybody else. It’s nice to be treated that way…. We try to make the experience as positive as we can so they can see hope and they can see their lives differently.”
In coming days, Yonker says, he sees “a lot of things blossoming” in the relationship between the mission and the resort. “They’re the five-star hotel, and we’re the no-star hotel,” he says. “But with this kind of food rescue, we just might turn into a two-star.” An added bonus: The Broadmoor donated the luxury towels that mission guests use after showers.
“I joke that 70% of the people in Colorado Springs have never dried off with a Broadmoor towel,” Yonker says. “But I’ve got 300 guests using them here. It’s kind of funny, but it’s also fun. These little touches affect people in ways we can’t explain. It’s really neat to see The Broadmoor understand how blessed they are and how unique they are in a community like this.”
Soltes is a contributing writer. email@example.com
Some manage speeding tickets. Some pay for adoption services. The following are just a handful of benefit options and how they work.
Purpose: Six years ago, Peerfit was created to redefine the way employers were engaging in wellness. Emma Maurer, vice president of enterprise health, says the company sought an answer for employers subsidizing unused big-box gym memberships.
Peerfit built a network of fitness studios offering yoga, Pilates and boot camps. Employees have access to any of the available classes via credits an employer purchases. Employees can go online, check out their options and book the classes.
“This is important in the age of personalization because they can customize it for each employee,” Maurer says. “People can do things they are interested in and can physically do.”
Cost: Employers pay only when people go to classes. They typically make one class each week available to an employee. The cost varies depending upon the location and the number of credits purchased, but Maurer says a 500-employee company in New York might expect to spend $10,000 per year for coverage.
ROI: Wellness programs can be difficult to measure, Maurer contends, because it’s hard to measure when something like cardiovascular disease is prevented through exercise. But Peerfit can show employers exactly how money is being spent, who takes part and the percentage of overall engagement.
Extras: Part of the engagement process is enabling people to invite others to attend classes. An employee can send invitations to others, and with the click of a button, the class is reserved for them as well. Maurer says this encourages the social aspect of the classes, like a healthy happy hour.
Purpose: The company introduced its first legal plan to the market 46 years ago. The goal was to provide assistance to people “in the middle,” says Emily Rose, LegalShield’s senior vice president of broker and partnership sales.
“People with lower incomes can get legal aid, and those on the high end probably have a private attorney on retainer,” she says. “Plans were brought to the marketplace to ensure the general public had reasonably priced access to attorneys.”
The program has evolved into a package of services covering common legal matters like speeding tickets, estate planning, adoption and bankruptcy.
Cost: Everything is covered in one plan from initial consultation to legal representation, if needed, for a $200 annual payroll deduction. This covers the employees, spouses and dependents.
ROI: Money in versus money out is the best way to figure ROI, Rose says. On average, someone would be charged $300 per hour for an attorney (as opposed to $200 annually for their services). Uptake is typically 12% to 15% of employees in the first year and grows in subsequent years.
Extras: The organization takes a white-glove approach to customer service, according to Rose. Attorneys in the network respond to calls within eight hours; the industry standard with legal plans is 48 hours, she says. They also have a mobile app that allows clients to take a picture of a speeding ticket and send it to their attorney “before the police officer is back in his cruiser,” she says.
Healthy Paws Pet Insurance
Purpose: Pays for unexpected accidents and illnesses for cats and dogs. Healthy Paws helps pet owners save up to 90% on veterinary bills. Employees take their pets to the veterinarian of their choice, pay up front and get reimbursed for the expense.
Rob Jackson, Healthy Paws CEO and co-founder, says the insurer doesn’t cover preexisting conditions, wellness and preventive services. The company aims to cover accidents and long-term, chronic conditions which can easily add up to thousands of dollars.
Cost: Rates start around $15 a month for cats and $30 a month for dogs.
ROI: Pet insurance is an increasingly requested voluntary benefit, with a more than $2.5 billion market in 2016, according to Research Nester. The organization says much of this growth is because more than 65% of Americans have pets in their homes. Spending on the health of household pets has increased 11% in the past decade.
Extras: Employees can upload a photo of the vet bill through the phone and get reimbursed for the care within days. There are also no maximum limits or caps on payouts.
Purpose: The new kid on the benefits block, Sum180 offers a dizzying array of financial wellness options, from budgeting apps to student loan repayment. Sorting through this can be confusing for many employers.
“It is the Wild West, and we are still in the early days of figuring it out,” says Carla Dearing, CEO of Sum180. “Companies want to know what is offered in the marketplace and what they can hope to provide.”
Because of this, Sum180’s program aims to cover all of the most common financial issues in one stop—from beginning budgeting to paying off debt and saving for retirement. Participants in the program enter information, including what they make, spend, own and owe, and are given “next steps” for their finances. The program also provides tips, advice and support.
Cost: The fee is $1 per employee paid monthly or $12 per employee paid annually.
ROI: Engagement in this kind of behavioral-change program is often low, Dearing concedes. The information is confidential and participants aren’t outwardly ranked, but there are internal categories through which an employee moves up as his financial situation improves by paying down debt or fully participating in a 401(k) program.
“Over time, as people come back in, you monitor their situation,” Dearing says. “Ideally, you can report that people have moved up in their financial health.”
Sum180 uses a “gamified” approach to financial assistance. This essentially means it’s easily understandable. Users can access information simply by swiping their phones or can dip their toes in by watching short videos or getting tips, then move up to budgeting and saving.
“It’s about small steps and positive reinforcement, which are powerful features for change across all kinds of behaviors,” Dearing says.
The need for a design-build approach to benefits is here, and it’s beginning to play out among employers large and small. These days, brokers must increasingly work to uncover their clients’ unique needs and pull together the resources to serve them.
“Employee benefits are getting deliciously complicated,” says Joe Ellis, senior vice president of CBIZ’s Employee Services Organization.
But it can be a challenge to determine the right package to offer, especially when brokers are fielding offers from hundreds of vendors. How do you figure out where the value is?
Ellis says the key is creating an overall benefits strategy. “You have to build out a plan that will meet the needs of as many people as possible,” he says. “But you have to do it in a way that isn’t just the company giving out more and more money.”
Jack Wilkinson, a senior vice president in the Benefits Advisory Group at J. Smith Lanier & Co., says the move beyond traditional benefits has changed the way he does business.
“I was recently with a prospective client and had an hour and a half scheduled to meet. We were 50 minutes in before we talked insurance,” Wilkinson says. “Before that, we talked about how we engage employees and if they have focused action to manage specialty pharmaceutical costs. The insurance wrapper is around everything else we are offering.”
Ellis says the design-build world hearkens back to the formerly popular cafeteria plans, in which employers offered a range of benefits and employees decided where to spend their money. The market is different today, and many cafeteria plans have gone by the wayside. But competition for a solid workforce demands that employers offer a wide range of benefits, some paid for by the employer and some by the employee.
Some cover a broad swath of employees like legal assistance, pet insurance, wellness programs and tuition reimbursement. Some look to pinpoint specific groups of needs like fertility insurance or adoption assistance.
A wide group of offerings allows for self-selection by employees. This is desired specifically by millennials who may not need long-term care insurance but might want to cover veterinary expenses for their 80-pound Labrador. It allows them to choose benefits that are tailored to their lifestyle over time. From a broker’s perspective, Ellis says, it’s good to have a “generationally balanced team” to tease out what the employer and employees want. He tries to ensure this happens at his organization. That way, when he comes in with employee feedback for one of his clients, he gets input on the results from millennials to baby boomers.
“One group can offer what they teased out of the results, and another generation can say, ‘This is what I’m hearing,’” Ellis says. “A good, broad benefit plan would have the ability to cover a wide population, and the only way to find out what they want is to ask.”
Still an Uphill Battle
IMA Financial Group has nearly 700 employees scattered across four states. Their needs and desires vary as widely as their individual personalities. But through dedicated data collection and benchmarking, IMA has been able to gain a clear understanding of what benefits they value and what will continue to make IMA a desirable place to work.
They have days allocated for biking to work, volunteering at a charity and even raising funds with an outdoor ping pong tournament. Another popular benefit is the firm’s internal dream coach. His job is to help employees accomplish whatever goals they may have, big or small, work-related or not.
“This is something they wanted and cared about,” says Jessi Ryan, IMA’s Total Rewards practice lead. “It’s very unique and could only have been known by using our data.”
Like identity theft protection—who would have thought that would be something employers would be thinking about? But whatever the consumer is purchasing—and employees are consumers—you can let them buy it at work.Tweet
The company’s Total Rewards Program employee benefits package was created using feedback from its employees. IMA is vigilant about benchmarking—to find trends in the employee benefits industry, understand what its competitors are doing and, most importantly, understand what is valuable to its employees.
IMA’s program demonstrates the expanse of options for employers who want a custom package, but Wilkinson says the industry is still far ahead of where many employers currently stand. Most, he says, still prefer to offer traditional benefits and nothing else. Paying up front for benefits that might lower their total spend (like reducing healthcare costs over time or improving retention to lower administrative spending on new hires) can be a tough sell for many employers. “Getting them to spend nickels to save dollars has been more of an uphill battle than we expected,” he says.
But that doesn’t mean brokers should give up on offering a wide array of options. In fact, good ones should be able to walk into a meeting and say, “Here are things you probably don’t know about but you should,” Ellis says. “Like identity theft protection—who would have thought that would be something employers would be thinking about? But whatever the consumer is purchasing—and employees are consumers—you can let them buy it at work.”
This approach also benefits brokers. Instead of just working with an employer for one or two products, brokers become consultants, advising clients on their entire benefit portfolio.
Brokers should also be motivated to stay abreast of benefit trends by the fear of missing out. The last thing a broker needs is clients knocking on the door asking why they hadn’t been told about a new benefit they heard about through another agency.
Sorting Through Options
Whether employers are asking for abundant benefit packages or brokers are (or should be) introducing them, options are nearly endless. So how does one wade through the possibilities? Very carefully.
Wilkinson has a small checklist of considerations when choosing which products to bring into the fold. He tries to determine if the program or service is new to the market or another iteration of what is already available.
“There is lots of duplication on the market,” he says. “You have to wade through vendors to figure out which products are truly disruptive. And our market is ripe for disruption.”
Brokers need to understand if the programs and services put in place are actually working to attract and retain employees. Given the nature of many products, this can be yeoman’s work. IMA relies heavily on employee surveys for this task and, while the staff specifically asked for a dream coach, IMA often finds that the core benefits are still highly relevant for its employees.
“In our data set, we find that medical benefits and options for retirement, savings and rich, paid time off are still popular,” Ryan says. “These are all things we are continuing to see rise to the top in terms of value.”
Some of the initiatives offered at larger companies, such as “napping pauses” and buses to transport employees to work, may not have value at other organizations. At IMA, for example, employees value paid time off more than pet insurance.
Ryan stresses the importance of understanding what employees want and how those products may fit into the workforce culture. Then, use employee feedback to make sure they are having the desired effects on retention, recruitment or employee health.
“Brokers can use tools to do the heavy lifting and compile data, but they need in-house expertise to make sense of it and come back to the client and say, ‘Here are our recommendations based on employee feedback,’” Ryan says.
Vetting the Vendors
There is lots of duplication on the market. You have to wade through vendors to figure out which products are truly disruptive. And our market is ripe for disruption.Tweet
Joe Miller, president of Shortlister, in Park Ridge, Illinois, says his organization was created out of necessity. Coming from a background in wellness, he understood that brokers and employers couldn’t manage the ever-increasing number of vendors knocking on the door trying to get face time.
So he began compiling lists for brokers. Soon after, others were knocking on his door for more information. His lists now cover more than 40 different categories of vendors. And doing this for a living has made him sympathize with brokers attempting to do it on their own.
“We are the experts behind the experts, and we have a hard time,” he says. “Employers expect brokers and consultants to have a good understanding of the selection out there, and that’s not even possible right now.”
Shortlister is aptly named because it provides lists to self-insured employers and brokers seeking to find vendors for different aspects of their benefits program. An employer group takes a quick survey discussing its goals, philosophies, demographics and other pertinent information. Shortlister compiles this and returns with a list of prequalified vendors that might fit the employer’s needs. The brokers analyze that and narrow it to a handful of options. Then, Miller gets quotes, meets with the vendors and has them answer questionnaires. That information is then returned to the client, enabling the client to choose its best option.
Dave Kerrigan, founder and managing director of Sante Nasc, in Woburn, Massachusetts, is also working to help brokers wade through the vendor sea. He has designs to build a searchable database, primarily of early-stage vendors, for brokers to peruse. He hopes to make the market easier to navigate by centralizing intake and standardizing the evaluation of vendors and then compiling that information in one place.
“Some of these vendors are better than others, and brokers and consultants may not be equipped to evaluate these companies,” says Kerrigan, a former broker. “Brokers out there are going to be able to go into the database and search for companies based upon key criteria.” For example, a broker could search for a category of company such as property and casualty or student loan services. Then within that, they’ll be able to dig down deeper into specifics, such as mental health services within the health and wellness sector. “They will be able to find new things, differentiated offerings or new vendors in the spaces where the usual players aren’t cutting it,” he says.
If brokers want to keep the process in-house, Ryan says, research is a must. She uses a site called Owler.com. On Owler, brokers type in the name of a vendor, such as Gradify, which helps repay student loans. Owler provides some company information, news on the organization and a list of competitors in that space.
One good marker to use during the vetting process is inquiring about a vendor’s dedication to employee engagement. Benefits can be added to a program, but if employees don’t know about them, they’ll go unused. Both vendors and brokers need to understand new, interactive ways to talk to employees.
“A blue-collar employee might not use the internet” on the job, Wilkinson says, “but they do have a smart phone, so they need to have built-out apps to engage them. Engagement should be year-round, not just at open enrollment.”
In fact, Kerrigan says a vendor’s fees could be based on engagement, whereby employers pay only for the employees who use a program instead of an across-the-board fee.
Brokers can also ask if vendors will return fees if they fail to bring people into the fold. No employer wants to spend a lot of money on a program only to find no one is using it. And there are ample resources to get employees on board—chatbots, mobile apps, texting and artificial intelligence can all be employed to get the workforce engaged.
On the employer’s side, decision support tools are an increasingly important resource, even using artificial intelligence to help employees sort through benefit options.
Businesssolver’s Sophia and Jellyvision Lab’s ALEX are both AI systems that walk employees through the enrollment process virtually. These are intuitive programs that ask employees questions, such as their family history of cancer or how many dependents they have, and use that information to determine what kind of benefits are best for them.
“Benefits are confusing, especially to the younger generations,” says Jamie Hawkins, president and CEO of Benefit Technology Resources in Tampa. “They didn’t grow up with union benefits like their parents. And they aren’t going to read a book about their options. This dynamic education is what they need.”
It’s the decade of bright and shiny objects, and brokers need to be able to figure out what is pyrite and what is gold.Tweet
And on the healthcare side alone, there are copious applications and programs to help employees take better care of themselves.
“Brokers are overwhelmed because the sky is dark with the number of tools and applications and capabilities” in this space, says Michael Turpin, executive vice president and managing consultant for USI Insurance Services. “It’s the decade of bright and shiny objects, and brokers need to be able to figure out what is pyrite and what is gold.”
There is technology that targets people with high body-mass indices, women with high-risk pregnancies and people taking costly specialty prescription drugs. Offerings range from telemedicine office visits to smart phone apps that help diabetics regulate blood glucose levels by being more compliant with their healthcare plans.
“There is a whole side of consumer engagement communication tools to speak to a person who doesn’t have more than two minutes to listen to a message and understand what to do to be a better healthcare consumer,” Turpin says.
The many options on the market are only working to make benefits procurement more complicated as brokers try to administer custom plans for every client. It used to be common among larger organizations, Hawkins says, but even smaller companies are seeking this flexibility.
This change has left brokers analyzing internal processes like benefit procurement, onboarding customers, enrollment meetings, communication and renewal. And they are increasingly looking at technology to make the process smoother for themselves and their clients.
Hawkins, for instance, worked with an agency in New Orleans that was sending a staff member to enrollment meetings in five different locations. During his entire day presenting in various conference rooms to employee groups, he mostly saw people staring at their phones while he was talking. “It clicked for them that today’s workforce learns and wants to access information differently,” Hawkins says.
The firm implemented a benefits administration system where employees could upload videos on various benefits. This allowed employees to decide which programs they want to explore and then watch at their leisure. Not only is this a time saver for the brokerage, but the employer doesn’t have to pull people away from work for tedious enrollment meetings.
This newer technology can help improve processes, engagement and benefit reporting and analysis. But there is so much on the market that brokers definitely need to determine what will work with their organization’s culture and use it to its full potential.
“The technology is there,” Turpin says. “But, like anything, theoretically it enhances or makes processes better. But it can also fall flat on its face if not used correctly.”
Programs like TechCanary’s agency management system can customize operations for an array of uses. Reid Holzworth, founder and CEO of the Milwaukee-based company, says the system was built inside Salesforce, so it enables brokers to streamline the process of working with various vendors by adding them into one system. Then, on the back end, brokers can build out analytics that show whether each product is truly helping to attract and retain employees.
One important note for any technology that is adopted, Turpin says: it has to be used systemwide. Historically, brokerages with a national presence have tended to work in silos. Consolidations have resulted in firms with offices in various states banded under one umbrella but operating under completely different systems. A firm in Atlanta might find a great new product for its clients while its sister organization in California has no idea the program exists. Some of the newer technologies can help link those offices and share institutional knowledge.
“We need to eliminate the 100-year-old practice of each producer having their own way of doing things, with their own team and a million redundancies,” Turpin says.
There are probably few brokers who got into the employee benefits industry because they were lovers of math and technology. It’s inherently an occupation guided by Excel spreadsheets, handshakes and customer relations. But technology is changing the way business is done.
“Lots of large brokers like Marsh & McLennan, Lockton and Gallagher have entire tech divisions,” Hawkins says. “It has definitely changed the structure of brokerage firms.”
These newer divisions both implement the technology brokers use, such as Employee Navigator, and vet new technologies on the market. Smaller brokerages may not be able to afford entire technology divisions, but they do have options, Hawkins says. Often, they can partner with consultants or choose one technology and focus on learning it well.
“Honestly, it is hard for smaller brokerages without some help,” Hawkins says. “The HR/tech landscape is changing so fast even the large brokerages are struggling to keep up.”
The industry has reached a tipping point at which productivity is going to have to come from somewhere other than “the backs of people,” Turpin says. For the most part, there is already a high level of productivity, and there’s not a lot of spare time or energy on the part of brokers to do more.
So the industry will need to change for the sake of its survival, Turpin says. Customers no longer want to meet over a long lunch to discuss their plans. These days, they want to talk by text.
When it comes to technology, a lot of brokers are “fast followers.” No one wants to be first in line, but they aren’t going to be fifth either, Turpin says. His organization has chosen to be decisive about its adoption. “You can’t blink when people push back,” he says.
CEOs will need to be “bilingual” in technology instead of delegating the issue to someone else. This is, in part, because the marketplace is crowded with tools; some of them work well, and others are over-engineered and hard to adopt. It’s going to be crucial to know the difference.
Organizations will have to understand how to move into the digital age, and part of that change may be cutting some jobs considered of lower value.
But Turpin tempers that outlook with caution about making too many changes at once. At least, in the near future, technology will require the use of people to understand, interpret and relay it to clients.
“At a certain point, people are saturated with change, and you have to decide when to put a stake in the ground and when to be patient with adoption,” he says. “The best firms can improve their productivity if they can automate their business, but sales will always be where they are looking someone in the eye. Trust is currency when someone is hiring eyes and ears in the marketplace.”
Worth is a contributing writer. firstname.lastname@example.org
But in the evolving world of marketing that bar is set much higher.
A brand is more than your age-old unique selling proposition (USP), that long-valued mainstay essential to every good marketing campaign. Today, branding is about your voice, knowing what you stand for and what you value. It’s your story. Can you tell it?
We are all competing for best in class talent, a larger market share and stronger customer engagement. The marketplace is constantly changing and saturated with options. So how do we get their attention? How do we tell our story so customers will want to do business with us and employees will want to work for us?
Our customers continue to be more diverse. They are likely multigenerational, of varied race, gender, ethnicity and sexual orientation. They speak various languages and one of those will probably be digital. They have skills we aren’t familiar with and have deep expertise in areas we barely understand. If our workforce doesn’t reflect this diversity, how can we meet their needs? Or know how to reach them?
It’s not as simple as just expressing our core values or revising our mission. People want to align themselves with companies that share similar values and beliefs. They want to see themselves in your brand. Will you be able to identify with them and respect them? Will you infuse these values in the way you talk about your firm, in the way you approach hiring new people? Seth Godin, an author and lecturer on the digital age has said, “being able to connect with customers and meet them where they are on a mental, emotional, or spiritual level, rather than trying to bring them in to where the brand is will allow for them to feel like they are being seen, heard, and respected. When a customer or, even more broadly, when a person feels respected, their affinity for the brand will build, and they will talk about it.”
In marketing, this means ensuring messaging and materials reflect these values and beliefs. Our Customers are changing and so should the way we portray them. In an Ad Age magazine story, Shelly Zalis writes, “It’s not just about making sure ad campaigns feature different races, genders and ages; it’s about making sure that different kinds of people are portrayed in a fair, accurate and realistic way—instead of cynically or lazily relying on age-old stereotypes that prey on and reinforce society’s existing biases.”
This may seem obvious, but are you auditing your website, marketing and promotional collateral and social media channels regularly to ensure you aren’t using dated stock images or generic copy that is not representative of the values you want reflected back to your customers?
Starting on the Inside
Messaging alone, however, won’t bring a diverse workforce to our doors. Before you start selling your story externally, you have to truly build the culture internally. From the moment recruiting begins, you have an opportunity to shape your story and help define your culture. How you sell your firm and what you do matters. If customer service is paramount, then put a marker right up front about the value your firm places on building long-term relationships. Your sales process will not be a one and done event. If you value an entrepreneurial spirit, craft a job description around rewarding new ideas and putting them into action even if they result in failure the first go-round. Infusing your brand into the things you value and the ethos your firm honors, will give your employees the voice to share and reinforce it with everyone they connect with.
We must also broaden our recruiting channels and experiment with different approaches to successfully target new talent. We have to be creative in seeking them out and suspend the tried and true methods we’ve relied upon. One initiative yielding great success is a re-entry paid internship created by The Society of Women Engineers. This STEM Task Force brings women engineers who are ready to re-engage in the workforce after taking a career break. In a male dominated field, the program gives employers to the opportunity to increase the number of mid- to senior-level women in their ranks and it gives these talented women a chance for re-entry. In two years, the Task Force is gaining traction with conversion rates of over 60% along with some firms hiring 100% of their interns.
Targeting and recruiting candidates of varied backgrounds, experiences and perspectives will illustrate the value you place on those who bring diverse thinking into your organization. Studies show that diverse teams deliver results that enhance performance metrics and foster innovation.
A study by Garr, Atamanik, and Mallon, High-impact talent management, finds that companies with inclusive talent practices in hiring, promotions, development, leadership, and team management generate up to 30 percent higher revenue per employee and greater profitability than their competitors.
Your employees are your single, most effective brand resource for your organization. They convey trust and extend your voice to a broader audience. Aligning them around your values, right from the start, makes their barometer for success more tangible. It gives them a standard to uphold and to share.
“It doesn’t matter if your company culture is friendly or competitive, nurturing or analytical. If your culture and your brand are driven by the same purpose and values and if you weave them together into a single guiding force for your company, you will win the competitive battle for customers and employees, future-proof your business from failures and downturns, and produce an organization that operates with integrity and authenticity,” says Denise Lee Yohn in “Why Your Company Culture Should Match Your Brand,” in Harvard Business Review.
She also says it helps to break down organizational silos because everyone is singularly focused around the same priorities. Yohn asks: “how can you tell if your culture and your brand aren’t interdependent and mutually reinforcing?” There are telltale signs, she explains:
- A disconnect between employee experiences and customer experiences. If you engage your employees differently from how you expect them to engage your customers, your firm is operating with two set of values.
- A lack of understanding of and engagement with your brand. Your employees should understand what makes your brand different and special from a customer’s perspective. They should clearly understand who the company’s target customers are. They should use your brand purpose and values as decision-making filters and should understand how they contribute to a great customer experience—even if they don’t have direct customer contact.
The 2016 Edelman Trust Barometer revealed employees are among the “most trusted of all company spokespeople—even more than the CEO.” They are essential advocates for your firm. Ensuring they understand and can articulate your values and beliefs not only enhances your brand equity but strengthens your competitive advantage. Equally as important, it helps you hire the right people, develop and grow your employees and create a more engaged and committed workforce. Aligning values and beliefs equals a better customer experience.
What more could you want?
Rushford is The Council’s SVP of Marketing and Communications. Susan.Rushford@ciab.com
What was the driving idea behind Aclaimant?
A family friend was running a work comp captive in the staffing industry. At the time, I was at the Lightbank venture fund in Chicago, and he, just like many people in the workers comp industry, was experiencing all kinds of problems related to getting claims filed on time, accurately, with complete information, and having policyholders who knew what to do when something went wrong. One day, he asked me as a technology guy if I could help him build an app because he thought it was crazy he could get an Uber on his phone but he couldn’t get somebody to report a work comp claim. We began to dig into this space, and that nugget led us to what became Aclaimant.
Can you talk about Aclaimant’s evolution from a mobile app?
Our initial hypothesis was a mobile app to report work comp claims was the solution. We realized the problem was actually significantly larger than originally thought. It wasn’t just about claims and getting claims reported. It was companies either don’t know how to manage risk at their business or don’t have enough resources to do it effectively.
We felt we had to address this holistic problem and not the symptom. We revisited the technology approach and built what we now call resolution performance systems. The idea is to help companies see risk more clearly and do something about it. Effectively, that means streamlining every phase of workplace safety, incident and claims management into a single tool to help these clients supercharge their safety, risk management, claims and incident management programs to become a better risk by optimizing every step of the process.
Walk us through those steps.
Obviously, it starts with prevention. On the workplace safety side, we’re helping companies do digital safety initiatives—everything from observations, site inspections, audits, job hazard analysis or job safety analyses—that kind of holistic safety approach. When things start to go wrong, we’re starting at the near hits and near misses, walking through every phase of that incident management piece, the reporting, the documentation, the internal management triage and follow up, and ultimately producing analytics for reporting and understanding what’s happening. Think about the data capture, the workflow, the task management, the material creation. That’s the area that we live in and the area that creates the most paperwork for safety and risk managers. It’s also the biggest opportunity to help them enhance their risk profiles.
Why does improved incident reporting matter?
We find the most common challenge is lag time in reporting. Can I get a claim reported more quickly? Statistically, if I can get it reported more quickly, it should cost less. If I can get in front of it, better things happen. Very often companies that want to get things reported more quickly want to make their reporting experience better but don’t really know how. It’s because the people who are involved in this process are generally outside that risk management suite. Very rarely would someone get hurt sitting right next to a risk manager. They’re getting hurt out in the field. They’re on a job site. They’re on a truck. They’re working at a branch or a different facility. You have this gap, both spatially and cognitively, between the knowledge center of risk management and the actual risk-inducing event.
For us, being able to find a way to help democratize that knowledge throughout the organization is where you begin to drive meaningful improvement. Not only do you get that event reported immediately, our real finding is how you can improve those outcomes. When an event has happened, it’s happened, but the companies that are really differentiating themselves are the ones that are being proactive with injured employees, that are immediately doing everything to address the potential liability for the company, and protecting their employees and their P&L.
What’s important is being able to truly help these companies effectively streamline their risk management process, because the people who are doing a better job of managing those processes are actually doing a better job of protecting their businesses and consequently doing a better job of reducing risk and reducing the cost of risk to the business.
What markets are you working with?
We initially thought we would be a fit for the small and mid-market. We actually found we apply to large enterprises as well as medium to small enterprises and also brokers. We are targeting industries that either have a focus on safety and prevention or have a frequency or severity problem when it comes to incidents and claims. We’re geared toward industries like staffing, construction, and the insurance agencies and brokerages that they work with.
Can you talk about your work with agents and brokers?
Agents and brokers are always looking to find new ways to add value for their clients. On the one hand, they look at us as a tool to help their clients help themselves. A lot of times, they’ll offer consulting services—loss control, risk-management type activities—to help those team members they’re working with do better. We kind of close that gap very nicely. The other way we work with agents and brokers is that, if they are involved in that claims submission process, for example, we can plug in as that workflow management tool and manage the intake, the submission and the follow-up through our tool.
How is technology changing the role of agents and brokers?
We’ve seen an incredible groundswell coming from the brokerage community, where people are no longer afraid of technology in this space. Brokers and agents are being leaned on more and more to help vet technologies for their clients. Whether or not they want to be in that position, they’ve positioned themselves to be almost a consultant or a true advisor to the companies. In the last handful of contracts we’ve closed, the agent has been brought in as part of the buying process. Agents’ roles have evolved from simply being somebody to help place insurance to helping to manage risk in a business and now extending beyond that. It’s a very interesting trend to watch in an industry that generally has been a technology laggard but is now accelerating into the future.
What’s Aclaimant’s history?
The conversation that sparked the idea was in June of 2013. The first line of code was written January of 2014. Our first five customers came on in the same week in June 2015. We took our first investment round about two months later. Our first major carrier partnership was CNA, which we announced in early 2017. We’ve been off to the races ever since.
Chicago seems to be pretty hot for insurtech. Why?
Chicago is one of those overlooked tech and insurance hubs. Here, we have the right set of ingredients to produce a ton of really great companies. You have the headquarters for a number of large corporations that have big risk management and insurance problems. You have the headquarters for a number of large insurance companies and agencies. On top of that, you also have an incredible supply of talent, a number of great universities and a cost of living that I think is appropriate for attracting a good amount of talent. There is a lot of ecosystem support here. Even looking at the change in the past six years—the number of venture funds, the number of meet-ups, the number of co-working spaces, people’s reception to new technologies and the desire to innovate and collaborate together—it all kind of caught steam. If you’re starting an insurance technology company, Chicago is one of the best cities based on who’s here and who you can get to within an hour’s flight of here.
This survey has been done for a number of years. What trends have you seen over time with employer benefit plans?
I’ve been in this business going on 40 years and with DirectPath for 10. So it’s been interesting over the decade to see how some things have changed and others stayed the same as employers grapple with healthcare costs. Every few years, there is a shiny new toy that’s going to solve all of the problems. Back in the day when I first started working, there was an indemnity plan, and then they introduced HMOs, and then it was managed care plans and then PPOs and then high-deductible plans and then private exchanges.
I think we are just starting to wrap our heads around the fact that there is no silver-bullet solution to healthcare costs. Every case is going to be individualized whether it’s to the company, to the industry or to the geography. So every tool that works for any given organization is going to vary.
So there’s no real answer to the problem?
I think the thing that would potentially have an impact on healthcare costs is providing better education to employees. I’ve seen statistics on healthcare literacy and health insurance literacy in the United States, and they are pretty abysmal. Until we help people understand how insurance works, how to select the right plan, how to use that plan, how to budget for healthcare costs, proactively work with their provider and shop around for cost-effective care, I don’t think we’ll ever really solve the healthcare cost issue.
Organizations used to have large and robust human resource benefits departments and a person who could sit down with employees and walk them through their benefits questions and answer them. But now employees don’t know where to start. Now we have regulations like HIPAA making it impossible to do that even if we had the bandwidth to have these conversations. Increasingly, employers and brokers are coming to companies like us for assistance because they know they can’t handle all of that, but it is an increasingly critical part of the puzzle. Particularly with each new generation of health plans, it’s becoming more complex.
High-deductible health plans are thought to be a potential panacea for employers’ rising costs. But your study found just a moderate uptake of these plans. Any idea why?
The responses are a little deceiving here. Some 78% of employers offer high-deductible plans, but they represent only 30% of the plans in our database, which essentially means employers are offering a lot of other options as well. When high-deductible plans were first rolled out, there was a lot of talk of these being the only option available, but there was a lot of pushback from employees. Initially, people were attracted to the low premium, but then they came up against the high deductible.
Particularly now that we have five generations in the workforce, each generation has different preferences and priorities. That’s why one size doesn’t fit all. And it does vary somewhat by generation. For instance, really young people may like high-deductible plans because they don’t have a lot of medical expenses. Or baby boomers may be inclined to go for a high-deductible plan because they may have more discretionary income. Older generations may also understand that an associated health savings account may give them a place to save more money for retirement.
Have you seen any evidence that people are foregoing important care to save out-of-pocket costs, particularly with HDHPs?
The Kaiser Family Foundation released a report finding 43% of people were having a hard time affording deductibles, 27% put off needed care, 23% skipped a test, and 21% didn’t fill a prescription because of cost.
The notion was that the HDHP was going to drive down the cost of healthcare by making people shop around, but it drove down utilization. That’s horrifying that so many people skipped care because they were afraid of how expensive it was going to be.
Are there other options employers are using instead of HDHPs to lower costs?
I think at this point employers are shifting away from whole new plan designs and toward tweaking the elements of their plans. We’re seeing things like narrow networks or accountable care organizations, changing a pharmacy plan to include things like mandatory generics or step therapy, surcharges for spouses who have care elsewhere and tobacco charges.
Pharmacy costs are a big concern, particularly with specialty drugs. What are employers doing to save in that space?
I was really surprised we didn’t see more interesting things around that. I’m wondering if we’re going to see that shift over the next couple of years. From the specialty drug perspective, it appears employers are absorbing much of the price increase. They seem to realize if someone is on a specialty medication, they have a chronic condition or something pretty severe. They want to protect that employee or family member to the extent they can.
The study also found the number of employers offering wellness programs dropped from 50% to less than a third in a year’s time. What do you think is behind this change?
First, there were some questions when wellness plans first came out about whether they worked, and there are still some questions there. Second, I think employees aren’t really sure they want their employer to have that kind of personal information about them. And I think employers think they are a fun thing to do for their employees but any real cost benefit will just be a bonus.
What are some other voluntary benefits being offered? What direction are these going, and what is causing the movement?
We are starting to see more of these because they expand the options employees can offer at little or no cost to them. They can say, ‘See all of these other benefits we offer you?’ Some of these are providing an additional safety net to those scary high deductibles, so you’ll see things like critical illness, cancer and disability coverage.
A new one getting more attention is identity theft protection. Supplemental life, accidental death and disability always remain popular for voluntary benefits, but the percentage of those dropped dramatically this year. But I’m thinking that’s because more employers are treating those as standard benefits now instead of part of the voluntary offerings.
The survey noted that telemedicine is on the rise, which purportedly cuts costs and increases access. How can employers and brokers increase utilization?
I think that, as more and more people see the value of it, it will become more and more popular. It’s certainly less expensive than going to the emergency room; you don’t have to wait in a waiting room; and if you are sick at 11 p.m., chances are your doctor will not be seeing you. We are seeing some employers setting the co-pay for a telemedicine visit equal to an office visit, and sometimes even below that, just to drive use of that program.
With all of the changes going on in the healthcare and benefits industries, what are employers looking to brokers for to reduce costs and increase employer satisfaction?
I think in general they need to be prepared creatively. We are going to see more employers going to brokers and saying, ‘This is my situation. What arsenal of tools can you provide to solve these problems?’ They need to start thinking outside of the box a little more than changing health plans or increasing employee costs a little bit. The employee’s share of costs can go only so far before employees are going to rebel.
I remember seeing some statistics that, over the past five years, salaries have gone up an average of 1.9%, but medical costs have gone up 9%. So you know employees are falling behind. And in a tight job market, that can be challenging for employers who are trying to attract and retain top talent.
I think employers are looking for partners. Human resource departments and benefit departments are getting smaller, and they just don’t have the level of bandwidth to provide the support they would like to. They’re looking for the brokers to come in and help them—whether it’s the brokers themselves or the brokers identifying partners they can work with. We’ve certainly had a number of brokers reaching out to us to see if we can support voluntary benefits, sales, uptake or helping with the engagement process. There’s a lot more demand to tailor to the needs of the individual employees, and brokers need to determine how to do that well. Going back to there being five generations in the workforce, we’ve got to work with baby boomers down to students graduating from college who have always been able to personalize everything from their coffee to their cell phones.
Behind the scenes, I had just gotten the go-ahead to begin working on a new magazine for The Council, what would soon become Leader’s Edge.
The Council’s president and CEO Ken Crerar and I put our heads together to come up with a plan. He thought up the name, we agreed on a concept, and he gave me six months to pull it all together.
Starting next month, my tenure as editor in chief of Leader’s Edge will end, and Sandy Laycox, our associate managing editor, will take the helm. To ensure a smooth transition, I’ll be working with Sandy and the staff until the end of the year. In the meantime, I’ll have the chance to do some writing for the magazine—something I haven’t been able to do for 15 years.
But come January, I will shift my focus to other forms of writing, namely books. I started writing novels in 2011 and have enjoyed it more than I could have ever imagined. Currently, my third thriller is scheduled for publication in September, and I’m working on a fourth. I will no longer need to rise at 5 a.m. to write for a few hours before leaving for the office, although I’ve discovered it’s a nice, quiet time of the day, and it’s a habit I might not want to break.
I’ve been a journalist since 1978. I started at a small weekly in Springfield, Virginia, and then went on to dailies and news services, finally ending up in the magazine business. I’ve started two magazines during my career, and believe me, it’s a lot more fun using other people’s money. I’ve worked at The Council longer than anywhere else—15 years. During that time, I went from being one of the younger staffers to one of the oldest.
Pat Wade was my first colleague when we started Leader’s Edge. She became our business manager. Today, she still sits by my side in the office as my co-pilot of the ship. For a while, it was just the two of us. I hired freelance writers, artists, advertising salesmen and even a printer—well, several printers until we finally found our perfect fit in Royle Printing of Madison, Wisconsin. Pat figured out how to deal with postal regulations, invoicing, advertising insertion orders, a circulation list pulled from our membership database and finally the annual circulation audit for advertisers—a real beast. She is a saint. No other word adequately describes her.
Jacquetta Williams later joined us as ad trafficking manager. Both had other duties at The Council for many years until we grew to the point where they became full-time magazine employees.
For nearly 13 years, I was the only full-time editorial employee. To say the least, Ken prides himself on running a tight ship.
During the past 15 years, we’ve angered some readers and received many accolades. We fought with the Post Office over obtaining our periodical postage permit. It took so long, that when we finally received it, the Post Office owed us six months of free postage. I guess that was a good year financially for the magazine, but it put Pat through hell to get there.
We wrote about everything from corrupt state regulators to the havoc wrought by Eliot Spitzer on innocent people to further his political ambitions. We published stories about some of the nicest, most charitable people I’ve met—our readers. We recognized the first 100 game changers in our industry during The Council’s 100th anniversary year. And we continue that tradition every December.
And as your world changed, we changed with it, focusing more on technology, leadership, benefits and looking forward trying to figure out what will be the next incoming salvo to hit our industry. Somehow, our readers always manage to find the answers. And for all of the comments about how staid and boring insurance is, change in this business really is the one constant.
We’ve gone through many changes in staff during our journalistic lifetime at the magazine, but several have stayed with us throughout. Maureen Brody, our news editor and copy chief, came with me from my previous tour at Independent Agent, as did our humor columnist Jonathan Hermann (aka Jonathan Spence). Others who have been here from the beginning include Michael Fitzpatrick (Tech-No-Savvy), Leslie Hann (editor at large), Adrian Leonard (foreign desk chief), Scott Sinder (legal column) and Joel Wood (politics). Two designers remain with us, Brad Latham (creative director) and Ted Lopez (associate art director), as well as our panel cartoonist Ted Goff. In a transient world, it’s hard to believe so many talented writers and artists have been such steadfast friends and colleagues.
We couldn’t have done this without our Royle printer representative, Steve Szoczei. He helped us with a lot of creative printing ideas. Remember the face on our tech issue that was cut out with a laser? Or how about our feature story that folded out like an accordion? Remember that translucent page that changed messages when you flipped it? All of that may look easy to produce, but there was actually months of planning to pull it off.
In a media world that has struggled to survive, we are happy to report our advertising sales have been among the best in the industry. Revenues have grown almost every year in recent years. We have our advertising directors, Dave Bayard and Scott Vail, who work diligently with our industry, to thank for that.
Most of all, though, I’d like to thank Ken. It took a lot of guts to hand over his vision to someone else. We weren’t strangers at the time, but we didn’t know each other well. Yet we saw eye to eye from the beginning. Remarkably, when Ken would—how should I say this—“vigorously” point out some flaw in our coverage over the years, I would remind him how we agreed on 95% of the magazine’s contents. Sometimes reluctantly, he would shake his head and concur.
So it has been a shared a vision for 15 years to create something starkly different from what was already out there. We wanted something bright and new that highlighted our business for what it really is but did so in an engaging fashion.
Now it’s my time to start the process to disengage and let Sandy take her turn at keeping the vision alive. I recently interviewed Steve De Carlo, who just stepped down as chief of AmWins. He said we all need to understand when it’s time to move out of the way and let others take over. He set a great example I hope to follow.
For my part, it’s been a good run. I hope you found as much enjoyment out of reading Leader’s Edge as we did creating it.
Thank you to my staff, The Council staff and especially our readers for your support over the years.
Editor in Chief
Everyone searching for an in-network doctor will appreciate this. Five of the largest healthcare organizations are launching a pilot blockchain program to improve data quality and reduce administrative costs. Humana, MultiPlan, Optum, Quest Diagnotics and UnitedHealthcare say they’re looking into how blockchain can help ensure the most current healthcare provider information is available in plan directories. An estimated $2.1 billion is spent each year in the healthcare system acquiring and maintaining provider data, according to Health Plan Week.
B3i is getting down to business. Founders of the Blockchain Insurance Industry Initiative (B3i) have formed an independent Zurich-based firm, B3i Services AG, to commercialize blockchain solutions for insurers and reinsurers. Until now, B3i had been a collaborative effort of 15 global insurers and reinsurers. “The transition of B3i from consortium to independent company is a concrete step forward to realizing the enormous potential of blockchain for the insurance industry,” says Gerhard Lohmann, CFO of reinsurance at Swiss Re, who has been appointed as chairman of the new company.
Proof of insurance is a new target for blockchain technology. Marsh is developing blockchain-based commercial proof of insurance in collaboration with IBM, ACORD and ISN. Since this is often a key business requirement in many industries, the companies say this blockchain solution opens up the possibility to provide verification on a much broader scale.
Marsh has also joined the Enterprise Ethereum Alliance, the world’s largest open-source blockchain initiative with more than 400 member companies. The alliance seeks to create open industry standards and frameworks for blockchain applications based on the Ethereum platform.
“We see the potential of blockchain technology as having a game-changing impact on the risk management and insurance industry,” says Sastry Durvasula, Marsh’s chief digital officer.
Written premium for the commercial cyber liability market will reach $6.2 billion by 2020 with uptake rates growing 20% to 30% over the next several years, a new Verisk analysis estimates.
“Cyber liability risk is rapidly permeating every business that has any dependence on digital technology—which means very few enterprises are exempt,” says Maroun Mourad, president of commercial lines at Verisk’s ISO. “We see rapid growth being powered by gains in small and midsize accounts as the market matures.”
There’s plenty of room for growth for cyber in small and midsize businesses. Nearly six in 10 small and medium enterprises don’t have a cyber insurance policy, but almost two thirds of such business have been the victim of at least one cyber incident during the last 12 months, according to a study by Argo Group. The study found that 81% of brokers say many of their clients don’t understand the significance of cyber threats and aren’t allocating sufficient resources to defend against them.
It’s not just business. About one third of U.S. consumers have been notified that their data have been breached, and one in five have been victims of identity theft, according to a survey from Hartford Steam Boiler. Almost half of those who received a breach notification had been informed within the past 12 months, the nationwide poll conducted by Zogby Analytics found. “On the positive side, forty-eight states now require that affected individuals be notified, and more consumers are taking advantage of credit monitoring and identity restoration services offered by businesses and insurers,” HSB vice president and counsel Timothy Zeilman says. Almost two thirds of those whose information had been breached were offered such services, and 41% took advantage of them, the survey found.
Among new data breaches, UnderArmour says about 150 million user accounts for its MyFitnessPal food and nutrition app were potentially exposed, including data such as user names, email addresses and passwords, but not Social Security numbers and payment information.
It’s got that rude, choppy dialogue that Hemingway liked, and it introduced two mega movie stars to the big screen: Burt Lancaster, hopelessly hunky at age 32, and Ava Gardner, age 23. He plays Swede, a gangster, who gets murdered in the first 10 minutes. She is Kitty, the gorgeous, flirtatious, and cold-hearted dame who leads him into the lowlife. (“I’m poison, Swede,” she says, “to myself and everybody around me.”)
Swede gets mixed up with a crime kingpin and two of his henchmen, delightfully named Blinky and Dum Dum. But the hero is insurance investigator Reardon from Atlantic Casualty, who gets involved in Swede’s murder because of a $2,500 life insurance payout to a chambermaid who is Swede’s beneficiary.
The insurance boss tells Reardon to forget investigating the murder with its peanuts payout. But he knows that the obsessed Reardon will work for Prudential for more money if he doesn’t get his way. (Seriously.) Reardon, playing at being a real detective, pulls together zillions of plot threads, solves an old robbery, and does not go to work for Prudential.
The Killers made tons of money and was nominated—fruitlessly—for four Oscars. But it wrote the rules for the film noir genre, with its fedoras, frosted glass office doors, cheesy rooming houses and greasy diners. It also introduced a classic piece of scary music that was plunked out every time the bad guys showed up on screen. For reasons currently unknown, it became the theme music for the TV show “Dragnet” in 1951. Now that is a contribution.
But what we haven’t talked about in this buy/sell whirlwind is the mental hang-ups that many agencies bring to the table:
- Selling my firm is selling out.
- If I sell, I’ll betray my staff. They trust me—they’re depending on me for their future.
- Everyone else in my region is selling. That makes this is a great time to fish for their clients and employees.
These are some of the misconceptions we face in the market every day. But there’s good reason for this thinking. Often owners open up a file of what-ifs when the conversation moves to “What’s next?” Where do you see yourself next year, and what about five years down the road? What is the succession plan, and how will you execute it?
But what if you thought differently about succession—about selling, buying or persisting independently in this market?
In The 4 Disciplines of Execution: Achieving Your Wildly Important Goals, authors Chris McChesney, Sean Covey and Jim Huling talk about how to focus your team’s energy on a winnable game in the midst of distraction. They suggest a mindset shift. Instead of asking, “What’s more important,” reframe the question to: “What is the one area where change would have the greatest impact?”
That’s a different way of thinking, isn’t it? By looking at goals through this lens, you very well could identify a different initiative—one that can make an impact on your organization. When we apply this type of thinking to M&A and planning for the future, we can also think differently about our strategy and what actions can make a marked impact on our businesses.
So let’s take a look at those common M&A hang-ups and how thinking differently could prompt us to act differently and more strategically.
Selling My Firm Is Selling Out If this is true, then why are so many firms choosing to sell? The reality is, many agencies are selling in this attractive market because they believe in the power of leveraging the strengths of an organization that has already established and built out resources. They’d rather combine forces and tap into those resources than build it themselves, and this makes sense. Then, they can focus more on selling and serving clients.
It’s not about selling out—it’s about plugging in.
The bottom line here is, as an owner, you built an asset that has value, and you took the risk by being an entrepreneur. You have every right to sell your business and monetize that asset. Selling can be an opportunity for you to maximize the value of your business and create growth opportunities for your employees and community.
Selling Is a Betrayal of Commitment to My Staff This is a common rationalization and stress that owners struggle with because they feel they owe it to their people not to sell. However, many small businesses hit a growth ceiling, and as a result there are limited opportunities for talented employees to rise in the ranks. Your good people could end up leaving for other opportunities if they don’t find what they want at your organization. Selling can actually create more fulfilled careers for your employees—and the key is to communicate these opportunities to your staff so they understand how the deal could potentially provide them with a better career path. You have the ability to control the narrative. Your comments and attitude toward a future combination can help set the internal tone when the inevitable happens.
Everyone Else Is Selling, So We Can Recruit Competitors’ Employees and Clients A likely scenario when other agencies in your area sell and get larger is that they gain more resources and bring more opportunities to their people and their clients. They get stronger. They have a bigger brand name and more influence. Your competition gets better—and harder to beat.
So, while your perception might be that you can grab your competitors’ best people and woo their key clients away because they decided to sell, that’s generally not true. Instead, you’ve got local competitors who gained access to more resources and sophisticated solutions. You’ll likely have to work harder to keep your team members and retain your book of business.
Many businesses sell because they want to get better.
Instead of second-guessing those who sell, have you asked yourself why you haven’t considered it? If the goal is to remain independent, what are you doing to get better?
There’s no better time than now to review your goals. What are you doing to improve? If everything at your organization stayed the same, what’s the one area you could change that would make the greatest impact?
Focus there. If that’s expanding your geographic footprint, how will you do it? If that’s getting into a niche line of business, how will you develop that expertise? If that’s growing volume, how will you gain the resources and talent to do it?
Many organizations today are answering these questions by selling—they’re leveraging the resources of organizations that are already implementing these goals. They’re not “selling out,” they’re building out.
The second quarter of 2018 began with signs of increased activity, with 29 announced deals compared to the 23 in March. The 2018 year-to-date total is 128. While deal activity still appears to be slowing compared to the same period in 2017 (182 vs. 128), buyers remain active, and we still see revisions to monthly deal counts due to delays in public announcements.
Hub International jumped into the lead with 10 deals this year. It is followed closely by Alera Group (nine) and BroadStreet Partners (eight). Private-equity backed brokerages remain the most active buyers, accounting for nearly 55% of deals in 2018.
While USI Insurance Services remains in the headlines after its March agreement to purchase the insurance operation of KeyBank (Key Insurance & Benefits Services) and its 2017 acquisition of Wells Fargo Insurance Services, more big news has emerged. BB&T Insurance Holdings agreed to acquire Regions Insurance Group, and Alliant Insurance Services is acquiring Crystal & Company. Crystal was ranked the 25th largest brokerage in 2017. Regions was ranked 33rd. Keep an eye out for more large transactions throughout 2018. The market continues to be filled with rumors of other pending transactions of top-100 brokerages.
Trem is EVP of MarshBerry. email@example.com
Securities offered through MarshBerry Capital, member FINRA and SIPC. Send M&A announcements to M&A@MarshBerry.com.
At Texas Christian University, you were executive director of Frog Camp. What’s that?
Frog Camp is a new-student orientation program that helps incoming students prepare for college life at TCU. Incoming students spend a week together. They could be rock climbing in Colorado or stay in Fort Worth doing community service. Now they have a chance to go to London and other places abroad.
You and your wife, Katie, met at TCU?
We met at Frog Camp. She was actually one of the directors. Katie was also incredibly involved at TCU. She’s a natural leader. I’d love to say it was an immediate connection for both of us, but I had to pursue her.
And you’ve stayed in Fort Worth. Why?
Fort Worth is an interesting mix of cowboy and culture. My wife and I fell in love in Fort Worth and hope to never have to leave.
What is the best thing about living in Texas?
The people. Texans have a very untamed spirit. There’s a sense anything can be accomplished here, and that makes it a fun place to live.
You and Katie have four kids ages 4 to 8. That’s got to be a tricky balancing act.
At one point, we had four children under 5 years old. If it were up to my wife, we’d have a hundred children. Last summer, we hosted three orphans from Ukraine. Two of the three children are currently in the process of being adopted. It was a fantastic experience. It gave my kids a greater appreciation for the world beyond what they are accustomed to in Texas.
What’s the secret to maintaining sanity when you’re outnumbered?
A good partner, for one. I think having a healthy appetite for laughter helps. My wife and I find humor in a lot of situations other people might find crazy. I came home last year from a hard workday, a Friday, and a friend comes walking out of the back hallway. She looks at me and says, “I am so sorry, Matt.” The kids had gotten into a paint fight in the playroom. They had covered the ceiling, floor, couches, walls and each other in paint. If I hadn’t had such a bad day, I probably would have been mad. Instead, I took out my phone and just started videotaping it. By Sunday morning at church, it had 5,000 views. Complete strangers were coming up to us saying, “I would have killed them.” In the moment, my first reaction was, “At some point, we’re going to think this is funny.”
You’re an avid fisherman and hunter. Where do you like to fish and hunt?
I go fly fishing for trout in Colorado. My favorite type of hunting is bird hunting—dove, duck. I do some deer hunting, mainly in Texas. I went dove hunting in Argentina with a guide for a week. It was incredible. Next year, I’m heading to New Zealand for red stag.
And you’re a downhill skier. How does a Texan become such a proficient skier?
My father is a great skier. I grew up skiing with him and my brother. We’d ski on spring breaks and different holidays. We still ski together when we have the chance.
When you talk about company culture at Marsh & McLennan Agency, what does that mean?
I think culture has to do with the heart of the people who work here. It’s about caring for the person next to you and going the extra step to make sure everything is done so they can get home to their families. To me, culture is how you treat people.
What’s the best advice you ever got?
There’s a plaque on my desk from the Ronald Reagan Presidential Library. It says: “There’s no limit to what a man can do or where he can go if he doesn’t mind who gets the credit.” I absolutely love the quote. I think it speaks to your culture question. It’s not about one person. It’s about many people pulling together.
If you could change one thing about the insurance industry, what would it be?
I think the industry as a whole has largely been reactive. The last five years we’ve become more proactive. I think that’s the biggest thing I would change—the energy level toward proactivity.
What gives you your leader’s edge?
My energy and passion for the people in the business. I love what I do, and when you love what you do, it’s not work.
The Stadler File
Favorite Family Vacation Spots
Seaside, Florida, and Durango, Colorado
Favorite Ski Resort
Park City, Utah
The Thomas Crown Affair
The Count of Monte Cristo
“Right now, I really like Sturgill Simpson.”
The Boys in the Boat
Ford F-150 King Ranch
As I wrote last month, diversity without inclusion doesn’t do anyone much good. We need to take steps to make all employees within our organizations feel welcome and included, celebrate their differences and encourage their ideas and perspectives. Because as we well know, new thinking breeds new opportunities.
The Council’s board of directors recently gathered for an intense work session on diversity and inclusivity. The discussion was thoughtful and direct. We talked about needing a diverse workforce to meet the demands of increasingly diverse clients, hiring the right people instead of simply meeting quotas, changing where we look for talent and, importantly, creating a culture of inclusivity.
One area of focus during our discussion, and something that is coming to the forefront is pay equity. A handful of states are already making changes around robust pay equity laws (which are already in place in the UK), including California, Maryland, Massachusetts, New Jersey, New York, Puerto Rico and Oregon. These new rules and regulations around pay transparency and reporting, designed to make it easier to prove pay discrimination, will no doubt create an increase in lawsuits. But that’s not the only reason you should be paying attention.
Topping our many takeaways from this conversation was the importance of conducting a full-throttle workforce assessment for diversity and inclusion. Such an assessment helps identify key metrics in your firm that paint the full picture of your firm’s talent lifecycle—everything from prospecting and hiring to pay equity and terminations, rate and timing of promotions, and more. This exercise is useful (and I recommend outside expertise to truly create a holistic and independent report) because it’s difficult to move forward if you don’t realize or recognize your friction points and gaps, and perhaps even some systemic issues.
Uncovering hiring and recruiting trends doesn’t give you the full story, but it’s a start. How and where do you advertise your positions? What criteria do you use to make hiring decisions? Is it objective or subjective?
When you hire, who determines whether the individual is assigned to benefits or property-casualty? How do you determine starting salaries? Do you use prior salary in your decision-making process? How do you determine a merit increase? Do you pay for performance? How are employees promoted? Do you promote from within?
The deeper you dig, the easier it is to see areas to improve.
Understand that there is no magic roadmap. Every firm has different factors to deal with—size, location, clientele, specific skill sets required for specific positions. The point is, you won’t be able to design an effective plan of action without first understanding where you have holes. It’s hard to make changes if you don’t know what to change. A diverse workforce assessment arms you with data and information to help you start results-driven discussions and track gains and losses along your talent lifecycle, holding you accountable for real change.
Admission and awareness of this ever-present diversity and inclusion initiative is the first step, but an action plan and follow up is what is needed. You don’t know what you don’t know until you do something about it.
That’s not being ignorant. That’s knowing what it takes to achieve a competitive business advantage.
Potentially quite a bit if you have any EU operations or customers or if personal data in your business is flowing between the EU and the United States.
The General Data Protection Regulation sweeps in non-EU-based insurance intermediaries through its so-called “long arm” jurisdiction. There are two key pieces at work here:
- The framework applies to all controllers and processors of natural persons’ data (i.e., anything that could be used to identify an individual, like name, address, etc.). It is not specific to the insurance industry. “Controllers” determine the purposes and means of the data processing, and “processors” process the data on behalf of the controllers. The distinction matters because it determines your specific obligations and liability parameters under the regulation. The respective roles are determined on a case-by-case, fact-specific basis. Under U.K. guidance, for example, indicators of a controller include making the decisions regarding collecting information in the first place, how much and what data to collect, purposes for which the data are used, whether and to whom to disclose data, and how to manage the data.
- The regulation applies to controllers and processors outside of the EU when their data processing activities are related to the offering of goods or services to individuals in the EU or to the monitoring of individuals’ behavior if that behavior occurs in the EU. And notably, the regulation’s consumer protections and requirements travel with the data, so any transfers of personal data from the European Union to the United States will require compliance with the regulation on the U.S. side.
So what does it mean if you’re covered as a U.S.-based intermediary? At a high level, it means additional complexity and the potential for increased exposure on multiple fronts. For instance, with respect to the data rules you must follow, it will require reconciling existing insurance-focused rules like HIPAA with this broader regime. All this as Congress continues to explore its own data-security standards and breach notification requirements.
It also portends a new dynamic between intermediaries, sub-intermediaries and carriers as these entities figure out how to limit their own liability exposure and establish new, top-to-bottom processes and procedures to comply with the EU regulation. There are real consequences for how you structure the controller-processor roles, and sub-agents, third-party service providers—everyone in the data processing chain—will have to be considered.
It means dealing with new supervisory authorities beyond U.S. insurance regulators (e.g., national authorities in the EU) and the risk of multiple or disparate enforcement actions. And the enforcement stakes in the EU are high. In addition to civil damages for violations, hefty administrative fees are in play—up to the greater of €20 million or 4% of a company’s worldwide annual revenue.
At an operational level, the regulation is extensive and multifaceted, governing the circumstances in which you can process data at all, the purposes for which you can process data and how much of it, how to store and protect data and consumers’ privacy, and what to do in the event of a data breach. There are special rules for certain categories of data like health data and criminal history. The rules and responsibilities get even more onerous in these cases.
To give you more of an idea of the sheer breadth of the EU construct, here are its seven fundamental principles for processors of personal data—each of which drives buckets of onerous regulatory standards:
- Lawfulness, fairness and transparency
- Purpose limitations
- Data minimization
- Storage limitations
- Integrity and confidentiality
Additionally, consumers are given robust rights with respect to their data, including access, “the right to be forgotten,” the right to correct data, portability and various notifications.
With the compliance date now here, covered entities are expected to be able to demonstrate and document full compliance with the regulation or face substantial enforcement and financial consequences. This is, to say the least, a very big deal for U.S. businesses with EU ties.
Sinder is The Council’s chief legal officer and Steptoe & Johnson partner. firstname.lastname@example.org
Jensen is an associate in Steptoe’s DC office. email@example.com
Shenk is a partner in Steptoe’s London office. firstname.lastname@example.org
Soussan, email@example.com, and Woolfson, firstname.lastname@example.org, are partners in Steptoe’s Brussels office.
But 73% of those programs show no ROI, and 95% fail in their follow-through, according to the Corporate Executive Board.
For most companies, the talent is there, but many organizations haven’t fully figured out how to develop prospective leaders. Ignoring or demoralizing internal talent can have dire consequences. It can result in low engagement and high turnover. More than half—51%—of managers feel disconnected from their job, and 55% are looking for outside opportunities, says Gallup. If the employees jumping ship are your high-potentials, it can get extremely costly. So as competition for smart talent heats up, organizations can’t ignore their internal talent. They must grow their own leaders.
“Turning Potential into Success,” an article in Harvard Business Review written by Claudio Fernández-Aráoz, Andrew Roscoe and Kentaro Aramaki, offers a road map to help employers. To prevent your talent from walking out the door, identify the competencies that are most critical for your top roles. A competency is measurable or observable knowledge, skill, ability or behavior that is important to successful performance in a job. Here are eight competencies Fernández-Aráoz feels are important for leaders, along with baseline and extraordinary measures for each.
- Results Orientation—At its most fundamental level, this is completing assignments and working to make things better. At an extraordinary level, this is redesigning practices for breakthrough results and transforming the business model.
- Strategic Orientation—The baseline is to understand immediate issues and define a plan within a larger strategy. At its highest level, it creates high impact and/or breakthrough corporate strategy.
- Collaboration and Influence—At a basic level, this is demonstrated by responding to requests and supporting colleagues. At its highest level, this competency establishes a collaborative culture and forges transformational partnerships.
- Team Leadership—This is exhibited at a fundamental level as directing work and explaining what to do and why. At the extraordinary level, it motivates diverse teams to perform and builds a high-performance culture.
- Developing Organizational Capabilities—This competency, at a baseline level, supports development and encourages others to develop. At the extraordinary level, it builds organizational capability and instills a culture focused on talent management.
- Change Leadership—Accepts and supports change at a fundamental level, drives firmwide momentum for a culture of change, and embeds that change.
- Market Understanding—The baseline for this competency shows up as knowing immediate context and knowing general marketplace basics. At its highest level, it identifies emerging business opportunities and sees how to transform the industry.
- Inclusiveness—At the baseline, it accepts different views and understands diverse views. At the highest level, it strategically increases employee diversity and creates an inclusive culture.
The second step in the road map to high-potential leadership development is to assess the potential of your aspiring managers. The authors suggest you “check their motivational fit and carefully rate them on four key hallmarks—curiosity, insight, engagement and determination.” Fernández-Aráoz defines these hallmarks in Harvard Business Review’s “21st Century Talent Spotting”:
- Curiosity: a penchant for seeking new experiences, knowledge, and candid feedback and an openness to learning and change
- Insight: the ability to gather and make sense of information that suggests new possibilities
- Engagement: a knack for using emotion and logic to communicate a persuasive vision and connect with people
- Determination: the wherewithal to fight for difficult goals despite challenges and to bounce back from adversity.
You can assess your potential leaders through a deep review of their work experience, direct questioning and conversations with their bosses, peers and direct reports.
In the third step, you create a growth map that shows each person’s strengths (hallmarks) and how they align with the required competencies. This will allow you to predict where each person will succeed. According to the authors, curiosity correlates with all eight competencies, so it is critical to be considered for a promotion. The other hallmarks—insight, engagement and determination—correlate with different competencies.
For example, people with high determination exceed at the competencies of results orientation and change leadership. Those with high engagement scores are strongest in team leadership, collaboration, influence and developing organizational capabilities.
Step four is where the work is done to turn high-potentials into leaders. This can be done by giving them opportunities, coaching and support to help close the gap between where they are and where you need them to be in the eight critical competencies. Job rotations, stretch assignments, coaching, mentoring programs, and formal and informal training are all ways to help your high-potential leaders succeed.
“When companies take this approach to leadership development—focusing on potential and figuring out how to help people build the competencies they need for various roles—they see results,” say the authors.
Having a defined approach to talent development can be an extraordinary competitive advantage. It allows you to hold on to your top talent and helps your most valuable employees turn into invaluable leaders.
McDaid is The Council’s SVP of Leadership & Management Resources. email@example.com
Early this year, however, two incidents involving automated cars raised questions about the self-driving revolution and whether it’s time to pump the brakes…or at least lighten up on the accelerator. In March, automated cars caused two deaths: one pedestrian hit in Arizona by an Uber automated Volvo and another car accident involving a person sitting in the driver’s seat of a self-driving Tesla in California. Both accidents involved cars that, while having automated features, still require a passenger in the driver’s seat to take control of the vehicle if something goes wrong.
According to Thom Rickert, vice president for Trident Public Risk Solutions, a large misconception people have about self-driving cars is they don’t need a fully present driver. He explains the difference between automated vehicles with self-driving features and fully autonomous cars that don’t rely on a passenger for assistance. “They have these automated features, whether it’s braking, lane controls, et cetera, and there always has to be a driver ready to take over,” Rickert says. “With the Tesla accident, it was reported that the indication was that the extreme sunlight in front of the vehicle kept it from recognizing the tractor trailer rig…. An autonomous vehicle would allow a vehicle to drive without a driver and to do that in all conditions—i.e., all weather conditions, types of roads, rural roads, freeways, downtown surface streets.”
A minor investigation into the Uber accident found there weren’t enough sensors on the company’s Volvo SUV, which recently replaced Ford Fusion automobiles in Uber’s self-driving fleet. While transferring sensors, Uber failed to take into account the SUV’s higher off-the-ground elevation, which led to more blind spots and the need for more sensors. That said, footage from inside the car shows the driver not paying attention and looking downward as opposed to in front of her.
Martial Hebert, director of the Robotics Institute at Carnegie Mellon University in Pittsburgh, believes these accidents are inevitable but could provide valuable information for the industry’s future. “There are certain things that can happen that cannot be prevented, no matter how precise the system is,” Hebert says. “What we need to have, and what I believe is happening, is complete analyses of those accidents and full transparency. A little like the airplane industry. When there’s an accident, you know there is an investigation and a full disclosure of all the data and the circumstances and the amenities.”
Although both self-driving car accidents have set back the industry temporarily—Arizona took away Uber’s license to test self-driving cars in that state, for example—Ryan Harding of the Arizona Department of Transportation believes this new technology could save lives. “With public safety ADOT’s top priority, we are advancing efforts that can reduce crashes and deaths on our roads,” Harding said. “In 2016, there were more than 37,000 fatalities on U.S. roads, with nearly all being the result of human error…. Arizona recognizes that, and our approach to self-driving technology is one of cooperation, common sense and embracing innovation.”
The mass integration of self-driving cars could ultimately lead to market disruption for the insurance industry. “If you reduce the frequency of accidents and pay fewer claims for bodily injury and property damage, the rates over time will begin to decline,” Rickert says. “Automated vehicles will begin to reduce the frequency of accidents by notifying the driver, ‘You’re approaching this car, I’m going to hit the brakes; you’re weaving out of your lane, get back in your lane.’ That type of thing will begin to reduce auto accidents over time. If you do reduce accidents by 20%, you should see a commensurate over-time reduction of rates.”
“There are also the insurance considerations for the manufacturers, because there is an expectation that these systems are safer—when there’s an accident, it’s the software’s fault; it’s the hardware’s fault,” Rickert says. “So those types of product liability suits could increase…. [There’s] the potential for cyber hacking, blocking a vehicle’s connection to the stop light. That liability and how the insurance industry reacts to it will drive the availability and development of that equipment.”
Ian Sweeney, general manager of mobility for the insurtech startup Trov, agrees that insurance liability will switch from current drivers to auto manufacturers or self-driving fleet operators. Trov currently works with Waymo to insure its self-driving car passengers in case of harm. Waymo, which began in 2009 as Google’s self-driving car project, became an independent self-driving technology company in 2016. “Our ability to offer comprehensive protections comes from innovative partnerships, technologies and the points at which they converge,” Sweeney says. “Trov’s platform uses signals of ‘state change’ that come from any source (smart phone, vehicle state, beacon, etc.) to trigger the best-fit coverage for that context in real time. Next to this technology are Trov’s insurance wizards and partners, whose collaboration gives birth to new services, policies and value for both consumers and companies alike.”
Rickert believes that we are still three decades away from having a driverless car show up to our house to take us to our destination; however, it is important for the insurance industry to prepare for the mass integration of automated vehicles as this wild and promising market matures in years to come.
What’s to love
Porto is a charming, small city, where life is very easy. We have great food, nice restaurants, a vibrant cultural life, and temperate weather. It is a very historic city, where everything is close together, but it is also modern and trendy. We have both a mighty river and a coastline running along the Atlantic Ocean, which is quite unique.
Portuguese cuisine, especially fish and seafood, dominates the culinary scene. But new restaurants are creating diversity. Italian and Japanese restaurants are popular, and we now have some great “Author’s Cuisine” restaurants, where chefs incorporate unusual textures, aromas and flavors in innovative ways.
Favorite new restaurant
Euskalduna Studio is an intimate and very sophisticated place. Chef Vasco Coelho Santos serves creative Asian and Portuguese dishes.
Favorite classic restaurant
DOP, definitely. It is a handsome restaurant in the heart of the city. I love the consistency and innovation of Chef Rui Paula’s food (he is a Michelin star chef), and they have a great wine service. My favorite dish is lobster rice with fish.
Casa de Chá da Boa Nova, one of the most beautiful restaurants you will ever find in your life. It is another of Paula’s restaurants, and here he offers tasting menus. Designed by the famous architect Álvaro Siza and situated “on” the rocks, facing the Atlantic and the waves, it is FABULOUS.
Casa Vasco is a very nice bar to have a cocktail or glass of wine or Port. It is located in a chic area of town called Foz. There are lots of beautiful people.
InterContinental Porto – Palacio das Cardosas is a new hotel housed in a historic building that has been restored. It overlooks the Liberdade Square, a great location in the main historic zone.
Porto is a city of modern architecture, kind of the Chicago of Portugal. Taking a tour of some of our iconic buildings is highly suggested.
The beach is wonderful in the summer, but we sail and surf, run and bike the whole year.
The Broker Smackdown Midwest 2018 will be held in Chicago from July 10 to July 12, the perfect time to explore the city’s newest attraction, the Chicago Riverwalk. Stretching 1.25 miles from Lake Street to Lake Michigan along the south side of the Chicago River, the third and final phase of construction on this riverfront park was wrapped up at the end of 2016. Among the many honors it has received are two from the American Institute of Architects (AIA), one for Architecture and the other for Regional & Urban Design. AIA was effusive in its praise: “This is an exemplary urban intervention; the design and execution are perfect. The impact on the community is transformative.”
This is no small feat. The river used to be an open sewer. In 2002, the city started working to clean it up, and in 2015, it opened a new water treatment plant, improving the quality of the water significantly. It is now extremely popular with a variety of birds and locals. One of those locals, Carol Ross Barney, is the architect behind the 15-year waterfront project. As she said in an interview in the “2017 Chicagoans of the Year” issue of Chicago magazine, “The big success of the Riverwalk is it has repurposed this really important urban asset and basically returned it to the people.”
You can stroll unimpeded for the six blocks of coves, or “rooms” as they are called, which are found in between the bridges that cross the river. Under the bridges, curved panels of polished steel buffer the street noise and reflect the water. Each of the rooms has a distinctive design and purpose. The Marina connects the Vietnam Veterans Memorial to the new portion of the Riverwalk. You can dock a boat here and enjoy the view from the upper dining terrace and built-in bar. At The Cove, you can stop for a snack or rent a kayak. Concerts are held at The River Theater, where a slope of trees, steps and seating leads down to the river. The Water Plaza is a sunny cove where children can play in the fountain. The Jetty has floating wetlands gardens and seven piers where people can fish, bird watch and learn about the river’s ecology and canals. Finally, at The Riverbank, floating gardens meet the confluence of the three branches of the Chicago River.
There are many places to eat and drink along the Riverwalk. You can grab a hot dog from Lillie’s Park Grill to enjoy while sitting on a bench by the water or sit on the patio at City Winery for a glass of wine and some charcuterie. Keep in mind that all the chefs nominated in the Great Lakes region for the 2018 James Beard Awards for best chef are from Chicago. Their restaurants include Boka, Elske, Fat Rice, Parachute and Roister (the first three are included below). That’s five good reasons to venture further afield.
All of that is true, but it’s not as simple as making good hires.
You may boast a diverse workforce with all the talent in the world but that doesn’t necessarily mean it’s a booming environment. Diversity and inclusion, while often used interchangeably, are not the same thing. The first step toward implementing successful D&I initiatives in your organization is understanding the difference between the two.
Diversity equals representation and that’s pretty straightforward to measure by analyzing HR and recruiting data. Defining and quantifying inclusion on the hand, is a bit more complex. First, you have to identify where barriers are emerging in your systems, then you have to bust them up from the inside out. That brings into center focus the hard challenges that come with change management.
Inclusion is the only scalable way to build diversity within an organization. Numerous studies show, in fact, that without inclusion there’s often a diversity backlash.
What that means to us as leaders is that recruiting and hiring a diverse pool of employees is just the beginning of a continuous journey that requires support from the top. Leaders can begin a top down revolution on the way and sequence in which critical matters are discussed by putting talent and finance on equal footing.
Leaders of companies have long recognized that it’s easy to talk about D&I in abstract terms but it’s really difficult to take that talk and turn it into action. And without practicing the active efforts of inclusion—such as making people feel welcome and involved; celebrating their differences, ideas and experiences; and elevating different people for key opportunities and high-profile assignments—energy, productivity and dollars will be wasted, and innovation and growth will stall.
Harvard Business Review research finds that employees with inclusive managers are 1.3 times more likely to feel their innovative potential is unlocked; employees who are able to bring their whole selves to work are 42% less likely to leave their job within a year; employees with mentors are 62% more likely to have asked for and have received a promotion; and nearly 70% of female employees say they would have stayed at their company if they’d had flexible work options.
Keeping diversity and inclusivity a consistent part of the conversation is important for your culture because it’s the right thing to do, but it also drives business results. There is a huge opportunity to boost your firm by leading a culture change that brings in all kinds of very talented people who ultimately will reflect the changing patterns of customers going forward. As you’ll read in this issue (flip to The I’s Have It), diversity and inclusion done right (or wrong, I suppose) is linked to your current financial performance. Companies with high D&I rankings had 2.3 times higher cash flow per employee, were 2.9 times more likely to identify and build leaders, and were 1.7 times more likely to be innovation leaders in their market.
The visible backing of leadership coupled with more awareness and competency around D&I is necessary to create and sustain a truly diverse and inclusive workplace. Don’t let your time, money and talented people go to waste because of the nuances between the two. With better understanding comes better results and stronger organizations.
Well, if the sandbox in question happens to be an insurtech regulatory sandbox, the process can be difficult indeed.
A regulatory sandbox is a method to give flexibility to companies to develop a product and to determine whether the product has any market legs, says Patrick McPharlin, director of Michigan’s Department of Insurance and Financial Services and head of the National Association of Insurance Commissioners’ Innovation and Technology Task Force. For example, sandboxes might tackle such issues as how coverage reduction/cancellation notices would apply to on-demand insurance.
But there’s not a single one in the United States. In fact, across the country, there’s not even agreement as to what an insurtech sandbox looks like. The issue is critical because Insurtech has become a more important part of the insurance landscape, and with the potential to touch virtually every nook and cranny of the business, it will only become more important.
“Our definition of insurtech is technology-fueled innovation anywhere within the insurance ecosystem,” says Jennifer Urso, vice president of market intelligence and insights at The Council. “Our stance on this is the innovation and evolution that technology is bringing to the table is helping the industry align with consumer expectations and preferences that have been shaped by other industries.”
The American Insurance Association has drafted a proposal calling on the NAIC and state legislatures to actively encourage the pilot-testing and implementation of innovative new insurance technologies, products and services. The AIA is asking the NAIC to consider authorizing insurance regulators to grant targeted relief giving state regulators broad discretion to attach consumer protections and other conditions to any grant of relief and to adopt clear protections for trade secrets while including measures to maintain a level playing field.
But Jillian Froment, director of the Ohio Department of Insurance, says she isn’t sure how a sandbox would differ from Ohio’s approach of actively encouraging innovation. She says Ohio already promotes Insurtech innovation without having to construct a regulatory sandbox.
McPharlin takes a similar stance in Michigan. “We’ve had a handful of people come and talk to us, those who have real questions about a product they wanted to innovate. We were able to tell them there was no problem.” They hadn’t asked before, he says, because they thought they’d be turned down.
But because these conversations are happening in some states, that doesn’t mean they’re happening in all. “At this point, this is a state-by-state approach,” says John Fielding, general counsel for The Council.
“There’s no uniformity in the way states are coming at this.”
While this reflects how insurance is regulated in the U.S., some say such an approach might hinder sandbox progress.
DOING OUR OWN THING
While the United States continues its individualized approach to sandboxes, several jurisdictions outside the United States have created them with shared characteristics. According to the AIA, those in the United Kingdom, Australia and elsewhere all provide a supervised process for experimentation with insurance innovation. And under some circumstances, they offer relaxed legal and regulatory requirements that otherwise might be hurdles to forward motion.
Some observers fear the United States will fall behind its competitors if regulation does not catch up with digital reality. “We currently see on the global level competition for investment and talent,” says Vladimir Gololobov, The Council’s international director. “It’s all about pairing innovation with insurance services, an opportunity for countries to claim their leadership in the financial segment they want.”
Things have gone “a lot farther overseas than here in the U.S.,” says Mike O’Malley, senior vice president for public policy at AIA. He notes the United Kingdom established its sandboxes in 2016 and has already had more than 150 applications. “They’ve been very active,” O’Malley says.
“It’s about trying to support industry and their use of innovation while balancing that with consumer protection. That’s not easy, but it’s not impossible.Tweet
And despite the experimentation happening in some states, some sandbox proponents believe the state-based insurance regulatory system doesn’t give room for enough meaningful innovation to allow the United States to follow international competitors’ lead in creating sandboxes. One main roadblock “is that basically you can’t have a national sandbox,” says Vikram Sidhu, a partner at law firm Clyde &Co. in New York. “Any sandbox that is created would have to be in a state. But states don’t have meaningful flexibility in being able to give exemptions to startups from the various insurance laws that exist.”
The fragmented nature of U.S. insurance regulation is an impediment to creating sandboxes, Gololobov says.
“Regulators historically are worried about their turf,” he says. “Fragmented regulatory structure takes away from the whole idea of insurtech globally, which is all about scale and breaking down barriers.”
However, some regulators say it’s easier for innovators to deal with a single state than to try coordinating efforts nationally. McPharlin says it’s easier to innovate on a one-state basis because innovators and state regulator scan meet one-on-one and get to know each other. “With a federal agency, I’m not sure you’re going to get that same level of personal service,” he says. “I think the state format is an advantage. We’re talking about having some sort of coordination among the states. We’re not at any decision yet.”
Many regulators say they have nothing against innovation, provided it affords consumers adequate protection. In fact, over the past few years, regulators have begun to agree a regulatory sandbox isan important and effective tool, says Andy Mais of Deloitte’s Center for Financial Services.
“It’s important to allow testing of innovative ideas but in a supervised environment,” O’Malley says. “For example, you don’t want someone to sell policies in a sandbox who can’t cover claims.”
“We also want to make sure that we don’t inadvertently create an unlevel playing field,” says Dave Snyder, vice president at the Property Casualty Insurers Association of America.
“Most commissioners are very positive on innovation,” McPharlin says.“ But if someone comes in and wants to be free of paying taxes during the development process, no legislature will allow that.” He also raises concerns about consumer protections regarding personal data. “Who owns information and profits from it?” he asks.
“It’s about trying to support industry and their use of innovation while balancing that with consumer protection,” says Ohio’s Froment. “That’s not easy, but it’s not impossible.”
Sandbox proponents have an educational job ahead of them, Fielding says. “It’s a quickly evolving area. It’s a big task for insurance regulators to getup to speed on the constant change and regulate it very quickly. Education and understanding are the biggest parts.”
“The general feeling on the part of state regulators is they will not fall behind the curve,” Mais says. “I think there is openness despite what some regard as a fragmented system.”
And regulators have a stake in encouraging innovation, notes Scott Sinder, The Council’s chief legal officer and a partner at Steptoe & Johnson.“ The big threat to state regulation is, if they’re not able to keep up with the innovators, then as an innovator, you say, ‘Maybe I need to rethink this,’ and come up with something that allows the transfer of risk but is not an insurance product.”
That insurance is governed by decades-old regulatory approaches is another obstacle. “When I talk to regulators, they think they’re doing a lot,” Sidhu says. “They are really trying, but our system of insurance laws and regulations grew up over 150 years. It’s trying to address issues that arose a long time ago, but how we do business has changed dramatically. The issues arising from the 19th- or 20th-century approach to regulating the insurance business clash with the 21st-century ways of doing the business and are only going to get bigger.”
WE’RE NOT GOING BACKWARD
With a federal agency, I’m not sure you’re going to get that same level of personal service. I think the state format is an advantage.Tweet
One factor that could give the U.S. some breathing room in the race for Insurtech expansion is the size of the nation’s insurance market. “When you’re comparing us to other countries, we have by far the largest insurance market in the world,” PCI’s Snyder says. “We’re going about this in a careful way, and we’re convinced that in the end we’ll be up to the challenges as we have been in the past.”
“You can prove a concept in Hong Kong, you can go to Australia and develop an interesting product—but America is still the largest insurance market,” Sidhu says. “Insurtech will still come to these shores.”
While the U.S. is still the leader in technology, O’Malley says, the country needs to take action to remain ahead. “I worry if we in the U.S. don’t get on the sandbox bandwagon soon, we are going to fall behind,” he says. But he adds that AIA “is very confident we’ll get to the point where we have sandboxes in the U.S.”
In fact, legislation that would create insurance-specific sandboxes has been introduced in Hawaii and Illinois, while less-targeted but applicable bills have been introduced in Arizona and Massachusetts. “We’re not going backward,” Fielding says. “You’re going to see more and more talk at the state level and more and more talk at the NAIC. I think it will move from education to actually doing something. The market’s just going there. They’re going to have to figure it out.”
Hofmann is a contributing firstname.lastname@example.org
You’re going to see more and more talk We Will Innovate at the state level and...at the NAIC.Tweet
Ito, who has testified before state legislative committees in favor of bills that would create a sandbox, says realizing the sandbox concept would bring economic benefits to the state.
“It could create growth in our tech sector by attracting innovators to work with insurance companies in Hawaii,” Ito says, “as well as encourage insurers outside of the state to use Hawaii’s sandbox to test innovations for use in the United States or Asia.”
He says technological advancements in mobile platforms, artificial intelligence, data collection, storage and the “continuing transformation in our economy are factors that attracted our interest in creating a sandbox in Hawaii to encourage innovation in the insurance sector. Hawaii’s unique location could result in the state becoming an insurtech center that facilitates collaboration between tech innovators, insurers and even other insurtech countries that are already fostering innovation.”
Ito points out that Hawaii has built a reputation as an insurance regulatory innovator. “Back in 1986, Hawaii was one of the first states to adopt captive laws, resulting in the state’s becoming one of the premier captive domiciles in the world,” he says. If the current legislation becomes law, “Hawaii would be the first state to pass a law specifically dedicated to creating an insurtech environment.”
Not surprisingly, Ito does not share the concern of some sandbox supporters that state-based regulation stifles innovation such as sandboxes. “The state-based system does encourage innovation,” he says.
He says states will either pass insurtech laws or will work within their own frameworks and provide flexibility by granting exceptions. He believes the insurance and technology sectors will work together to create efficiencies and new products, underwriting processes, and sales and payment methods. The blending of insurance, technology and other sectors will also occur.
“Insurtech or regulatory flexibility will be the rule and adopted in many states rather than the exception,” Ito says.
Carrier legacy systems, he says, need to be replaced. “Attracting tech companies to work with insurers in not only upgrading existing systems but implementing entirely new processes is an example of the talent and technology that could bolster the insurance sector,” Ito says.
“There is an infinite number of possibilities, which could benefit consumers by creating more choices and improving efficiencies in the insurance area,” Ito says. “They are already evident in other sectors of the economy. The U.S. is a technology leader and has the largest insurance market in the world. Changes are constantly happening in both worlds. It’s exciting times in the insurance and technology areas."
Regulators willingly embrace technology to enhance their own operations, according to the Deloitte Center for Financial Services. But the regulators remain guarded about how carriers employ new technology.
“In a time of rapidly increasing technology adoption, a growing number of regulators are likely to use the latest technology to enable the kind of deep, broad, and real-time oversight of the insurance market that could not have been dreamt of even a decade or two ago,” says the 2017 Insurance Regulator Technology Adoption Survey. However despite those predictions, the survey found regulators are implementing new technologies in their departments mainly to automate manual processes and replace or integrate legacy systems. The fact that 69% of them cited legacy systems as a driver could indicate they still need to modernize current systems before considering more advanced technology. Not surprisingly, nearly three quarters of the respondents cited budgetary constraints as the main roadblock to adopting technology.
“Generally speaking, everybody sees technology will change the interaction between the regulators and the industry,” says Rich Godfrey, principal and U.S. insurance advisory leader at Deloitte & Touche.
But the survey also found regulators "seem unlikely to give insurers the benefit of the doubt regarding new technology uses, so insurers would need to display greater transparency in their relationships with bold customers and regulators.”
Nearly half the respondents said new technologies create more need for regulatory oversight. Among the chief concerns are data security and fair market conduct. Regulators also seemed somewhat cool to the idea of insurtech sandboxes.
“While most agree engaging with different stakeholders—insurtech start- ups, insurers, consumer-protection groups, and other regulators—to pursue innovation would be a positive step, more than four in 10 only somewhat agree,” the survey says. “So if sandboxes are to be a useful tool, state insurance regulatory leaders may need to educate their colleagues on their potential.”
Can you tell us about Bluzelle and its mission?
We are a technology company, and our mission is to use blockchain technology to basically allow a new set of people to use financial products by lowering the cost of entry. In terms of insurance, what we believe is that blockchain can bring new insurance models. Theoretically, you have a generation that’s going to grow up not owning the same type of insurance that I did. My kids are probably never going to buy car insurance. They’ll live in a city like Singapore or New York, a major metropolis, where they’ll just use Uber or public transit. For an insurance company, that’s a major problem of how to get this person to buy insurance. With blockchain, you can start doing pay-per-use, short-term insurance and small insurance products that, before, might not have made a profit margin for them. Now, if you do daily insurance or pay-per-use insurance, blockchain takes a lot of the operational cost away so they can still make money on it.
For developing markets, you have this untapped world of people who want to use insurance, but previously it was way too expensive, and the cost of entry was too high. Blockchain can reduce those costs. Bluzelle provides the infrastructure technology to allow for that to happen. We work with insurance companies, and we built a middleware technology that allows us to build those use cases or products better. For insurance, we can do smart contracts, which allows them to issue insurance policies onto the blockchain and then do real-time claims management. With that type of model, you can apply it to several different use cases, whether it’s personal injury insurance, travel insurance or short-term bike insurance.
Are we on the verge of a major shift to blockchain technology?
Initially, everybody was aiming at enterprises and saying let’s get going, but the big companies have been pretty slow to adopt. That’s just the nature of being a big company. I think the major shift that’s happening now is companies are getting funded faster through token sales and ICOs [initial coin offerings] and now they can experiment and go direct to the customer for a lot of these financial technologies or applications that use blockchain. That should be a catalyst for the bigger enterprises to say we have to catch up now because these guys are actually moving ahead without us. Before, a lot of the companies that wanted to do these products were underfunded and had to rely on the banks and insurance companies to get the customers. Now it’s kind of the other way around.
How does Bluzelle use blockchain technology?
We do it in two ways. One is we built our own infrastructure, our middleware, a platform that allows big banks and insurers to get some of these customers or build these products. The other way is we are building a new decentralized database that is needed by all blockchain companies to store their data, instead of using a company like Oracle. What we’re saying is a decentralized database from us is going to be more secure, safer and far more reliable.
Can you explain how a decentralized database works?
For a traditional database—let’s say a centralized cloud—all your customer data is stored in one cloud. If any part of that cloud goes down or part of the network goes down, you have limited access to your data and you have to wait around. If somebody breaks in and steals all that customer data, that’s going to lead to data breaches and leaks.
In a decentralized manner, we’re taking that data and spreading it to hundreds of thousands of servers or nodes out there and only storing bits of data on all those networks. Even if a node or one server goes down, all the data is still present and alive, and you have access to it. You can’t steal any of it because you’d have to take over the entire network to put all the pieces of that data together. It’s similar to the way bitcoin, ethereum and blockchain technologies work. It’s decentralized and in multiple places and has encryption on each level.
In our situation, let’s say you have insurance customer data sitting there; it’s basically like Airbnb. What we’ve done is empowered hundreds of thousands of consumers to download our protocol, put their computer storage space up, and an insurance company can pay with a token to have all their data spread out on these hundreds of thousands of computers everywhere.
How secure is a system using individual computers?
We have confidence that once we deploy our protocol, it has the necessary security. The protocol itself has encryption built into it. We have encryption advisors. Once our consumer downloads it and they put the Bluzelle protocol onto their computer, it comes with that encryption built in. It would be the same as downloading the Bitcoin protocol and turning my computer into a mining space. The Bitcoin protocol itself has all the security built in.
How scalable is this kind of system?
Before, people used to look at it as, say, let’s take one of the blockchains—ethereum—and build it on there and put all the data on there. That isn’t scalable, because ethereum is good for smart contracts and validations of transactions but it can’t store large amounts of data, because the cost is too high to retrieve it. Now with products like ours, we’ll build up the database that’s needed by all these products. Now you can have that scalability and a more fluid system. You’re basically breaking it up and not having everything sit on one blockchain. You’re breaking all the technology components into different layers.
How is decentralized database storage going to change how companies operate, and will it have an impact on insurers and brokers?
It’s going to be a big change in the sense that consumers are almost going to demand it: Equifax gets hacked and a bunch of records are stolen; Uber the same thing. It’s just going to be a necessary response. Data breaches are getting worse and worse; the current centralized infrastructure isn’t working. Consumers are going to want their data in safer places, and they’re going to demand that. I think it will be a fundamental thing. As companies like us get out there and more blockchain projects are built on a decentralized database, companies may decide a decentralized system is better to store their data on.
Tell us about Bluzelle’s history.
We were founded in Vancouver and started in August 2014 to get going on blockchain projects. In February 2016, we moved to Singapore to focus on enterprises, like banks and insurers, and to get them to understand what this technology is. We did a bunch of projects for them, like payments on the blockchain, insurance on the blockchain, digital identity on the blockchain. Doing those projects, we realized there is a core database system missing in a decentralized internet, or the blockchain. We ran into this problem while doing these projects. We realized that, if we’re having that problem, other people are going to have that problem, so why don’t we just create the solution for it.
It was really because we looked at where we were in Vancouver and said if enterprises and financial enterprises are the early adopters for blockchain, we didn’t see enough customers in Canada and we realized Asia would probably adopt this faster. Singapore is a financial hub, so we’ll have more customers in a centralized area. From there, we could prove ourselves there and move into the rest of Asia. It’s really a matter of where those customers are in a smaller area that we can get to in a concentrated way.
Being in Asia and Singapore for the past two years, we realized a lot of the adoption of blockchain applications will come from Asia and Southeast Asia because there are a lot of developing markets there. They can skip technology generations, and they’re really understanding this much faster. You have this huge market. In Indonesia, you have almost 300 million people, and fewer than 5% have insurance. India, the same. Vietnam, the same. Insurance companies can really try out these lower-priced products and have a consumer base to test them on.
Initial coin offerings, or token sales, raised some $5.6 billion in 2017—more than 20 times the $240 million raised in such sales in 2016, says Fabric Ventures and TokenData. Unlike in an IPO, investors don’t buy shares of the company but, rather, purchase cryptocurrency “tokens” that provide access to the firm’s goods or services or its network of users.
ICOs take a crowdfunding approach that stands in contrast to the more traditional process of convincing venture capitalists to fund a startup, developing the company through early stages and later going public or being bought by a larger, more established company.
“A good way to look at it is cryptocurrency meets Kickstarter,” says Pavel Bains, CEO of Bluzelle, which works on blockchain projects with insurers and is developing a decentralized data storage system. The Singapore-based startup raised $19.5 million in a January ICO. “It’s a way for companies like ourselves to raise the capital that we need to build out our product. To do so, what we’re saying is we’re going to give you a coin or a token that you need to pay for the service or the product. We’re creating our ecosystem around that.” (See Tech-No-Savvy’s Q&A.)
While the coin or token doesn’t represent a share of the company, investors may still be hoping for a profit as the company’s service gains traction and its tokens appreciate.
“What a lot of buyers will do is that, as this product gets used more, the price of that token or currency will go up and they can keep it as an asset,” Bains says.
That’s an aspect of ICOs that’s attracted attention from the U.S. Securities and Exchange Commission, which takes the view that, whether investors are buying a “utility” token or a share of stock, an instrument that offers the promise of future profit is a security. It was widely reported earlier this year that the SEC had issued subpoenas in connection with some ICOs.
“It seems that regulators—the SEC in particular—have taken note of ICOs,” says Caribou Honig, CEO of 3rd Act Ventures and co-founder and chairman of InsureTech Connect. “It’s hard to say whether their intent is to put a mild chill on ICOs or a deep freeze, but either way, I won’t be surprised if we’ve already seen ‘peak ICO.’”
While ICOs enjoyed explosive growth last year, longer-term they may represent more of a niche rather than a broader market transformation. And they don’t likely herald a disruption of the venture capital industry.
“There are a number of legitimate challenges for VC firms over the next decade, but ICOs would be low on my list,” Honig writes in an email interview. “While ICOs might be an extraordinary opportunity to raise capital for a handful of companies, I think they will be the exception and not the rule.”
Venture capital firms don’t just write checks, Honig notes, but also nurture startups with critical expertise.
“Many of the best entrepreneurs will welcome what VCs can bring to the table—fresh eyes, industry or operational experience, a network, and more—that makes VC money more than just money,” Honig says.
ICOs, however, seem to be a natural fit with some blockchain-focused startups.
“Stepping back a bit,” Honig says, “ICOs ought to be most interesting where a company wants the users, or customers, themselves to have a stake in the whole business succeeding, particularly network-effect businesses. Communication platforms expanding functionality beyond messaging, for instance, are one of the areas looking at ICOs.”
For blockchain startups, it can be difficult to raise money from traditional venture capital firms, Bluzelle’s Bains says.
“It requires a lot of education for them [VC firms] to understand,” Bains says. “There is a cryptocurrency world of enthusiasts who understand the technology and understand the risks, and they’re more open to supporting companies like ourselves that might be the next big thing in the decentralized world that they are envisioning.”
While investors are always looking for the next big thing, caveat emptor remains the rule.
“The biggest concern is about scams and false products,” Bains says. “Just like in any asset class that arises, people come in and have not done their homework—do not understand the technology and what’s behind it—and just get in because of fear of missing out. It’s really important for any token buyer to educate themselves on the fundamentals of blockchain technology, the company whose token they’re buying, what is the technology and is the team credible.”
For its part, the SEC acknowledges that, although ICOs can provide needed capital for startups, investors should proceed with caution because they offer substantially less protection than traditional securities markets, SEC Chairman Jay Clayton said in December.
“At best, investors need to be very diligent to assess what they are actually buying when they participate in an ICO,” Honig says. “At worst, it’s the Wild West, and investors need to be mindful of the risk of outright fraud.”
What is AMNOG?
It’s regulations crafted in response to Germany’s historical high drug prices. It was very similar to the United States; Germany’s drug prices were historically, on average, 26% above the rest of Europe’s.
Germany passed legislation in 2011 with the intention of improving the value of pharmaceutical spending. They were facing a lot of pressures similar to many other countries—healthcare costs that were increasing, in particular pharmaceuticals.
How does the AMNOG system work?
All new drugs in Germany have to go through an assessment process to determine how their benefit compares to the other drugs on the market. The thing that is groundbreaking about AMNOG is it requires first an assessment of the clinical benefit of new drugs and then a determination of what that means in terms of prices and reimbursement.
When a new drug hits the market, it can be introduced at any price and is reimbursed by all insurance plans at that rate for the first year. During that time, the Institute of Quality and Efficiency in Healthcare (IQWiG), compiles data and analyzes dossiers created by the drug manufacturers.
Once IQWiG has assessed the dossier, it makes a recommendation to the private Federal Joint Committee (made of payer, provider and patient representatives). IQWiG makes a recommendation on whether the drug is therapeutically superior to what’s already on the market. If it isn’t, it goes into the country’s reference pricing system to be reimbursed like other generics in its class. If it does get a superiority ranking, that information is used to negotiate between drug makers and an organization representing Germany’s insurance providers. The agreed-upon price is what payers pay for the new drug.
Since the new system began, how many drugs have gained the superior ranking?
About 63% were determined to have additional benefits (to those already on the market) between 2011 and 2016. But that means more than a third of drugs didn’t.
There are a variety of reasons why an additional benefit is not always proven. Sometimes there is not enough data, and the drug industry has the option of resubmitting down the road. Sometimes there is just not enough benefit. There are a number of reasons, but a meaningful number of new drugs have been deemed not to be therapeutically superior.
Is that an indication of what would happen in the United States under a similar system?
There are a lot of innovative drugs here. But there is absolutely good reason to believe a number of the new drugs in the United States aren’t cost effective. And what I mean by that is the prices they set aren’t worth the additional benefit those drugs offer over others on the market.
It’s complicated, and this is where the science needs to come in and do rigorous evaluations that the current system in the United States doesn’t have. We need to have a systematic approach to looking at these new drugs and what their benefits are relative to their new price across different patient populations.
What kind of undertaking was it to create the AMNOG program?
Legislation started around the turn of the century in Germany, and there were a few waves aimed at pharmaceutical cost control that ultimately led to AMNOG. For certain aspects of it, the building blocks were there before. They had a system of referenced pricing for some drugs, and IQWiG was already there.
The big move that made this possible is the legislation that put the cost of compiling these dossiers on the manufacturers. It’s the drug companies that have to submit these dossiers and conduct these studies and gather data on whether new drugs are therapeutically superior. To evaluate every new drug is very challenging from a resource perspective. Putting that task on the industry in Germany is what allowed it to go into effect right away.
If we were going to have something similar, we would have to think about where those resources would come from. Right now, the FDA approval process focuses on safety and a drug’s effect compared to placebos. Comparing them to the next best drugs is a whole different study.
How has AMNOG affected the price of new drugs?
In 2015, Germany saw savings of $1 billion in new drug spending. There is an average of a 21% discount off the price of new drugs.
Under AMNOG, if insurers don’t agree with the price and rebate of manufacturers, there is an arbitration panel that can set that price. It’s typically a cap compared to what the price is in a basket of European countries. They have a nuclear option when there is disagreement on pricing, but it rarely gets to that point.
Legally, manufacturers can set whatever price they want. If they want to bypass AMNOG, technically they can set the price above other referenced prices. But then the patient has to pay the difference, and historically where drug companies have done this, there is a complete collapse in market share because patients aren’t willing to pay the difference.
We often hear this kind of system would stifle innovation. Have you seen that in Germany?
Pharmaceutical companies pour a lot of money into all of their drugs, and they don’t always know ahead of time which will be superior. They are in a race with other pharmaceutical companies to come out as quickly as possible. They could come out with a drug and two months later another comes out and they don’t get a superiority designation. They argued that would stifle innovation. Whether it actually does, we haven’t seen any clear evidence. From its launch in 2011 to August of 2016, 146 new drugs were assessed.
The whole notion of innovation and incentives for them and what drives that becomes an international discussion. There is some fear our system would be such a large part of the pharmaceutical market that it could be the straw that breaks the camel’s back if we implemented something like AMNOG.
But some think it would be a good thing and encourage companies to invest specifically in the really innovative drugs we want rather than investing in some that aren’t as innovative. That it would force them to allocate their resources more efficiently.
What did the German pharmaceutical industry think about the program initially?
The pharmaceutical industry feels compiling these dossiers is very burdensome, and they really fought against this in Germany.
But Germany had some strong-willed politicians who really pushed this legislation through. The tide had shifted there. The situation was different there than it is in the United States now. Lots of states have proposed legislation, and a small number are doing things. But federally, the political will is a different issue when it comes to lobbying and the pharmaceutical industry.
How did they go about choosing the committee to evaluate the drugs? Did they have a lot of buy-in from different areas of the industry?
Germany has something called corporatism, where they have associations that represent hospitals, physicians, insurers and patients. They have a lot of experience coming to the table together and working things out in a consensual process.
Any other differences in our system that might make implementation here challenging?
Structurally, the German system is very similar to ours. IQWiG and the joint committee are private institutions. That’s similar to what the United States would do.
With the price negotiations between the manufacturers and insurers, it’s pretty similar to our price negotiation and rebates. But the drug prices of superior drugs aren’t linked to their efficacy. It is based on complicated market factors.
We also don’t have reference pricing. In the 30% of cases where drugs aren’t deemed superior, they get classified with others in their therapeutic class. If they aren’t deemed superior here, how would you get those prices? Saying they have to be the same as others in their class would be a big political change here.
Something like AMNOG would be possible in the United States. We would just have to look at things differently on reimbursement and pricing to reflect the nature of our healthcare system.
It wouldn’t be difficult to sit down and come up with a beautiful piece of policy that could accomplish these goals and adapt AMNOG to the United States in a way that is fitting for us. I have yet to see any real piece of legislation in Congress that has a realistic sense of passing. I’ve been tracking this lately, and I haven’t seen anything big on a federal level that is meaningful and close.
An atypical congressional newbie, MacArthur, 57, came to Washington in 2014 after 11 years as chairman and CEO of York Risk Services Group. His reported assets come to some $31.8 million, and he is the wealthiest member of the New Jersey delegation. He and his wife have three homes, all in New Jersey. His transition from mayor of Randolph to congressman involved $5 million of his own money.
Starting fresh out of Hofstra University as a $13,000-a-year insurance adjuster, he spent 30 years in the industry. Under his leadership, York grew from a small local firm to an international leviathan with thousands of employees.
It didn’t take long for MacArthur to put his leadership to work in Congress. He voted against repeal and replace because the replacement wasn’t ready. Then, last April, he proposed the MacArthur amendment to that month’s version of the Republican healthcare bill. It includes provisions that would unravel some core components of the ACA by allowing states to waive essential health benefits and ending the prohibition on charging different premiums to people in the same area.
“It’s a high-risk game,” Ross Baker, a Rutgers University political science professor told NJ.com. “He’s willing to take the risk that his stands will not alienate his constituents.”
MacArthur says he’s in Congress to do more than repeal the ACA. “That to me is not helpful. To boast about inaction is a very, very poor substitute for solving problems.”
How did you get here in the first place?
It wasn’t a straight line. I became a pension actuary by accident and then moved into general management consulting. I’m probably one of the few people who worked across HR and risk management, across pension, life and p-c insurance and banking. I became chief risk officer for Scottish Re, at the time a global life reinsurer, and it was an interesting business model. They essentially wanted to be the Fannie Mae of the life insurance industry, buying huge blocks of life insurance and then securitizing them. Unfortunately, they were doing this right in the middle of the crisis and a lot of their securitization structures had collateral that was with Lehman Brothers. So they got caught up in the subprime crisis just as I was joining them in 2008. I learned a lot.
Then, I became chief risk officer for Validus, a global property cat reinsurer soon to be part of AIG. I left Validus and joined AIG in 2010, initially as the first chief risk officer of their global p-c business. I built the risk management function at AIG p-c and did the first allocation of the cost of capital. I then became chief reinsurance officer and the head of insurance capital markets. I started observing a lot of things that were happening in the capital markets, which led to a lot of the ideas underpinning what we’re doing now with Ledger Investing in leveraging capital markets.
Why Ledger Investing?
When I took the reinsurance role in late 2011, there was a fundamental shift in the investor base in the insurance-linked securities (ILS) market—from sort of opportunistic investors, like hedge funds, who were seeking reinsurer type returns to more stable long-term investors, like pension plans and endowments, who were seeking some relative value compared to other fixed-income investments. Interest rates had been low, and they were expected to stay there. So they were seeking some yield.
As they started coming into the market, they observed the performance of the securities was not correlated with the rest of the markets. In distressed markets, everything becomes correlated. And yet, even during the crisis—you can see statistics on this thing—insurance-linked securities were not correlated.
We started tapping that market and noticed its cost to capital was much lower than reinsurance. I started examining why. I wanted to know whether that was simply opportunistic, cyclical or something fundamental. I realized what was happening was that ILS investors were pricing in the diversification benefits of risks, which are completely uncorrelated to the traditional asset classes. So they were OK with lower returns instead of the returns insurance stock investors needed.
For example, insurers’ cost of capital is around 10%, but ILS investors don’t need 10%—instead needing only 3% to 6% to create relative value compared to their fixed-income investments.
Especially when interest rates hover around 1%.
Exactly. Insurance risk should naturally have a much lower cost of capital because of diversification, but when you put it on an insurance company balance sheet, two things happen: first, it is mixed with all the other risks and becomes opaque. As a chief risk officer, it was hard enough for me to understand all the risk in the insurance company much less being able to convey that to the management team and then to the board. Investors are so far removed they really have no clue. That opacity has a cost.
Second, for large p-c companies, you know, it’s not unusual to have maybe 30% to 50% of capital there simply for investment risk that by definition is fully correlated to the capital markets. So if you’re an investor and you buy insurance company stock, you need a 10%+ return. But if you invest directly in cat risk, you may need only a 5%-6% return.
Also, when you hold risks on a balance sheet, even though the entire insurance industry or reinsurance industry in total has $2 trillion, let’s say, it’s still concentrated, and there’s a cost of that concentration. When you place this concentration into the deep pool of the capital markets, it diversifies, and the cost goes down. So that’s another reason why the cost of capital on an insurer’s balance sheet is artificially high.
In 2012, I saw this as fundamental. It was not cyclical. This was an enduring trend. I thought, in fact, the prices should go down even more until they converged to equivalent rated risk in the traditional asset classes, like high yield, fixed income. And that’s what happened over the next four years. And every year in Monte Carlo the reinsurers would say, “Oh, I think it’s at its bottom and it’ll go back up.” They were treating it like a cycle because historically that’s what’s happened in the markets. Capital flows and prices have been cyclical.
I observed this fundamental shift and realized it’s not just for cat risk. In fact, all insurance risk is uncorrelated. Over the long term of the business cycle, things can get highly correlated. But from an investor perspective, correlation has a different time frame. Investors are really focused on short-term volatility—daily, weekly, monthly, annual. And from that perspective, almost all insurance risks—loss ratios—don’t bounce up and down like stocks and bonds do.
I saw an opportunity to source capital for all the insurance risk and try to make the case to do that within AIG. But that is difficult to embrace in an industry that for a couple hundred years has thought of itself as a warehouser of risk, where it’s gone to market by saying, “I have the biggest balance sheet.”
Insurance companies used to leverage that, and to all of a sudden tell them “you shouldn’t be a warehouser of risk” is very difficult. But that’s the opportunity I wanted to chase. So I started recruiting big investors. There’s already a market of insurance-linked securities funds. There are maybe 50 or so in the market, and they’ve grown. But it’s still a niche asset class.
I went to big investors and said, “Why don’t you come into the market? We can issue securities.” And they replied, “We understand this whole premise. The thesis is sound. However, you guys understand your risk better than we do. So you could pick us off.”
So I focused on that. I saw how to make risk more transparent and reliable for investors and how to standardize the structures by focusing on using this for capital management rather than risk management. The industry still thinks of all this in terms of reinsurance. And reinsurance is thought of as a risk management tool.
But here’s the capital management perspective: you need 100 units of capital to take on 100 units of risk. You have to figure out what’s the cheapest capital. Is it your balance sheet, the reinsurer balance sheet, or the capital markets? And that’s the game. It has nothing to do with risk management, which is a separate objective; you need reinsurance for that.
You have to keep this independent of an insurer; otherwise, investors will say, “You’re going to keep the best risks.”
Exactly. So the risk analysis has to be reliable and transparent. What’s happening around the same time is the use of technology that has improved data, analytics and predictive modeling. I saw an opportunity to leverage that to improve transparency.
Ledger Investing creates a platform that allows insurers to securitize all of their risk classes—life insurance, health insurance, property-casualty insurance, short tail, long tail—by applying analytics that are much more transparent. Portfolio analytics are much more transparent and reliable. Their reliability can be gauged by investors without them having to become underwriters, and the structures are standardized for capital management purposes.
Every insurer, for reinsurance purposes, wants to negotiate their terms because what they’re saying is, “I want these risks, and I don’t want those risks.” But capital is fungible across all risks, so you don’t need the reinsurance kind of complexity. There’s an opportunity to standardize from a capital management perspective.
And the risk is spread among many investors.
Yes, the more reliable and transparent the risk analysis and the more standardized the structures, the greater the number of investors who would be interested in investing in ILS. This is key to commoditizing insurance capital to achieve lower costs while increasing capacity.
We’re not creating a brand-new product. We’re taking an existing product that’s a niche market that was focused on reinsurance and expanding it to all of insurance by standardizing, making things more transparent, and making it efficient and positioning it as capital management.Tweet
So instead of going to their balance sheet to cover risk, carriers would be going out to the markets.
Yeah. So, the opportunity is that, if an insurance company securitizes its risk, it has a bunch of different benefits. First, it has a smaller balance sheet. By the way, I’m not suggesting they securitize everything. I think 25% to 35% of the capital should be securitized.
Why not more?
Because there is a downside. Let’s say you have $1 billion of capital and 10 product lines, and let’s say $100 million in capital is attributed to each product line. And I take one of the product lines and I securitize that $100 million. Well, now, that $100 million is available for only that product. If I had kept it on the balance sheet, that $100 million would have been available for all products. So if you securitize too much, you lose fungibility—essentially the diversification benefit of your portfolio.
The good thing, however, is you have less on your balance sheet so you get a higher return on equity. The stuff you are writing that goes off balance sheet, you’re earning a spread on that. You’re earning some profit commensurate with the value you created originating and underwriting it and servicing that risk. You’re just not holding it.
You do need to get paid something, and that’s essentially what that spread represents. And so it’s essentially a fee business. Insurers have tried to grow their fee business. It’s extremely difficult. This is the easiest way to get fee business for a huge portion of your portfolio. That would give you a much higher return on equity.
Also earnings become more stable when you have less risk on your balance sheet. And most importantly you can write far beyond the limits of your balance sheet. This is one of the biggest problems in our industry. The industry says it has a lot of excess capital, but at the same time there’s a huge insurance gap—the difference between economic losses and insured losses. The difference is because of the cost of that capital.
People don’t talk about this. A couple of years ago, I was at a Bermuda conference where some very prominent CEOs were saying, “We have excess capital. You brokers should go out and write more business.” But they failed to touch on the fact their capital was very expensive.
There’s opportunity for the industry to organically grow instead of just stealing from each other by leveraging cheaper off-balance-sheet capital through securitization. The higher ROE, more stable earnings and ability to grow increase the valuation of the company.
You say carriers are reluctant to change their business model.
There is a significant cultural constraint there, even though there is a meaningful percentage that really believe in the capital markets as opportunities. I found brokers are one step ahead of carriers. They don’t have the same constraints, because they have always been looking for the cheapest capacity. They were never warehousers of risk.
Are you going to disintermediate insurers?
That’s not my objective. The insurance industry is huge. We’re a tiny little blip. We’re not going to disintermediate the insurance industry. I am suggesting that only 25% to 35% of capital should be securitized, because if you securitize too much, then you suffer the loss in fungibility of capital. So we will always need rated balance sheets that insurers provide.
However, sourcing capital and regulated entity/issuing paper will become a commodity. It’s just a question of how quickly. Capital has become a commodity in every other major industry, and the only reason it hasn’t in insurance is because risk is opaque. If we can break through that, capital becomes a commodity. It already is in cat. So it will happen.
Pension plan consultants are advising clients to put 1% to 3% of their assets into this class because of the lack correlation. Fixed-income investments in the world account for $80 trillion. So, that’s easily $1 trillion to $2 trillion in new capital for insurance. Compare that to all the capital in the insurance industry, now. Property-casualty insurance is less than $1.5 trillion, and the reinsurance industry has about $500 billion. So the potential is huge. I think of this as a tsunami of capital.
People talk about the disruption of technology, but the capital has already created new business models, whereas technology has not—yet. Technology has made things efficient. But all the major reinsurers are now asset managers investing for third-party capital for a fee. It’s clear this is a business that their shareholders had, and now third-party capital has it. So it’s already disrupted.
There are brokers who have arranged private deals directly into the capital markets. The NY MTA, Amtrak, Kaiser Permanente and many Caribbean countries have bought insurance directly from the capital markets. They skipped the entire value chain. So this is hugely disruptive. And we don’t have to create this. We just ride it and position it to channel to the insurance industry.
Then the question for all players is if you’re an insurance company, what are you going to do. There’s an opportunity for insurers to become what Scottish Re was, essentially the facilitator to the capital markets. But we can’t do 100% into the capital markets. There always needs to be risk on a balance sheet.
Since 1997, there have been cat bonds. So the regulatory and rating agency treatment already exists. Life insurance risks have been securitized, as well. So we’re not creating a brand-new product. We’re taking an existing product that’s a niche market that was focused on reinsurance and expanding it to all of insurance by standardizing, making things more transparent, and making it efficient and positioning it as capital management. In fact, by collateralizing more of the risk and making insurance more accessible and perhaps cheaper, regulators may look favorably at securitization.
How can brokers ride this wave, and what does that mean to carriers if they do?
You have to decide which part of the value chain you want to play on. Brokers need to invest in technology and compete on the basis of the connectivity with the customer. One thing they need to do that’s been missing is to gather data. They handle clients, but they’re missing the loss and exposure data. And when I talk to brokers, I ask, “Do you have any data?” They say, “No, we don’t. The insurance company has it.”
So this is going to be a fight. Who’s going to be able to keep the data? That data is gold. Not only account-level data, but given the state of analytics today, there’s lots of third-party data that could be brought to bear. Brokers have the opportunity to maintain control and service the policy with claims. If they can do that, then it’s easy to connect up to somebody like us or anybody else who furnishes them the pipeline to capital.
Historically, tech has disrupted other industries by getting control of the customer. The number of startups that are focused on that connectivity in insurance is huge. And that means brokers are under attack from both sides. They’re squeezed by insurers and also getting competition from this new source.
They can defend themselves against insurers by pursuing this kind of a new, more efficient channel. Yet insurers have a decision to make as well. They can either continue what they’re doing and try to be that big balance sheet and hold on to some of the flow, or they can facilitate this flow into capital markets and make money because, as I said, not all the risk can go into capital markets.
Insurers who facilitate the flow into the capital markets rather than fighting it are in a position to control much more business than the size of their balance sheet currently can. So, whether you’re a $10 billion company or a $1 billion company, it’s conceivable you can have 30%, 40%, 50% of a market. That was previously impossible to fathom given the fragmentation of the industry. There’s nothing that stops you if you’re efficient at this value chain.
If you’re an insurer, if you buy into this proposition, you can control a huge portion of the market. Very much like how other tech companies have suddenly dominated their markets, there’s an opportunity for insurance companies to do the same.
Brokers can do this too by getting the connectivity of the customer and the data. Then, they can attach to this pipeline.
So what you’re telling me is that brokers could disintermediate 25% to 30% of insurers?
I’m talking about over a 10-year time frame. I mean, the pace is the only thing that’s uncertain. There’s no limitation, there.
Insurers who facilitate the flow into the capital markets rather than fighting it are in a position to control much more business than the size of their balance sheet currently can.Tweet
What does this do to premiums?
Pricing, naturally, is a market phenomenon. You go to a market, people buy and sell from each other, and you get a price. So price is something that you observe. It should not come out of a model, yet in the insurance industry, that’s what happens. That’s because those who actually hold this risk—the investors—don’t know anything about it. Because the risks are opaque, they generally say, “I want 10%+ return.” Yet, they can’t tell you how much return they want on workers comp, homeowners, commercial property or aviation. They don’t know the risks.
But if you securitize the major risk classes and create transparency, then investors, through their actions, price those securities—different prices for different risk classes based on their risk profile.
You see this in cat bonds. You see curves where the cat bond price will go up and down. An insurer can take those prices and transfer them to insurance buyers directly, so pricing no longer comes from a model but instead from interactions between investors on the one hand pricing securities and consumers on the other hand buying insurance based on those prices.
There’s a reason why when you want to get a good mortgage, every day the price changes, because that risk ends up in the capital markets where prices move every day. So why can’t we envision insurance pricing working the same way? Can’t you imagine in 10 to 20 years you go to some website—to the originator—and you get prices for a bunch of insurance policies based on capital market prices?
So if you’ve reduced pricing—
When cost of capital decreases, capacity increases significantly. Even now, there isn’t sufficient capacity. I saw commercial accounts where they wanted $500 million in peak cat coverage and they could only get $100 million. The industry was only willing to give them $100 million. There’s a reason why New York’s MTA [Mass Transit Authority] went to the capital markets. They couldn’t get capacity that they wanted at a reasonable price.
My point is that not only does the price go down to its naturally occurring and most efficient level but the capacity increases incredibly. If you have a limited amount of capital, you focus on risk selection; when you have unlimited capacity, you focus on pricing all risks.
Does this mean lower premiums and smaller commissions for brokers?
No, no. Rates go down, but the volume increases, which means bigger commissions. There’s a subtlety here that needs to be understood. I think everybody acknowledges there isn’t sufficient coverage. I mean, you see this all the time. Only a fraction of the economic loss is insured. Why is that we say that we have a lot of excess capital?
How will rising interest rates affect the capital that’s going to flood into insurance?
That’s a good question. So, first of all, let’s break up interest rates generally into two parts. One is the risk-free rate. It’s Treasuries. And the other one is the spread on corporate fixed income.
When Treasurys fluctuate, it doesn’t affect insurance-linked securities’ pricing, because these notes are actually not fixed interest rate notes but variable. The capital that’s raised to cover the risk sits in a fund earning the risk-free rate. So if the risk-free rates go up, the investors get whatever the returns are in that risk-free account. Plus, they get the risk spread on the notes—that’s the reinsurance premium.
Risk-free interest rates going up doesn’t affect this. It’s when spreads of comparable risk, securities and other asset classes widen. Pricing will still go up and down, except it will go up and down with the capital markets, not with insurance markets.
We will no longer have the insurance cycle?
Exactly. Part of the logic in the insurance and reinsurance industry is if you have a loss, I’m going to raise your price. Not because I think there’s more risk next year. Not because exposure has changed but because you have a loss, so I’m entitled to charge you more. That’s not risk management. That is not really insurance. That’s like financing your loss.
You are starting to see in the market now that when you have big losses prices don’t go up much. That’s because the capital markets have come in and put pressure on this dynamic. So they will not follow the underwriting cycle, which, quite frankly, I don’t think was a real cycle.
When you have a lot of permanent capital, you have no choice but to deploy it. So if I’m an insurer, I have permanent capital, and I want a return of 10%. That’s what my investors want. So I price my policies to meet that goal.
For whatever reason, let’s say that you, a competing insurer, have a lower assessment of the risk and your price is lower than mine. So I’m going to lose some business to you. Now, if I lose business to you and if I can’t replace it, because it’s a zero-sum game in the industry, I have to lower my price. I can’t just sit and not change my price because otherwise I’ll have capital that will get zero return. And so I lower mine. And the next guy then lowers his. That’s what drives the soft market.
It’s not really a cycle. There’s a permanent dynamic that softens prices, and this is a huge problem. But if you had securitization, you could write a little bit less and securitize less. You can flex the capital, and you’re in a better position to protect against a soft market and manage to get the returns for your investors that they really want.
There’s also double taxation that securitization avoids. As you know, the insurance company gets taxed, and then the investor gets taxed on dividends. But if you securitize this risk and you give it directly to the investor, the profits were never in the insurance company. They go to that investor instead. It gets taxed once.
And the insurance company gets a fee for making it happen.
They get a fee for the value they create. They’ve originated the business, they service the business, they gather data, they do analysis and they make risk transparent. They’re entitled to make money on that. In fact, there’s an opportunity for insurance companies to be like tech companies. If you can imagine this going to the extreme, you have less and less capital. You have less and less risk. Most of your focus is on origination and gathering data and analyzing risk. That’s all tech activity.
You become more like a tech company. So you can get a tech multiple valuation rather than an insurance company valuation. Instead of being a highly regulated, very opaque, capital-intensive company, you’re now capital lite, very tech oriented, a fee-based business that makes multiples.
Does this mean you could finally get larger limits on something like cyber insurance?
No, not yet. Remember, the constraint here is that the risk must be transparent and the risk assessment has to be reliable.
Because we don’t understand cyber yet?
That’s right—from everything I’ve known in cyber, and I certainly understood the need for capacity. The issue with cyber is there are people who will say we know how to model cyber. But I don’t think there are investors who will buy that kind of modeling and say it’s objective, back-tested and reliable. Until you achieve that, I think it will be difficult. Remember, you need standardization, transparency and a reliable risk.
I can see our top brokers can easily step into this and work with somebody like you. Would it be more difficult for our regional and smaller brokers?
Well, if they don’t have the staff to do the data gathering and analytics.
They don’t have to do that. That’s my point. We have been spending a lot of time and effort on analytics. This is my background: modeling risk. We don’t need brokers to do the analysis.
Our analysts can deliver account-level underwriting pricing models to brokers. Data science, quite frankly, is becoming commoditized. All the brokers we work with just need to have strong connectivity with the customer and get historical exposure and loss data.
You take the data and put it into your model and then price the securities?
On the investor side, we would do it as a portfolio. We don’t give investors detailed, account-level information. We give them portfolio analytics. We can back-test it. For example, we now have a client portfolio for which we have data for the last 10 years. We can back-test our risk models on this in many different ways. The investors will see the strengths and weaknesses of different models, just like they do now for cat, and they will price it.
On the other end, for the brokers, we take that portfolio price and convert into account-level prices so that they can price the individual policies. And what they essentially need to do is control the customer. By controlling the customer you should be able to get all the data.
So, predict the future. How are brokers and carriers going to react to this?
It’s soon going to become a free-for-all. In the very near term—I’ve already seen this. Until now, everybody respected their position in the value chain. You’re my client. I don’t go around you. Reinsurance doesn’t go around. But soon, everybody will be going around everybody.
I think capital and operating licenses are increasingly going to become commoditized. It’s a question of pace. I can imagine 10 years from now you will have some people who have large market shares in certain product lines. They will grow the market by writing new business, not just taking it away from others. So there will be natural growth.
The front end is entirely tech activity. All risks are priced rather than focusing on risk selection. The idea that I have to choose between higher risk and lower risk is a little bit frustrating for people outside the insurance industry. Let the investor price both. The higher risk actually may be more profitable because it also has the higher premium. Only when you have finite capital and you are a price taker, then you have to choose, and you would likely choose the lower risk.
It’s like investing in fixed investments. The risk and return of Treasurys versus corporate bonds.
It’s exactly the same thing. That’s what happens in credit, right? You have a credit score.
What about carriers? Sooner or later they’re going to have to do something about their business model. They can’t just ignore this.
I think the carriers are focused on predictive modeling on the origination side. They have not embraced the capital side. I think they’re going to be caught off guard because reinsurers were caught off-guard. They thought this was cyclical and then they all immediately turned. Within a few years, they all became asset managers. I think this will quickly become an issue. Because all these ILS funds are starting to go around insurance companies.
Are you talking about pension funds?
Pension funds invest through specialist ILS funds. Those funds are starting to have a lot of capital that must be deployed. So they have connected with fronting carriers that are essentially pipelines from MGAs directly into the capital markets. It’s small. It’s a niche. It’s going to grow exponentially. And the way it will grow exponentially is once they break into a new product line and set a precedent, the trajectories will be exponential, just like it has been over the last five years for cat.
The defining characteristic of the insurance industry is that it is not great at leading innovation but it is a very good follower.
Most technology is just making something more efficient. It’s not a disruptor. This idea, what you’re doing with the capital markets, it appears to actually be disruptive.
The business model hasn’t changed. This changes the business model from the carrier side or from the broker side. It defines the insurance 2.0 value chain. Insurance 1.0 has been very efficient for a couple hundred years. I agree with you that a lot of the technological improvements are simply things that were due. They should have happened 20 years ago when all other industries did this, and so now they’re due. All the hype about technology and insurtech, they have not actually changed business models. And the insurance company corporate venture capitalists—for the most part—who support this and finance this are doing so for ones that will make their current business model more efficient, not blow it up.
I think securitization is disruptive. It’s already disrupted reinsurers. Go and talk to reinsurers and ask how many of them are asset managers now. Three years ago, this did not happen, right? This is a tsunami, and it’s going to continue.
Disruption doesn’t come from within. That is one reason we went to Silicon Valley. We wanted to learn from them how they built marketplaces in other areas. We don’t think we can learn from the insurance industry.
So, I think the disruption will come from the outside and it’s a question of who will embrace it. It’s a free-for-all. These next five years are going to be interesting. And because it’s a free-for-all, it also, I think, creates a lot of opportunities in terms of business models, which could emerge in many different ways.
“I would refer them back to their insurance partner or PBM or HR department,” Rea says. “That was the extent of the input or help I could give them in the few seconds I had to talk in a busy pharmacy.”
But in 2008, one patient stopped his hamster wheel. The woman asked him which of her eight medications she should skip that month. She was living paycheck to paycheck and had an unforeseen expense, prohibiting her from buying them all. But she was diabetic, she had high blood pressure and cholesterol, and there wasn’t a lot of give.
Rea decided to see what he could do for her. He went home that night and spent the evening calling pharmacies to find out the cash prices of her medications. He analyzed her insurance and drug plans, seeking alternative ways to accomplish the same goals as her current medications did but in a more cost-effective way.
The next day, Rea gave her the information. She took it to her physician and was able to change medications and doses and include other health treatments. After this medication review, the woman was able to save $3,000 on prescriptions over the next year.
Rea decided he might have identified a need in the market and created Rx Savings Solutions, based in Overland Park, Kansas, to meet it. He’s now the CEO. Rea has created a patented algorithm that evaluates patients’ demographic and clinical information and then provides an individualized road map for the most clinically sound, cost-efficient prescriptions for each person.
Rea isn’t the only one out there looking to lower prescription drug costs. Employers, consultants, nonprofits and think tanks alike are trying to figure out how to manage the ever-increasing cost of prescription drugs in the United States. Greater cost-effectiveness analysis and drug importation are just two of a wide range of options being used to reduce spending for individuals and businesses.
According to the Centers for Medicare & Medicaid Services, prescription drug spending accounted for about 10% of the $3.3 trillion in total healthcare costs in the United States in 2016. The percentage of healthcare costs spent on medication is even higher for employers, with experts estimating prescriptions make up at least 30% of their health expenditures.
And there doesn’t appear to be an end in sight. A 2017 report by healthcare information and research firm QuintilesIMS estimates prescription costs will increase by up to 5% annually through 2021, to $405 billion.
And Americans are singular in their healthcare spending. A 2017 report by the Commonwealth Fund found Americans spend 30% to 190% more on prescription drugs annually than nine other high-income nations, including Australia, the United Kingdom, Germany and France. The study’s authors compared four main factors to determine a nation’s medication costs: population, per-person usage, type of medication and cost.
While the United States has a large population, we use about the same number of drugs per person as the other countries. And 84% of medications prescribed in the United States are generic—more than any country except the United Kingdom.
So where is the outlier in the U.S. market? Cost.
Prices for common medications are 5% to 117% higher in the United States than in other nations. Blockbuster and specialty medications are the main culprits for our extensive spending. The Commonwealth report highlighted six popular brand-name medications and found Lantus, an insulin injection for diabetics, costs up to $67 per month in other countries and $372 in the United States. Advair, an inhaler used to prevent asthma attacks and treat chronic obstructive pulmonary disease, costs as much as $74 elsewhere but rings in here at $309. And the controversial hepatitis C drug Sovaldi tops out at about $17,000 in Germany, yet it costs $30,000 in the United States.
The report’s authors attribute the lower prices in other countries to their use of tactics like centralized price negotiations, the creation of national drug formularies and drug pricing based on comparative effectiveness research.
But the U.S. market is more complicated, and many groups—manufacturers, distributors, insurers, pharmacy benefit managers—have their hands in the cookie jar. So it’s difficult to pinpoint how the industry has been able to increase prices, essentially unchecked, for years.
“Fundamentally, drugs are expensive because they can be,” says Ronny Gal, a senior research analyst covering the specialty pharmaceutical industry at New York-based Sanford C. Bernstein & Co. “It is a superior good—people don’t have a lot of choice.”
Gal says he rejects a lot of assumptions made in the debate over why prescription medications are so costly. Intermediaries like PBMs and wholesale distributors, he says, aren’t responsible for the high prices. Nor are drug manufacturers barely scraping by as they claim, trying to recoup massive costs of research and development.
Between 2006 and 2015, about 67% of the largest drug companies’ profit margins increased 15% to 20%, while profits among large non-drug companies worldwide increased 4% to 9%, according to the Government Accountability Office. Yet between 2008 and 2014, spending for drug research and development increased from $82 billion to just $89 billion. At the same time, federal spending was stable, but other incentives, like the orphan drug credit for medications that treat rare diseases, increased more than fivefold from 2005 to 2014.
Gal also says it’s not necessarily the pharmacy benefit managers, pharmacies and others in the distribution chain that are at fault for rising prices. They are trying to maximize their profits and get their piece of the pie. But their take is based on the original high price.
Fundamentally, drugs are expensive because they can be.” —Ronny Gal, senior research analyst, Sanford C. Bernstein & Co.Tweet
As the Commonwealth report notes, generic drugs are relatively well utilized and are often (not always) a less expensive alternative to name brands. But it’s the new, specialty medications—which have little to no competition and lots of marketing clout—that are breaking the bank.
“As old drugs become generic and new ones come in, those newer ones are being priced 10 times more than the old drugs,” Gal says. Often, there isn’t much patients can do about prices. “If you are in anaphylactic shock and I’m holding an EpiPen in my hand that can save your life, how much is that worth?”
The cost of medications used to treat such maladies as cancer, rheumatoid arthritis, asthma and diabetes have risen in the past five years “more than anyone could have expected or some think is warranted,” says Shawn Bishop, vice president for the Controlling Health Care Costs program at the Commonwealth Fund in New York.
Specialty drugs have boomed in the past couple of decades. In 1990, there were only 10 on the market, says the Pew Charitable Trust. Now there are more than 300, with nearly another 700 in development. More than 500,000 Americans are plagued by annual drug costs greater than $50,000, an increase of 63% since 2014.
And employers are paying the lion’s share of those expenses. It has been estimated that about a third of total healthcare spending is attributable to drug costs. And Chris Labrecque, president of the employee benefits group at Insurance Office of America, says about 85% of those costs can be traced to the specialty market.
Part of the issue is groundbreaking new drugs like Kymriah, approved by the Food and Drug Administration in 2017 for the treatment of childhood leukemia. It has been shown to be highly effective for about 20% of patients who don’t responded to other treatments. The manufacturer, Novartis, set the cost for the treatment at $475,000. Manufacturers set prices by amortizing the lifetime value of a cure, which is something not seen in other areas of medicine, Labrecque says.
“I broke my leg when I was six, and the doctor reset it,” he says. “Should I have paid him for the lifetime value of not limping? I think it’s price gouging and they have positioned themselves financially to defend it.”
Managing these costs is increasingly challenging for employers because they don’t want to employ cost controls. They worry it will look like rationing or cost-shifting to employees. But rationing is already occurring naturally when people like Rea’s customers are forced to forego needed medications because of the costs.
Though businesses are typically conservative when it comes to making changes in healthcare, Bishop says enthusiasm for change has increased as costs continue to rise. Employers are in a good place to affect the market because not only do they pay the bill, they also have a vested interest in keeping costs down. They may want to retain good benefits for their workforce, but Bishop says employers understand that raising deductibles and increasing co-pays on medications (enabling them to keep rich benefit plans) result only in employees paying more for drugs and other healthcare services.
“We are on the precipice of getting some more expensive drugs into the system, and how are we going to manage it?” he says. “We are already starting from a pretty high base if you are looking at employers’ spend.
They want broad access to care, but at the current price points, they just aren’t sure they are paying for it correctly.”
One way to cut costs is through state and federal legislation. To date, the federal government has done little to sway the prescription drug market with the exception of some movement in Medicare. States, on the other hand, have taken up the torch.
Some are doing simple things that don’t require legislation, like pooling public employees with prisoners to leverage a greater number of covered lives for negotiations with pharmaceutical companies. Some are joining purchasing pools to get the same result.
But Jane Horvath, a senior policy fellow at the National Academy for State Health Policy, says these are short-term measures. “Those net some discounts but not enough to change the trajectory of what is going on,” Horvath says. “They are staying one step behind the band. When prices go up, they are still just getting a 10% discount on those higher prices.”
Some states have taken the legislative route. Horvath says more than 100 bills were introduced in 2017 and nearly as many already have been in 2018. Some are focused on curbing high prices—New York passed a law to cap Medicaid drug spending. Maryland, known for its progressive healthcare market, is considering creating a commission to set ceiling rates for high-priced drugs. States are also focusing on increasing transparency, requiring pharmacy benefit managers to disclose their manufacturer rebates and forcing manufacturers to justify prices that seem unusually high.
Other states save money by importing drugs from countries such as Canada and Australia. Unlike busloads of seniors crossing the border to Canada to buy their prescriptions before Medicare Part D was enacted, passing important legislation would allow states to do it on a wholesale basis.
The cost savings of looking to other nations can be substantial. In 2016, Kaiser Health News compared the cost of some popular brand-name drugs in Canada and Brooklyn. Most drugs in Canada were 50% to 75% cheaper than the same drugs in the United States. This savings can be small, as in the price of the generic version of the cholesterol drug Crestor, costing $6.82 here for a 30-day supply (the same amount in the name brand is around $175) and $2.58 in Canada. It can also be more significant, as with the leukemia treatment Gleevec, where the name brand runs around $336.33 per 400-mg. pill in New York and $48.77 in Canada (the generic is closer to $125 per pill).
Horvath says importation is not the ultimate solution but state legislation pushing it does place pressure on the industry and federal government to do something. The National Academy for State Health Policy has its own model drug importation program to guide states and smaller groups or just for certain medications, such as those in the expensive specialty market. To cut costs, employers are using this option more frequently.
Gary Becker, founder and CEO of Baltimore-based ScriptSourcing, has spent 33 years learning how to help businesses mitigate risk and cut spending. Three years ago, he added international health tourism and mail-order programs to his other offerings and has written more business than in his three previous decades in the industry.
The things we are doing are not status quo, but we have had a tremendous amount of success.Tweet