Insurtech Lemonade is attracting big money.
Talks of a looming recession continue in the news. While the sky isn’t falling yet, everyone seems to be holding their breath waiting for the economic shoe to drop. We aren’t there yet however.
Using research from law firm Steptoe & Johnson, we broke down some basics of the federal proposals on the table. We also took a look at the volume of state action and found that, among the varied legislation that has been introduced around the country, more than 25% of states have introduced some kind of single-payer solution.
Uncertainty hovers over the federal healthcare system. The future status of the Affordable Care Act remains a part of the political agenda, along with calls for a single-payer (or government-run) system. In the meantime, states have initiated a variety of programs to improve patient care and efficiency in healthcare programs, and they’ve done so to plug gaps they believe have not been filled by Washington, D.C.
North Carolina has launched managed care contracts for insurance and healthcare provider groups in an effort to reduce overall costs.
A vast majority of Americans support government-based proposals, some of which are truly single-payer options, until they see the price tag.
The calls for reform are especially highlighted among Democratic presidential candidates.
Last December, health services company Cigna acquired Express Scripts, the last major stand-alone pharmacy benefit manager (PBM). The new organization will have size and purchasing power on its side, with a combined expected revenue of more than $140 billion.
Some say such mergers may become necessary for pharmaceutical companies whose business practices are increasingly scrutinized.
Pharmacy benefit managers have usage data, but they don’t have outcome information.
Bernstein recently estimated PBMs likely have closer to 85% gross profit—almost double that of drug distributors and nearly triple that of insurers and pharmacists.
Sometimes the best ideas really do come on the links. Health insurance veteran Jeff Smedsrud says he started noticing an interesting pattern in conversations among his golfing partners.
On average, 10,000 baby boomers retire each day.
The aging cohort poses challenges that could dramatically transform the nation’s healthcare system.
Healthcare insurers and providers are experimenting with outside-the-box solutions suited especially for boomers.
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A builder’s mentality helps us approach big, hard-to-solve opportunities with a humble conviction that success can come through iteration: invent, launch, reinvent, relaunch, start over, rinse, repeat, again and again. They know the path to success is anything but straight.
Leaders come and go. It’s great ideas, better execution and long-term visions that stick.
Springbuk is a healthcare analytics software provider whose products are engineered to turn basic data into actionable health information for employers. Gandolf discusses how healthcare intelligence is moving beyond basic data analysis to compile information from various sources, analyze it and offer solutions for reducing costs and improving population health.
When Leader’s Edge last touched base with Jerome Corsi, the financier and raconteur was planning to unseat incumbent Massachusetts U.S. Sen. John Kerry in the 2008 general election. Alas, Sen. Jerome Corsi never became a reality.
The insider threat has long been recognized as a major factor in cyber-criminal activity. The Insider Threat 2018 Report stated that 90% of respondents felt vulnerable to an insider attack and 53% confirmed an insider attack in the previous 12 months.
My parents, sisters and I were on a month-long trip through Europe in 1987 in a bright orange Volkswagen van that Dad still claims he didn’t choose. It was a mechanism for international embarrassment—European Vacation, Teen Daughter edition.
“Surprise billing” is the hot healthcare reform topic du jour. Also known as balance billing, surprise billing commonly refers to situations in which patients receive out-of-network emergency care or treatment from an out-of-network doctor at an in-network facility and then get hit with large, unexpected bills.
In March, Council President and CEO Ken Crerar and I met with our industry peers from around the world at the annual meeting of the World Federation of Insurance Intermediaries.
Applied Systems, which last year received a “nine-figure’ investment from Google, has acquired insurtech company TechCanary, the leading insurance customer relationship management (CRM) system built on Salesforce.com. Terms were not disclosed.
Five percent of patients in the United States account for 59% of healthcare costs, according to the Agency for Healthcare Research and Quality.
Following his standing-room only session, A New Breed of Analytics: Holistic Risk Management Decision Making, we chatted with Ben Fidlow, global head of core analytics at Willis Towers Watson.
AXA XL’s Steve Bauman spent some time with us to help explain the pros and cons of using them.
We caught up with Kristen to learn how RIMS is evolving and to get a sneak peek into RIMS 2020 in Denver.
We spoke with Dr. Teresa Bartlett to learn the causes and characteristics of PTSD and what employers need to know to address the issue.
Cindy’s here in Boston this week to catch up with some of Western Union’s broker partners and carriers, and engage in discussions about the current risk landscape.
We caught up with Erika Weisbrod of International SOS to discuss travel risk management for companies when their workforce is on the road.
We’re known as a last-minute industry. That has to change.
Cannabis-derived cannabidiol (CBD) products are quickly becoming ubiquitous—gummy bears for sale at local mom-and-pop retailers, lotions at high-end department stores and lattes at your neighborhood coffee shop.
In late September 2018, the Venta Maersk arrived at the port of Saint Petersburg, Russia, following a five-week voyage from South Korea through Arctic waters north of Siberia. It was a significant milestone, the first container ship from Maersk to successfully navigate the Northern Sea Route.
The potential opening of the Northern Sea Route, through Arctic waters north of Siberia, has been hailed as a “monumental” event for cargo ships.
Shipping accounts for 90% of global trade and involves more than 50,000 merchant ships around the world.
Environmental and geopolitical policies are compounding shipping insurers’ challenges.
The marijuana field is blossoming and appears ripe for the picking. Legal cannabis has fueled one of the fastest-growing industries in the United States, with sales expected to surge from $10.5 billion in 2018 to $22 billion in 2022, according to a report released in January by Arcview Market Research in partnership with BDS Analytics.
As the cannabis industry transitions from the illicit market to legitimacy, placing coverage can be tricky.
Although recreational marijuana use remains illegal in 40 states, 33 states do allow its medical use.
With legalization in Canada, sales there are expected to reach $5.9 billion in 2022.
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Access to affordable housing, or lack thereof, is one of the socioeconomic factors affecting the health of people living in poverty. Building new homes in impoverished communities is expensive and labor intensive, but 3-D printing may be on the verge of offering a plausible solution to this problem.
3-D printing, known as additive manufacturing, is being used to develop artificial coral reefs, limb prosthetics, antique car parts, even houses.
Like any new technology, additive manufacturing brings its own set of risks for businesses.
Global spending on 3-D printers is projected to rise from almost $14 billion in 2019 to over $22 billion by 2022.
What the hell is going on? Every time I turn on the TV or open the newspaper, there’s a headline about elected leaders who lie, journalists who shade the truth, academics who cheat, parents who pay (and lie and cheat and shade the truth) to make it easier for their kids to get into the best schools, religious institutions that have tolerated crimes. And that was all in one news cycle!
Wojcik and Alexander discuss how prescription co-pay discounts lower patients’ costs but can negatively impact pharmaceutical pricing in the long run. They say insurers’ approaches to co-pays offer only a short-term solution for a systemic problem.
State Applies Co-pay to Deductible
In March, the issue of maximizers and accumulators was picked up by Virginia, the first in the nation to address the topic legislatively. Lawmakers there passed a bill, signed by the governor, requiring health insurers to count all payments made on behalf of a plan enrollee—including payments made under co-pay discount card agreements toward that person’s deductible and out-of-pocket maximum. According to Bruce Silverman, MD, a nephrologist in the Richmond, Virginia, area and advocate for the group Fair Health Care Virginia, 20% of all employers have implemented some form of adjustments to offset the co-pay discount cards. In an opinion piece in The Daily Progress, Silverman said the legislation is a cure for maximizers and accumulators that put “patients at risk of being forced to discontinue treatment for severe, even life-threatening conditions, because they simply cannot afford to pay out-of-pocket maximums that can be thousands of dollars.” The mandate doesn’t affect self-insured organizations.
You know how it goes with insurance characters onscreen: they represent the dull, the stuffy, the nerdy, the dry-as-dust. This is not quite true of Olivia Maple in the You Tube original series “Sideswiped,” which was launched last summer. She seems to represent all that is dutiful and buttoned up, yet within, rages a single, lonely, lusty woman of 35 who fears her eggs are drying up. She suddenly and desperately needs a man.
Any time you give something a new name, it’s a big deal. While naming a company is very different from naming a pet or your first-born child, it still feels close to home because, ideally, you’re looking for a moniker that speaks to the very heart of how you do business.
Why are we still trying to convince thousands of companies to buy cyber insurance? As you read this column, another Fortune 500 company is likely in the middle of another widely reported hack, data breach or phishing scam.
Fast Focus on Cyber Security Tips
The Federal Communications Commission created a one-page flyer with helpful cyber security tips for small businesses: fcc.gov/document/ten-cybersecurity-tips-small-businesses.
For help building a more detailed, plan, visit the National Institute of Standards and Technology publication titled Small Business Information Security: The Fundamentals (nist.gov/publications/small-business-information-security-fundamentals) and consult with your agent or broker.
The first quarter of 2019 has come and gone. In a few months, the year will be half over, and you will start focusing on your 2020 goals. However, before you move on to 2020, I need each of you to stop and reflect on 2018 just one more time. I am not one to dwell on the past, but I want to make sure firms are focusing on the right measurements and that we all have proper perspective.
Insurance agencies and brokerages experienced a record-breaking number of mergers and acquisitions in 2018. As the number of M&A deals continues to rise, it is crucial for agencies and brokerages to understand the common challenges that come with integration processes, including converting data from one system to another, and the best practices to overcome those challenges.
In the seemingly never-ending quest to attract and retain good talent, understanding what employees really care about is crucial. Many reports today indicate that employees want to feel valued by their employer, and that comes across in multiple ways, including the benefits they receive.
Fun Facts About Tenure
Though modern speculation has people believe that older generations held only two or three jobs over their lives, this is false. According to a 2017 U.S. Department of Labor report, baby boomers held on average nearly 12 jobs in their lifetime. In addition, it is important to understand that when the economy is growing, average employee tenure shrinks. More jobs and economic benefits create further opportunities for changing and improving salary and job status. During the 2007 market recession, employees with 10 years or more of tenure increased in percentage while employees who stayed at a job for one year or less declined.
One of the most noteworthy discussions we heard centered on the role of new college grads in an industry that is becoming increasingly technology dependent. Many agreed that students, who have grown up in a tech-driven and interconnected world, will play a crucial part in the industry’s adoption of and adaptation to technology. However, the job opportunities discussed were solely focused on the carrier and insurtech sectors. This was not so much an effort to exclude brokerages but likely due to the proportion of carrier-focused insurtechs at the conference.
Just over two years ago, Crawford & Company acquired a majority interest in WeGoLook, an online and mobile collaborative economy platform headquartered in Oklahoma City. This strategic investment empowered Crawford to revolutionize, automate and expedite its claims handling processes by using a large, mobile, on-demand workforce for automotive and property inspections.
Tina Valdez is currently a senior at St. Mary’s University in San Antonio, TX, where she was born and raised. She double majors in finance and risk management and marketing. She currently serves as the co-president of the Beta Xi chapter of Gamma Iota Sigma at St. Mary’s. Upon graduation, she will start her career with Marsh as part of the Marsh TRAC program out of the Houston office.
It wasn't too long ago that children with disabilities could not go to school. Their parents—their best and sometimes only advocates—would use newspaper ads to find other families grappling with similar issues, and together, they would form non-profit, community-based programs. Their goal was simply to increase the quality of life for their children by helping them more easily engage in the community with various physical and social support services.
Business Insurance has been tracking and publishing reports on the largest brokerages in the United States dating back to 1972. At that time, the top brokerage, Marsh & McLennan Companies, reported $151 million of brokerage revenue.
Taking on an outside capital investment is a significant undertaking, often done in part to boost revenue growth through organic or inorganic means. While such investors are most often thought of as financial partners, great investors are partners in much more than just the economics.
Ending on a mostly positive note, 2018’s healthy growth in GDP and strengthened labor market conditions led the Federal Reserve to announce in December that it would raise its target range for the federal funds rate, the fourth time of the year. That news came despite the fact that capital markets struggled in the last quarter of 2018, with all the major indexes finishing negative on the year despite being positive through September. By the end of December, capital markets fell near bear market territory and even came close to ending a bull market run that started in 2009.
During 2018, it seemed like there was a new headline-making transaction hitting the newswires weekly. Here is a list of our top newsmakers.
The U.S. property and casualty industry’s current financial stability is the result of calm conditions and/or solid construction and good captaining in the face of stormy weather.
Coming off a record-high year in 2017, during which 557 announced brokerage transactions were posted, it was difficult to imagine that 2018 could eclipse such a frenzy of activity. Despite the odds, 2018 saw a new record high in transactions. MarshBerry tracked 580 announced brokerage transactions, which represents a 4% increase from 2017.
While business interruption remains the biggest concern for companies worldwide, it is primarily a concern in Western economies as well as China and Russia.
If you’ve ever picked up Leader’s Edge before you know that culture is always top of mind for me. And how could it not be? Culture is, after all, your organization’s DNA. If leaders don’t promote their own culture, how can they expect their teams to?
The world is merging. Global M&A activity reached a new high in the first nine months of 2018, with deals worth nearly $3.3 trillion, fueled by high share prices and consumer confidence on one side and low interest rates and deal fees on the other.
Mergers and acquisitions and their “synergies” are changing the nature of risk at your clients’ companies.
If a business is purchased and rolled into an existing placement without extreme care, specialty coverage that underpins the business model of the acquired could be lost.
Labyrinthine insurance arrangements may be critical to the success of the underlying transaction.
Mergers and acquisitions in the property-casualty and life and health insurance sectors broke new ground in 2018—and not just in the skyrocketing value of deals. M&A deal value among both P&C and L&H insurers—$40.3 billion—more than doubled in 2018 compared with the prior year, although the number of deals (533 in all) declined by 13%, according to audit firm PwC.
Some atypical factors, such as business transformation, are helping drive M&A among carriers.
The ILS market has cemented its role as an additional source of risk-bearing capital.
The desire to harness the potential of emerging technologies is also showing up as an M&A trend.
Brightside is a financial wellness organization that works with businesses like Comcast, its anchor client, to help employees make sound financial decisions, get out of debt and increase cash flow. King discusses how the new field of financial wellness is tied to health benefits and how stress induced by money problems can impact employee health.
I get out of bed in the morning with a lot of drive to do things better today than I did yesterday.
The Council’s Midyear Board of Directors Meeting & Strategic Work Session will be held in London May 1-4, 2019. For those traveling to this enduring city, Brexit remains a question.
When actor Rami Malek thanked his late father while picking up his Oscar for best actor in Bohemian Rhapsody, it wasn’t just an afterthought.
Companies are starting to learn that it is very important to pay attention to privacy and cyber risks when conducting M&A due diligence.
“I’m not for sale.” Another call comes in from a buyer, just like the last. “The business is not for sale. We’re not selling.”
Tips for complying with New York’s sweeping cyber-security regulation as you acquire.
Brokerage mergers and acquisitions have been at a high level for years, with no sign of significant slowing. According to Optis Partners, 2018 was the busiest year since the financial consultancy began tracking M&A activity, breaking several records.
Private equity funds shape how we think about consolidation in insurance intermediation. PE actors have been instrumental in driving brokerages’ market valuation across the globe and have contributed much-needed capital to ignite recent acquisitions.
People who identify with the sandwich generation, the popular term for middle-aged individuals who care for their aging parents while supporting their own children, understand what it is like to be in a pickle.
On average, black Americans are less likely to be screened for numerous diseases, including colon cancer, making black men more prone to developing the deadly disease.
Stephen Thomas loves barbershops. For him, as for so many African-American men, they are a place of historical and cultural relevance. In the 19th century, some barbershops doubled as abolitionist sites or stops on the Underground Railroad.
The goal is to improve the health of the barbers and their mostly African-American clientele.
One partner in the program is Capital Digestive Care, one of the largest private gastrointestinal practices in the country.
On average, black Americans are less likely than white Americans to get screened for colon cancer and more likely to develop colon cancer.
On Jan. 17, 1994, a 6.7-magnitude earthquake struck the San Fernando Valley region of Los Angeles, killing 72 people, injuring more than 10,000, and causing an estimated $40 billion in widespread property damage. Thousands of homes, buildings and cars were destroyed in what remains one of the costliest catastrophes in U.S. history.
Developed by scientists at MIT, the seismic muffler consists of a V-shaped array of boreholes dug hundreds of feet deep.
The one- to three-foot-diameter boreholes, cased in steel or a comparable composite material, slope away from the protected asset.
The boreholes divert hazardous surface waves generated by an earthquake away from the protected asset.
Being a televised Real Housewife is not all fake eyelashes, cleavage and cat fighting. The girls often have jobs, too, but none as lofty as Vicki Gunvalson, the longest-standing Real Housewife of Orange County, who owns and runs Coto Insurance in Irvine, California.
I’ve always been partial to the saying, “The grass is always greener…” Over the years it has kept me on my toes—especially when it has come to my career.
Wamberg is an advisory firm that provides genetic products and services as part of employer benefit packages. Bellanca discusses how the burgeoning field of genomic testing has the potential to improve employee health and reduce employer medical spend.
It was such a great feeling to say, “I don’t care if I fail.”
During the 1992 presidential campaign, Clinton campaign strategist James Carville famously coined the phrase “The economy, stupid.” That message was reportedly intended to be only an internal note for campaign workers in the Little Rock headquarters to highlight when speaking with constituents (for those keeping track, one of the other talking points was “Don’t forget healthcare.”) As the story goes, the phrase ended up becoming the slogan for the entire election campaign.
In conversations with industry stakeholders—brokers, carriers and others—we often hear how insurance is misunderstood, that the industry needs to do a better job telling its story. Well, they’re right. But it’s difficult to get down to that deeper level—the one that makes the story worth telling—amid the complicated web of relationships, contracts, regulations, markets and capital.
Lots of things happened in 2018 that focused our attention on privacy. Facebook got everyone’s attention in March when The New York Times and The Guardian revealed that Cambridge Analytica used the personal data of more than 50 million Facebook subscribers to help the Trump campaign.
I have a friend who recently decided to invest in solar panels on his roof. By financing the transaction, his fixed monthly payments would be far less than his historical electric bills, and in some way, he is probably helping save the planet.
“Life’s most persistent and urgent question is, ‘What are you doing for others?’" —Dr. Martin Luther King Jr.
Are you as influential as you think? Research says probably not. Ninety-five percent of leaders think they are more influential than they are.
Gig economy businesses are underinsured. But a new niche product that capitalizes on digital connections between service providers and customers is an example of how innovative brokerages can carve out a specialized block of business that may lead to big accounts as gig startups mature.
When Apple first aired its now-famous 1984 Super Bowl commercial it sold us—in a really dramatic and masterful way—the promise that its technology would open the door to freedom of thought, freedom of expression and freedom of innovation. It started the journey that would lead to Apple being arguably ubiquitous in our society.
Your personal technology is vulnerable not only in your hotel room safe but tucked in your pocket walking down a street. We talked with technology expert David Holtzman about the unknown risks you take with your proprietary business information when you travel. —Editor
The property insurance startup raised $300 million in a Series D funding round led by SoftBank Group with participation from Allianz, General Catalyst, GV (Google Ventures) and others. Lemonade says it plans to use the money to accelerate its U.S. and European expansion in 2019.
“Looking forward, we aspire to create the 21st-century incarnation of the successful insurance company: a loved global brand that can endure for generations; an organization built on a digital substrate, enabling ever faster and more efficient operations, and ever more delighted consumers,” co-founder Daniel Schreiber said in a statement.
The Lemonade funding follows other recent big deals, including the $125 million raised by WeFox earlier this year, as well as $375 million raised by Google parent Alphabet in Oscar Health last year, a $200 million Series C funding round for Bright Health, and a $70 million funding round for Hippo.
According to MarshBerry’s proprietary benchmark report, “Perspectives for High Performance” (PHP), average organic growth in 2018 was 6.8%, the highest average organic growth we have seen since 2014. When you dig deeper, you’ll find the growth is not being driven by an increase in new business by brokerages across the United States. It is primarily being pushed ahead by the economic expansion we continue to see. This is confirmed by 2018 PHP data, which show average new business written in 2018 was 14.7% of prior year commissions and fees—a number that remains relatively consistent year over year. This means both exposure base expansion and the rate environment are still the primary drivers of the higher organic growth.
As merger and acquisition activity continues at a rapid pace, there is good news for the independent firms that are trying to be competitive in the space. In 2018, the independent segment accounted for 19.7% of the total transactions in the insurance brokerage marketplace. Through April 2019, that number has risen to 27.3%. A small number of independent firms have positioned themselves in a way that stands out from the busy sea of other more active buyers.
What is their secret? Like most successful businesses, they have a viable strategy. It starts with answering a few basic questions.
Why: If your desire to acquire is to supplement your lackluster organic growth, you should strongly reconsider. Because it is often difficult for an independent firm to compete on pricing alone, acquiring successfully in this market takes precision and a strong value proposition. Acquiring to complement your industry-leading organic growth rate is a better reason to do it. Helping a target understand how it can grow at a higher rate than it has historically can be a valuable part of your message.
What: Decide what an ideal target looks like. Are you trying to get a niche up and running, or is there something that can bolster an already existing strength of your firm? Either way, you need to have a way to evaluate an opportunity when it arises. Don’t be reactive. Know how to measure quality from a cultural and productivity standpoint.
How: Be focused on being a credible buyer. No one ever wants to be your experiment. Know how you are going to value the firm. Are you going to give them credit for all of the synergies from the deal? What will be your communication approach relative to the negotiation? More importantly, you need to know how you will structure the deal. Be clear regarding the tax advantages or disadvantages to you as the buyer, but also understand how structure impacts the seller. Finally, make sure you have the capital lined up. Nothing is more catastrophic to a deal than if you get to the closing table but cannot fund the acquisition. It will stop all momentum and may ruin your reputation as a potential buyer.
While these points are just a few to be ready for, it is important that you have a clear line of sight as to what you are trying to accomplish. The market is overwhelmed right now with the number of buyers running around looking for deals. If you believe your house is in order, then you should consider developing your own viable strategy to acquire. You can be the different choice in your market. But buyer beware. Success is typically higher when you have a prescribed method to analyze a quality opportunity against a “too good to be true” deal. Remember that a bad deal can be costlier to unwind than it is to purchase in the first place.
Bottom line, a relentless focus on organic growth can help you thrive even when the economy turns (which it will at some point). However, if your internal sales culture is already performing at a high level, turn your sights to an acquisition strategy by first understanding why you are different and how you can leverage your own success to support new partnerships driven through your own acquisition activity.
"A small number of independent firms have positioned themselves in a way that stands out from the busy sea of other more active buyers."Tweet
After a strong first quarter in 2019, deal activity continues to remain ahead of 2018’s pace. There were 38 additional transactions announced in April 2019, bringing the year-to-date total to 200 announced transactions. The year-to-date total is 10% higher than for the same time period in 2018, and retroactive announcements continue to trickle in.
Patriot Growth Insurance Services remains the top buyer, with 19 announced transactions in 2019, but closing the gap are Hub International and AssuredPartners, with 13 and 12 announced transactions through April, respectively.
There are some obvious trends as we look at the announced transactions so far this year. The market appears to be more active for retail agencies, as 81.5% of transactions this year have involved retail agencies, compared to 18.5% for managing general agent and wholesale operations. Additionally, private-equity backed buyers remain, by far, the most active buyers in the market. Through April, these buyers accounted for 53% of the 200 announced transactions, and eight of the current top 10 buyers based on announced deals so far this year are backed by private equity. This should come as no surprise given that private-equity backed buyers have accounted for over 50% of insurance brokerage transactions since 2016. That will likely continue to be the trend as more investors enter the market.
Trem is EVP of MarshBerry. firstname.lastname@example.org
“States have felt increasing pressure to address health insurance markets as the Congress has proven unable to reach solutions,” says Scott Behrens, director of government affairs at Lockton Companies in Kansas City, Missouri.
Across the country, states have initiated an array of healthcare and insurance-related reforms. In North Carolina, state officials have successfully launched managed care contracts for insurance and healthcare provider groups in an effort to reduce overall costs. Maryland is partnering with the Centers for Medicare & Medicaid Services to keep updating an all-payer rate system that has been widely praised for efficiency. Wisconsin, Colorado and other states are operating multimillion-dollar reinsurance programs and public options designed to stabilize premiums. Oregon has worked with a coordinated care model that has opened the door for more care for patients with health needs ranging from behavioral issues to cardiac care and is planning to tap into the plan for commercial markets.
“One thing is really clear,” says Jeremy Vandehey, director of the health policy and analytics division at the Oregon Health Authority. “States are innovators that are trying to deliver better care on the ground. Healthcare is local. At the end of the day, care is delivered by the local hospital, the local provider. That’s where a lot of the innovation is going to continually happen. We’re trying to pay for healthcare delivery differently, improve outcomes and at a lower cost.”
The National Debate
These state actions are occurring against the backdrop of continuous single-payer debate not only on the federal level but also among some states. Many polls show a vast majority of Americans support the government-based proposals, some of which are truly single-payer options, such as Medicare for All, and some with a public or buy-in option. The calls for reform are especially highlighted among the Democratic presidential candidates, indicating that the conversation may last until 2020 and beyond. In short, the polls are showing Americans are losing faith in efforts to deal with sometimes unwieldy markets.
Still, many people might not understand what those options mean for them individually. The Partnership for America’s Health Care Future, a group that includes drug makers, insurance companies and private hospitals, supports efforts to build on the existing combined system of employer-sponsored insurance and government programs. Its research shows that, while 75% of Americans do not believe the current system ensures affordable healthcare, 85% are very or somewhat satisfied with their current health coverage.
Jordan Roberts, health policy analyst at the John Locke Foundation, a nonprofit think tank in Raleigh, North Carolina, offers a similar take on the public response in his state. “I suspect that the North Carolina population mirrors national polls, which find relatively broad support for a universal healthcare system that covers all Americans,” Roberts says. “But the support plummets when responders are given specifics about cost and coverage tradeoffs.”
Physicians express uncertainty about the controversial issue. A decade ago, polls showed doctors were uniformly and vehemently against the single-payer proposal. That has changed, with more doctors leaning toward the idea. Still, there are split views about single payer in their ranks, depending on who is being asked and by whom.
“Healthcare is local. At the end of the day, care is delivered by the local hospital, the local provider. That’s where a lot of the innovation is going to continually happen.”Tweet
For instance, a widely publicized 2017 survey by Merritt Hawkins, a physician recruitment company, showed that 56% of doctors were considered either strong supporters or “somewhat supportive” of a single-payer system. That contrasted sharply with a Merritt Hawkins survey in 2008, which found that 58% of physicians opposed single payer.
The American Hospital Association has consistently opposed single payer. In February, its executive vice president, Tom Nickels, issued a press release for the AHA stating the association opposes Medicare for All because it would impede the group’s shared goals. “A one-size-fits-all approach would disrupt coverage for the more than 180 million Americans who are covered by employer-sponsored health plans,” he said. “That coverage, and plans sold on the marketplaces, offer benefits that Medicare doesn’t. Importantly, enrollees in these plans are protected from catastrophic costs.”
David Merritt, executive vice president for public affairs and strategic initiatives at America’s Health Insurance Plans, the largest single health plan association, cautioned in a September 2017 AHIP statement that single-payer “will eliminate choice, undermine quality, put a chill on medical innovation and place an even heavier burden on working taxpayers.”
States Attempt Single Payer
States such as Vermont and Colorado have stumbled over proposals for single-payer plans. Colorado voters rejected a 2017 ballot measure to enact a state-based single-payer system by a nearly 4-to-1 margin. The Colorado initiative was designed to allow residents to gain insurance through a tax-funded government insurance program, but private insurance would virtually cease to exist. Vermont floated the same idea in 2014, but the governor ditched the plan, noting it would result in high payroll assessments on business and increased tax premiums on income. While an increasing number of physicians and other clinicians see benefits to single payer, health experts point to uncertainties regarding the impact on insurers, drug makers and hospitals.
“Naturally, employers are pushing back, but they may need to start asking whether paying a small amount for reinsurance now is better than paying more to fund a single-payer system later.Tweet
Behrens says he believes if the single-payer concept makes inroads in government, “it will be on the federal level and not the states.” Indeed, a string of states have turned down the concept, in the words of Rich Twietmeyer, executive director of sales in employee benefits at M3 Insurance in Madison, Wisconsin, “because the projected costs have been astronomical.”
A George Mason University study of Bernie Sanders’ proposal said it would lead to a $432 trillion increase in federal spending over a 10-year period.
Among the most highly publicized single-payer proposals from the states has been the push by Gov. Gavin Newsom in California, although the plans reportedly have stalled in the Democratic-controlled legislature, in part because of a lack of specifics. As soon as he took office, Newsom emphatically advocated for sweeping healthcare coverage for all Californians.
Newsom campaigned for a single-payer system and has remained committed to it. He also called on the federal government to allow California and other states to create a single-payer program.
Brokers and insurers are on edge regarding California’s plans, says Keri Lopez, president of employee benefits for Relation Insurance in Walnut Creek, California. The mere discussion of single-payer proposals has upset the strategic planning among brokers, she says. “Years ago, we would have a three- to five-year strategy for what our plans are. Not now,” Lopez says, referring to the uncertainty surrounding the single-payer proposals. “It’s difficult to plan ahead because of the potential to change.”
“You have to control the costs of care, and I think Maryland has done a great job doing that.”Tweet
Lopez worries about the impact on brokers who would have to change their roles to adjust to a single-payer system. “What would our model look like? It’s a big unknown,” she says. After the ACA was implemented, Lopez says, “we saw a huge attrition of brokers who left and retired.” Ultimately, she says, “single-payer for Medicare would put brokers out of business.”
Yet Lopez doesn’t believe that single payer will be a California-based initiative. A major reason, she says, is that Newsom may be “more business-friendly than he projects himself to be.” Lopez notes that, as mayor of San Francisco, Newsom supported plans to require employers to provide a minimum level of health insurance coverage to their employees or pay into a state fund. In turn, that would open access to healthcare providers. “That’s somewhat similar to the ACA now,” she says.
North Carolina Managed Care
North Carolina received approval for a federal waiver in 2018 to transition most of its Medicaid population into managed care plans. Fifteen different managed care groups won contracts, and the plans are set to be rolled out in two phases over the next couple of years, says Roberts, of the John Locke Foundation. The contracts are effectively shifting Medicaid payment models from traditional fee-for-service toward value-based care, he says.
Major healthcare systems are also participating in advanced Medicare accountable care organizations for various payment arrangements, with the idea of lowering healthcare spending, Roberts says.
“North Carolina has been a pioneer in the transition to value-based care in the public and private sectors, focusing on alternative payment models for a substantial portion of the state’s population,” he says. “There is also a focus on integrating behavioral and physical health into plans for individuals in this population with more serious conditions.”
Blue Cross Blue Shield of North Carolina has partnered with five of the largest hospital systems in shared-risk payment models, which emphasize improved health outcomes and lower healthcare costs through more managed and collaborative care, Roberts says. BCBSNC also announced an agreement with Duke Health to create a new insurance company focused on improving the health of Medicare Advantage members. Roberts says BCBSNC “appears to be excited about the work they are doing with the Blue Premier and the other ventures, which focus on value in healthcare payments.
“Given all the new ventures in North Carolina focused on value and health outcomes, I’d say this is as an exciting time as ever for the state’s insurers and providers because there is so much innovation in the effort to make the healthcare system as efficient as possible with an emphasis on lower costs and improved health outcomes.”
While some advocacy groups in North Carolina continue to advocate for a single-payer system, a legislative fiscal report said it would cost about $40 billion—or 66% more than the governor’s state budget proposal for the next fiscal year.
Maryland’s All-Payer System
Maryland and the Centers for Medicare & Medicaid Services are in a partnership designed to improve patients’ health and reduce costs in the only all-payer hospital-rate regulation system in the country, according to CMS.
For decades, Maryland has had fixed hospital prices across all payers regulated by its Health Services Cost Review Commission. Despite that, “costs were very high, somewhere near the top 10 in the nation,” Dr. Jesse Pines, M.D. and national director for clinical innovation at US Acute Care, said in a March 2018 discussion with Leader’s Edge.
In 2010, to bring costs down, Maryland piloted a global budget revenue (GBR) program in a handful of hospitals, then expanded the program to all hospitals statewide in 2014. “The hospital gets a target budget at the beginning of the year based on historical patient loads and budgets,” Pines said. “If they go over the target, they can’t retain those reimbursements, but if they undershoot, their budget in the future year is reduced.”
Under the model, Maryland hospitals have committed to achieving significant quality improvements, including reductions in their 30-day hospital readmissions rate and hospital-acquired conditions rate. In return, Maryland has agreed to limit all-payer per capita hospital growth, including inpatient and outpatient care.
So far, the program appears to be financially successful. State figures show it has saved an estimated $400 million over three years and has held steady the state’s healthcare costs.
However, as Pines noted, “Any time you are trying to reduce costs in one part of the system and there are pockets of fee-for-service, then by the nature of the market, the care will move from the global budgets to fee-for-service because that is where the opportunity is for greater revenue.
“The best analogy is squeezing a balloon. If you squeeze one part, another part is going to expand. The only way to do it is grab more of the balloon with the overall goal of reducing the amount of air in there. The only way to change that is to change the system of payment for overall healthcare services, where it wouldn’t just be hospitals on global budgets but where there would be GBR for other entities, like outpatient clinics.”
In January of this year, Maryland began an initiative to try to do just that by aligning non-hospital providers—such as physicians, skilled-nursing facilities, home health providers, and others—with the goals of the GBR model.
The state and CMS expect the all-payer model to succeed in improving the quality of care and reducing program costs for Maryland residents, including Medicare beneficiaries. Moreover, Maryland may serve as a model for other states interested in developing all-payer payment systems, according to CMS.
Samuel Fleet, president of the Group Benefits Division at AmWINS Group, agrees with the CMS assessment. “You have to control the costs of care, and I think Maryland has done a great job doing that,” Fleet says. “The partnership with the state, CMS and the hospital systems has opened a lot of opportunity for creativity and innovation. In that way, a small health plan can compete with the Blues in Maryland very easily.”
Fleet notes that Maryland’s plan reflects an overall industry move toward value-based purchasing, regardless of payer. “In the commercial markets, you are seeing a move more to two-sided risks”—in which physicians as well as insurers would be responsible for payments—“and they will focus on quality and efficiency,” Fleet says. “I think we’ll see the movement toward all types of payers—Medicare, Medicaid and commercial payers. Everybody is looking for a value-based methodology.”
Wisconsin and Colorado are among the states proposing reinsurance programs to reduce healthcare costs and help offset premiums. Wisconsin is trying a $200 million reinsurance program designed to stabilize premiums in the state’s individual health insurance market. A five-year federal waiver, known in Wisconsin as BadgerCare Reform, authorized the program, which will be jointly funded by the state and federal governments. With the reinsurance program, premiums on the state’s individual market are projected to drop by an average of 3.5% next year, according to the governor’s office.
“Many states have or are working toward establishing a reinsurance program,” says Lockton’s Behrens. “I think states would prefer to have reinsurance at the federal level but they’re not willing to wait.”
According to Behrens, “State-based reinsurance programs have largely proven to reduce premiums and help stabilize the market.” In some instances, employers are asked to help pay for the reinsurance program, but they have faced considerable opposition, he adds.
On a federal level, the ACA established a three-year reinsurance program, starting in 2014, “that was paid for in part by an assessment on both insured and self-funded health plans,” Behrens says. Known as the transitional reinsurance fee, it was not popular among employers, he suggests. “Our experience was that most employers were not eager to pay the TRF,” Behrens says, “and were glad to see it expire.”
The political fight on the state level over reinsurance was reflected in Oklahoma, Behrens says. Its reinsurance plan would have been paid for through an assessment on employer plans. Several employer associations told CMS they opposed the assessment, he says. Eventually, Behrens says, Oklahoma withdrew the plan.
The ERISA Industry Committee, the HR Policy Association, the National Association of Wholesaler-Distributors and the Self-Insurance Institute of America outlined their concerns in a letter to CMS.
While the community “recognizes the importance of a stable individual insurance market and supports state efforts” to lower costs, the assessments would have an opposite impact, the industry groups said. The assessments on employer-sponsored insurance penalizes businesses and would result in “reduced stability for some employer-sponsored plans,” among other issues, the industry groups wrote.
It may not be smooth, but there is room to overcome complexities, Behrens says. “Naturally, employers are pushing back, but they may need to start asking whether paying a small amount for reinsurance now is better than paying more to fund a single-payer system later,” he says.
Wisconsin insurers are also involved in a statewide cooperative that focuses on a group of rural school districts that pool purchasing power to reduce costs related to insurance coverage and healthcare. The cooperative allowed one district to save $200,000 through lower premiums and lower contributions. The program replicates a state program that enables more affordable coverage among farmers, says Twietmeyer, from M3 Insurance.
M3 is representing about a dozen groups in the cooperative statewide, which could represent thousands of members. According to Twietmeyer, the cooperative’s larger numbers result in more stability and strength, which gives it some leverage with providers not only to reduce costs but also to provide better access to care. “Statewide,” he says, “our cooperatives have outperformed leveraged trend [in spending] each year. It’s more predictable than with a small group. It’s a win, win.”
Colorado officials also have initiated plans for a reinsurance program, with several lawmakers saying they believe reinsurance is a proven program that will lower the cost of health insurance premiums. Gov. Jared Polis asked the legislature to invest $1 million in the program for 2020. A year ago, the state scrapped a similar program because officials believed it would cost too much to fund.
Recently, Colorado’s state Senate approved a measure to endorse a study to create a state-run health insurance option. The bill would direct state agencies to consider plans that would compete with existing private insurance plans and those offered on Colorado’s healthcare exchange. The idea is simple: curb some of the nation’s highest insurance premiums, state officials say. Although premiums are increasing in rural areas, there is a concern among private plans that the government would be a competitor, according to some lawmakers.
The public option plan does raise some questions, according to Behrens. Among them: would the state wield unfair bargaining power? “A public option is an exit ramp to government-run healthcare,” Behrens says. “A public option forces insurers to compete with a program driven by politics and backstopped by taxpayers. As lawmakers, the government is able to set and change the rules of negotiation. That’s a power no private carrier can match.”
Oregon’s ‘Share in the Learning’
Over the years, Oregon has worked extensively to evaluate and improve Medicaid’s effectiveness. Among its premier programs has been its coordinated care model, which has integrated hospital-based services with primary care, behavioral health and social support. Initiated in 2012, the model was a significant transformation of its Medicaid program spurred by an innovative arrangement with CMS, which provided an upfront investment of $1.9 billion to the state. By setting budgetary goals, the state has significantly limited the growth in Medicaid spending while also drastically reducing emergency department visits and hospital admissions. Now the state is laying out plans to improve the commercial markets.
Vandehey, from the Oregon Health Authority, says state programs are subject to a 3.4% growth-spending target instead of the 4.7% national forecast. As a result, there are savings of almost $700 million.
Vandehey says the Oregon program is an example that other states may want to examine to reduce costs. “We try to figure out what works and spread it to other markets,” he says. “We continually look for ways to evolve, a really patient-centered focus to improve outcomes.” And, he says, “We want to share in the learning.”
There are widely varying opinions on the value of—and the reasons behind—consolidation in the healthcare space. Some say such mergers may become a necessity for pharmaceutical companies as they are increasingly scrutinized for some of their business practices, mainly the way in which prescription rebates are funneled through the system.
Some say market forces are requiring insurers to look at the industry and fit organizations like PBMs into their business model, especially considering the size and importance of the pharmaceutical business within the overall healthcare system—and the corresponding data these companies bring to the table.
“PBMs have really siloed the outpatient prescription drug benefit from the rest of the healthcare equation,” says Susan Winckler, president of Leavitt Partners Solutions. “It hasn’t integrated with claims data and the information of the traditional insurer. And as the pharmaceutical piece has continued to get more important, we have to question why we have separate systems and why they don’t communicate and get a patient’s full picture. Logic says we want that information together.”
The merging companies themselves would agree, saying combining will allow them to do what they couldn’t as stand-alone businesses: integrate medical and pharmaceutical data. This will enable them to better track medication adherence, cut costs and manage the whole person.
“Both Cigna and Express Scripts have robust capabilities that proactively monitor and drive outreach to improve medication adherence and prevent unnecessary complications/hospitalizations, which improves quality and affordability,” says Kim Richards, senior vice president for producer business development at Cigna. “Our combined company is now able to bring the strengths of our medical and PBM clinical programs and prevention together to further enhance these proactive efforts to ensure better health outcomes, leveraging our combined data.”
Richards says the combined entities will have three key focus areas. “First, to optimize the significant medical and pharmacy cost synergy opportunities, which will directly benefit our customers, patients and clients and help improve affordability. Second, to harness the breadth and depth of our combined data to better predict and identify conditions or behaviors, and improve connectivity between our customers, patients and healthcare providers. And third, to expand our reach to new geographies and broaden our solutions portfolio to better serve employers and their employees.”
Brian Henry, vice president of corporate communications at Express Scripts, says the merger of Cigna and Express Scripts holds the opportunity to “address what is challenging about healthcare today.”
In the largely episodic system, patients see a physician, receive a prescription and fill it elsewhere. It is rare within this system that anyone actually tracks patients to make sure they take the medication properly and achieve the desired outcomes from the treatment.
“We will have more data but also more insights into what it is telling us…about how best to care for patients. Both companies have done this, but the promise is now we will get even better at it.”Tweet
Ideally, Cigna and Express Scripts can begin to connect the dots between patients’ office visits, hospital stays, medications and other care. By joining the disparate systems, Henry says, the merger has the potential to lower costs, improve care and treat patients in a more holistic manner.
Pharmacy benefit managers, Winckler says, “are able to track, tablet by tablet, in a way that provides clarity and specificity that you don’t see in other areas. Before, it was hard for a PBM to really evaluate patients if all they had was the incredibly rich drug data. It was still only a portion of the picture of that patient’s experience and exposure.”
Henry says the merger gives the combined company a “360-degree view” that did not exist before. “We will have more data but also more insights into what it is telling us…about how best to care for patients,” he says. “Both companies have done this, but the promise is now we will get even better at it.”
He says this will be particularly helpful in proactively working with patients with chronic and complex medical conditions—for instance, working together to better manage a patient with diabetes. With combined data, they will know if the person is seeing a doctor to get regular blood glucose tests and whether he is keeping his glucose levels in a healthy zone. If not, the organization can direct the patient to a diabetes care pharmacist to manage the condition and prevent issues that can be caused when glucose levels are chronically high.
It’s also a cost saver, as medication adherence is a primary driver for reducing costs among patients with diabetes, says John Matthews, strategy leader for healthcare and life sciences at KPMG. As Henry says, pharmacy benefit managers can track fill rates and see if someone appears to be taking medication regularly. In the past, the PBMs did not have any reason to track these rates other than the increased income they receive when patients refill their prescriptions regularly.
“But now,” Matthews says, “if they are a combined entity and the PBM finds out John isn’t taking his meds, that information can get to the insurers, and they can communicate with a physician to do additional programming with him. The combined entity can internalize that value.”
The insurers have tended to use predictive analytics for this kind of risk stratification in the past, Matthews says. They can analyze patient data and understand if someone has a higher risk of having bad outcomes because of the patterns they see in the medical records. Now that they can combine that with pharmaceutical data, he says, it will help complete the picture for each patient.
Richards reinforces this point, noting that Cigna and Express Scripts are integrating medical, pharmacy, behavioral and external data where appropriate to gain insights that drive more accuracy in identifying non-adherence. And they will have the ability to share relevant, timely insights and recommendations with providers that work with Cigna in collaborative arrangements, Richards says.
“They have declining profit tools, so the more they can aggregate of the business, the more they are going to sustain profitability in this world.”Tweet
The challenge for these initiatives, which admittedly look good on paper, is there still may not be enough data to fully understand the whole patient picture.
Pharmacy benefit managers have usage data, but they don’t have outcome information. They can’t say a patient is taking metformin for diabetes and responding to the treatment in one way or another. Insurance companies often don’t have clinical data that is in a patient’s electronic medical record. It’s the clinical data that will help insurers get closer to understanding whether metformin is helping keep patients’ glucose in a normal range or if they need more medication or other treatments. This is the information that could lead to better clinical interventions, Matthews says. Insurers that employ a large number of physicians may have a leg up on tying all the data together.
“If they can intervene clinically, they can understand more clearly what the value of procedures and medications would be,” Matthews says. “That’s the holy grail, but I think it will be hard to do. It’s interesting. Even United and Optum really haven’t gotten to the point where they are doing it effectively yet.”
David Wichmann, CEO at UnitedHealth Group, offered a different view in the company’s first-quarter 2019 earnings call. “In digital, our initiatives are accelerating,” Wichmann said. “We completed beta testing of the individual health record physician platform and have built over five million active consumer health records. Simultaneously, our enhanced Rally consumer digital health platform now integrates digital engagement, coaching, telemedicine and incentives with quality and advanced cost transparency and estimating capabilities.”
As challenging as it may be to integrate all of the patients’ data and begin to use it effectively, consolidation in the market may be the most effective solution, Winckler, of Leavitt Partners Solutions, says. “It does seem like these mergers could facilitate it,” she says. “It may give them the capacity and energy they didn’t have as stand-alone organizations.”
Pressure on PBMs
While there’s a decent case to be made for the benefits of merging, some say it’s a response to market pressures. It’s no secret that healthcare costs in all sectors of the industry have been under scrutiny in recent years. Spending has increased steadily year over year, reaching $3.5 trillion in 2017—or nearly $11,000 per person. This accounts for nearly 18% of the nation’s total gross domestic product. Matthews says this gradual and persistent rise has placed pressure on all of the industry’s players to bring down costs wherever possible.
Some insurers have seen losses as employers increasingly move toward self-insurance and the individual market continues to act as a drain (though some sectors like Medicare Advantage make up for these and then some). KPMG’s Matthews says this reduced income has led insurers to seek out as much of the healthcare dollar as possible.
“They have declining profit tools, so the more they can aggregate of the business, the more they are going to sustain profitability in this world,” he says.
And the place to look for profits is pharmacy benefit managers. Though many report humble earnings of between 4% and 5% annually (including Express Scripts), analysts and experts think those numbers are deceiving. Investment firm Bernstein recently analyzed the numbers and estimated PBMs likely have closer to 85% gross profit—almost double that of drug distributors and nearly triple what insurers and pharmacists gross. Numbers like these led Scott Knoer, chief pharmacy officer at the Cleveland Clinic, to refer to PBMs as “programs bilking millions” in a recent op-ed.
To some degree, the profits of pharmacy benefit managers stem from “sophisticated and complex contract mechanisms,” Matthews says. “They use tiering, rebates and other elements that allow them to extract profitability from contracts between the end-users and the pharmaceutical companies,” he says. “But there is increasing pressure on their model as employers, payers and sometimes manufacturers become more disciplined about pricing.”
Regulators, too, have begun to question how PBMs generate their profits. The Trump administration recently announced it intends to analyze and eliminate protections that allow PBMs to negotiate and keep drug rebates. Instead, the administration hopes to transfer that revenue directly to consumers.
With PBMs under such intense scrutiny, mergers like the one with Express Scripts can enhance as well as hide the organization’s business practices, says Kevin Schulman, M.D., a professor of medicine and economics at Stanford University.
“I know how the big players are able to compete. But what about the hometown pharmacy in rural Iowa? What does it mean for them?”Tweet
The PBM business practices—which Schulman calls, at best, questionable—inflate prices for consumers, distort the pharmaceutical market and are set up mainly to benefit the PBMs, he says. Anthem, which was close to merging with Express Scripts before Cigna did, sued the PBM for $15 billion in 2016, claiming it was overcharging Anthem $3 billion a year. Express Scripts denies the allegation. Anthem announced earlier this year that it would begin transitioning customers from Express Scripts to its new PBM, IngenioRx, this spring. The move was initially planned for Dec. 31 of this year.
Schulman says PBMs “are going to continue to get scrutiny, and what comes out of that we will have to wait and see.”
Pharmacy benefit managers also feel pressure from other market forces, such as Amazon, which acquired PillPack late last year. PillPack delivers medications to patients who are often being treated for one or more chronic conditions. The medications are presorted by dose and organized to be taken at the right time. The company helps ensure drugs are refilled and renewed properly to increase adherence. Amazon’s purchase of PillPack was widely viewed as a potential market disruptor, and after the purchase was announced, stocks of brick-and-mortar drugstore giants like CVS and Rite Aid plummeted by $11 billion in one day.
With a business model that is potentially eroding, Express Scripts followed the other major PBMs in the industry. In the early 2000s, UnitedHealth Group purchased a PBM now known as OptumRx, and last year CVS Health (Caremark PBM) acquired Aetna. These big-three PBMs hold about three quarters of the market share.
“There is an increasing appetite to say the world of healthcare is changing,” Winckler says. “They are asking how they are going to have to change their model, and collaboration would be good for everyone.”
No one really knows how things will shake out when the dust settles from this merger, but experts do have some thoughts.
Winckler stresses the importance of being mindful of the atypical consequences from such mergers. A pharmacist by trade, she is concerned for the small players still left in the industry. Her hope is that “vibrant competition” will persist among the three major PBMs and that there will continue to be engagement among all the drug stores.
“I know how the big players are able to compete,” she says. “But what about the hometown pharmacy in rural Iowa? What does it mean for them? We have to make sure we are still strengthening those that don’t exist at the macro level.”
In areas served by regional plans such as Blue Cross Blue Shield, Matthews says, those insurers aren’t going to be “super keen” on using PBMs that are owned by one of their insurance competitors.
Schulman says this type of merger may actually be more likely to reduce patients’ choice. CVS and UnitedHealthcare will, understandably, want to send their patients to providers and pharmacies within their own umbrella. The healthcare marketplace isn’t very “choiceful” to begin with, Matthews says, and he can’t see this merger necessarily expanding choices for consumers.
“If you put it all together, what we are sailing into is a world in which we have fewer entities and more strategic partnerships,” Matthews says. “They are looking to create lots of different ways that the consumer is engaged with them. They [CVS and Aetna] are trying to create a web so the consumer never has to leave the CVS/Aetna world. They can create value for themselves and possibly better manage the cost of care. But it is premised on keeping patients bound rather than expanding choice.”
Richards notes that, at least as far as Cigna is concerned, the Express Scripts deal is about more choice, not less. And she cites changing consumer preferences as part of the driving force. “In an environment where some are restricting access in order to narrowly drive affordability, Cigna sees an opportunity to further expand customer choice and to make it easier for people to access the health services they need, whether in a doctor’s office, an urgent care center, a retail setting or employer clinic—or, for more acute needs, at a hospital or outpatient service center,” Richards says. “In addition to these venues, customers increasingly choose to secure the healthcare services they need at home or through digital platforms…we see these expanded, personalized engagement and delivery channels as a tremendous opportunity.”
For example, Richards says, Cigna has more than 50,000 patients with internet-enabled blood glucose monitors who share data related to their blood sugars with their pharmacists every day. “When one of our dedicated pharmacists detects an out-of-range blood sugar level, they reach out to the patient immediately with an intervention tailored to that patient’s needs,” Richards says. “Over time, we’ve seen meaningfully improved outcomes, including 4% increase in adherence to oral medication, 23% drop in hyperglycemic episodes, 42% drop in extreme hyperglycemic episodes, and a 36% drop in extreme hypoglycemic episodes.”
If combinations of insurers and PBMs truly use their larger, data-driven view of the patient, the possibilities for successful, value-based payment arrangements are real. And there’s no better market for those than in the employer-based system, where everyone has a lot at stake. “Innovations driving the delivery system shift from volume to value began in employer-provided coverage arrangements,” Richards says. “Every new year, more and more employers are focused on better reimbursement of accessible, high-quality providers; consistent access to acute, chronic and preventive care; health-engagement and coaching programs; and incentives to encourage individuals to seek the highest value in their healthcare choices.”
OptumRx and UnitedHealth Group have also shown their combined efforts can make a difference, including in patient costs. OptumRx recently announced that point-of-sale consumer discounts on branded pharmaceuticals will be its fundamental approach to business. And, according to UnitedHealth Group’s Wichmann in that earnings call, “UnitedHealthcare is well under way implementing point-of-sale discounts at scale for the more than eight million consumers covered through its commercial risk business. At the counter, people are already saving about $130 per eligible script.”
The company also continues to invest in its provider business, which is called OptumCare. The network already serves millions of patients across approximately 80 health plans and payers through value-based care arrangements and an integrated approach to care. For example, one new outpatient program delivers integrated medical, surgical and radiation oncology, chemotherapy and immunotherapy, imaging, palliative care and 24-hour oncology urgent care. “This is one of the ways we are exploring value-based specialty models that uniquely align to our primary care and ambulatory capabilities to deliver better quality, lower costs and higher satisfaction,” Andrew Witty, Optum CEO and executive vice president of UnitedHealth Group, said in the same first-quarter earnings call.
Cigna is also committed to value-based models and has more than 600 accountable care organizations, which are payment arrangements that incentivize providers to deliver care based on the health outcomes they achieve. “Recently,” Richards says, “we announced that we have exceeded our value-based care goal of having 50% of our payments to healthcare professionals made through alternative payment arrangements, resulting in $600 million in medical cost savings between 2013 and 2017.”
That being said, Matthews estimates the merger between Cigna and Express Scripts likely won’t do a lot to change benefit plan design for most employers, and Schulman says the deal could serve to expand the already nontransparent PBM market. PBMs may, he said, try to garner rebates on products they haven’t delved into before, like specialty pharmaceuticals and orphan drugs (medications that treat extremely rare conditions).
Today, a patient’s drug benefit determines how the patient receives outpatient medications. Inpatient and physician-administered drugs have been part of the medical benefit. PBMs had no exposure to the medications someone received in a hospital, and “most would say that is a great thing,” Schulman says. But with medical and pharmaceutical sides integrated, they may begin to merge interests.
“For the rebate model to expand, it will have to move into those markets, and that’s going to set up big conflicts with things like hospitals and patients,” he says. “At the end of the day, we are just trying to buy access to healthcare for our employees. And this is the only market where the role of intermediaries is growing, not shrinking.”
Schulman says this could be the year to start reading the fine print on drug and medical benefit contracts. “They need to look at where the restrictions in plans are in terms of how people get access to therapies and if that is something they are comfortable with,” he says. “Especially for small employers, getting multiple bids to see how they are structured is really important.”
Schulman also says it may be time to look at other possible models, like PillPack or the website GoodRX, which allows a patient to purchase medication at a deeply discounted price without using insurance. “There are alternatives, and there are transparent methods of buying pharmaceuticals out there,” he says.
Worth is a contributing writer and healthcare editor. email@example.com
“My golf friends are all aged 60 to 65, and the number one topic of conversation is how do I bridge my health insurance coverage to Medicare?” says Smedsrud, the 60-year-old CEO of Pivot Health, a specialty health insurance products provider based in Arizona. “There is a tremendous need for a bridge product for people in the right economic strata. If a person is eligible for a subsidy under the Affordable Care Act, they should just enroll in an ACA plan. But if you earn more than $80,000, you will be ineligible, and you could end up paying $1,500 per month for that coverage.”
Enter Pivot Health’s Bridge to Medicare, a new bridge insurance product underwritten by Companion Life Insurance Co. that Smedsrud launched in February. It is designed to provide up to three years of bridge health insurance, until Medicare eligibility kicks in at age 65.
Call it self-help. Smedsrud is a baby boomer, that gigantic generational cohort that is finishing its last years of employment and entering retirement at a clip of 10,000 per day, according to the Pew Research Center. Born between 1946 and 1964, the first of them turned 65 in 2011, while the last will not reach this milestone until 2029.
The aging baby boomer cohort poses enormous challenges to the healthcare system—among providers, payers and employers—a situation that could transform elements of the system dramatically.
No single solution exists to address the boomers’ wide-ranging needs. But many in the system are examining those needs and, like Smedsrud, are experimenting with outside-the-box solutions to better tailor care and insurance to their needs in a more cost-effective manner.
Boomers’ Role in Rising Costs
While there are dangers in reducing any population to age cohorts, the baby boomers really do stand out in terms of their size, health challenges, and expectations.
“Given the large number of boomers exiting the workforce, there is a downward trend in the proportion of the working-age population participating in the labor force.”Tweet
The baby boomers are the largest cohort to age into retirement in U.S. history. The over-65 population will nearly double because of the boomers, according to a 2008 landmark report by the American Hospital Association and First Consulting Group, “When I’m 64: How the Boomers Will Change Health Care.”
The boomers pose inescapable expense implications as they enter the high-healthcare-cost stage of their lives, driving vast increases in payouts for Medicare and Medicaid. The Congressional Budget Office (CBO), for example, has predicted that Medicare spending will increase to 4.9% of GDP in 2038, a 63% jump from 2013. And a 2015 LIMRA Secure Retirement Institute study found that 73% of employers have planned for benefits expenses to increase as a consequence of having older workers in their companies, with half saying they will absorb the costs and 41% responding they will pass the costs on to employees.
Some of this is due to health conditions—both good and bad. Baby boomers are living longer due to lifestyle choices like smoking less and exercising more. They also have benefitted from significant medical advances in treating major conditions, like heart disease and cancer.
But living longer provides opportunities to accumulate more medical problems and will necessitate greater medical and long-term care. More than six of every 10 baby boomers will have to manage more than one chronic condition, according to the AHA/FCG study, with the number managing multiple chronic conditions expected to grow to almost 37 million in 2030.
And there are weak spots in their health profile: more than one out of every three baby boomers—more than 21 million in all—will be considered obese, according to the AHA/FCG study.
Health conditions aren’t the only reason boomers are driving costs up. Another is the labor implications of their exit from the workforce. “Given the large number of boomers exiting the workforce, there is a downward trend in the proportion of the working-age population participating in the labor force,” says Lisa McCracken, director of senior living research and development at Ziegler, a specialty investment banker and researcher in the senior health and living space. McCracken says such shortages are driving up the cost of caregivers at senior living providers, home health agencies, and other care providers.
However, many baby boomers are more educated and more tech savvy than their predecessors. Almost 90% of boomers graduated from high school versus only 68% of their parents, according to the AHA/FCG study. Thus, they have high expectations for the duration and quality of their lives and are willing to research alternatives for care and identify the best, even if more expensive, option for care. So if there ever were a time to innovate, this ready and willing cohort might be the right audience for it.
Even though baby boomers are retiring in great numbers, they are still working longer than past generations. Americans 55 and older made up about half of all employment gains in 2018, according to an analysis of Labor Department data by The Liscio Report, a research publication for investors. That reflects their desire to remain meaningful, as well as the real danger that they will outlive their savings, given that their retirement portfolios in many cases were savaged by the 2008 Great Recession. Many, particularly those with impaired health profiles, choose to stay with employers and their group plans until Medicare eligibility begins. That scenario has implications for the number of employees with serious medical issues and for the risk profiles of insurers. As with most group plans, employers and healthier, younger employees end up subsidizing the larger medical needs of older employees.
There is also a trend of employers’ gaining additional plan members in the boomer category as some workers’ spouses retire. For example, if an employee is enrolled in her spouse’s employer-sponsored plan and the spouse retires, both individuals may jump on the active employee’s plan, noted David Rook, chief marketing officer at JP Griffin Group, an employee benefits consulting firm in Arizona, in a recently published analysis.
“Healthcare benefits are the most valued benefit after pay and one that becomes even more valuable to older employees to the point where some employers feel they must have an attractive health package.”Tweet
Add to these trends a stroke of good fortune for boomers in that they happen to be approaching retirement in a relatively tight employment market. At least partly because of this, some employers have been reintroducing more choice in the health benefits they offer of late, says Steve Wojcik, vice president of public policy at the National Business Group on Health, a Washington, D.C.-based nonprofit that represents large employers’ perspectives on national health policy issues.
For many employers, such benefits are an effective tool to persuade employees with valuable expertise from retiring. “Healthcare benefits are the most valued benefit after pay and one that becomes even more valuable to older employees to the point where some employers feel they must have an attractive health package,” Wojcik says.
Focus on Cost
While employers want their benefits package to stand out from the rest, they also desperately want to control expenses—particularly the high cost of insuring boomers. Aided by consultants, employers are actively trying to influence their health cost profiles in a number of ways. “We are seeing employers adding additional advocacy and claims-management programs to help employees navigate the healthcare system specifically in the areas of cancer, diabetes and mental health,” says Tricia Schmidt, a senior director at Willis Towers Watson.
Wellness programs are also a huge focus. Still, many programs are questionable in their ability to deliver results, says Wally Gomaa, CEO of ACAP Health, a wellness subsidiary of Iowa-based insurance brokerage Holmes Murphy & Associates.
Gomaa says there’s a need to critically assess which wellness programs are actually delivering results. ACAP Health sells Naturally Slim, a digital program designed to help people reverse their risk for obesity-related conditions. It can back up its wellness promises with clinically studied results. In 2017, the company released a study of 2,000 people who started the Naturally Slim program between Jan. 1 and June 30, 2016. The study found more than 55% of those polled lost 10 pounds or more in the first 10 weeks of the program, reducing their overall risk for obesity-related conditions, such as high blood pressure and diabetes. Over the long term, more than 53% of surveyed participants maintained their full weight loss. This has large implications for the associated costs of related illnesses, like heart disease and diabetes, Gomaa says. “One client, Genesis Health System, publicly shared their plan’s success in reversing risk and saving more than $30 million in their employee plan of 5,000 employees over a 10-year period,” he says.
Brokers and agents can play a big role in helping employers determine which of these approaches is cost-effective for them, and part of that decision comes down to the sophistication of the analytics they can offer their clients, says Scott McGohan, CEO of McGohan Brabender, an insurance brokerage and advising service based in Ohio. “I think many in the health industry aim small and miss the opportunity to find the best strategy for increasing effectiveness for treating aging-individual related conditions—say, orthopedic services for hips and knees,” McGohan says. “What’s interesting is what our data analytics show is that the most cost-effective providers are not the cheapest ones. What happens is many brokers, employers and insurers look at what did the knee surgery cost me, when the better question is what was the long-term outcome and cost of all related care, which requires you to look at related issues like the incidence of care complications, readmissions and success rates in patient follow-up for a course of care.”
Government Pushes Value and Advantage
As boomers depart the workforce, they represent the shifting of a vast segment of the population from group healthcare plans subsidized by employers to the government-managed, government-sponsored Medicare program and plans that supplement and sometimes replace aspects of Medicare, notes David Smith, founder of Chicago-based Third Horizon Strategies, an organization that assists healthcare companies in their strategic planning.
“Many baby boomers were not planners and savers, and a significant portion are unhealthy. By the time they began to examine long-term planning, millions were disabled and obese and not insurable.”Tweet
As government programs see the influx of boomers, the Centers for Medicare & Medicaid Services continues to make efforts to move away from the traditional fee-for-service provider payment system and toward a value-based payment system. In April, for example, CMS and its parent agency, the U.S. Department of Health and Human Services, announced a new set of payment models aimed at transforming primary care to deliver better value for patients throughout the healthcare system. A new set of Primary Care First (PCF) payment model options, for example, will test whether financial risk and performance-based payments that reward primary care practitioners and other clinicians for easily understood, actionable outcomes will reduce total Medicare expenditures, preserve or enhance quality of care, and improve patient health outcomes.
The federal government is also helping to drive private market solutions for high healthcare costs by incentivizing the move from fee-for-service plans like Medicare to managed care alternatives like Medicare Advantage, including allowing more supplemental benefits and greater flexibility in such plans. Medicare Advantage programs replace Medicare Parts A (hospital insurance) and B (medical insurance) with Part C insurance provided by private payers. Those programs usually come with restrictions on doctors, hospitals and physicians that compete for subscribers by offering different combinations of benefits that aren’t available with traditional Medicare (somewhat similar to how health maintenance organizations compete).
The government also employs a Five Star Quality Rating System that compares Medicare Advantage performance with ratings based on medical outcomes, clinical process measures, patient experience and administrative efficiency. More than one third of all Medicare beneficiaries were covered by Medicare Advantage plans in 2018, according to the Kaiser Family Foundation.
Despite the challenges of managing high healthcare costs, serving seniors has become a profitable business for many healthcare and insurance providers. In particular, some provider and payer giants are reporting positive results from their Medicare Advantage Plans.
“We experienced strong Medicare Advantage enrollment growth and solid performance across all segments in the first quarter [that raise performance expectations for the full fiscal year],” Humana CFO Brian Kane, noted in comments accompanying release of the company’s first-quarter 2018 results.
Insurers offering Medicare Advantage plans are going beyond a payer role and are increasingly helping to manage and deliver care. Because these plans often are responsible for all costs of their populations, they are willing to try new care approaches to help reduce overall expenses.
Medicare Advantage providers have become adept at controlling costs, says Danielle Roberts, who founded and co-owns Boomer Benefits, a Texas-based insurance agency that specializes in Medicare-insurance related products. “They use teams of three or four medical professionals—not just the primary care physician—and technology to manage the costs of chronic condition care, including through prevention,” Roberts says. “So, for example, a primary care physician and an endocrinologist may work together to monitor a pre-diabetic patient’s glucose remotely.”
They are driven to do so because Medicare contains cost by paying only a fixed amount for coverage each month to the company offering that plan and these companies must follow Medicare’s coverage rules. Plans have a yearly limit on what participants pay out of pocket for Medicare Part A and B covered services.
Medicare Advantage plans are also getting some lift from CMS. Beginning this year, CMS expanded the definition of “primarily health-related” benefits that can be included in Medicare Advantage plans, including healthy food, transportation to doctor’s appointments, home delivery of meals and air conditioners for asthmatics, and non-skilled in-home care services.
In addition to Medicare Advantage, there are 10 so-called Medigap supplemental insurance plans available to people age 65 or older in which private insurers supplement Medicare Part A and Part B offerings. While the insurers set their own premiums, every insurance company that offers a particular plan, such as Medicare Supplement Insurance Plan F, provides the same coverage, notes CMS in its 2019 Medigap policy guide. Some cater to the specialized needs of an active population. Medicare Supplement Insurance Plan F, for example, is a comprehensive option that can facilitate post-retirement travel.
The Housing Angle
How and where baby boomers live has large implications for healthcare costs. And as we know, they have high expectations for autonomy and quality of life. The continuing care retirement community (CCRC) model, which typically incorporates independent living, skilled nursing care, and assisted living services into autonomous communities, has had to adapt to the baby boomers, who increasingly prefer to age at home or in a home-like setting or want to participate in a community with more amenities than the basics that originally formed the core of many CCRCs.
“There is a growth in care being provided in non-residential settings, such as one’s own home,” says Ziegler’s McCracken.
For example, Community Aging in Place Advancing Better Living for Elders (Capable) is a client-directed, home-based intervention to increase mobility, functionality and capacity to “age in place” for older adults. Capable consists of time-limited services from an occupational therapist, a nurse and a handyman working in tandem with the older adult, says Sarah Szanton, a Johns Hopkins University School of Nursing professor who leads the program. “The program can decrease hospitalization and nursing home stays by improving medication management, problem-solving ability, strength, balance, mobility, nutrition, and home safety, while decreasing isolation, depression and fall risk,” Szanton said in a June 2018 article she wrote for The Playbook.
A three-year demonstration project of 281 enrolled adults found that a $3,000 investment in program costs yielded $22,000 in medical costs savings, according to Szanton, who notes the program is now provided at 27 sites in 12 states by a mix of payers.
Another Johns Hopkins program involves addressing the challenges of providing hospital-caliber care to seniors with limited mobility, which can reduce the cost of care by removing it from the high-cost hospital setting.
Hospital at Home is a Johns Hopkins School of Medicine healthcare model that can provide hospital-level care in a patient’s home as a full substitute for acute hospital care. Patients who require hospital admission for community-acquired pneumonia, congestive heart failure, chronic obstructive pulmonary disease (emphysema), cellulitis and others can be treated in the Hospital at Home.
The model can save 19% to 30% compared to traditional inpatient care, says Bruce Leff, M.D., the Johns Hopkins geriatrician who developed the model.
Long-term care insurance has been among the insurance product lines most affected by baby boomer demographic trends. As a stand-alone product, long-term care insurance has faced severe challenges in recent years. Unexpected adverse financial drivers, such as longer-living seniors and more use of services, have led to large losses, premium increases, fewer new consumers, and carriers’ withdrawing from the market.
The problem, says Jesse Slome, executive director of the American Association for Long-Term Care Insurance, is that a product sold in the past as a solution for all cannot function that way. “People mistakenly look at the market and expect that 70 million baby boomers will all buy LTCI,” Slome says. “No, that is not true. Many baby boomers were not planners and savers, and a significant portion are unhealthy. By the time they began to examine long-term planning, millions were disabled and obese and not insurable. And the actual monthly costs of these individuals who can qualify average more than the $100 or so in monthly premiums that consumers find tolerable.”
Increasingly, long-term care insurance has become a component of a combined product that also includes whole/universal life insurance or other investment-oriented products.
A total of 350,000 Americans bought long-term care insurance in 2018, roughly half the number who bought the policies in 2000, according to the American Association for Long-Term Care Insurance. Today, 16% buy traditional stand-alone products, while 84% buy the product linked to other insurance.
“As boomers enter the pre-retirement and retirement stage, we see an increased demand for the asset-based hybrid products we sell as people realize the risk of outliving their retirement funds because of care-related expenses,” says Dennis Martin, president of the Individual and Life Financial Services (ILFS) division of Indianapolis-based insurer OneAmerica. “Traditionally, the products have been funded through a single-premium large investment. Now there are more ways to fund the products, such as through recurring annual premiums. Today, we’re seeing people more attracted to the flexibility of our hybrid product as well as more advisors who understand how asset-based protection can fit within a client’s portfolio and protect the retirement strategy they and their clients have built.”
Slome says insurance agents and brokers can sometimes struggle to sell these hybrid products because they are competing with investment advisors who may have a stronger allegiance to individual consumers’ trust. Elaine Tumicki, corporate vice president at insurance and financial research and education organization LIMRA, says hybrid products also face the challenge of dividing up the same pool of money over the same death and long-term care draws.
“As brokers and consultants, we need to remain mindful not just of active employees but also of individuals who are beginning to transition away from traditional group offerings,” says Lydia Jilek, a senior consultant at Willis Towers Watson. “While people have historically had individual life insurance agents who would discuss other options with their clients, in today’s more highly computerized and less interactive world, many of these relationships are lacking. As this significant population transitions out of the workplace—some with chronic health concerns—brokers need to think about how they can offer support in choosing appropriate coverages for the next phase.”
David Tobenkin is a contributing writer. firstname.lastname@example.org
As we round the corner past the midway point of the year (boy, did that fly by!), I thought it was an appropriate time to engage you on this idea of having a builder’s mentality. Reread the quote above and think about your business. It’s brilliant, right?
It should be—it’s one of the many tried and true takeaways from Jeff Bezos’s 2019 open letter to Amazon shareholders. I look forward to Bezos’s letter every year. Each missive offers invaluable insight into his philosophy about customers, innovation, success, failure and the way of the world—all of which can be applied to any business and any leader.
Bezos’s maxims—to approach things with a “beginner’s mind,” to listen to your clients, to “wander” on their behalf, to take risks, and to be customer obsessed—can and should be applied to what we’re seeing in the world of healthcare right now.
Our industry—and the benefits sector in particular—continues to lag behind the pace of creativity and innovation our clients want and need. Think about the lack of real transparency in healthcare costs. Think about our inability to confidently turn data into useful information to better engage the customer. Think about whether we’re truly keeping up with tailoring benefit plans to meet the needs of the rapidly changing workforce.
Bezos regularly talks about listening to your clients and anticipating things they don’t know they want or need. That’s what he means by creating a culture of builders, people who are curious and who like to discover the obstacles and opportunities where you can make inroads in your business. Testing new ideas and wandering to find solutions, even if they fail, is not something we should be afraid of (this of course is easy for Bezos to say). But his point is we must invent on behalf of our clients. “The biggest needle movers will be things that customers don’t know to ask for. We have to tap into our own inner imagination about what’s possible.”
This year’s Employee Benefits Leadership Forum provides an excellent platform to do just that—to bring fresh thinking to the table and be customer obsessed. As the national debate about healthcare access, data, cost and choice churns on, we have an opportunity to figure out ways to collectively deliver better options and drive higher-quality care. We need to build our own culture of curiosity and come up with some thoughtful solutions.
Technology, data and customer expectations are in the process of creating an entire business transformation, and the pace of change is not slowing down. We have to grow, to wander and to innovate solutions that consumers don’t even know are possible until they see them. And we have to find actionable ways to deliver even greater value to our clients.
So tap into your builder’s mentality and know that, if the road ahead appears wayward and bumpy, you’re probably on the right path.
As the national debate about healthcare access, data, cost and choice churns on, we have an opportunity to figure out ways to collectively deliver better options and drive higher-quality care.Tweet
Tell me about growing up as an expat overseas.
It exposed me to different cultures, different languages and different people. It basically expanded my view of the world and motivated me to look beyond the pond. Traveling and working abroad better prepares you for trends that are both coming and going on either side of the Atlantic or Pacific.
You’re a sports car enthusiast and member of several car clubs. Tell us more.
Life is short. It cannot be only about your work. You need to find time to unwind. I am an avid motor enthusiast, and I’m particularly involved with marques such as Lamborghini. I have the privilege of being president of the Lamborghini Club of Bahrain.
Your father has also had a long career in insurance. Did you expect to go that route?
My father is and always has been an inspiration for me, and he was a big factor in getting me involved in the industry.
Does your dad still give advice?
Like any parent.
"We employ leaders at every level in our organization, not managers."Tweet
Is there a leader in the business world you most admire?
Leaders come and go. It’s great ideas, better execution and long-term visions that stick.
Do you think about that in terms of your own business?
Every moment of my life.
How do you stay relevant?
I think you have to be a good learner, a good reader, and I think you have to avoid being arrogant or overconfident. If you have a good idea, pursue it.
Tell is about your upcoming book, The Business of Me.
It’s not really about me. It’s more about my advice for would-be entrepreneurs and young businesspersons. It’s basically about everything from negotiating to building a business to managing success. It also talks about our industry going digital. We are invested heavily in that at the moment. That’s what I do on a day-to-day basis.
Tell me about Silverbrook Holdings.
It’s a collection of international insurance and reinsurance businesses. We own and operate a portfolio of leading local and regional brokerages, managing general agents and a reinsurer. I started my career on the risk management advisory side and then moved to broking and underwriting. We built an international operation employing over 250 people across the Middle East, Africa and Asia, and we’re now investing heavily in the international underwriting space via our ConnectUW group platform.
You’re also the founder and chairman of GBN Worldwide, which is now in 140 countries. Why did you think there was a need for such a network?
I saw an opportunity to create a different kind of insurance network for the greater international (re)insurance market and not just insurance brokers. We share tools and resources, product development, research information and, of course, business development opportunities among our carrier, broker and specialty members.
How would your co-workers describe your management style?
I’m not sure. I never asked them that question. We employ leaders at every level in our organization, not managers.
If you could change one thing about the insurance industry, what would it be?
To be honest, I can’t think of anything I’d want to change. It’s an industry that has its opportunities and challenges. Personally, I would like to see more passporting and freedom of services arrangements like we have within the EU.
The El Bahou File
Favorite vacation spot: South of France
Favorite city to travel to: Milan (“The food, the people, the business.”)
Favorite movie: The Thomas Crown Affair
Favorite singer: Frank Sinatra
Favorite book(s): (1) Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne (“It’s been a very big influence on my business thinking.”); (2) The World Is Flat by Thomas Friedman; (3) Jack Welch and the G.E. Way by Robert Slater; (4) Competitive Advantage by Michael Porter; (5) Platform Revolution by Geoffrey G. Parker, Marshall W. Van Alstyne and Sangeet Paul Choudary; (6) The Art of War by Sun Tzu; (7) Screw It, Let’s Do It by Richard Branson
How is Human API is tackling the challenges of health-data sharing?
The big and bold mission of Human API—the reason we started the company—is we want to accelerate the pace of innovation in healthcare for everyone, everywhere. That’s really our reason for existing. It’s fair to say that innovation within the healthcare industry significantly lags behind other industries where disruption has continued to accelerate and improve our quality of life. Yet healthcare may have the biggest opportunity to make a real impact on that very quality.
And the biggest gating factor is feeding that innovation with data. The inherent issue with access to healthcare data today is core to what’s holding back innovation. The fact that healthcare data is so difficult to get, much less actually make sense of and use, means that anyone who wants to push the envelope on innovation can’t get their hands on the data they need at any level of scale or consistency to deliver on their vision. To that end, we took a different approach than anything that has been tried in the market to date, to my knowledge.
We approach health data sharing as fundamentally a consumer-centric—or really human-centric—problem, hence the company name. The Human API model is to put the human at the center: allow that person to permit, to authenticate, to authorize his or her data from wherever it may exist to wherever that person wants it to go.
As an example, say you are applying for life insurance and you as the consumer are saying, “Look, I understand that as part of this process you guys need to collect medical records from me. So rather than making you do it by fax machine and wait eight weeks, I’ll just give you my patient portal credentials to do this in a few days.”
What are the challenges in “consumerizing” health data? And can tools like those Human API is developing get people to engage with their health data to inform their decisions?
I don’t think the majority of consumers want to engage directly with their health data; it’s more like a raw ingredient. That data is not going to create value on its own. But when it’s leveraged for a specific purpose to generate an outcome, it becomes incredibly valuable. No one used PayPal to store money online just to watch it sit there, but they began to use it—and then use it a lot—to fulfill the outcome of purchasing valuable items on eBay.
Similarly in healthcare, users can create value with data via transactions—you’re signing in to the doctor’s office, and you don’t want to fill in the form for the hundredth time and maybe miss something important. You’re applying for insurance, and you don’t want to have to pee in a cup and get another blood test and wait eight weeks.
You’re not going to engage with your data as a consumer because it’s fun. You’re going to engage with it because you have a specific job you’re trying to do. The first step in empowering consumers is to find transactions that they’re already going through and make them easier—tapping into the unmet needs.
Part of the problem is that before a consumer can even get that value—that diagnosis, that insight, that insurance product, participation in that clinical trial—before you can unlock that experience, you need to have portability and availability of your relevant data to share. And, in the best-case scenario, share seamlessly.
How can employers use Human API’s technology to address healthcare costs and improve employee health?
I think you’ll find both employers and payers fit in the same category—at some level, they are both risk-bearing organizations. That means they care about their employees’ or their members’ health because they have a financial incentive to manage their risk. One big problem is that there’s no way they can manage what they can’t measure. It’s impossible.
The way Human API fits into this equation is that we’re enabling employers and payers to better appreciate and understand their risk and how it impacts their costs. We’re helping them do that by enriching and actually providing a holistic view of those individuals’ health. And we can sleep well at night by knowing this serves to both help control these costs and improve individuals’ health.
The way that we’re solving this problem is very different from what’s been traditionally done. We’re saying, “Why don’t you just ask the consumer, the employee or the member to share it with you? You are giving them value—they should want to do it.” This is a narrative that is resonating with payers extensively now, because the future of their business depends on being member-centric. So that’s helping a lot.
Where do employee benefit brokers fit in?
"We’re moving closer to what I would consider web standards for data sharing, which is sort of the gold standard."Tweet
We work a lot in the life, disability and long-term care arenas with benefit brokerages. Those types of products use us a lot. In a similar manner, there are additional benefit plans that Human API can be instrumental to improve.
Let’s zoom out again and think about how the goal of a broker is to connect people and to help the applicants get a product that matches their needs. And much like the payers, their financial incentive lines up with the consumer incentive—if the enrollment process is painful for the applicant, regardless of the product, brokers are going to lose business. And even for those that do go through the process, it’s longer and more costly for the broker.
Since health data is changing hands—lab data, pharmacy data, electronic health record data—we make that painless for the consumer and faster for the broker. But more than that, we provide this information directly to the underwriter to make a decision on this data. That’s where the real value is created: the outcome of the data changing hands quickly and easily.
How is the current regulatory environment helping or hindering your work?
The current regulatory environment in the United States is helping us. We have HIPAA, the HITECH Act and “meaningful use” legislation. On top of that, we now have the GDPR [General Data Protection Regulation] in the European Union with U.S. versions coming of age as well, such as the California Consumer Privacy Act—which is near and dear to our hearts, as we’re based in Silicon Valley.
All of these regulations push a similar agenda that I support 110%: protect consumer/patient data like it is your own and put that person in a position to own it. It’s the right way to do it. It’s why we don’t avoid the consumers but, rather, put them in charge of their own data portability.
While these regulations provide tailwinds to our approach, they are not enough on their own. But it’s certainly comforting to know that the spirit across all legislation and all political parties is supportive of the Human API business model of putting consumers at the center, allowing them to share their data, to access their data, on their terms.
Can you discuss the impact of the adoption of the Fast Healthcare Interoperability Resources standard (FHIR), and Apple’s role in driving that?
I think it’s fantastic that FHIR is being adopted by some providers. We’re moving closer to what I would consider web standards for data sharing, which is sort of the gold standard. I speak on this topic often, and I caution people that we’ve had this type of Promised Land before and there’s never a silver bullet.
On FHIR in general, it’s good that we’ve implemented superior authentication protocols. It’s good that we’ve implemented some more structured web standards, because that’s how more modern data sharing works. With respect to Apple, it’s fantastic to see the largest and most successful consumer company in the world just playing in this space. I don’t know if Apple is driving the adoption of FHIR so much as legitimizing the fact that patients should have access to their data. That is helping the industry as a whole move forward, given Apple’s clout.
What are some of the roadblocks you’re facing?
Making sure the data is made available to consumers is a critical component to our model of data sharing. We’re not talking about burdening the vendors that originate this data with standards or excessive work; we’re simply just saying to make it available. It doesn’t matter the format; it doesn’t matter the standard. If you make it available, we’ll be happy to take it from there. That is the biggest roadblock, but the good news is that this data availability is trending very positively in our favor. In some cases, people haven’t made 100% of the data available to their patients or consumers yet, but the infrastructure is there, so the heavy lifting is done.
What impact will health-data sharing have going forward, and what role will Human API play?
We will see that pace of innovation in healthcare truly accelerate. It starts with solving for those unmet needs by improving processes that consumers are already going through and creating better versions. But true disruption will occur when more radical innovation tackles the unrealized needs—solutions that consumers didn’t even know were possible until they see them. That stage of innovation will come from current brand names like Apple, Google and Amazon as well as new entrants that are singularly focused on a grand vision.
We’ve heard of health analytics. Explain what the term health intelligence means?
It’s kind of a progression. Data warehousing is where it starts. We realized when we began in 2015 that employers needed a good warehouse to pull all of their data into.
Then they need to be able to look at that data and understand what they are looking at. That’s where health analytics comes in. Employers with that are able to see that data…[but] they have no direction or recommended actions to take based on the analytics.
Health intelligence allows employers and brokers to maximize their investment because they receive data along with proactive direction offering steps to take to remedy the issues. Health intelligence says, ‘OK, we see that we have a problem, but now what do we do about it?’
There is a lot of data out there. The problems seem to be making it uniform and aggregating it into a usable format, correct?
We don’t need more data. Employers need direction on how to use what they have.
With an employer’s permission, we get insurance claims data, including medical and pharmaceutical, and we can use vendor data, like biometric screenings, as well. We can also use payroll information, so if an employer has regional offices, they can dissect data by those different places. Maybe they have a manufacturing plant and a corporate business unit; those can be separated to delineate between those different populations.
Then we ingest that data and have a health intelligence team with clinical expertise, data science experts and health strategy experts. They have built out some models to analyze the information. This isn’t an easy thing to do, which is why not everyone is doing it. The hardest part is receiving the data; anywhere from 30% to 40% of medical claims have an error in them, which makes them difficult to work with.
What kinds of things can be predicted using health intelligence systems?
"This can help with retention because they are showing employees they think differently about the benefits and employee experience they provide. It allows them to do what’s right for their workforce using all of the data they have access to."Tweet
We are able to see, based on healthcare usage, if someone might be at risk for a condition.
So, based on predictive modeling, we can say a certain population may be at risk for diabetes if they start having certain kinds of medical claims. We look at people who don’t have it and see that they have the same claims as people who do. Based on their healthcare experience and demographic information, we can say someone may have a higher risk for the condition. There are machine learning and AI [artificial intelligence] methodologies that play into building that out in real time.
There are more than 60 different predictive insight cards in our platform showing which groups might be at risk for things like Type 2 diabetes or stroke. Then we can offer steps to take to address what an employer’s goals are regarding those issues, whether it’s managing costs or improving population health.
With health intelligence, providers offer a menu of ways to address whatever problem they want to take on. It provides an opportunity to manage the issues and give strategies and tools to move forward.
Something that is somewhat common is identifying people at risk for thyroid disease. The fix for that is a medication that costs $10 a month, and it can help solve it. If you can identify those members and get them treatment, you see increases in productivity and decreases in absenteeism.
When you start being able to mitigate those things, you can see real cost savings and life changes for the members, which is pretty amazing.
What are other actionable ways employers or brokers can use health intelligence?
We have some examples. The most recent one we released was Durham County [North Carolina], which is publicly funded, so they really have to be smart about how they spend their money. We found they had a large diabetic population that had several gaps in care. We worked with a near-site clinic to close those gaps and were able to save $272 per person per month. They were able to get $270,000 in savings over one year, and there could be an additional $240,000 as they continue to close those gaps.
We worked with another employer to help them address unnecessary procedures and surgery. They had a young, healthy workforce but had a lot of joint claims, and we identified the problem quickly. We were all befuddled by it, but after we dove into it, we realized the founder of the company was a marathon runner and running was part of their culture. Generally, it was runners hiring runners who hired other runners. They ended up having joint pain and surgery, and it was costing a lot of money. We brought in Brooks Running to custom fit employees for the right shoes and braces and those kinds of things.
We have also started identifying opioid risk. We can identify risk there quickly and offer solutions. Mental health is one we get asked about a lot, too. We can help identify people who might be at risk for a mental health condition or a comorbidity with another condition, and we can show tools for ways to address it.
Because this is all PHI [protected health information], the data we use is aggregated or anonymized. There is usually an identifier for each member, but there is nothing else to identify them in the reports that employers receive. They get member-level data that isn’t associated to any individuals. For the most part, it is all aggregated.
Are there other benefits for employers who delve into health intelligence?
Part of it is transparency. Traditionally, insurance is supposed to be confusing; to a certain extent, carriers don’t want you to understand it. Having health intelligence tools provides the opportunity for an employer to offer some transparency. This can help with retention because they are showing employees they think differently about the benefits and employee experience they provide. It allows them to do what’s right for their workforce using all of the data they have access to.
We have several pretty large tech employers on the West Coast, and what we are starting to hear groups like this say to brokers is, ‘Benefits get 8% of the budget, so you have to figure out how to make the most of that. We have to make it go further, but how do we have the most impact on our well-being or culture or employee retention?’ They are realizing that healthcare costs are out of their control at the macro level, but they are figuring out they can do a better job of managing it on the micro level.
These tools are an investment in their workforce. They are putting more upfront when they invest in them with the hope it will have a very positive long-term impact on their people and long-term business.
Are you able to track results for clients?
Yes, there are several ways to do it in these platforms. You can compare focus populations over time. You can compare the general population with ones taking part in wellness programs over time. We can run more than 30 different metrics on them and show a history of their health before and after implementation.
What kind of cost and ROI can companies expect from this kind of program?
Well, we have a 97% retention rate, so obviously there is value in what we are providing. We have done some studies on groups who have been using the program for more than two years, and they save, on average, $12 pepm [per employee, per month]. That may not sound like a lot, but it is if you spread it over 10,000 people for a year.
But we really don’t tout the ROI, because sometimes we are encouraging them to spend more on their workforce. It’s about intelligent investments in their employees. To a certain extent, investing in employees is just the right thing to do. But then they may recognize savings downstream with things like increased productivity.
What we have found is reducing costs is important but it’s not what employers are the most focused in on. With unemployment so low, people are their most valuable resource, and they want to maximize the investment they are making in them. Instead of throwing spaghetti at the wall to see if it sticks, they want to know what to do with their budget to make it go the farthest.
Do health intelligence products improve the landscape for brokers? How do they fit into the picture?
When we initially rolled out Insights, brokers were worried about the impact on their jobs. But they found out something from the power users of this. The analyzers on their team that make the most of it get to spend less time digging for data and more time building plans around it, which is why we got into what are doing. We can ingest the data and send it back to them instead of them trying to find a way to marry all the different information. They have the ability to analyze, track and measure all in one place. It allows them to be more effective at their job.
When they sit down to meet with employers, it provides them a menu to work with. They can offer opportunities for the employers to act on. And it’s the brokers that know those solutions providers and where they best can make an impact for employers.
The brokers can discern what works best for their clients. They may have a preexisting relationship with diabetes management or other wellness vendors. They are the expert in the room and own those relationships.
We will make recommendations on programs and can provide hypothetical goals, but we don’t tell them who they should work with for their solutions. Brokers and employers have those relationships. We don’t want to be too prescriptive.
“In its distinctive ambience, we may compare Over-the-Rhine to New Orleans’s French Quarter, New York’s Greenwich Village, Washington’s Georgetown, Philadelphia’s Society Hill, even to Boston’s Beacon Hill. Except for Over-the-Rhine, each of these districts now constitutes a focal point of its city, a source of its urban pride. They were all slums once.” John Clubbe wrote this in his 1992 book, Cincinnati Observed: Architecture and History. Once a bustling neighborhood of German immigrants and a treasure of 19th-century brick Italianate and German revival architecture, Cincinnati’s Over-the-Rhine had fallen into decay, socially and literally, by the early 1990s. It had a reputation as one of the most dangerous places in the United States and was named one of the 11 “most endangered” places in the country by the National Trust for Historic Preservation.
In 2003, recognizing “the whole city has a stake in Over-the-Rhine,” Mayor Charlie Luken and leaders of the corporate community formed the Cincinnati Center City Development Corporation, a private, nonprofit, real-estate development and finance organization. Since then, more than a half-billion dollars has been invested or leveraged in OTR, as the neighborhood is known, rescuing historic buildings, rehabilitating parks and developing vacant lots. “Cincinnati’s chief claim to urban distinction,” as Clubbe called it, is once again a source of urban pride.
Over-the-Rhine is a livable community with a ton of cool things to do. Stop for a coffee at Collective Espresso, which sources beans from the best roasters in the country. Eat old-fashioned donuts made from scratch at Holtman’s Donuts. Shop the art galleries and boutiques (this summer Over-the-Rhine Premium Cigars opens, stocking, among others, the IBold, a historic Cincinnati brand known as the working man’s cigar). Wander the foods stalls at Findlay Market, the oldest public market in Ohio, which offers plenty of enticing places to grab lunch. Dine at some of the city’s most popular restaurants helmed by its hottest chefs (see Please, Sartre and Salazar below). Have an IPA at Rhinegeist, a craft-beer hall housed in the former bottling plant of Christian Moerlein Brewing Co. Sip a cocktail at Sundry and Vice, a turn-of-the-century apothecary-themed bar. Enjoy a glass of wine at Revel Urban Winery, produced in-house and served in a jelly jar, just like in the old country.
OTR is now the cultural heart of Cincinnati, too, many thanks to Ensemble Theatre Cincinnati. The theater, which produces world and regional premieres of works that often explore social issues, “remained an unwavering anchor despite offers to relocate and instead championed the renaissance of Over-the-Rhine,” its website says. In 2017, it was joined by the restored-to-former-glory Music Hall, a high-Victorian, Gothic-revival style building that is home to the Cincinnati Symphony Orchestra, Cincinnati Pops Orchestra, Cincinnati Ballet, and Cincinnati Opera. The same year, Cincinnati Shakespeare moved from downtown to the modern new Otto M. Budig Theater, across from Washington Park, where all seats are less than 20 feet from the stage.
At Washington Park, join locals any day of the week for outdoor workouts and yoga and most days in summer for live concerts and open-air markets. All of this fun is just a 20-minute walk from downtown—less if you hop on a Red Bike rental bicycle or take the Cincinnati Bell Connector, an electrified streetcar.
What’s to love
Atlanta is an excellent place to do business, but its diversity, cultural offerings and tree-lined streets make it an even better place to live. Like New York City’s High Line, the Atlanta BeltLine adds to this in a meaningful way and is one of the best things to happen in the city in a long time. The ribbon of parks and paths connect neighborhoods like the Old Fourth Ward with Piedmont Park and Buckhead. It has enhanced our enjoyment of the city and will get even better as it’s completed.
I love the combination of Mexican and Southern food. No one does this better than Eddie Hernandez at Taqueria del Sol. Fresh, quick, inexpensive and so good. Garden & Gun voted the fish taco with poblano tartar sauce and pickled jalapeños one of the “100 Southern Foods You Absolutely, Positively Must Try Before You Die.”
Favorite newish restaurant
Umi, an intimate modern Japanese restaurant, is a standout for me. The sushi is the best in the Southeast, and the chef is uniquely talented. Booking in advance is advisable, unless you know someone (or are a celebrity).
Blue Ridge Grill and La Grotta in Buckhead are my go-to restaurants. BRG has the atmosphere of a North Carolina lodge. The grilled Georgia trout is not to be missed. La Grotta is one of the best Italian restaurants in the city. The veal is outstanding.
We often take clients to Atlas Buckhead, the bar in The St. Regis Atlanta hotel. It’s a beautiful space with a newly renovated courtyard, and the art collection is unparalleled. It also happens to be a few steps from my office.
I’m based in Buckhead, so many of our clients and friends stay at The St. Regis. It’s a luxurious and comfortable base for exploring all of the shops, bars and restaurants in the area.
If you’re in town for a few days, visit the High Museum of Art or the new award-winning National Center for Civil and Human Rights. In the summer, an outdoor concert at Chastain Park makes for a great night.
The Chattahoochee River runs through the middle of Atlanta, and the state parks and riverside trails are fun to explore. On weekends, my family and I often take our dogs for a walk along the river and occasionally even try to navigate it in a canoe.
Watching an Atlanta United FC soccer game in the new Mercedes-Benz Stadium is hard to beat. The energy is off the charts.
But Corsi did become a social media mainstay, embroiling himself in a mix of bravado and potential perjury over his knowledge of Julian Assange’s intentions to publish damning Hillary Clinton emails. It comes as little surprise that Corsi fell into the crosshairs of the Mueller Russia collusion investigation.
But before the zeitgeist tagged him a “Harvard-trained conspiracy king” (The Washington Post), “unhinged crackpot” (Think Progress) and “racist, conspiratorial crank” (The Nation), Corsi had once carved out a niche as a forward-thinking entrepreneur and financier. That reputation was built on having the foresight to capitalize on the 1980s deregulation of the banking industry through the establishment of third-party financial marketing firms that channeled the investment portfolios of AIG, New England Life, Transamerica and other powerhouse players through Main Street financial institutions.
“When Jerry is on a mission, though, he’s on a mission,” a former business partner recalled in a 2005 Leader’s Edge profile.
The Corsi mission, by the turn of the millennium, had gone from finance to book writing (over 30, and counting), using his pen as a weapon in the domestic political and cultural battle—a war that now threatens to claim the 72-year-old Corsi as collateral damage.
In a statement accompanying his withdrawal from a federal plea agreement, Corsi said, “I fully anticipate…I will be indicted by Mueller for some form or other of giving false information to the special counsel or to one of the other grand jury or however they want to do the indictment. But I’m going to be criminally charged.”
In an ironic turn, the former financial whiz is now seeking donations through his website, CorsiNation, to support a legal defense fund along with the production costs of “Silent No More: How I Became a Political Prisoner of Mueller’s ‘Witch Hunt,’” a nine-hour podcast.
There is no reason, whatever his fate, to expect Corsi will emerge daunted or diminished.
“If there is one thing I’ve learned over the years, it is to be who I am,” Corsi told Leader’s Edge in a self-assessment that is perhaps more true today than it was 14 years ago.
Insiders have traditionally been thought of as current or former employees or contractors who use their authorized access to an organization’s system and data to conduct or assist cyber-criminal activity. But employees who make poor decisions about the organization’s cyber-security program can also dramatically increase the risk of attack. They may not be considered insiders in the traditional sense, but these bad decision-makers can be just as risky as nefarious insiders wishing to harm the company.
Cyber attacks are no longer just about data breaches. Over the past two years, attacks have involved encryption of data and ransom demands, zeroing out servers, exploiting unpatched or unsupported software, and causing massive business interruption, denial of service attacks (including via internet of things (IoT) devices), and sophisticated social engineering attacks for credentials. A report by Positive Technologies—Cybersecurity threatscape Q2 2018—noted the number of unique cyber incidents grew by 47% over the previous year. Cyber criminals are expected to make $1.8 trillion off their criminal behavior. The problem is that a number of these attacks could have been avoided if employees had made better decisions about preventive actions.
The impact of bad cyber-security decisions by internal personnel becomes glaringly apparent when one considers how their decisions contributed to the severity of the attack and its cost to the company. An Advisen report found cyber-related business interruption losses increased 30% between 2016 and 2017. Losses from the NotPetya malware alone are estimated to range between $4 billion and $8 billion (the White House estimate was $10 billion).
In the Crosshairs of Blame
Decisions made by personnel in the C-suite and management frequently result in a failure to take actions that are commonly known to help prevent attacks. Although top executives are not typically considered to be insider threats, they play a critical role in enabling attackers when they make or participate in decisions that cause an organization to become more vulnerable to attack. (For more on this, see the sidebar, “Failure to Act.”)
What’s more, companies that have not hired a chief information security officer are unlikely to have a mature cyber-security program in place or the ability to effectively respond to an attack. Target, for example, did not have CISO when its notable breach occurred in 2014, and its failure to segment and firewall its network played a major role in the event.
Board members also are not exempted from blame. In 2014, Institutional Shareholders Service (ISS) called for seven of the 10 Target board members not to be reelected, stating it believed the directors “failed to exercise adequate risk oversight.” They were ultimately reelected, but their action sent shivers through boardrooms.
"Executives and board members who fail to understand they have particular responsibilities for cyber-security may well be more dangerous insiders than the traditional hostile insider."Tweet
Four years later, ISS called for five Equifax board members, including the chairman, not to be reelected over their failure to exercise their “responsibility for risk management related to technology security.”
Following the Equifax breach, in 2018, the SEC issued guidance for publicly traded companies to inform investors about material cyber security risks. It specifically noted, “Companies should assess whether they have sufficient disclosure controls and procedures in place to ensure that relevant information about cyber-security risks and incidents is processed and reported to the appropriate personnel, including up the corporate ladder, to enable senior management to make disclosure decisions and certifications and to facilitate policies and procedures.”
The New York Department of Financial Services’ cyber-security regulation became effective on March 19. Three months earlier, the agency’s superintendent issued a memorandum to remind all covered institutions that department-regulated entities are required “to adopt the core requirements of a cybersecurity program, including a cybersecurity policy, effective access privileges, cybersecurity risk assessments, and training and monitoring for all authorized users…. The regulation also requires the establishment of governance processes to ensure senior attention to these important protections.”
"Companies that have not hired a chief information security officer are unlikely to have a mature cyber-security program in place or the ability to effectively respond to an attack."Tweet
Health providers and government contractors already have requirements for cyber-security programs and governance compliance. The Federal Trade Commission’s proposed revisions to the Safeguard Rule, which was released on April 4, also has increased requirements for cyber-risk assessments, vulnerability, and penetration testing and governance.
Executives and board members who fail to understand they have particular responsibilities for cyber-security may well be more dangerous insiders than the traditional hostile insider. If correct decisions are not made internally about cyber security, the consequences can be painful and expensive, as the NotPetya attacks so clearly demonstrated.
Spend the Money
The primary reason most companies do not conduct regular risk assessments, perform vital cyber-security actions, or hire chief information security officers is because they don’t want to spend the money. That thinking is penny wise and pound foolish, and it fails to take into consideration how expensive cyber attacks are, how much forensic and regulatory investigations cost, and what the potential hit on reputation and market share may look like.
Customers are truly beginning to care about doing business with companies that are trustworthy. A 2017 report on consumer intelligence by PwC indicated that “87% of consumers say they will take their business elsewhere if they don’t trust a company is handling their data responsibly.”
This concern represents an enormous opportunity for insurance agents and brokers to meet with clients and discuss their cyber-security programs, help them understand where they might be deficient, and encourage them to conduct regular cyber assessments so they can develop an appropriate risk-transfer strategy. The large business interruption claims over the past couple of years reminds us that a robust cyber-security program consists of more than blaming criminals, including insider criminals. Increasingly, cyber-security attacks can also be blamed on poor decision-making by management.
“Understanding this issue begins by focusing on the risk, without insurance being a driving thought,” says Max Perkins, senior vice president for global cyber and technology, global professional and financial risks with Lockton Companies. “Once the risk is understood, only then can proper governance procedures be continued, strengthened or implemented. Risk management includes the hardening of security controls, user awareness and training, and risk financing/transfer. We find that clients whom we lead or who have been through this process are best positioned to negotiate with insurers and, more importantly, to respond to the underlying incident.”
Westby is CEO of Global Cyber Risk. email@example.com
We’d arrived at a toll booth and didn’t have correct change. The “middle sister” was proficient in rudimentary French, but she was asleep. Desperate times. We were blocking traffic, so we screamed at her to “wake up and speak French.” Dazed and confused, she conversed with the toll taker; it’s unclear whether it was her translation skills or his sympathy (or irritation) that allowed us free passage.
This family classic comes to mind as I contemplate the employee benefits industry and impediments to innovation. We are asking the same people who have been successful in this industry because they like process, certainty, contracts and an annual “cycle of things” to now be flexible, creative, innovative and open to failure. Typically, this “ask” is without additional resources or training to make such a pivot.
We might as well be running though our organizations (insurance carriers or brokerage firms) yelling, “Speak French!”
Like my sister, most industry veterans are up for a challenge and quite capable of getting the job done. But it’s difficult to capitalize on opportunities in the changing competitive, regulatory and payment landscape without the infrastructure, or least some scaffolding, for support. Mindset isn’t the miracle cure. We have to address some real obstacles in the behaviors we reward and irrational budgets. Now is the time to make that assessment if you want to be well positioned next year.
The Overview Effect
One year ago, I concluded my term as chair of CIAB’s Council of Employee Benefits Executives Advisory Committee (CEBE), and I know first-hand the passion and commitment of The Council’s member firms. We are creative, curious and competitive – traits that have served us well in this business, usually as seller-doers. Then, in a bit of a plot twist last year, I stepped away from my role as a seller-doer and founded GenuineShift to examine the employee benefits business through an entrepreneurial and objective lens.
Author Frank White uses the term “the overview effect” to describe observations astronauts have shared after their return from space. They launched predicting that their awe and excitement would come from seeing what they were headed toward. Yet it was the fresh perspective they gained in outer space that was so profound.
“When we originally went to the moon, our total focus was on the moon,” one astronaut recounted. “We weren’t thinking about looking back at the Earth. But now that we’ve done it, that may well have been the most important reason we went.”
It’s difficult to capitalize on opportunities in the changing competitive, regulatory and payment landscape without the infrastructure, or at least some scaffolding, for support.Tweet
“We look back at ourselves, and it seems to imply a new kind of self-awareness,” White writes.
These quotes resonate with me as an experienced employee benefits executive who has had the benefit of observing the industry by stepping out of it. I’ve had time to synthesize and digest my observations and I've gained a broader perspective that would have benefitted me in the past.
A couple of themes are trending in my consulting work with benefit executives at firms of all sizes and ownership structures.
- Leaders are stressed that they’re not spending the time and resources to develop their 2.0 client and talent acquisition strategy. They see cracks forming.
- Redesigning their practice to drive strategic initiatives is daunting in conjunction with the other pressures I’ve mentioned. They’re stuck in reactive state/firefighting mode hoping the status quo is “good enough” to survive another year.
We’ve all routinely worn multiple hats and juggled priorities, but I have never seen a higher fatigue and frustration level than now. This is an understandable consequence of having player-coaches, stretched too thin, fighting fires daily. While smart and experienced, many are barely hanging on to keep operations profitable.
Just-in-time hiring budgets that prioritize (and reward) near-term valuations over long-term growth strategies can also be a constraint. This is universal and not just a public brokerage phenomenon. Teams must have the resources and bandwidth (during the day, not the night shift) to succeed. Is your budget aligned with your EB team’s forward thinking and growth strategy? What would be possible if changes were made to comprehensively support your vision?
Take the Time
This month, as industry leaders gather at The Council’s annual Employee Benefits Leadership Forum, meetings are held, and enthusiasm is high. You’re taking notes, and the “idea factory” starts firing up. Yet buzzing in the back of your head is that little voice asking, “Are you nuts? Your hair is already on fire! You’re not even executing on existing priorities!” No business benefits—pun intended—from another list of strategic ideas that well intentioned people can’t execute.
Find an opportunity to suspend your day-to-day concerns and contemplate, objectively, how your organization fits into the benefits ecosystem. Ask trusted partners for their perspective, as well.
Two truths that I’ve learned in my work at GenuineShift are these: something has to change; nobody has the time. But sometimes you have to make the time. The Employee Benefits Leadership Forum presents an excellent opportunity for leaders to share ideas on how to effectively transport and disseminate optimism and tactical strategies back to their firms post-event. Creating and sustaining momentum is challenging, to be sure, but a huge opportunity for those who prioritize it.
While it’s true there are a multitude of interconnected threads knotting employee benefits advancements—healthcare costs, legacy systems that can’t handle radical transformation, talent deficits at all levels, a rapidly changing provider/insurer landscape—there is a steep opportunity cost of the default, stalled position. Use EBLF to shift your mindset and prioritize making the time to execute on your vision. Let’s get started now so we can make an impact for 2020.
Au revoir et bonne chance! (Translation: Goodbye and Good luck)
Walsh is the founder of Genuine Shift. firstname.lastname@example.org
The surprise charges, representing the difference between what the patient’s insurer paid and the non-discounted “list” rate charged by the provider, often are well above in-network or Medicare reimbursement rates for the same services.
Some news accounts have reported that one in five emergency room visits and one in 10 elective hospital admissions now result in such a “surprise bill.” Others project the extra charges total well into the billions of dollars annually. Across the country, lawmakers are hearing the agitation being expressed by the many families victimized by these billing practices, and both Congress and state legislatures are taking action.
The finger-pointing is rampant. Some blame insurers for moving to skinnier networks to save costs. Others blame providers and hospitals for charging rates disproportionate to the value of the services provided. Whoever we blame, there’s no question that surprise billing—aside from feeling fundamentally unfair—creates problematic incentives.
For example, because disputes over balance bills often are sent to arbitration for resolution—some state laws, in fact, require them to be settled by arbitration—providers have a perverse incentive to set the bill as high as possible and negotiate down from there.
Surprise billing might also financially incentivize large medical groups to stay out of networks that include the facilities where they perform services. Something akin to “network gerrymandering” raises serious network adequacy concerns, particularly in areas like ambulances (traditional and air), anesthesiology, radiology—and sometimes entire emergency departments—where patients can hardly choose to forego services.
New Jersey passed a law requiring providers to tell patients before scheduling an appointment about the provider’s network status and the costs the patient would likely incur from a procedure.Tweet
Potential legal questions surrounding some of these practices range from claims of network inadequacy to false advertising to outright fraud. One consulting service challenges the magnitudes of these charges as not being justified. Some courts have sided with them, questioning whether there is “mutual assent” about price, particularly in emergency situations, and forcing providers to accept much less than the amount billed.
In response, many hospitals now require patients to sign contracts as a condition of admission guaranteeing payment of the hospital’s charges regardless of the level of insurance reimbursement. Some courts have found that this does constitute a valid contract—though even those courts have had a hard time determining how much the patient should owe, largely because the “right” price is hard to nail down in a marketplace in which prices are all over the map and often undisclosed because they are claimed to be proprietary.
Proposed policy solutions, not surprisingly, run into opposition from various stakeholders that stand to lose money if dollar amounts on bills shrink or if the obligation to pay shifts to someone other than the patient. But many policymakers are pressing forward anyway.
Some have decided to work on minimizing surprises in the first place. As with so many things in the sector, this is an area where more disclosure and transparency could be helpful. In non-emergency situations, for instance, up-front disclosures about out-of-network providers who work at a facility—and their costs—may help ensure patients schedule procedures with in-network providers. New Jersey took this approach and passed a law requiring providers to tell patients before scheduling an appointment about the provider’s network status and the costs the patient would likely incur from a procedure.
Some hospitals already require their in-hospital doctor groups to contract with the same carriers as the hospital. This practice was apparently more prevalent prior to the growth of mega medical groups, which generally assert more bargaining power over hospitals and, for financial reasons, might decline to participate in the same network as the hospital.Tweet
More generally, hospitals could publicly post specialties or services in which they lack providers who participate in the same networks as the hospital. Consumers would then have some mechanism by which to gauge their likelihood of encountering an out-of-network situation as well as the potential attendant costs at that facility.
Some solutions have been proposed to lessen the financial sting for patients (and minimize some of the aforementioned negative incentives). The most consumer-friendly approach is to remove the patient from the situation entirely, which several states have done, and obligating insurers and providers to work out the payment. But when insurers are put on the hook, the argument often goes, they will pass on the costs via higher premiums.
Another proposed solution is to cap balance bills at an amount pegged to Medicare rates (e.g., 125% of Medicare reimbursement for the same service). Providers generally do not support these proposals because they say the rates are too low.
Under another proposal, all providers at in-network facilities would be required to accept in-network rates. Notably, this could be driven by the private market rather than imposed by the government. In fact, some hospitals already require their in-hospital doctor groups to contract with the same carriers as the hospital, perceiving other arrangements as anti-patient, disruptive and potentially damaging to the hospital’s reputation. This practice was apparently more prevalent prior to the growth of mega medical groups, which generally assert more bargaining power over hospitals and, for financial reasons, may decline to participate in the same network as the hospital. Critics of the approach note that such arrangements give carriers a huge negotiating advantage over doctors, who then must contract with the insurer to work at the hospital. If the insurers insist on unreasonably low rates, entire groups may decide to walk away from the hospital.
Regardless of stakeholder opposition, major change is likely coming to surprise billing. Half the states have adopted some protections for consumers, and this issue has been the subject of presentations and discussions at recent meetings of the National Conference of Insurance Legislators and the National Association of Insurance Commissioners. So far, nine states have enacted comprehensive protections—California, Connecticut, Florida, Illinois, Maryland, New Hampshire, New Jersey, New York and Oregon. These measures include protecting patients in both emergency and non-emergency scenarios; removing patients’ responsibility for paying balance-bill charges, which leaves negotiations to insurers and providers; and an outright ban on balance billing.
More groups are agitating for federal action on balance billing to protect consumers in both the fully insured and self-insured contexts and to allow for adoption of a more comprehensive approach to such protection. Multiple federal proposals have been released, but lawmakers have yet to coalesce around any particular approach. One bipartisan proposal in the U.S. Senate, which applies to insured and self-insured plans, would limit patients’ cost-sharing to what they would have owed in-network; would set payment standards according to what insurers owe providers based on median in-network rates or averages of geographic prices for services; and would prohibit providers from balance billing patients.
There is no denying that balance billing is on policymakers’ radars. We can expect reforms of these practices in the not-so-distant future. It will be a true balancing act to avoid unintended consequences for networks and premiums, but there seems to be consensus emerging that the status quo—which traps American families in the middle—is not a viable option.
Sinder is The Council’s chief legal officer and Steptoe & Johnson partner. email@example.com
Jensen is a senior associate in Steptoe’s Government Affairs and Public Policy Practice Group. firstname.lastname@example.org
Each of these meetings is remarkable in its own right, but this one was particularly exceptional, as it celebrated the organization’s founding 20 years ago in the historic city of Rome, Italy, where the organization was founded.
Global industries like ours rely on regular channels of intelligence sharing to ensure our markets remain strong and efficient in the face of regional instability or regulatory intervention. WFII has proven itself over the years to have incredible clout and to be an invaluable forum for the industry, including following the 9/11 terrorist attacks, during the Spitzer investigation and U.S. implementation of the Foreign Account Tax Compliance Act (FATCA), and currently with the ongoing Brexit exercise.
It was our delight this year to personally present at WFII the outcome of our ongoing work to exclude non-cash-value insurance from the 2010 U.S. FATCA regulation. The regulation caused major headaches across the globe, as compliance was particularly burdensome and most non-U.S. financial institutions struggled to understand its purpose and why they had to comply.
Our six years of work with Congress and the Treasury Department under the Obama and Trump administrations finally paid off when the Treasury Department issued draft regulations in December that agreed with our position: traditional property/casualty insurance that has no cash value cannot be used as a vehicle to evade taxes and is irrelevant to FATCA. It’s a sweet victory for our government affairs team, but we were not alone: our work was combined with voices from around the globe that came from WFII. The federation itself told the U.S. Treasury of the negative impact the regulation was having on markets and its irrelevance to our business, and our friends from the United Kingdom expressed to Treasury the concerns they were hearing from their own members on the misguided regulation. Victory has a thousand fathers, and we’re grateful for their help in securing this critical clarification.
Global industries like ours rely on regular channels of intelligence sharing to ensure our markets remain strong and efficient in the face of regional instability or regulatory intervention.Tweet
WFII does more than provide a venue for intelligence sharing. It also provides us the opportunity to directly communicate with international standard-setting bodies like the International Association of Insurance Supervisors (IAIS). The IAIS is an organization composed of insurance regulators from around the world. The group has no binding regulatory authority, but it does consider regulatory issues in various markets and issue recommendations and principles to which it believes regulators should adhere. International lending organizations like the IMF and World Bank also consider adherence to IAIS principles and recommendations as part of the terms for their own initiatives. So IAIS recommendations, although non-binding, can carry significant clout, particularly in emerging markets. Many emerging markets around the world are significantly underinsured and ripe with growth opportunities. And the number of exposures that multinational corporations have in these emerging markets all over the globe makes the IAIS an increasingly influential body.
Our interactions with IAIS representatives at these meetings are crucial—and not only because of their influence. I regularly find myself defending the organization and explaining its significance to members of Congress. It faces harsh criticism from some insurance organizations that argue for protectionist policies when it comes to international cooperation. Following the creation of the Federal Insurance Office in the post-recession Dodd-Frank legislation, the IAIS has somehow become the industry’s bogeyman for globalization or worse: the face of the effort to erode the state-based regulatory system. I find the trajectory of this conversation on Capitol Hill incredibly frustrating.
When FIO was created in 2010, the initial intent was that it was to serve as the single voice to the IAIS on behalf of the United States. However, advocates for the state-based insurance system ensured that the final law stipulated that the FIO representative would serve in addition to the state regulators at IAIS meetings. So the intent of creating a single voice for our country alongside every other country representative at these roundtable meetings was a little watered down when FIO ultimately became the 57th U.S. voice at the table. Despite the volume of noise that the United States now brings to IAIS deliberations, advocates of state-based regulation are so fearful of what could come from the group that they’re seemingly demonizing IAIS in support of their efforts to “rein in” the responsibilities of the Federal Insurance Office. The problem is that, if these advocates had their way, hamstringing our representatives at the IAIS would arguably make influencing regulations in emerging markets even more difficult, potentially hindering industry and economic growth both at home and abroad. Fortunately, this continues to be an uphill battle for the movement, but it’s one we’re following closely.
This year I’m happy to report that our interactions with IAIS were incredibly positive, as they always are. Other discussion items included insurtech and regulatory sandboxes, TRIA, and cyber markets. But equally important to the agenda items was the conversation itself, in which our role is to serve as a resource for deliberations and to ensure the participants truly understand the evolving and critical role of the insurance broker. It is in this ultimate context that WFII always delivers—by gathering global expertise around one table to ensure that brokers continue to serve consumers around the world in a fair and competitive environment.
Kopperud is vice president of government affairs for The Council. Joel.email@example.com
Applied, the largest provider of agency and brokerage management systems, says the acquisition expands its sales and marketing solutions and underscores its commitment to automating both front and back office workflows.
“This transaction brings together the leading provider of agency management systems globally with the leading insurance CRM system built on the Salesforce.com platform, providing an integrated solution for front-office sales and marketing automation needs,” Applied CEO Reid French said in a statement.
Applied will integrate TechCanary’s CRM system with the Applied Epic agency management system to enable agencies, insurers and MGAs to use the Salesforce platform to manage their sales and marketing. The TechCanary platform also will provide Applied customers with open access to the thousands of applications available on the Salesforce AppExchange.
TechCanary, a cloud-based insurance CRM system built on the Salesforce.com platform for agencies, brokerages and others, was founded in 2013 by Reid Holzworth, who had developed a system to manage his own agency and later released it on Salesforce app exchange.
“Ninety percent of the insurance industry is on Salesforce already in some way or another,” Holzworth told Leader’s Edge in a 2018 interview. “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.”
“As the demand for sales and marketing automation is increasing at a rapid pace, we recognized an opportunity with Applied for our customers to benefit from the broader, more global product portfolio as well as Applied’s technical resources and support services,” Holzworth said in a statement. “This acquisition provides our customers with access to new innovation and scale to further accelerate the growth of their businesses.”
Though these superusers come from diverse socioeconomic groups, there is a paucity of crucial research data from certain communities. That’s why the Department of Health and Human Services has begun to collect and research data from Americans whose class, race, gender and/or culture have been underrepresented.
Near the end of last year, HHS, through its Health Resources and Services Administration (HRSA), awarded $21 million to 46 community health centers to survey and collect medical research data on understudied groups of Americans. The initiative is called the All of Us Research Program and is curated by the National Institutes of Health.
“HRSA-supported community health centers’ participation in the All of Us Research Program is a critical opportunity for individuals from all walks of life to be represented in research and support the next generation of medical innovation,” HHS Secretary Alex Azar said in a press release. “All of Us will lay the scientific foundation for a new era of personalized, highly effective healthcare. We look forward to working with people of all backgrounds to take this major step forward for our nation’s health.”
According to HHS, there are about 1,400 health centers operating more than 11,000 service delivery sites in the United States, serving more than 27 million individuals. The HRSA subsidy will advance health centers’ interoperability and preparedness to use and share patient data to assist research.
The All of Us Research Program hopes to build a network of at least 1 million U.S. participants.
“Our mission is to accelerate health research and medical breakthroughs, enabling individualized prevention, treatment and care for all of us,” Alyssa Cotler, director of communications at All of Us, tells Leader’s Edge.
“Beyond engaging a diverse participant cohort, we’re bringing together a diverse set of data—including information from surveys, EHRs, physical measurements, biosamples and digital health technologies. Researchers will be able to use that information to learn more about how individual differences in lifestyle, environment and biology influence health and disease. Their findings may lead to more tailored prevention strategies and treatments in the future,” she says.
Anonymized data will become accessible to researchers, according to Cotler.
“Researchers of many kinds will be able to request access to the de-identified data, though there will be some limits on appropriate data uses,” she says. “Researchers seeking access will have to verify their identify, take research ethics training, sign a code of conduct, and describe their research purpose for posting online. In some instances, additional approvals may be required from an All of Us committee that oversees data access. Full details about the registration process and prohibited uses of data (such as marketing, for example) will be outlined in the program’s forthcoming data use agreement.
“The All of Us Data and Research Center, led by NIH awardee Vanderbilt University Medical Center, is charged with acquiring, organizing and providing secure access to the program’s data set. Later this year, we anticipate launching the All of Us Research Hub, where researchers will be able to request access to program data for analysis. Researchers will bring their own questions and hypotheses to the data set, which will grow over time as we add more participants and new data types.”
Specialized medicine is receiving substantial attention as a long-term potential cost saver, especially in high-use cases and underserved communities. “We are increasingly seeing more and more of our clients’ overall dollar spend jam-packed into a very small number of members, and that trend is growing,” Dr. Ronald Leopold, chief medical officer at Lockton Companies, told Leader’s Edge. “If you are looking for cost mitigation, the real runaway costs are in this population.”
But addressing the problem requires lots of data, careful analysis, and a range of solutions that meet the needs of the superuser populations—the core purpose of the All of Us endeavor.
At least one insurer is part of the effort.
“Blue Cross Blue Shield Association is a member of the All of Us consortium, helping raise awareness about the program among the diverse communities it serves. BCBSA joined as a sub-awardee of Scripps Research, which spearheads national engagement activities for our direct volunteers (those who join apart from affiliated healthcare provider organizations),” according to Cotler.
“BCBSA insures one in three Americans, and we have prioritized precision medicine as a key focus,” Nick D’Addezio, executive director of development and international business at Blue Cross Blue Shield Association, tells Leader’s Edge. “The Blue system should fit well with the values of the All of Us initiative. The diversity angle was important to us. We are the only insurer in every zip code in the United States, and we want to bring personalized medicine to all our clients. It was really a no-brainer.
“We can bring a lot of value to the program in terms of awareness. We’re part of the direct volunteer program about awareness and educating on the importance of being part of research. We want our members in our communities to understand that medicine is for all of us. We currently have challenges in that. Minority populations have traditionally been underrepresented.”
More than research, though, the program hopes to yield results that manage and reduce the incidence of expensive chronic illnesses and high-cost, critical disease.
“Precision medicine should help improve quality outcomes, value and equity,” says D’Addezio. “We want to help create better drug therapies, better medicines. We are about value-based healthcare that is equitable. We are looking at it from a long-term perspective. From a cost perspective, we’re not necessarily sold that precision medicine must increase prices in the short term. With proper education, making sure the right people are enrolled in clinical trials, etc., we think we are uniquely positioned to educate the system on the right way to evolve precision medicine.”
Those interested in joining the All of Us Research Program who don’t have access to participating provider organizations can enroll online through the Participant Center. A list of subcontractor participants and awardees is available at the Participant Center as well.
How are you using data differently?
I think we can do a lot more than we’ve ever done before. The technology, the access to data and the computing power has really changed how we do analytics. We can do predictive analytics almost on the fly, and we’re making it much more consumable. Gone are the days of the 80-page PowerPoint. Now it’s dynamic and interactive, and you can pull in other things like a client’s EBITDA or cash flow. So, we can tell a better story, and I think that’s going to change even more as we go forward.
I think our industry has been slow to get to it, but we have a couple of advantages: we’re good at data, we’re good at risk analyses, and we can empower our corporate clients who are trying to figure out what to do with data and analytics. Once we get good at big data sets and analytics we can apply it to almost anything, so I think we can branch into helping our clients beyond risk as well. It could be manufacturing process optimization, sales, M&A activity.
Are there any surprises you find when you analyze data in this way?
We’re at a level of risk transparency that we’ve never been at before and it brings up the risk tolerance discussion quicker, more specifically, and in more earnest. The analytics might say that someone is buying too much limit, but those clients might say those are risks they just don’t want and are willing to pay extra to take them off the table. Or you might have an analysis that shows someone is not buying enough, but they say they can handle it and want to spend the money elsewhere. It’s teasing out the risk tolerance discussion at a level we weren’t able to easily get to before.
How are you able to attract young, tech-savvy talent?
We’ve had luck hiring people right out of school and then building them up. The technology we’re building is so new that once people buy in they get excited about changing the industry, not just being part of the industry.
What are some current or emerging risks that lend themselves particularly well to captives?
The first emerging risk that comes to mind is cyber – it’s new, potentially volatile and costs could be uncertain but it could very well be suited for captive utilization if structured in a prudent manner understanding that captive utilization is a long-term venture.
What challenges do businesses face in forming captives successfully?
Companies looking to form a captive in this environment are in a real advantageous place right now, with more captive domiciles than ever to choose from, a large amount of captive consultants to choose from, and more variations than ever of types of captive vehicles to fit a broader range of business entities, i.e., single parent captive, group captive, cell captive, etc. Challenges could be making a corporate decision to put up extra capital, funding and formation fees to begin to review and establish a captive entity, understanding the captives are long-term ventures which will be more costly in the short term. Challenging could also be the need to focus on a smaller vision of risks to initiate a captive’s feasibility and set up, and not to try to boil an ocean with possibilities.
We have seen some reports of captives being used to combat the challenging commercial auto insurance market. What are your thoughts on this?
Captives are made for risk management challenges such as commercial auto, and with so many clients with more mature captives with proven track records and extra capital and surplus built up over the years, captives are ready for the challenge. But all new risk placements into a captive should be carefully reviewed with a proper structure and to be fully compliant with all regulatory concerns.
How can brokers pinpoint which clients could be well served through a captive approach and how should they engage clients on this issue?
Brokers should look for clients ready to have a long-term commitment to a risk management strategy that includes a captive assuming more risk, while at the same time ramping up loss control efforts, so to benefit from the expected results of retaining premium for less expected losses.
Last year’s RIMS brought in a large student population. How successful was that in terms of attracting young talent to the industry and what is this year’s focus in terms of talent generation?
It’s an on-going process. RIMS is seeing more universities offer RMI content and degreed programs. Most people at my stage in my career didn’t have this as an option when they were in school. This is incredibly important for us as an industry because we have an aging population and we need to ensure that the next generation is ready to join us. RIMS is working with 3 universities in North America to develop a curriculum based on the RIMS-CRMP content, which is the only accredited risk management certification in the world.
We also have a couple of programs to help our rising risk professionals. We have the Mentor Match program which is a new way for RIMS members to seek out, interact with, and learn from leaders in risk management and future leaders in the industry. Both people in the match have the opportunity to learn from each other. We also developed an internship manual for our RIMS members to utilize and help create internships at their companies. Internships are a great way to get students involved. I have been fortunate enough to work with one each summer for the past four years. The annual conference is a great place for the students to meet the future potential employers and secure themselves jobs and internships as well.
What are some other goals or focus areas for RIMS this year, and why have you chosen those in particular?
For 2019, we are focused on going global. The ease and opportunities for companies to go global is supporting this. RIMS has to be able to support their members when they make this move to expand their organizations’ operations. RIMS is currently focusing on three geographic areas – India, China, and ASEAN (Asia Southeast Association of Nations) We have Regional Advisory Groups in each of those locations on the ground who are providing us with information on where risk management is in the country and what they have as challenges that we can help with. We further support this initiative by working with the universities there as well to help educate those students utilizing our RIMS-CRMP curriculum.
Another focus area for RIMS continues to be diversity and inclusion. We had a task force last year to research this topic and we established a formal council this year to continue our efforts. With this, we have created a D&I vision statement and are insuring that we are a welcome and inclusive society.
What trends are you seeing in terms of risk? What are most business leaders concerned about these days and how would you gauge the insurance industry’s response/preparedness in these areas?
I think that cyber continues to be a hot topic. I am actually speaking on cyber at the conference in conjunction with someone from France to discuss how companies based in the U.S. might view cyber differently from those based in the EU. It is going to be really interesting to see the different perspectives that we discovered during the research phase.
Technology is evolving to give us additional data analytics and help us to identify trends that are out there. Risk managers are able to access information better to make decisions and recommendations for their companies. There are so many different technology solutions to help virtually augment the risk management team from wearables, RMIS platforms, and app-based solutions. It’s really exciting to see such innovation and creativity in our industry that can help to mitigate and control losses for organizations.
Climate change and political issues/risks as companies go global will continue to be a hot topic. That is why we are focusing on global development so we can be positioned to deliver valuable content and information to the members.
Give us a peek into what we can expect from RIMS 2020.
Every year I go to the conference for 3 things:
- Education – The conference covers so many different things and I always walk away learning something that will help my company mitigate risk. Cyber and vendor risk management are two of the topics I am really looking to learn more about.
- Networking – I love getting to see all of my friends every year and make new ones that I can exchange ideas with or learn from. Having this face to face contact really helps to cement and strengthen relationships. I am able to meet with other risk managers, underwriters and other service providers all in one convenient location.
- The Destination - The RIMS staff always picks a fabulous place to visit! RIMS 2020 will be in Denver, Colo., and a little later (May 3-6) to avoid the snow. Denver has great food and nightlife so if you get to venture away from the conference, you are sure to have fun!
I can’t wait to see what new ideas and trends are emerging that we can focus on and learn about in 2020.
What is the role of employers in ensuring the mental health of their employees?
Employers play a key role in knowing about the energy level of their employees and ensuring they provide a safe space for workers, meaning workers know it is okay to seek help and ask for assistance when they are struggling with mental health issues.
What is the cost/risk to an organization if employees’ PTSD and other behavioral health issues aren’t addressed?
The cost can be devastating. Depending on the issues that trigger a worker, many people today suffer from PTSD and an employer may never know because people suffer in silence.
Key Takeaway from RIMS Session: Research has shown that PTSD changes the biology of the brain, and that may not ever go away. You may not know what kind of trauma has occurred in your employees’ lives.
How should employers go about addressing PTSD with an employee?
Making it known that there are programs available to workers and training supervisors to understand the signs that someone may be struggling is important. Not that the supervisor has to address it themselves, but they need to know where to go for help and to whom they refer the worker to in the event it is needed.
If an event just happened in the workplace, it is helpful to have crisis counselors meet with those exposed to the disruptive event. This can be in a group or one-on-one. They need to know what they are experiencing is normal and that the feelings and thoughts they are having are okay.
Key Takeaway from RIMS Session: It is also important to have clinical involvement early on. There needs to be a partnership between the employer and their preferred medical provider.
Are there any tools out there that could help?
There are several tools including cognitive behavioral therapy, medication, re-exposure therapy and specific sessions to help the individual reengage in life.
Key Takeaway from RIMS Session: medical marijuana and MDMA (aka ecstasy) are showing promise in studies to treat people with PTSD.
What is an employee benefit broker’s role in helping their clients with this issue?
Brokers can be very helpful in assisting employers in setting up programs before an event happens and helping them establish protocols, policies and procedures around disruptive event management. Brokers can also help employers develop a readiness plan.
What trends do you see on the horizon in terms of preventing or managing workplace violence and other risks that cause PTSD?
The best trend that I see is that employers want to be prepared. The more prepared you are for an event the more appropriate your response when something happens. Preparation and training cannot be taken lightly. It is well worth the time and effort to have a plan in place.
Key Takeaway from RIMS Session: Early intervention is key. Incorporate job accommodations with direction from a medical provider. Show compassion. You don’t know about an employee’s past exposures.
What are the top three biggest challenges facing you as a risk manager in a financial services company?
Making sure our cyber-risk insurance is adequate in terms of limit and coverage to adequately cover the risk; managing complex claims with multiple internal and external teams involved that are at times siloed; and explaining our business and associated risks with insurance brokers and carriers. It’s fairly complex, but I think it’s really important that they understand it well.
What are your thoughts on the current cyber coverage market?
I find it challenging in terms of pricing and lack of capacity/competition on a primary basis. I’m also not sure how sustainable it is in the long term given the high volume of claims being paid.
Do you feel like insurers have a handle on cyber risk?
Not really. I think they may be vastly underestimating the size of the exposure worldwide.
How is your company working on building resilience in the current risk climate?
We benefit from a strong balance sheet, but we also examine and strategize on risk mitigation across the company.
International SOS is a medical and travel security firm that provides organizational support and risk assessments for various aspects of employee travel including IT liabilities, employee tracking and medical response.
What are the biggest risks facing business travelers today?
Travel risks vary from person to person depending on an individual’s profile and/or destination. However, the most prevalent risks that business travelers can expect to encounter today include:
- Petty or opportunistic crime
- Natural disasters and extreme weather
- Political and social unrest
- Medical emergencies
- Road traffic accidents
An incident as common as a pick-pocketing or a bag theft can leave a traveler without important documents, such as their passport, money, or phone. It also could also result in the theft of a company-owned device, such as a laptop, exposing the company’s data privacy. Many travelers also find themselves with minor medical ailments, such as gastro-intestinal issues, which if not treated, or treated improperly, can become much more severe. While it is important to prepare employees for how to respond in the case of critical incident, the more common but benign incidents have the potential to become more acute if not handled properly, and they either don’t request or receive appropriate assistance.
Talk about the level of liability companies have for employees traveling internationally.
Employers have a legal obligation—or Duty of Care—to act prudently to avoid reasonably foreseeable medical and security risks, which include any risks employees may face during international travel. Because of this, employers must build a broad culture within their organization that addresses the health, safety, security and well-being of their employees and other related collaborators to the business. To do so, they are expected to develop and deploy appropriate travel risk management approaches to protect people from possible harm. Along with mitigation measures, they must also be aware of healthcare laws and insurance coverage of a particular location.
Despite the increasing number of international business travelers worldwide, organizations continue to struggle to keep pace with the changing needs of the modern workforce, as found in our 2019 Business Resilience Trends Watch study. In order to protect the modern workforce during international travel, it is important for businesses to develop or update their travel risk policies to address destination-specific risks, the different profiles of their mobile workforce – such as female, LGBTQ+ and executive travelers – and the way that business travel is conducted today. For example, many companies are now identifying the need to incorporate guidance on the use of shared economies, technology for tracking and communication with employees while abroad or support during leisure, or ‘bleisure’ travel, into their policies.
While organizations are responsible for identifying and raising awareness of foreseeable risks pertaining to their employees’ travel, there is also an onus on the traveler – or Duty of Loyalty – to comply by their company’s policies, to read and follow company-provided travel advisories and to complete any mandatory travel risk awareness training.
What does providing true duty of care to employees look like?
While there are many companies globally who are committed to providing the highest standard of duty of care, there are others that struggle with engaging the full spectrum of managing employee travel risk. Failure to overcome organizational challenges and to adopt best practices is likely to lead to unnecessary risks, potential harm to employees traveling domestically and internationally, and increased liability to employers. We have identified 10 best practices for an organization to adopt a successful Duty of Care program:
- Increase awareness
- Plan with key stakeholders
- Expand policies and procedures
- Conduct due diligence
- Communicate, educate and train
- Assess risk prior to every employee trip
- Track traveling employees at all times
- Implement an employee emergency response system
- Implement additional management controls
- Ensure vendors are aligned
Give us three top tips for the business traveler.
- Prepare - Research medical and security risks of your destination before you go and take the appropriate steps to mitigate against them. As a business traveler, it’s important to look into the safest accommodations and means of transportation, obtain the appropriate vaccinations, know what medications to take or leave at home, and understand cultural norms or sensitivities which will enable you to maintain a low profile.
- Stay Informed - Ensure you are up to date on any developments that could disrupt your trip, both before you depart and during your journey. This could be related to local elections, holidays, strikes, demonstrations or severe weather events.
- Have a Plan - Know what resources you have to assist you in the event of an emergency during your trip. Pre-program emergency contact information for your company, assistance provider, or local embassy into your phone, as well as write them down and carry a hard copy.
It is important to proactively raise awareness among employees on how employees should respond in such situations. This can be done through pre-trip briefings and trainings, as well as communicating the types of resources available if an incident should occur. For example, educating travelers on road travel safety or the appropriate emergency response contact numbers for a medical and security incident, especially in a place where the local ambulatory and/or security forces are unreliable.
Tell me about helicopter skiing.
You’re dropped off on a ridge at 11,000 or 12,000 feet elevation. When the helicopter leaves, there’s a sense of quiet that you don’t get anywhere else. People don’t talk much, because you need to stay in the moment and focus on the elements and surroundings. There is a sense of being small in a really big area.
Who were your childhood heroes?
My father—he had such a strong work ethic. Vic Belfore—he was this big, flamboyant, Italian stockbroker who I met in high school. He taught me about giving people a second chance. Bob Ladouceur—my football coach at De La Salle High School in Concord, California. He taught me about committing to a common goal and a common cause.
What do you think you bring to your job from your experience playing football?
There’s a plaque on my desk that was given to me by Bob. It says: “When preparation meets opportunity, greatness can be achieved.” I try to bring that idea to this organization every day.
You became CEO at InterWest in July 2008, in the heat of the financial crisis. What was that like?
About three months in, I really thought to myself, “Man, I just really wish I could go back to producing and managing a branch, and life would be great.” But there was a core group of people within InterWest, so I had a lot of support and a lot of talent, and everybody was willing to work really hard at some crucial times.
At what point did you aspire to become CEO?
Never. The organization, from 1992 to 2006, was run by three divisions. I was running one of the three divisions. It became clear that we needed to remove the division model. Our chairman, Tom Williams, asked if I would be willing to take the reins from him. I joke that I missed a meeting and got elected president and CEO.
What is something your colleagues would be surprised to learn about you?
I’m probably more emotional than they would think. I can’t watch Rudy without crying.
Your office in Chico is very close to some devastating wildfires. What has been the impact on your firm?
Our Chico office has 100 employees. About a dozen were personally affected. They lost everything. So it hit home with us. At the same time, we had over 250 clients in the Paradise-Chico area that experienced losses—and all of them were total losses. The impact on the community is going to last for a very long time. I’ve never seen anything like it in my 33 years in the business, and I hope I never do again.
What three words would your colleagues use to describe your management style?
Entrepreneurial, respectful and demanding.
If you could change one thing about the insurance industry, what would it be?
We seem to have a huge disconnect in the timing in which we are able to deliver information to our clients regarding their policies upon renewal on an annual basis. We’re known as a last-minute industry. That has to change.
What gives you your leader’s edge?
It’s our commitment to the two or three generations behind and their development. It has cost us millions to develop that talent, but we’re reaping the benefits.
The Schuler File
Favorites vacation spot: Lake Tahoe
Favorite Lake Tahoe restaurant: Sunnyside. “It’s on the waterfront—California cuisine, great bar on the marina. It’s just got a great Lake Tahoe mountain vibe.”
Favorite city to travel to for business: Anywhere I can take my wife with me.
Favorite movie: Kelly’s Heroes
Favorite actor: Gene Hackman
Favorite book: Outliers, by Malcolm Gladwell
Wheels: “From Monday to Friday, a BMW X5. After that, a Ford F-150. We joke that the X5 is the corporate jet and my car is the F-150.”
In March, CVS announced it would begin selling CBD products in 800 stores in eight states. A week later, Walgreens said it would sell CBD products in 1,500 stores in nine states. Nationwide sales revenue is projected at $16 billion per year by 2025. Yet perhaps never has there been such a disconnect between what is happening in the marketplace and what is legally allowed.
Before passage of the 2018 Farm Bill, all species of the cannabis plant—including both marijuana and hemp—and their derivatives (such as CBD) were classified as Schedule I controlled substances under the federal Controlled Substances Act. This rendered it unlawful to possess, distribute or dispense them or to aid or assist such efforts in any way.
The Farm Bill legalized hemp—defined as the cannabis plant with a tetrahydrocannabinol (THC) concentration of 0.3% or less—and its derivatives by removing them from the purview of the Controlled Substances Act. Such legalization has provided businesses with lawful access to key banking and financial services, including insurance. But the Farm Bill was far from a cure-all, and significant legal impediments remain.
On the day the Farm Bill was signed into law, the Food and Drug Administration issued a statement that it “treat[s] products containing cannabis or cannabis-derived compounds as [it] does any other FDA-regulated products.” That means hemp-derived CBD products that are no longer illegal under the Controlled Substances Act still are subject to the Federal Food, Drug, and Cosmetic Act and its associated regulatory and approval processes prior to being sold or marketed.
The FDA argues the food, drug and cosmetic law presents two legal hurdles to most products that contain CBD. First, the agency contends that any CBD products that claim to treat diseases or provide therapeutic benefit qualify as unapproved new drugs because they are intended for use in the “diagnosis, cure, mitigation, treatment, or prevention of a disease.” In short, according to the FDA, if a product containing CBD promises to cure anxiety, reduce swelling or take care of more severe illnesses, then (absent FDA approval) its sale violates the Federal Food, Drug, and Cosmetic Act.
An additional complicating hurdle is present for all foods, beverages and dietary supplements containing CBD. Specifically, the law prohibits the marketing of foods or dietary supplements that either contain an active ingredient in an FDA-approved drug or were subject to substantial clinical investigations prior to being marketed as foods or dietary supplements. In the view of the FDA, this prohibition applies to foods and dietary supplements that contain CBD because of the agency’s approval of drugs like Epidiolex—a seizure treatment for two rare forms of epilepsy that contains CBD—and its public investigations into products like Sativex, which contains both CBD and THC, to treat pain in patients with advanced cancer. (An interesting underlying legal issue: CBD was widely available prior to the CBD drug testing/approval, but its sale violated the Controlled Substances Act. To eliminate this issue, the FDA must issue regulations allowing the use of the pharmaceutical ingredient CBD in foods or dietary supplements, a process that could take years.)
That said, some CBD and other hemp-derived products do not require FDA approval or regulatory action. CVS and Walgreens, for example, are preparing to sell body care products such as lotions, sprays and roll-ons, provided they do not make “unsubstantiated therapeutic claims.” Similarly, the FDA has determined that certain food ingredients derived from hemp seeds (including hulled hemp seed, hemp seed protein powder and hemp seed oil) are “generally recognized as safe” for their intended purpose and can thus be marketed and added to foods without further FDA approval.
The FDA has issued several warning letters to online CBD retailers and manufacturers, but the agency recognizes the impossible task ahead. One FDA official at an annual event hosted by the Natural Products Association described this as a game of whack-a-mole, explaining that, even if the agency were to devote all of its resources to removing CBD-containing dietary supplements from the market over a period of a few months, “we turn our backs and two months later…commerce would be just as saturated as it was when we started.”
Many states also restrict or bar the sale of CBD products through their own controlled substances acts and CBD-specific legalization regimes that clarify that CBD remains illegal in those states outside of the specific uses that have been legalized.
For example, Alabama and Georgia—and many other states—have established their own drug schedules under their own controlled substances acts. In these states, hemp remains classified as a Schedule I drug for most purposes (limited exceptions allow the possession of CBD products for a limited set of medical conditions), regardless of the changes made to the federal Controlled Substances Act. This means that, in those states, it remains unlawful to manufacture, possess or dispense CBD products—regardless of whether they are derived from hemp or marijuana.
Other states, like California—which has legalized marijuana for recreational use—has taken the specific position, based on the FDA’s stated policy and in an effort to comply with federal law, that hemp-derived CBD cannot be added to foods. Finally, states such as Colorado have modified their food and drug laws to facilitate the sale of foods containing hemp-derived CBD, counter to the FDA’s position at the federal level.
Applications already are being filed for approval of various CBD food, dietary supplement and health-claim-making topical products, but the approval process is long and arduous and generally is done on a product-by-product basis. The FDA also could theoretically initiate a rulemaking process to allow hemp-derived CBD to be sold in food and dietary supplements. But as former FDA commissioner Scott Gottlieb noted, the agency has “never done this before.” At a minimum, that means any such process would assuredly take years given the FDA’s normal testing and review requirements.
As intermediate steps, Gottlieb put together a “high-level interagency working group,” and the agency plans to hold a public meeting on May 31 designed to explore potential pathways to facilitate the market entry of these products. In announcing these plans, Gottlieb acknowledged that the issue may require a legislative fix from Congress that would define CBD under a certain threshold as a food additive and CBD concentrate as a pharmaceutical drug.
From an insurance perspective, the legal ambiguity in the CBD space poses interesting challenges. To what degree, for example, will a CBD food or dietary supplement be faced with product-liability exclusions based on the failure to have obtained (at least technically) the requisite FDA approvals? Insurance agents and brokers will need to be vigilant in understanding the exact products being manufactured, distributed and/or sold and the extent to which coverage being placed for such businesses will cover the presented exposures.
Sinder is The Council’s chief legal officer and Steptoe & Johnson partner. firstname.lastname@example.org
Gold is an associate in Steptoe & Johnson’s GAPP Group. email@example.com
Today, insurers can access more data than ever. Why is this a problem, and why is this an opportunity for Groundspeed?
Well, it is true there is more data than ever. That said, I believe we are probably in the very early innings of utilizing the new forms of data that are becoming available to genuinely improve risk selection and pricing. Nonetheless, information from IoT [internet of things] devices or high-def information about properties are examples of data that will be important over time. The truth of the matter is that in meaningful parts of the insurance marketplace—such as in the middle market, the complex commercial insurance segments, as well as the specialty insurance categories—very large and important swaths of data are still traded in a variety of formats and usually as unstructured electronic documents.
It is unlikely, given the complexity of that information, that the industry is going to come around to a set of standards soon. So technology has the potential to really bridge that gap in a much faster manner.
For brokers and carriers, what is the potential value that they’re not getting now from all that unstructured data, whether it’s paper, PDF or Excel spreadsheets?
On the broker side, there is foundational information that can be unlocked just from the existing book of business. Take for example, understanding the underwriting profitability that brokers are producing for their markets. Or understanding program structures for a specific segment or portfolio of business. Having ready access to this information to advise clients or create proprietary products would be invaluable. That information inevitably exists somewhere within the brokerage—the policy documents, loss runs, exposure schedules, quote responses. Similarly, for carriers, they’re seeing tens of thousands of submissions a year, and they may be quoting some portion and writing a fraction of what they quote. Yet vast information is lost through this process—it is available if it could be harvested. This flow offers tremendous opportunity to better understand the marketplace if carriers had a way to make sense of it and structure it in an efficient, cost-effective way. And that is part of problem that we see and that we’re trying to solve.
Besides providing a clearer picture of where the businesses and clients are now, can tools like artificial intelligence and data analytics also provide a more predictive outlook?
AI is at the core of everything we do, and we’re seeing exactly this sort of demand from our clients. Let me give you a simple example from a carrier perspective for commercial auto. If you’re a carrier, when you get loss information as part of the submission, that loss information does not necessarily make a clear determination about who is at fault for each claim. This information for many is critical in assessing and pricing risk. And there is an example where, if you had the predictive analytics to be able to make that kind of assessment, the risk selection and pricing could be that much more accurate.
We’re seeing lots of very specific demands like that, and we’re also seeing more general, broader interest from our customers, such as: “Could you give us a view on whether this is a higher or lower risk within a comparable cohort, and why do you see that as being a higher or lower risk?” Frequently that kind of insight is something that provides a perspective on a risk that might be different than some of the key features that carriers use to select or rate the client. That’s the kind of insight that I believe we can provide with predictive analytics over time.
You come from a venture capital background. When you’re looking for investment and thinking about insurtechs, what do you look for?
When I came into venture capital, I looked at it through the lens of very much an enablement of the industry. You know, I’m not a big believer in the disruptive thesis. I think that great companies are leaders for a reason and they are competent and capable to leverage new technologies. So a core investment thesis was really about enterprise solutions and the way to make really great carriers and great brokers even better. That drove the investment thesis for the work that we were doing at Oak HC/FT, my former company. I’m still there as an advisor, and the incumbent enablement continues to be the thesis today.
We’ve made investments in companies like Clara Analytics that are using artificial intelligence to improve the outcomes of losses and reduce the loss adjustment expense. And I think you’ll continue to see investments from Oak focused on improving the economics of the existing industry participants. Their investment in Groundspeed was very much in that vein. They see the potential for us to apply new technologies for the benefit of improving the performance, the economics and the competitiveness of the incumbent carriers or brokers.
What attracted you to Groundspeed specifically?
We’re a three-year-old company, and the CEO and founder, Jeff Mason, and I had a preexisting relationship because in my prior life I tried to acquire a company he had previously helped to start. It was an interesting MGA/risk retention group in the professional liability space. So I got to know him through that experience and maintained a relationship.
When he shared with me that he was going to create Groundspeed, we stayed in touch. When it came time to raise the Series A, I provided him a lot of help. That was an institutional round, but I invested myself and joined the board at the time. When it came time to raise a Series B, and I was with Oak HC/FT, Oak was very interested in making the investment, and part of the decision around that investment was my involvement in developing the business going forward.
I always knew I wanted to go back into an operating capacity, and I knew that I would want to focus on technology as the next step in my career. This just emerged as the right opportunity, and Groundspeed was really pleased to have Oak as a backer because you have a very well respected, very successful investor, and they put a very sizable chunk of money—a $30 million investment—into the company. This was the largest enterprise solution insurtech investment in the industry for all of 2018. I was very excited to be part of that investment and join to help drive the development of the business with Jeff.
Where is the business going?
Today, we have a core product that we’ve developed that supports a range of what we call use cases or scenarios that are very high value to our broker and carrier clients. We are working hard to perfect that, which basically means we’re doing intensive development of our technology platform so we can harvest information from loss runs, exposure schedules, policies, applications, quote response and other related documents regardless of how that data is presented. We provide back-structured information and predictive analytics from those source documents. That’s really our focus today.
Related to the question earlier about where AI is coming into play, our clients are asking us to apply our data science capabilities toward a range of predictive analytics that can be generated from the information we are harvesting in these documents. We see that as being kind of the next horizon. Fortunately, we already have several clients who are working with us in this capacity.
Officials at the Danish shipping giant described the trip as a onetime event, intended only to gather data. But global warming could soon turn the once-impassable route into a busy maritime highway for oil tankers, liquified natural gas carriers and perhaps ships carrying consumer goods. The Arctic is now losing ice at a pace of about 13% a decade, and some models project a near-complete absence of ice in the summertime as soon as 2030—and almost certainly by 2070.
Among those watching the Venta Maersk’s trial run closely was Captain Andrew Kinsey, a 23-year veteran of the U.S. Merchant Marine who now serves as a senior marine risk consultant for Allianz Risk Consultants (ARC). The potential opening of the Northern Sea Route is a “monumental” event, says Kinsey, whose father was also a mariner and whose son attends the Maine Maritime Academy.
“I grew up in the industry, and we literally are sailing the same courses and transiting the same routes as Magellan in many regards,” Kinsey says. “A new shipping route is unprecedented in my lifetime or my father’s lifetime, so the impact for us is quite astonishing, really.”
But for both mariners and insurers, that sense of astonishment is tempered by many unknowns.
“You’re starting with a blank slate,” Kinsey says of ships navigating around icebergs. “You don’t have current charts, you don’t have bathometric data, you don’t know what is under your keel, literally.”
One thing is for certain: if the Northern Sea Route does develop into a heavily traveled shipping option, the insurance industry will play a major role in defining the scope and the timing. In fact, determining the future of the passage is just one of several ways marine insurance is shaping the geopolitical risk map and, in turn, the shipping industry.
Traversing the Ice
Globally, marine insurance totals close to $29 billion a year, with $6.9 billion spent on hull insurance and $16.1 billion on cargo coverage, according to the International Union of Marine Insurance. The interplay between insurance and the shipping trade shifts as new developments—changes in a trade route, limits on carbon emissions, political disruptions that raise risks in volatile regions—factor into the mix.
The stakes in those interactions are high and affect consumers worldwide. Shipping accounts for 90% of global trade and involves more than 50,000 merchant ships around the world, according to Allianz’s 2018 Safety and Shipping Review.
“It’s a continually changing landscape, and it tends to highlight how delicate at times this supply chain that we rely on can be,” Kinsey says. “We tend to think of it as a very robust transportation network, but it doesn’t take much for overall supply chain disruptions to have a far-reaching impact.”
Maersk officials say they’re happy with the results of the Venta Maersk journey. “The trial allowed us to gain exceptional operational experience, test vessel systems, crew capabilities and the functionality of the shore-based support setup,” Palle Laursen, the company’s senior vice president and chief technological officer, said in a company statement after the ship reached port.
But Laursen also said the company doesn’t see the Northern Sea Route as a viable alternative yet because passage is feasible only three months a year and requires large, ice-classed vessels, which would necessitate an additional investment. The Venta Maersk is a Baltic feeder, one of the world’s largest ice-class vessels, but it needed an escort by a Russian nuclear-powered icebreaker at some points during the journey.
While Maersk plays wait-and-see on container ships, others in other industry segments are venturing ahead. Early last year, the Eduard Toll, a liquid natural gas tanker designed for Arctic travel, became the first commercial ship to traverse the Northern Sea Route in the winter without an icebreaker leading the way. The trip from South Korea to France via northern Russia was about 3,000 nautical miles shorter than it would have been via the Suez Canal. It encountered ice about six feet thick.
“I grew up in the industry, and we literally are sailing the same courses and transiting the same routes as Magellan in many regards. A new shipping route is unprecedented in my lifetime or my father’s lifetime, so the impact for us is quite astonishing, really.”Tweet
Others are also making the journey, though usually with icebreakers as companions. Cargo volumes along the Northern Sea Route rose to 9.7 million tons in 2016, an increase of 40%, according to the Russian Federal Agency for Maritime and River Transport. The tonnage is expected to jump to 40 million by 2022 and to 70 million or 80 million by 2030, thanks to growth in oil and gas fields.
Russia and China are eager to see use of the route increase. Russia, in particular, stands to benefit because the shallow waters near Siberia have less ice for longer stretches of the year. Vessels must apply for permits to pass through Russia’s economic zones and pay fees to be accompanied by an icebreaker. China, a near-Arctic state, is hoping to develop an “Arctic Silk Road” in areas opened up by global warming.
Backers of the Northern Sea Route pitch it as a cheaper, shorter alternative to the Suez and less tumultuous than sea lanes in the Gulf of Aden, the Indian Ocean and the South China Sea. Last summer, the first shipment of liquid natural gas left Russia’s new Yamal production facility and reached its destination in China 16 days faster than it would have via the Suez Canal.
But there’s substantial debate about the wisdom of introducing large volumes of maritime traffic to the Arctic’s already fragile environment along a route that is largely controlled by the Russian government.
The complications pile on for insurers assessing coverage for ships. “You’re dealing with unknown weather patterns,” Kinsey says. “You’re dealing with a harsh environment, in terms of the crew and the ship and the cargo. There are tremendous amounts of exposures, and there are tremendous amounts of risks that have to be properly evaluated.”
It’s not exactly smooth sailing. According to Allianz’s safety report, there were 71 shipping incidents in Arctic Circle waters in 2017, a jump of 29%. More than 1,000 icebergs were reported in North Atlantic shipping lanes in 2017, according to the International Ice Patrol, a U.S. Coast Guard-affiliated organization that has been tracking ice since the sinking of the Titanic in 1913. Last year was the 19th most severe in the past 100 years and the fourth consecutive year classified as “extreme.”
“Such extraordinary conditions require complementary training for crew, as well as additional routing support,” Arnaud Gibrais, a senior marine risk consultant at AGCS, noted in the Allianz report.
Kinsey believes the Northern Sea Route will see continued growth but says it isn’t likely to cause a significant shift in existing routes. “I don’t see a major impact on either the Panama Canal or Suez Canal traffic,” he says, “but I do expect to see continued utilization of a new and viable shipping route.”
Stephen Harris, a senior vice president at Marsh with more than 40 years of experience in marine insurance, shares that skepticism. He took part in a meeting of the All Party Parliamentary Group (APPG) for the Polar Regions at the British Houses of Parliament last fall, and much of the discussion was about the geopolitical implications of ships passing through Russian waters. “There’s been an awful lot of press about increased use of the Northern Sea Route,” he says. “However, we have to be realistic in the expectations of growth of traffic going through the NSR.”
For starters, Harris says, many vessels are simply too large to navigate those waters. “We understand that in the East Siberian Sea, which is on the northeast part of the Northern Sea Route, there are places where it’s not possible to get a vessel with a draft of more than 10 meters—about 31 feet deep—through the water,” he says. “We are never really likely to see the big container ships and the big oil tankers ever using that route simply for the physical reason that they can’t get through. It’s not because of the ice. It’s because of the shallowness of the water in certain places.”
"There’s substantial debate about the wisdom of introducing large volumes of maritime traffic to the Arctic’s already fragile environment along a route that is largely controlled by the Russian government."Tweet
There is potential, however, as Russia’s numbers indicate. “Perhaps the oil and gas industry is the area where we will see growth,” Harris says. “Russia seems very keen on developing their Yamal Peninsula and their oil and gas terminals.”
The Polar Code
The insurance industry is preparing for some impact. Shipping in the Arctic region is guided by the International Code of Safety for Ships Operating in Polar Waters, known as the Polar Code, which took effect this year. The code, established by the International Maritime Organization, sets requirements for design, construction, equipment and training for operating ships in polar regions.
But Kinsey and others believe the code, used by both the shipping and insurance industries, must be updated more quickly than IMO guidance for other parts of the world, a process that can take five years or more. “This is a fast-changing route, it is an unknown route, so I feel it is critical that the data we capture from successful voyages, the routing of those vessels, is shared,” Kinsey says.
The shipping industry also needs to shift away from its focus on analyzing what goes wrong in a voyage, according to Kinsey. “We don’t spend nearly enough time studying voyages that go right,” he says. “In this age of big data and the internet of things, we have to start to change our mindset. We have to start utilizing existing data to understand why that voyage was successful and simulate that, rather than identifying voyages that aren’t successful and saying, ‘Don’t do that.’”
Harris says the Polar Code, while still new, is already serving a valuable role. “Frankly, a vessel that is not strong enough, that is not well enough equipped, and crews that are not adequately trained in dealing with Arctic and Northern Sea matters should stay out of the waters,” he says. “That’s essentially the message of the Polar Code, and underwriters, I’m quite sure, will welcome that because it will actually help them minimize the risk of insuring those who do go through those waters.”
“Where are the salvage and rescue services that would come to assist a vessel that gets in trouble? That is a serious concern for underwriters.”Tweet
Technology may be developed to reduce risk. For example, drones equipped with cameras could play an increasing role in assessing hazards at sea, according to the Allianz report on safety. “If there is an incident, drones could also be used to assess damage, helping to mitigate losses, avoid loss of life or limit any potential environmental impact,” Volker Dierks, head of marine hull underwriting for Allianz in Central and Eastern Europe, says in the report.
There’s another factor that insurance industry and mariners should consider in Arctic waters, Harris says. At the APPG meeting in the British Houses of Parliament, he brought up the question of who will rescue ships as they ply dangerous waters.
“Where are the salvage and rescue services that would come to assist a vessel that gets in trouble?” he asked. “That is a serious concern for underwriters. It’s all well and good making sure that the vessel is well crewed and trained and the ship itself is sound, but if ships break down—ships do have accidents—where is the help going to come from?”
Harris says the question needs to be considered not only by cargo ships but by cruise ships carrying passengers. “Yes, it looks very attractive in a brochure from a cruise company, but the risks are considerable,” he says. “And when you have that many non-mariner people—i.e., the passengers—involved, should an accident happen, there is concern what the results might be.”
On Board with Sanctions
Icebergs aren’t the only now-you-see-them, now-you-don’t challenges facing underwriters. The insurance industry also must navigate sanctions imposed against rogue nations by the United States, the European Union, the United Nations and others. The list of target countries and prohibited goods can change frequently in the course of the year. At the moment, the United States has more than two dozen active sanctions programs, roughly triple the number 20 years ago.
The current list, maintained by the U.S. Treasury’s Office of Foreign Assets Control, includes Venezuela, Cuba, Syria, Sudan and other countries that pose a threat to peace in their region or have compiled a long record of human rights abuses. Others, like Iran and North Korea, are targeted because they’ve sought to obtain weapons of mass destruction.
In November, for example, the United States reinstated trade sanctions against Iran after the Trump administration withdrew from a 2015 deal designed to prevent the nation from developing nuclear weapons. The oil, banking and transportation industries were targeted, and the move hit Iran’s oil exports the hardest, dropping shipments by nearly a million barrels a day.
Insurers must pivot quickly when such a change is made and must wind down coverage involving sanctioned nations. “The sanctions on Iran mean we are no longer involved in the U.S. market in the coverage of Iranian tankers or the cargo of Iranian crude,” Kinsey says.
Eight unnamed countries were granted exemptions by the Trump administration, and they reportedly include Japan and South Korea. For insurers handling coverage for shippers based in the United States and the European Union, though, the course is clear. “There are tensions caused by the fact that there are still some countries in the world that still wish to deal with Iran,” Harris says.
For the shipping industry and its insurers, compliance with sanctions requires vigilance. In November, the Office of Foreign Assets Control issued an advisory to the marine petroleum industry warning about the risk of breaking sanctions against Syria. “Countries such as Iran and Russia have been involved in providing Syria with petroleum,” the advisory said. “Those who facilitate the financial transfers, logistics or insurance associated with these or other petroleum shipments are at risk of being targeted by the United States for sanctions.”
The advisory specifically warned shippers to be on guard against tactics used to obscure the provenance of shipments to Syria, such as falsifying cargo and vessel documents, transferring cargo from ship to ship at sea, and disabling automatic identification systems, or AIS.
“Ship registries, insurers, charterers, vessel owners, or port operators should consider investigating vessels that appear to have turned off their AIS while operating in the Mediterranean and Red Seas,” the advisory said. “Any other signs of manipulating AIS transponders should be considered red flags for potential illicit activity and should be investigated fully prior to continuing to provide services to, processing transactions involving, or engaging in other activities with such vessels.”
Such warnings are fairly common for sanctions, including the latest round against Iran. “It’s a concern that things may be masked in order to conceal the fact that they are Iranian-origin goods that are either being directed to Iran or being exported from Iran,” Harris says. “The ingenuity of people to mask the true provenance of goods becomes even more of a problem. The maritime industry has to be extremely careful that oil coming from anywhere in that region didn’t originate in Iran.”
Technology plays a significant role in detecting deception. Oilfields, Harris says, leave a fingerprint on the oil they produce. “A simple surveyor’s test of the oil will very quickly tell which fields that oil came from,” he says.
Doctoring documents to circumvent sanctions—the subject of the Office of Foreign Assets Control warning about Syrian goods—has become more difficult in the computer age. “Changing registries to try to hide a nation of origin is very rare,” Kinsey says. “You can find out where a vessel is from and where it’s been. They have a long history.”
Micro-monitoring of ships also is a safeguard. “On the vessel side of it, we have the AIS, the automatic ship identification system, which allows us to track vessel movement either by VHF if they’re within sight of land or by satellite,” Kinsey says. “You can look at where the vessel is, where the vessel is going, its current course, its current speed.”
The detail is even more granular. “The technology has gotten to the point where we can literally track individual cargo shipments and identify where they are and what their conditions are, how they’re being handled, what types of conditions they’re being exposed to,” he says.
Port-state inspections, which generally adhere to stricter conventions than flag-state inspections, also help protect against subterfuge. “What that does is give us a level playing field to evaluate risk on vessels,” Kinsey says. “Everything is apples to apples rather than having flag states impose their own criteria on vessels.”
Earlier in the year, the United States also layered another set of sanctions on North Korea, barring trade with dozens of North Korean shipping companies and North Korea-flagged vessels, as well as international shipping companies. Russia also has become a frequent target of sanctions.
“If we look the sanctions that the U.S. and the EU have on Russia, the oil and gas technology industries are featured quite prominently,” Harris says. “Insurers are having to be extremely careful about just what they’re insuring in Russia in order to avoid sanctions. The tougher the sanctions get, the more underwriters will retreat from dealing with that country.”
Insurers do have recourse when deception is discovered. “If at the time of a claim, it comes to light that the bill of lading has been amended, tweaked or changed, or is actually fully fraudulent, then of course that gives underwriters good reason to deny paying a claim,” says Harris, who describes the standard sanctions clause as “very cleverly worded.” Essentially, the clause states that insurance is nullified if the goods are under sanction at the time a claim is filed. “The power at that point is with the underwriters because they’re the ones who either will or will not pay a claim,” Harris says. “And if they say, ‘We will not pay this claim because we believe to do so would be a breach of sanctions,’ there’s not an awful lot the claimant can do about it.”
New Pollution Standards
By New Year’s Day 2020, the shipping industry must abide by new pollution standards set by the 173 countries that form the IMO. The insurance industry is at the forefront of those changes, too, advising ship owners on what they need to do to prepare and what non-compliance could mean for their insurance coverage.
The standards—known as Annex VI of the International Convention for the Prevention of Pollution from Ships (MARPOL)—establish stricter limits on nitrogen oxide emissions and require the use of fuel containing less sulfur. The sulfur content in fuel oil must be 0.5% or less, down from the current 3.5%. The aim is to reduce maritime emissions by 50% by 2050.
Shippers have several options: they could use lighter, low-sulfur fuel; install scrubbers that reduce the sulfur content; or switch to natural gas. Some companies, like Maersk Tankers, have chosen to install scrubbers after analyzing fuel supply and equipment costs. The restrictions are expected to increase fuel costs by one third and are said to have contributed to a recent downturn in growth in container shipping. Maersk has estimated demand for container shipping will rise between 1% and 3% this year, down from 4% last year and as much as 8% per year a little over a decade ago.
The effect of the new measures on insurance isn’t settled yet, but it appears ships that fail to adapt to the new standards quickly enough risk losing coverage. “It’s been a matter of huge debate,” Harris jokes. “If you ask four or five underwriters, you’ll get six or seven opinions, because it’s a lawyer’s paradise.”
Marsh has been advising its clients not to assume coverage will continue if a ship doesn’t meet the standards.
“If a vessel fails to comply with the requirements of the Convention, then it would effectively be in breach of the flag state national law, and the vessel’s MARPOL certificate may be withdrawn, or at least suspended, by the flag state,” the company stated in a report last year. “Such action could have considerable significance for the vessel’s continued insurance cover, as historically a breach of warranty within marine insurance conditions has had dire effects on the insurance.”
Marsh points out that nearly all marine hull and machinery policies on commercial cargo vessels, as well as most protection and indemnity insurance associations and most fixed-premium P&I, include a classification warranty, which requires a vessel to remain in class throughout the insured period.
A vessel may be arrested after Jan. 1 if it fails to meet the 0.5% limit. “Hull insurance or machinery insurance that the ship owners buy does not cover the full ship arrest normally, because it’s a physical loss or damage policy,” Harris says. “However, there is another policy that ship owners buy—hull war risks and strikes policy—that does offer arrest of the vessel scenario coverage.”
That coverage, however, contains an exclusion for breaching trading or customs regulations. “Underwriters, I think, are reasonably confident that, on that score of vessel arrest, their exclusions are pretty strong,” Harris says.
Similarly, ship owners will have to demonstrate they’ve taken necessary steps to maintain their ships if they’ve transitioned to lower-sulfur fuel, which can cause more wear and tear on machinery. “The generally held view is that it is the responsibility of the ship operator, the manager of the vessel, to ensure that his vessel is regularly maintained and regularly checked and monitored,” Harris says.
What if the operator has acted diligently—“That is the key legal word, diligence,” Harris says—but still an accident happens? “Most underwriters I’ve spoken to have said, ‘In that situation, that’s what we’re there for,’” Harris says. “That’s what people buy insurance for.”
Maintenance records will be key. “Where there has been a lack of diligence on the part of the operators of the vessel—they just haven’t bothered to check to see if the pipes are corroding and so forth—I can’t see that the underwriter will be so generous,” Harris says. “An operator that fails to act diligently risks having the clams denied on the grounds of lack of due diligence.”
Kinsey, the Allianz consultant and Merchant Marine veteran, says the new standards could be a particular issue for hull and machinery coverage, especially for ships that opt to use lighter fuel rather than install scrubbers.
“One of the keys to understanding when you’re going over to light fuel from heavy is that you have to make up for that loss of lubrication somewhere,” Kinsey says. “I had a situation back in the early ’80s where we went from slow-speed diesels that were burning heavy to burning light just by the nature of the contract. Back then, there was quite a litany of liner failures until we got the lube oil settings right.”
Today’s technology should help more shippers identify potential problems before excessive wear takes a toll, Kinsey says. “We also have the manufacturers who have dealt with this situation, so it’s not an unknown,” he says. “We have the luxury of learning from our past.”
Kinsey says it’s critical for shippers to ensure they’ve made necessary upgrades and identified bunker suppliers for lighter fuel sources before MARPOL takes effect. Training the crew is also essential. “Get the crews involved early and use their feedback,” he says. “They’re the ones who know machinery because they’re operating it.”
Enforcement of the standards could vary from port to port. “This is a problem of global shipping—the rules can be signed onto by national governments, but they have to be policed locally,” Harris says. “Some places are more active, policing things more stringently than others. But, again, it’s the underwriter’s job, as part of what’s in the public domain, to know where those areas are and write risks accordingly.”
Kinsey says that, in many regards, the measure will be self-policing as shippers watch each other’s compliance. “If you have major operators who are doing this, they’re not going to be happy sitting by and letting other people surf,” he says.
Both Kinsey and Harris are concerned, however, that shippers won’t be ready.
Many in the shipping industry have assumed the changes would be delayed because it would be difficult and expensive for so many to comply. “Literally a year or so ago, we were warning our clients this one is coming in, this one is not going to go away,” Harris says. “Living in denial and not bothering to do anything is the wrong move.”
With the deadline rapidly approaching, ship owners must move quickly. “I’ve seen the press that there are queues beginning to form now at shipyards to get scrubbers put on,” Harris says. “The clock is ticking, and shipyards can only repair so many vessels at a time and put equipment on a vessel, and the equipment manufacturers can only make the equipment at a certain speed.”
Harris also says he fears too many ship owners will forgo installing scrubbers and decide instead to pay for the more expensive low-sulfur fuel—those supplies also may dwindle quickly. “We have visions of vessels being stuck in ports because the ports run out,” he says.
The question of supply isn’t just important to ship owners. According to Harris, charterers need to be clear on what their vessels are doing to comply with MARPOL. “If a ship arrives in the port that the charterer has asked it to go to and there are inadequate supplies of the fuel grades the vessel needs, the vessel’s just going to sit there,” Harris says, “and it is the charterer who will pick up the tab for it.”
Insurers, in turn, may be on the hook. “If a charter incurs a liability arising out of the charter party,” Harris says, “it’s the insurers who would have the problem, because that’s why a charterer buy charters liability insurance. It’s to protect him against the liability he incurs under the charter party, and if one of the charterer’s responsibilities is to provide adequate fuel for the vessel, it’s the charter liability insurers who end up picking up the final tab.”
Some ship owners, it appears, are still holding out hope that the start date for MARPOL 2020 will be delayed. “We don’t want this to slowly creep up on people and they’re caught unawares,” Kinsey says. “I think that people talking about it, yelling about it, arguing about it is good.”
“Unfortunately,” Harris says, “I think we’re going to see a mad scramble near the end.”
“If Council members are not in it, they are looking at it,” says Scott Sinder, The Council’s chief legal officer and Steptoe & Johnson partner.
Placing cannabis business coverage, however, is not easy. It’s tough entering a business that’s transitioning from the illicit market to legitimacy. State laws vary, lawsuits loom and the federal government’s classification of marijuana as an illegal drug makes banks and insurers reluctant to come on board. And despite the buzz about marijuana’s benefits, its reputation for impairment and dependence also raise ethical concerns in the age of the opioid crisis.
Billion Dollar Business
Even though all things marijuana are wholly illegal under federal law, Although recreational marijuana use remains illegal under federal law, most states-33, at last count—nevertheless purport to allow intake for specific medical purpose. Ten states and Washington, D.C., permit recreational use by adults, and other states are considering legalization. Moving from medical use only to recreational use by adults creates a tenfold increase in the number of potential customers, according to Arcview.
In 2017, there were 1.9 million Americans using marijuana as medicine and 21 million monthly consumers, Arcview says. Another growth area is Canada, which legalized marijuana use last fall and is attracting business from the United States. Sales in Canada are expected to reach $5.9 billion in 2022, up from $569 million in 2017, according to Arcview.
“The difficulty of overcoming the well-established illicit market is a major factor that will keep retail sales this year [in California] to a mere $2.5 billion.”Tweet
Despite the overarching illegality under federal law, marijuana is losing its social taboo status. “People two or three years ago who would never try it are willing to try it,” says Ian Stewart, chair of Wilson Elser’s cannabis law practice team. More people are switching from alcohol to cannabis as well, he added. Ironically, marijuana is gaining social acceptance as the potency of tetrahydrocannabinol (THC), which causes pot’s euphoric high and impairment, has doubled.
Product development and marketing is making pot more approachable to mainstream America. Inhalation via pipe, bong or rolling papers remains popular, but there are plenty of other options as well. For “health-conscious” customers desiring the THC high sans smoking, there are edibles galore in the form of candies, baked goods and beverages available at dispensaries and online. The Atlantic reported last year that, as the stigma of marijuana use recedes with expanded legalization, sublingual sprays, among other products, are gaining popularity with mothers.
Americans are also turning to cannabidiol (CBD) for the benefits of cannabis without the THC. Practically unheard of three years ago, CBD is said to prevent anxiety and stress, relieve nausea, help fight cancer, reduce the incidence of diabetes and promote cardiovascular health.
And while the medical benefits of marijuana opened the doors to legal use in the first place, proving its medical effectiveness is tricky. Gold-standard clinical studies required by the U.S. Food and Drug Administration (FDA) are practically impossible when marijuana is illegal in the eyes of the federal government, though the agency has approved two synthetic THC-based medications and CBD-based Epidiolex.
To identify promising areas of marijuana’s medical potential, the National Academies of Sciences, Engineering, and Medicine conducted a review of 10,000 marijuana-related studies published since 1999. Its 2017 report, “The Health Effects of Cannabis and Cannabinoids: The Current State of Evidence and Recommendations for Research,” found significant statistical evidence that cannabis is effective for treating chronic pain in adults but that it also carries the risk of psychological addiction and other problems. For most other ailments, the study calls for more research.
Meanwhile, recreational access may be affecting the demand for medical marijuana. In California, demand for recreational marijuana is cutting into medical market sales because people don’t need to purchase a medical marijuana card for recreational use, Stewart says. Nationwide, adult-use sales rose from $2.7 billion in 2017 to $6 billion last year while medical use shrank from $5.9 to $4.5 billion, largely due to new recreational-use markets in California and Nevada, Arcview reported.
“This is not a get rich quick thing. You really need to know what you are writing to protect the client, as there are a lot of warranties and subjectivities.”Tweet
Like any emerging industry, the marijuana field faces growing pains. Though fraught with the dangerous risks of criminality, running a company free of taxes, liability, laws and regulations is arguably less complicated.
Legitimate cannabis businesses are also being undercut by those that are not above board, especially in California. “The difficulty of overcoming the well-established illicit market is a major factor that will keep retail sales this year [in California] to a mere $2.5 billion,” the Arcview study reported. The Golden State is unique in that it grows an estimated 70% of illicit cannabis sold in the United States, the report said, and the state’s tax and regulatory burdens are high.
Just getting the marijuana industry away from being cash-based is difficult due to federal laws and guidelines, Stewart says. (See the sidebar “Navigating Federal and State Laws.”) Local banks and credit unions are available, he says, but fees are high and services are limited. Some online marijuana businesses use bitcoin or wire transfers.
Brokers play a critical role in morphing marijuana companies into legitimate businesses, says Kieran O’Rourke, vice president and director of underwriting for Cannasure, a marijuana insurance wholesaler and general agency that has served the cannabis industry for nine years. Part of the brokers’ role is trying to make insurance and risk management as easy to understand as possible. “A lot of [marijuana businesses] have not bought commercial insurance,” O’Rourke says.
What legitimate cannabis enterprises do get is the risk of liability exposure, says Michael Aberle, senior vice president of U.S. and Canadian program development for CannGen Insurance Services, a managing general underwriter. Aberle has been a marijuana commercial business broker for several years.
Liability, Aberle says, has a “chain of custody” that involves any business that has “touched the product.” Labeling issues, misleading statements, the actual product or allegations that the product has caused injury are all potential concerns, he says. “The plaintiff’s bar is training people on how to sue the cannabis industry,” he says, and regardless of a complaint’s legitimacy, marijuana companies in court “are already perceived as a drug dealer in effect.”
“I want to see admitted carriers, more competition and more consistency.”Tweet
Marijuana business insurance is growing in sophistication but features the hallmarks of emerging coverage: few insurers, underwriting hesitance and policy limitations. Wilson Elser’s Stewart says the marijuana insurance market “began to gel” in early to mid-2016. “Larger retail outfits [that] did not want to touch cannabis a few years ago are now entering the space,” Stewart says.
Brokers that have been specializing in the marijuana industry for years welcome newcomers. “If you need markets, that is what Cannasure does,” O’Rourke says.
Bolton & Company, which began offering coverage in California three years ago, has more than 200 clients today. For the midsize brokerage that specializes in agriculture, manufacturing and retail, the marijuana industry is a good fit, says Corey Tobin, vice president and lead of Bolton’s cannabis practice. “We saw more and more clients one way or another in the business,” Tobin says, such as large property owners leasing buildings for marijuana-related companies.
Although brokerages can be hesitant about entering the cannabis industry due to broker liability issues, Tobin says, Bolton decided it was OK because California regulates the insurance and marijuana industries. The firm now offers coverage in states where it is legal and in Canada through Assurex Global relationships.
Of the thousands of agents and brokers selling commercial marijuana insurance, Aberle says, about 25 to 50 brokerages truly specialize in the cannabis industry. “There are a lot of agencies now that think they need to jump in,” Tobin says. “This is not a get rich quick thing. You really need to know what you are writing to protect the client, as there are a lot of warranties and subjectivities.”
Although the brokers are willing, the insurers are few. Currently, about 25 to 30 insurers offer various commercial lines. Nearly all of them are excess and surplus (E&S) carriers. The list includes United Specialty Insurance Company, Kinsale Insurance, James River Insurance Company, Protective Insurance, Knight Insurance Group and Hanover Reinsurance. The advantage of E&S insurers, Stewart says, is they provide the nimbleness necessary in a fluctuating market. Some carriers, including Lloyd’s of London, Markel and XL Catlin, pulled out of the market due to discomfort with federal laws or because former attorney general Jeff Sessions rescinded the Cole Memorandum in 2017. (See sidebar.)
There is also insufficient claims experience to develop actuarially sound rates, O’Rourke says. As a result, insurers willing to offer coverage are hedging their bets through limitations and exclusions. For brokers, that could mean patchworking or layering coverage to meet client needs.
Coverage gaps are one reason that Dave Jones, a former California insurance commissioner, last year started the National Association of Insurance Commissioners’ Cannabis Insurance Working Group. The group is exploring insurance regulatory issues concerning availability and scope of coverage, workers compensation issues, and consumer information and protection.
While commissioner, Jones encouraged brokerages and carriers to cover the cannabis industry. “I want to see admitted carriers, more competition and more consistency,” Jones says. California’s guarantee fund also backs admitted insurers, which protects customers.
Tobin doesn’t see more admitted carriers entering the cannabis industry “until something major happens at a federal level.” For his part, he would like to see more excess carriers but is even more in favor of a “true insurance product [in] quality and name.”
Brokers looking into the marijuana industry are also considering the ethical implications, Sinder says. “Some brokers have a moral opposition to cannabis legalization,” he says, “and hence the dilemma.”
Cannabis is a mixed bag indeed. Studies show it can be beneficial in some circumstances, but dependency carries high societal and economic costs. Researchers estimate that 30% of users may have some degree of marijuana-use disorder, though its physical addiction is debatable.
Some studies indicate the legalization of marijuana is increasing use by teenagers, which can permanently harm their brain development. Among 19- to 28-year-olds, marijuana use rose by 7.2% from 2012 to 2017, according to the National Institute on Drug Abuse’s “Monitoring the Future” report, published last July.
At the workplace, Quest Diagnostics’ Drug Testing Index shows a relationship between marijuana legalization and positive tests for cannabis. Positive blood tests for pot increased 4% in the general workforce from 2016 to 2017. For jobs considered safety sensitive by the federal government, including drivers and nuclear power plant workers, positive testing rose 8% in the same period.
There is also mounting evidence that marijuana legalization threatens road safety. The Insurance Institute for Highway Safety reported last fall that the frequency of collision claims rose a combined 6% following legalization in Colorado, Nevada, Oregon and Washington compared with four neighboring states where recreational use remains illegal. (The report did not specifically link the increase in the collision rate to driver impairment due to marijuana use.)
More than half of marijuana users for chronic pain admit to driving soon after using the drug, according to a survey published in the scientific journal Drug and Alcohol Dependence in January.
The legal cannabis industry’s coming of age will create opportunities for brokers looking to specialize in an exploding market. Although brokers are willing to offer insurance coverage, both the cannabis and insurance industries are experiencing growing pains. Therefore, brokers looking to specialize in the marijuana field require the commitment and adaptability to grow along with it.
Annmarie Geddes Baribeau is a contributing writer. firstname.lastname@example.org
For more than 80 years, marijuana has been illegal due to its classification as a Schedule I drug under the Controlled Substances Act. In 2016, during President Barack Obama’s administration, the Drug Enforcement Administration refused a petition to reclassify it as a Schedule II drug, which includes opioids. The reason: the U.S. Department of Health and Human Services concluded marijuana’s risks outweigh its potential benefits.
The Cole Memorandum in 2013 relaxed criminal enforcement in states that legalized marijuana possession and established regulation governing its production, processing and sale, which encouraged more states to allow its use. Although former U.S. attorney general Jeff Sessions rescinded the memo in 2017, most states are continuing to expand legalization. State legalization is not welcome by everyone. The New Jersey legislature is considering a bill to legalize recreational marijuana—in March the state’s lawmakers postponed a vote on the issue when it became clear that it lacked enough support in the Senate—but 60 towns in the Garden State plan to ban sales within their borders.
Meanwhile, other federal laws and policies discourage banks and insurers from serving cannabis businesses. Financial institutions could find themselves held liable for aiding and abetting an unlawful marijuana business or be subject to civil asset forfeiture laws. And businesses also have the Bank Secrecy Act/Anti-Money Laundering Law and the Racketeer Influenced and Corrupt Organizations Act to worry about.
The U.S. Treasury Department’s Financial Crimes Enforcement Network’s guidance is another concern. Scott Sinder, The Council’s chief legal officer and Steptoe & Johnson partner, says although the network intended to give financial institutions a path forward to service marijuana-related businesses, the suspicious activity reports and broader federal prohibitions are enough to discourage banks and insurers from entering the market.
The Internal Revenue Code Section 280E is also a problem because it prohibits businesses “involved with illegal activities from taking tax deductions,” says Ian Stewart, chair of Wilson Elser’s cannabis law practice team.
Congress has been considering ways to reduce or eliminate federal barriers. Several bills, which are either pending or awaiting reintroduction from previous sessions, fall into three general categories, Sinder says. The first, he says, would “legalize banking and offer broader financial services access for the cannabis industry.” The second would protect states that have enacted laws legalizing marijuana from federal prosecution by exempting them from the Controlled Substances Act. The idea, he says, is not to disrupt the overall federal framework but to “find room for states to do what they want.”
The third approach, which Sinder favors, would remove marijuana from the purview of the Controlled Substances Act completely and regulate marijuana in a manner similar to alcohol. The Food and Drug Administration, Sinder says, “would have little regulatory authority, and it would create an excise tax regime,” similar to what it created for cigarettes.
What’s to love
Nashville is a very hospitable town. People always comment on how nice we are. We have the HQ of AllianceBernstein moving here, and Amazon and Ernst & Young are opening large support centers, bringing more than 7,000 white-collar jobs to the city. Nashville was already a major hub for healthcare with HCA Healthcare and Vanderbilt University being here, but we’re also growing rapidly in our technology footprint. And there’s no state income tax.
Nashville’s dining scene is very exciting. There are a lot of new restaurants serving a variety of cuisines but especially a lot of farm-to-table places. My favorite new restaurant is 404 Kitchen in The Gulch. It’s actually not new, but it moved into a larger space and expanded the menu to include dishes like whole crispy chicken and a 30-ounce hardwood-roasted rib eye. The food is excellent, and they have a great bar with lots of different bourbons, scotches and tequilas.
Old School Eats
Midtown Café. It’s a Nashville staple that offers all kinds of food, including steaks and seafood, and is consistently delicious. The lemon artichoke soup and the blackened grouper are my favorites.
The Patterson House is probably the best. It’s a speakeasy. For every day, I like BrickTop’s on West End Avenue. You’ll see a lot of folks and some celebrities there. Another great one is L.A. Jackson, on the roof of the Thompson Nashville hotel.
Thompson Nashville, a luxury boutique hotel in The Gulch. It’s across from 404 Kitchen and close to a lot of really good restaurants. It’s also within walking distance to downtown.
Tootsie’s Orchid Lounge is an old staple that is still great. Willie Nelson and Kris Kristofferson played there back in the day. Also great is FGL House (Florida Georgia Line), Acme Feed & Seed and just about any honky-tonk downtown, where you can see all kinds of country musicians and songwriters.
Going downtown to go “Honky Tonkin.” If you like beer and great live music, it’s the thing to do. We are also known as being the second most popular bachelorette destination in the country.
We’re not just country music. Nashville has a great public parks system. The Nashville Symphony at Schermerhorn Symphony Center is one of the best. And we have more than 20 four-year colleges and universities based here.
This new technology, also called additive manufacturing (or AM), is enabling businesses to print homes for less than $4,000 and within 24 hours of breaking ground. (The 3-D printer actually prints and layers mortar, over and over on top of itself, to create walls.) The 3-D printing company Icon has pared with New Story, a nonprofit, to print an entire community in El Salvador to combat homelessness and poor living conditions.
Houses are just one of many products now being developed using 3-D printing. Others include artificial coral reefs, limb prosthetics, and antique car parts. The cost effectiveness and personalized service possible with additive manufacturing help drive its appeal.
Global spending on 3-D printers is projected to rise from almost $14 billion in 2019 to over $22 billion by 2022, according to International Data Corporation. These figures include the expenses for hardware, materials, software and services for 3-D printers. Discrete manufacturing alone makes up almost 54% of the market share for 3-D printers. Healthcare providers and education together make up about 22% of the market share.
But like any new technology, additive manufacturing brings its own set of risks for businesses. There are many variables that come with additive manufacturing, such as the 3-D printer itself, the 3-D design, the 3-D printing material, and the safety of the entire process.
Ben Beauvais, an executive vice president and chief underwriting officer at Liberty Mutual Insurance, says there are many stages to 3-D print manufacturing. Beauvais says the end goal of AM is to produce, but a lot of underwriting considerations need to be taken into account. These include risk management protocol, safety standards, labeling and typical considerations for product liability.
While all these components and stages in 3-D printing are complicated, providing coverage for this technology is just an extension of the basic insurance model in the manufacturing industry. “The downstream risk can be somewhat more dynamic, given the shifting liability of the manufacturers relative to how they are sourcing their products and the contractual relationships that exist,” Beauvais says.
“The downstream risk can be somewhat more dynamic, given the shifting liability of the manufacturers relative to how they are sourcing their products and the contractual relationships that exist.”Tweet
One of the challenges of issuing coverage in additive manufacturing is the lack of industry standards and the abundance of materials to print with. A business could have a top-of-the-line printer, but if it’s not filled with the right printing material or if it’s using an improper blueprint, the production process could fall flat or, even worse, create a defective product.
Ruta Mikiskaite, a senior casualty treaty underwriter at Swiss Re, believes the lack of standardization within additive manufacturing has been an important topic for several years now. Part of the confusion is the speed at which 3-D printers can print various objects and how dynamic their printing jobs can become. This is just one example of a universal metric that needs to be developed. Mikiskaite says there are several marketwide initiatives to improve AM standards being undertaken by the International Organization for Standardization (ISO), American Society for Testing and Materials (ASTM), and the Additive Manufacturing Standardization Collaborative. But there is currently no global framework that could be applied to all stages of the AM process. “Standardization would help control the risks associated with AM and play a major part in controlling the quality of both the AM process and the final product,” Mikiskaite says.
Both the software used in the printer and the 3-D design itself play a large role in risk assessments. Beauvais says the hardware of a 3-D printer has a vital impact on the AM process. Taking this into account, errors and omissions coverage will likely be needed. “You have sort of the traditional engineering and design side of professional liability, but you’re also entering into the software E&O world,” he says. “Because, largely, the output of your product will be dependent on the functionality of the 3-D printer itself. There’s a lot of hardware that goes into that—whether it’s the design of the machine that prints itself or the componentry that the machine is being asked to build.”
The implications for faulty 3-D printed products could be devastating and warrant legal action. For example, if a replacement house crumbles and hurts the occupants, a printed antique car part breaks while driving, an artificial coral reef causes pollution, or a prosthetic body part causes harm to someone, the ramifications could be great.
Coverage for 3-D printed products could also vary depending on the quality of the material used. “If we talk about product liability, we care about product performance and reliability and look into the overall life cycle of the product,” Mikiskaite says. “Therefore, products that are expected to live long, for example titanium hip implants, or are used as, say, safety-critical parts, need to be certified and comply with standards. In the case of 3-D printed products, there may be initial disbelief in their reliability and therefore an uncertainty margin. Having said that, we should embrace additive manufacturing as a not-so-new and actually quite well tested technique.”
One of the challenges of issuing coverage in additive manufacturing is the lack of industry standards and the abundance of materials to print with.Tweet
Beyond the risks facing businesses that are manufacturing products via 3-D printing, these machines have the potential to improve the manufacturing environment, including workplace safety. “We’re seeing more customers look to our metal-printing process as a safer alternative,” says Andrew de Geofroy, a vice president of application engineering at Markforged, a 3-D printer manufacturer. “This is because they aren’t managing hazardous and flammable materials. As a result, they can keep their insurance costs down by maintaining a safer work environment for their employees.”
In addition to creating a safer work environment, additive manufacturing could also help improve the recovery process when accidents do happen. “Commercial insurance could also think of potential use of AM in managing claims,” Mikiskaite says. “Business interruption costs could be minimized if it was possible to use 3-D printed replacements for damaged property.”
“Standardization would help control the risks associated with AM and play a major part in controlling the quality of both the AM process and the final product.”Tweet
This type of recovery could be especially beneficial for smaller businesses that rely on every single day of output and can’t necessarily afford the wait times or costs of replacing a broken piece through traditional methods.
Understanding The Risk
Because 3-D printing is a relatively new concept for mainstream business and it can be difficult to wrap your head around, there is an even greater need for insurance professionals to unearth and help the public understand the risks involved. Otherwise, one bad claim could turn the burgeoning field into an unpalatable risk.
“Let’s assume a hospital might be able to use 3-D printing to cut the unit cost of a key medical device component,” Beauvais says. “While there may be purchasing savings, what if poor quality with the in-house 3-D printed component led to a false reading or other outcomes that result in significant lawsuits? This is the value of bringing risk management, insurance brokers and carriers into such discussions.”
While 3-D printing is irresistible due to its low-cost benefits and aptitude for customization, there are many new dangers for this upcoming industry.
“From an insurance coverage perspective, clients and brokers need to ensure there are no gaps in coverage and the use of additive manufacturing is not excluded or inadequately limited,” Mikiskaite says. Meanwhile, she says, underwriters need to evaluate risk and ask questions about what additive manufacturing techniques and which machines are being used and for what purposes.
Ewell is a Leader’s Edge technology associate and staff writer. email@example.com
Interested in learning more about additive manufacturing? These sources can help:
Markforged provides self-learning courses and documentation to teach customers and those interested about its products and general 3-D printing practices.
Formlabs is another 3-D printing company that provides articles and information on the complexities of additive manufacturing and the need for more industry standards.
“I like Hollywood. I just like Minneapolis a little bit better.” —Prince
The Council’s Broker Smackdown North 2019 will be held in Prince’s hometown, at the Hotel Ivy, from July 16 to July 18. While the late Grammy Award-winning musician and icon didn’t say why he liked Minneapolis more than Tinsel Town, one reason might have been the friendly people who live here. Their reputation for being “Minnesota nice” was a defining characteristic of Marge Gunderson, the pregnant police chief played by Frances McDormand in the Coen brothers’ movie Fargo, which was partially set in Minnesota. Minnesota Nice was also the title of a documentary about the making of the movie.
But nice is just one of the city’s many charms. In a ranking of urban park systems published by The Trust for Public Land, the parks of Minneapolis were named the best of the 100 biggest cities in the country. Orchestra Hall, renowned for its acoustics, is home to the Minnesota Orchestra, which won the Grammy Award for Best Orchestral Performance in 2014. The modern Guthrie Theater, in the Mill District, a former industrial area now transformed by loft condos, craft beer bars and the Mill City Farmers Market, pays homage to the neighborhood’s history as the flour-milling capital of the world. The circular main auditorium reflects a mill. LED masts on top of the building look like smokestacks. And the “Endless Bridge,” a cantilevered lobby, provides 180-degree views for more than half a block.
Hotel Ivy is connected via the skyway (eight miles of elevated pathways connecting 80 city blocks) to the shops, bars and restaurants on Nicollet. The walkway culminates at the Walker Art Center, one of the most visited contemporary art museums in the country. The hotel is also near the urban art experiences you can have in the West Downtown Cultural District (so-called WeDo), where you will find another musical son of Minnesota, Bob Dylan, the subject of one of the neighborhood’s five large-scale murals. The Hennepin Theatre Trust has led the arts and culture development downtown, restoring three historic theaters—Orpheum, State and Pantages—that are venues for Tony Award-winning plays and international acts. The trust also oversees the Made Here program. Twice a year, underused public spaces become displays for art made by Minnesotans, sidewalks become venues for live performances and alleys become pop-up artist markets.
Minneapolis also has some of the best restaurants in the Midwest. The James Beard Foundation showed a lot of love to the Twin Cities in 2019, naming nine chefs, two restaurateurs and three restaurants as award semifinalists. A third of the nominees for Best Chef: Midwest hailed from Minneapolis (Thomas Boemer at In Bloom; Steven Brown at Tilia; Daniel del Prado at Martina; Ann Kim at Young Joni; Jamie Malone at Grand Cafe; Christina Nguyen at Hai Hai; and Karyn Tomlinson at Corner Table).
If you’re a fan of Prince (and even if you’re not), make the sojourn to Paisley Park, his home and recording studio, on the outskirts of town. Now a museum run by the same company that manages Elvis’s Graceland, it was opened to the public six months after his death. The tour begins in the white marble atrium, where Prince’s ashes are in an urn shaped like Paisley Park and encrusted with seven iridescent crystals (his favorite number). A pair of doves coos nearby. On a less somber note, there are exhibits of his gold records, instruments—including an original bass that was the inspiration for the Cloud guitar—and outlandish stage outfits like the “Raspberry Beret” cloud suit. You can even play ping-pong at Prince’s own table.
It’s absolute madness.
I’m not sure what kind of “leadership” we are witnessing these days, but the integrity bar must be set higher. What has led to this willingness to throw our standards and values out the window? Yes, these are hard and cynical times, but that doesn’t give people—and certainly not leaders—the green light to deflect responsibility and place blame on others. A mentor of mine, Fred Burns, once said to me, “You either have integrity or you don’t. Period.” He was so right. It’s pretty black and white.
Why do I raise this in a business publication? Because as the industry transforms, both from inside and out, there is an incredible opportunity to build a new system based on integrity for our clients. In this very magazine not too long ago, we wrote about the industry’s role in remediating the mistrust we see all too often in corporate America. “The insurance industry is in a unique position right now to greatly contribute to these efforts to change the conversation between consumers and corporations.” [Callous Capitalism, March 2017]
The message today is the same as it was then: that business value should be recognized well beyond closing deals and quarterly returns.
Part of this, of course, is corporate social responsibility—an increasingly important piece of today’s business strategy. But the opportunity for us to truly transform the way our business is perceived is through the service and counsel brokers uniquely offer.
I’m not suggesting you don’t make money. We’re all running businesses. But putting profit above all else is not the only responsibility of business, as economist Milton Friedman told us in 1970. There’s a difference between doing business with integrity and providing real security to your clients versus churning out contracts that require your clients to jump through hoops when they need you the most.
It seems to me that companies of high integrity succeed. Take Patagonia, for example. A product-driven company with more than $750 million in sales and a business philosophy focused on doing what’s right for the planet. Interesting that the decisions they make with the environment in mind seem also to be good for business.
The insurance industry does a lot of good. That fact needs to be highlighted more, as we all know. At the same time, the more we focus on service and fully embrace the role of advisor to clients we care about, the better chance we have of achieving success—as organizations and as people.
The seeming diminishment of integrity is all around us. We have a power and a responsibility to protect our industry from that fate. You see, integrity is not just a corporate responsibility but a personal one as well. It is important we lead by example.
I’m going to start by turning off the TV.
What are co-pay offsets?
Alexander: Co-pay discount cards are one way that pharmaceutical manufacturers reduce patients’ burden from out-of-pocket costs. Coupons [like GoodRx] are another type of co-pay offset, and drug manufacturers, wholesalers and other parties, like McKesson and Walmart, are getting into the game as well because they have their own discount cards.
How do they help patients?
Alexander: No patient in their right mind will argue in the short term against a reduction in prescription co-pay costs. In a study we performed, we found that, in the short term, they did diminish patients’ costs and may increase utilization and adherence.
Why are pharmaceutical companies using them?
Wojcik: They are designed by manufacturers to keep patients on more expensive medication when there are less-expensive alternatives, generic or other treatments that could be used by the patient. They provide stickiness so the manufacturer can keep their share of the market longer than they would have when market threats are looming. They are often used for expensive specialty pharmaceutical drugs but also when a patent is about to expire or another potential drug, like a generic, is being introduced. They use them to avoid competition gains in the market.
Are there downsides to these co-pay discount cards and programs?
Alexander: These types of approaches propagate a healthcare system where enormous costs are charged for prescription drugs that are borne by consumers and by all of us. The short-term implication is clear—if you have a co-pay offset, it will let someone pay a $5 co-pay instead of a $50 one.
But the long-term effect is trickier to know and understand. Years ago, we did a study looking at free samples offered by physicians, which is slightly different. We found that, paradoxically, people receiving free samples had higher prescription drug costs during, and well after, they received their samples.
It seems counterintuitive until you stop to figure it out. If someone receives a free sample for a drug, even a high-priced one, they may go on to fill a prescription for that same drug. You can imagine the same sort of factor at play with offsets. They are allowing patients, for a time, to fill prescriptions for more expensive medications.
Wojcik: There are some cases when high-priced medications like specialty pharmaceuticals offer manufacturers’ discount coupons that are helpful to both the patient and the plan. If there is no alternative, this can help the patient. But that is the minority of cases. Discounting their co-pays is potentially discouraging them from seeking lower-cost medications that might be appropriate. It saves the patient money at the time they are buying the medicine, but, over time, it costs the plan—and therefore the participants—more if there is a lower-cost alternative medication that they could be using. Driving the use of more expensive medications when lower-cost ones are available drives up the cost for everyone.
How do patients get these discounts?
Wojcik: Physicians may supply them to patients, and there also could be some direct-to-consumer ads whether on TV, print media or the internet. You’ve seen those that say things like “Please talk to your doctor” or “Go to our website for more information on how to afford this medication.”
The use of these has grown a lot in the last few years. For example, in 2009 there were 75 medications that had co-pay cards associated with them, and by 2015 there were 700. So there’s a big growth in recent years along with the growth in specialty pharmaceuticals and an increasing number of high-priced medications. Eighty percent of specialty drugs have co-pay discount card programs associated with them today.
What are insurers doing to reduce patients’ use of these cards and programs? We’ve heard of benefit changes like “maximizers” and “accumulators” that are being implemented into benefit plans.
Wojcik: Maximizers and accumulators are two ways insurers are attempting to get around the manufacturers’ co-pay offsets. The accumulator basically doesn’t credit any kind of manufacturer’s discount toward a deductible. So the patient’s deductible isn’t reduced by the amount that the manufacturer is helping out.
Maximizers are even more recent to the market. When a pharmacy benefit manager is aware there is a coupon out there (and they have good information about ones available), they will encourage a member to seek out the maximum in terms of coupons and deductibles and will add that on to raise the deductible or out-of-pocket maximum to include the total amount of aid coming from the manufacturer.
Alexander: One wonders why it took so long for insurers to do this. Accumulators and maximizers are short-term and imperfect fixes for a long-term problem. As time goes on, more will be revealed about how they impact the market. Now, there is relatively little information on what effects they are having. Like, there are some questions about what effect they will have on drug utilization and adherence.
Patients often have a difficult time wading through their health plans as it is. It seems like these programs would just make things more confusing.
Alexander: Patients can get caught in the middle, and it’s unusual, even for the most well educated, proactive patient, to stay on top of the way dollars are flowing through the healthcare system and the implications.
Wojcik: It’s not the ideal situation in the first place to have a need for a discount card and coupon and then on the back end adjusting for that as an accumulator and maximizer. It just adds confusion to the plan. Our response is, if it is causing so much of a workaround and administrative burden, why don’t they just reduce the price for everyone at the outset instead of just making it less for the lucky people that get these cards.
The plan owes it to patients to explain why they are implementing these: to ensure patients are getting the best value for their medications; that there may be a lower-cost alternative out there that is appropriate instead of the expensive name brand. In terms of a plan, they do, in written documentation, disclose when they are using maximizers or accumulators. But participants probably don’t read it, and then they have to call the insurer, who has to tell them their discount card doesn’t help reduce their deductible. It’s not an ideal situation all around.
Employers should reach out and say, “Why we have these is to reduce costs and improve value and spending on pharmaceuticals. And what we are trying to do is for the benefit of all of the members and the plan as a whole.” Otherwise, members will not understand how cards and coupons can be detrimental overall.
Are there other options brokers and employers could consider that have more of an impact on the system to reduce costs?
Alexander: Maximizers and accumulators are two tools in a toolbox that brokers have in order to get their hands around drug spending, but they are two of several.
The typical formulary has plenty of fat that can be trimmed. Pharmaceutical spend can be reduced by 10% to 15% by cutting products that have no business being covered. I realize there are a lot of factors that one has to swim upstream against, but, to be clear, if brokers and self-insured employers want to be part of the solution rather than the problem, they should trim the fat from their formularies.
Wojcik: Most employers feel the way pharmaceuticals are priced and the way the supply chain works isn’t optimal and would like another way. This involves payers coming together with manufacturers and figuring out a better way. But that’s a bigger change in the system.
We need more transparency in the pharmaceutical market and more information about how pricing occurs. This might obviate the need for things like co-pay discount cards and ways to counter them. The ideal scenario would be for patients to check with their plans and be fully knowledgeable about alternatives. Another important piece of communication and education which is increasingly happening is informing physicians about the prices of medications and alternatives. Often, they have no idea what the price in the system is. They can be more educated on pricing and the impact of discount cards and coupons when they are prescribing medication to patients.
She is abetted by her free-spirited, widowed mother Mary (Rosanna Arquette) and her married but frustrated sister Jayne (Chelsea Frei) , as well as her assistant at the Wilson and Hines insurance agency, who, being gay, clearly knows clever dating strategies. Jayne sets her up on Tinder, the dating app, and in a drunken moment, Olivia swipes right 252 times, then vows to go out with every single one of the men who responded.
Olivia is played by comedienne Carly Craig, 38, a Second City alum, who created the series based on her own life. The San Diego native is the daughter of minor league baseball player and former Seattle Mariners scout Rocky Craig and Marz Moore, a flight attendant on American Airlines. Working her way up in the comedy business, she ended a 12-year relationship at age 35, thus entering the world of digital dating. She used Tinder, dropping only a photo and no bio. Like Olivia, she got 252 responses.
Craig is a producer of the show, also a showrunner, a writer, and the star. She sold the idea to You Tube Premium, a new division that charges for original programming. The motley relationship and sexual adventures that run through the series (for all three women) are culled from Carly’s experience and those of her friends.
Of course, not all the onscreen encounters were real. Carly met her current boyfriend on Tinder way before she got to meet 252 bachelors. And, sadly, she has never worked in the insurance business.
In 2018, we successfully rebranded ourselves from Ascension Insurance to Relation Insurance Services. If you’re considering renaming your firm, here are seven things we learned that you should think about to help ensure a successful rollout with your team that will extend to clients and into the larger business community.
Involve the right people from the beginning. First, create a naming committee comprised of folks from all levels and facets of your business. Consider leveraging outside consultants where appropriate for support so the internal team can remain focused on the day-to-day business. New names also can create distractions and/or concerns for employees speculating about an ownership change. You can mitigate this by prepping the leadership team with key talking points and anticipated FAQs.
Know where you are so you can show the team where you want to go. Conduct an audit of company names already in use in your industry or tangential to your industry to help explain to employees where your current name fits in the ecosystem and why it needs to change. A helpful exercise is to plot out which company names in the industry are descriptive and which get turned into acronyms. Look at which names are constructed or invented and how many evocative names are out there.
Don’t be emotional about picking a new name. As you begin the process of reviewing potential names, strong feelings will likely surface, but remember: naming a company has to be strategic. To keep emotions to a minimum, establish the following guidelines for evaluating potential names:
- No one else should be able to lay claim to it in your vertical
- It has to distinguish you from competitors in the industry
- It needs to complement your brand positioning
- It has to be memorable, easy to say and spell, and look good on signage and marketing materials.
Take the time to get it right and push on. In order to find something that hits all of your criteria, you’ll need to construct or invent a name or find one that isn’t likely to be used in your vertical. Wherever you land, the new name will probably require some courage and vision to bring it to life. For us, at the core of every aspect of how we do business is our relationship and partnership to our clients. Once we landed on “Relation,” it became obvious that we needed to be bold enough to put that front and center on everything we did. We also knew that not everyone would buy into the new name at first, and we built that into our rollout plan.
Use internal influencers to help get the rest of the team on board. Identify groups of influencers within your organization who can be brand champions and brand ambassadors. The brand champions should be folks in leadership positions at each business unit who can help answer questions and address concerns locally while championing the brand to employees who may be attached to the old name/messaging. Gain their buy-in before the rest of the company.
The brand ambassadors should be associates in each office who can be continuously responsible for upholding the new brand standards at each office and making sure everyone has what they need. They can also be the first line of defense, letting leadership know of any minor issues before they escalate.
Keep the momentum and excitement building. Employees are influenced by leadership. All the way up until your external launch, your executive team should be demonstrably united and excited about the name change. Consider facilitating town halls, speaking one-on-one with any detractors, sending out regular progress emails to the whole company, and including updates on regular all-colleague calls. Drip-releasing branded collateral materials and merchandise also helps to build excitement leading up to the hard launch.
Don’t stop internal communications after launch day. After launch day, continue to send out weekly (or daily, if needed) email updates for housekeeping items. Consider devoting monthly all-colleague and sales team calls to give big-picture updates on branding and solicit ideas for new content and thought leadership. It’s also important to fold the branding into your employee experience initiatives for recruitment and onboarding, health and wellness, and employee engagement. Our national sales meeting happened to come hot on the heels of the launch, which gave us an additional opportunity to build pride in the new brand and begin a collaboration between marketing and sales on a new, comprehensive collateral system.
Changing your name can either generate a lot of interest in your work or make it harder for people to remember exactly who you are and how to find you. Your employees are the ones who can help set your firm apart from your competitors. Start from the inside out with them and let them build your advantage!
Natalie Zensius is senior vice president for marketing communications at Relation Insurance Services. firstname.lastname@example.org
But what about the many small businesses that fall victim to the same attacks? Their stories might not make the news, but these attacks are happening and the impacts are usually much more significant, often devastating.
We recently received a call on a Sunday afternoon from a small-business client in the construction industry who had just experienced a cyber breach. The insured’s computer system had been down for a couple of days, and they finally realized they were not going to be able to recover on their own. The company had been a victim of a ransomware attack. (Ransomware is a type of malicious software that threatens to publish the victim’s data or perpetually block access to it unless a ransom is paid.) This call, unfortunately, was very familiar. You might think that smaller businesses, with far less data than Fortune 500 companies, would not have to worry about cyber targeting. Not true. In fact, they’re often considered prime targets because they don’t have the resources or expertise to respond.
According a report released by The Ponemon Institute in September 2017, the percentage of small businesses reporting cyber attacks increased from 55% to 61% from the prior year. The most prevalent attacks against smaller businesses are phishing/social engineering and web-based attacks. This year’s Ponemon study revealed that cyber attacks were more targeted, severe and sophisticated. The institute went on to lament that the average size of breaches for small businesses involved 9,350 individual records—a nearly twofold increase from an average of 5,079 records the year before.
After talking with our construction client, it was pretty clear to us the company was unprepared for the attack—and unable to conduct business in its wake. The client was looking for some magical force to guide it and help restore its data, which had been locked up. Ideally, we would have referred our client to its insurance carrier for business recovery assistance, but, unfortunately, the client had declined the coverage. In this day and age, brokers and insurance companies should be selling cyber insurance to almost every business.
Some form of cyber coverage should be purchased by companies as routinely as they purchase other common property and casualty insurance, such as workers compensation, general liability, property and commercial auto. Most cyber coverage is relatively inexpensive when compared with other lines of insurance. More sophisticated insurance products even offer assistance with cyber breach response, alleviating some of the associated stress and anxiety. Furthermore, most insurance carriers place an emphasis on better understanding the cyber risk they will be insuring before extending a policy. This means an assessment of the company’s cyber risks is often part of the insurance purchase, which helps companies identify gaps in their cyber security and incident response plans.
Most businesses really expect their agents or brokers to find insurance carrier partners who can help quantify their cyber risks, assist in finding vulnerabilities, and advise them on the right cyber technology to deploy through approved vendor panels. And when an event does occur, the policy should respond with adequate coverage for the hard costs of the response—a forensic investigation, notifications to affected individuals and businesses, call centers and a public relations strategy to respond to the breach.
As for our client, we put them in touch with a few companies with expertise in responding to cyber attacks. After further investigation, it was determined our client had not backed up key data, which would have allowed the business to quickly restart operations. As a result, our client had to pay the ransom in order to successfully restore its data.
With all the information that has been published on cyber risks—and agents and brokers eager to sell more insurance—why aren’t businesses purchasing appropriate coverage? Advisen, which provides insurance data and technology services, publishes an annual survey of agents and brokers around the world who are directly involved in the cyber insurance business. Its 2017 survey found that a failure to understand cyber exposure hampers sales. “According to 77% of the respondents, one of the biggest obstacles to sales is that potential buyers do not understand their exposures,” Advisen reported. “Further, 56% of respondents also indicated that buyers do not understand the Cyber insurance coverages for those exposures. These top obstacles have remained constant year after year.”
The insurance community itself is also to blame. For example, there is no consistency in terminology from carrier to carrier, or even policy to policy. The term “cyber” itself is somewhat confusing, as it might mean one thing to one carrier and something else to another. I recently heard one industry expert suggest that we get rid of the cyber term altogether and just call it “data insurance.” Others say it should be a covered peril as part of property coverage or even a stand-alone policy. Keeping all these details straight makes my head spin, which is why I guess I am not our firm’s cyber expert. I do know one thing as a broker who sells cyber insurance: we still have lots of work to do.
Henry Wright is SVP and senior director of the Risk Solutions Group at McGriff Insurance Services. email@example.com
As you re-analyze your 2018 metrics, focus on organic growth and total growth. Are you comfortable with your results? Did you outperform your own expectations? Maybe most importantly, were your expectations aggressive enough?
In 2018, MarshBerry’s average client grew organically about 6%. The top 25% of that same data set grew just over 15%. That is roughly 2.5 times more organic growth for the insurance industry’s top performers compared to their average peer. And before you try to make excuses and discredit the data, it is a mix of large and small firms, from major metropolitan areas to rural areas. These organic growth metrics are the highest averages we have seen since 2014 and are partially being driven by strong economic and exposure base growth.
Even more staggering than the organic metrics are the total growth metrics being achieved by a subset of some of the largest firms in the insurance industry. We measured the total revenue growth for the top 10 acquirers in 2017 during the five-year period between 2013 and 2017. During that period, the four-year compound annual growth rate is 33.6%. This metric excludes the Alera Group, which grew from $0 to $193 million in that same period and is on the top-10 buyer list.
So where does all of this information leave us? How do you stack up against the industry’s average independent firms and the large “aggregators”? If you are not outperforming those two measurement groups, you are shrinking relative to your competitors. I visit with too many firms that try to justify why they aren’t growing or why their growth is “enough.”
Here is a stark reality: if your growth is not exceeding industry benchmarks, you should not consider your organization as one of the top-performing brokerages in the country. Don’t buy into your own press clippings. Set out to make meaningful change and institute accountability into your culture to allow your firm to operate at an elite level. Doing so will assist you in setting the course for your future, whether remaining independent or selling your firm to join up with another. It will also help make you more valuable. Buyers today are much more likely to pay higher valuations to firms that are continually outperforming the market growth standards. Organic growth is accretive to shareholder value, and if you can demonstrate an ability to do it better than others, you can command a more aggressive valuation externally.
At the end of the day, you have the ability to do whatever you want with your business. Strong profitability can help support a really great lifestyle. Just remember that there is fake news everywhere. And as you are trying to sort out fact from fiction, make sure you are telling yourself the truth. You may have a really good business, but if you want to have a great firm, you have to commit to growth that will allow for expansion even when the economy changes or the rate environment gets really soft. Your peers are proving it is possible. The commitment to perform is up to you.
Merger and acquisition activity in March produced an additional 37 announced transactions in the insurance distribution space. With several retroactive announcements coming in, the year-to-date total has increased to 161 announced transactions. If the first quarter of 2019 is any indication as to the appetite of the market, we are on pace for another record-setting year. There have been 30% more transactions announced in the first quarter of 2019 than in the same time period in 2018, and this has been the most active quarter in the last decade.
Patriot Growth Insurance Services remains the most active acquirer, with 19 announced transactions year to date, although it did not announce a transaction in March. The next most active acquirers are Hub International with 10 announced transactions, followed closely by BroadStreet Partners, Arthur J. Gallagher, and Acrisure, with nine announced transactions each.
Marsh & McLennan Companies completed its acquisition of Jardine Lloyd Thompson Group, which it had announced in September 2018, while Marsh & McLennan Agency announced the acquisition of Lovitt & Touché. With locations in Phoenix, Tucson and Las Vegas, Lovitt & Touché was previously ranked 77th on the 2018 list of the 100 largest insurance brokers of U.S. business.
Another trend within the market has been an increased attraction to direct-to-consumer insurance products. This bent is apparent, as Willis Towers Watson has agreed to acquire Tranzact. This $1.2 billion investment greatly bolsters Willis Tower Watson’s direct-to-consumer offerings and presents a great growth opportunity.
Trem is EVP of MarshBerry. firstname.lastname@example.org
Securities offered through MarshBerry Capital, Inc., Member FINRA and SIPC, and an affiliate of Marsh, Berry & Co., Inc. 28601 Chagrin Blvd., Suite 400, Woodmere, Ohio 44122, 440-354-3230.
Disclosure: All deal count metrics are inclusive of completed deals with U.S. targets only. Scorecard year-to-date totals may change from month to month should an acquirer notify MarshBerry or the public of a prior acquisition. 2019 statistics are preliminary and may change in future publications. Please feel free to send any announcements to M&A@MarshBerry.com.
When an M&A data conversion takes place successfully, the acquiring company will be able to more smoothly integrate standard business operations, including effectively generating reports and managing financial accounting.
There are three main areas to consider when integrating processes and data from one agency to another: the data, the technology and the people.
Ensure your data are fulsome and consistent. One of the most preliminary steps to data conversion is ensuring all data are properly loaded into the system. The more data entered into the system in a clean, consistent way, the easier and faster the conversion process. If you find that data have not been loaded correctly before the acquisition, it is important to take an audit of records that need to be adjusted and to clean up the data as much as possible.
Because no two agencies are the same, another common challenge most agencies run into is mapping the data from one agency management system to another. If two agencies are on different management systems, there could be fields that do not align, such as “phone” and “contact number.” To support accurate data transfer, your technology provider will work with agency staff to define an action plan, ensuring the proper fields align from one system to the next. Agency staff are then incorporated into final review and are part of the process for any future integration projects.
Agencies and brokerages must allocate sufficient time to review data; this is critical to the success of the data conversion process. While reviewing the data, ensure that all mapped fields were transferred correctly and all data from the previous management system are present. As staff know their agency information best, reviewing their data with their data consultant is one of the most important steps of the data conversion process.
Use a foundational, scalable management system. A successful data conversion will be next to impossible without the proper agency management system in place before the deal. Having a modern infrastructure and the ability to integrate other data and technologies within the system is crucial.
As you migrate new data and bring over new staff, there might be additional customer service or insurer connectivity integrations that would be valuable to add to your current software solution. If your current management system is not open, integration with other software can be time consuming and costly.
Educate staff and leverage the experts. One of the toughest aspects of an M&A transaction, especially for the agency being acquired, is change management for all employees. An effective change management strategy is the foundation for any successful M&A process. Transparency is key when navigating your change management plan. The more you can keep staff aware of changes with the systems or people they will be working with to migrate data or adopt new processes, the smoother the transition will be.
Along with considering the people within your business during an M&A data conversion process, leveraging support from your technology provider is vital. Subject matter experts such as project managers and data consultants oversee the data conversion and walk agency staff through what they need to do in order to convert clean data to the new system.
Staff should also take advantage of training and educational materials when going through a data conversion. Your technology provider should support agency staff with live training workshops and one-on-one educational sessions, providing assistance to staff as they clean and review data—and potentially learn a new management system.
Smooth the transition by making all users aware of what is required, because many of the processes and tasks are quite technical. After the transition, ensure better long-term implementation by providing continuing education on the new system for staff of the acquired agency.
There are several different stakeholders and factors to consider to successfully navigate a data conversion during an M&A transaction. Having clean and consistent data, an open and scalable management system, and the support of your agency staff and data experts are all crucial in a smooth data-migration process. Finally, leverage a technology partner that understands all three aspects. The right technology partner will support your staff, take care of your data, and supply an advanced agency management system to guide you through your M&A data conversion.
Kris Hackney is EVP of customer experience for Applied Systems.
Retirement planning is part of those benefits, though it’s often misunderstood or even ignored by employees. And with many employees leaving one job for another, often after only a few years, establishing a solid 401(k) can seem like an impossible goal.
But building tenure in your 401(k) doesn’t have to coincide with tenure at your job. That’s where synthetic tenure comes in. According to the Retirement Clearinghouse, synthetic tenure is “consistent participation in more than one defined contribution plan across multiple job changes, with no interruptions or breaks in contributions or premature cash-outs, throughout a participant’s time in the workforce.”
The site goes on to say, “Sponsors and plan providers should be asking themselves what they can do to replicate the benefits of consistent participation, while recognizing the highly mobile nature of today’s workforce. Creating synthetic tenure is the key. Sponsors and plan providers should take the lead in implementing programs that remove the frictions associated with account portability and facilitate plan-to-plan roll-ins, thus enabling retirement savings to follow participants as they change jobs. Broadly delivered, these solutions will create synthetic tenure and the positive benefits of consistent participation.”
While synthetic tenure’s main goal is to prevent leakage of retirement funds when an employee switches to another job, it can also come into play if an employee’s salary changes when taking a new job. If someone earns a larger salary at a new company, that person should be encouraged to give more, if not the same percentage, of their contribution to their retirement savings. Although this sounds like a given, it may not dawn on employees to contribute more to future savings when they change jobs.
Why should an employer care what happens to an employee’s retirement after that person leaves the company? It goes back to feeling valued. Employers who care what happens to their staff regardless of whether or not staff members stay with the company demonstrate their interest in those employees beyond just their current contribution to the business. And who knows how that interest will translate—it may even mean increased “real” tenure.
For benefits brokers who are looking to help their clients with talent retention and engagement, synthetic tenure could be a new angle to an old problem. If implemented properly, the majority of the work force can retire with the same benefits and financial security as those who do stay at an employer for their entire working careers.
Here in Chicago, more than 200 insurtechs, brokers, carriers, students, consultants and venture capitalists are gathering to discuss how emerging technology can enable business processes, while at the same time evolving the inherent nature of risk. From the internet of things (IoT) and telematics, to blockchain and artificial intelligence (AI), the transfer of real-time data can be used to mitigate risk and drastically cut costs across the insurance value chain.
But as a wise man once said, with great power comes great responsibility. While technology presents itself as a ripe opportunity for brokers and risk managers, a constantly evolving risk landscape lacking sufficient historical data can be a very difficult risk to insure, at least for profit.
In a world that’s rapidly changing, insurers and brokers alike need to understand modern risk and how to adapt to a changing industry.
”As the world economy grows, we’ll need a new AIG every year to cover the trillions of dollars of new risks.”
- J. Patrick Gallagher, Chairman, President, & CEO, Arthur J. Gallagher & Co., on how the growing global economy requires more capital to transfer risk
“90 % of all the data we’ve collected has been collected in the past two years. If you ask that same question two years from now, we’ll be able to say the same.”
- Pete Miller, CEO, The Institutes, on the abundance of data and its role in the insurance industry
“Companies are increasing their spend in risk management, but risk management academic departments are downsizing/decreasing,” findings from talent gap survey results."
- Phil Renaud, Executive Director, The Risk Institute, part of The Ohio State University Fisher College of Business
"AI is not magic; it's math, and AI can do the dirty work much faster and much cheaper”
- Phil Alampi, Vice President of Marketing, DataCubes
“We’ll see tremendous change in how we do it, but the essence of what we do stays the same… We take people’s risk.”
- J. Patrick Gallagher, Chairman, President, & CEO, Arthur J. Gallagher & Co, on the evolution of risk transfer
“In 2018, the global cost of cybercrime exceeded $1 trillion for the first time; 43 % of cyberattacks target small and midsized businesses; and more than 52 % of small businesses that suffered a cyberattack in 2018 went out of business by January 2019.”
- Stephen Soble, CEO, Assured Enterprises, on the dangers of cyber crime
Can you speak to WeGoLook’s transition to insurance, and how the gig economy (and independent contractors) has the potential to play a critical role in insurance and claims management?
WeGoLook’s innovative model allows Crawford to deliver many services as rapidly as same day and at a fraction of the cost of traditional offerings. Through our revolutionary integrations like TruLook, a program that uses a triage process to route claims in one of three directions, Crawford and WeGoLook are setting the standards for the next generation of claims handling and loss adjusting services. The gig economy, which includes our ‘Lookers,’ changes the way businesses operate today, and Crawford is unlocking that potential as it provides faster and more secure service to existing and future clients.
WeGoLook’s team utilizes a network of over 46,000 on-demand “Lookers” which includes 2,200 licensed drone pilots, to inspect property damage in high-risk areas after catastrophic events. Can you discuss the use of drones during last year’s historic nat cat season as a game changer for disaster response?
Drones are key to providing a rapid view to our clients of what level of losses they can expect. By comparing images shot by drones prior to a disaster with ones taken post-event, our clients were able to adjust their programs and more accurately plan for recovery. When disasters strike, our response, which includes drones, has been shown to be able to settle claims in an average of 3.7 days versus an industry average of 30 days. Additionally, our TruLook program, which incorporates a triage process that includes WeGoLook, can reduce costs by on average 20% to 30%.
What learnings can you take away from prior years’ hurricane seasons?
WeGoLook performed our first catastrophe (CAT) ‘looks’ during Superstorm Sandy in 2012 for carriers unable to access damage in the New Jersey area. Fast forward seven years and WeGoLook has become one of the most widely available on-demand CAT inspection solutions. We continue to focus on our mission of restoring and enhancing lives, businesses and communities by quickly deploying Lookers to capture detailed data, images, video and measurements in any scenario. For example, in Hurricane Harvey, WeGoLook had a network of over 800 Lookers within 30 miles of the Houston area who were dispatched to perform inspections on property and automotive assets damaged by wind, flood and hail across the gulf. Additionally, in Hurricane Maria, Lookers in Puerto Rico performed business interruption validation on a number of commercial properties across the island and were able to uncover a fraud rate of 67%.
Last year, Crawford began using robotic process automation, or RPA, to reduce repetitive tasks for adjusters, including simple steps like eliminating the need to copy and refill information from one computer screen to the next. How do you anticipate the claims process to evolve in the next year or so?
Crawford established Crawford Innovative Ventures (CIV) as a strategic catalyst to uncover the potential of new innovations that will disrupt the claims handling industry with practical, intelligent solutions. In addition to RPA, artificial intelligence, internet of things, and virtual reality are anticipated to change the claims process.
Lastly, what’s on the horizon for WeGoLook?
WeGoLook launched an assisted self-service app, YouGoLook, which allows customers to report and document claim conditions while being supported by an end-to-end workflow and WeGoLook’s central operations team to ensure the quality of data capture. With the YouGoLook self-service app, homeowners can submit their own claim photos, employers can audit their own fleets, and insurance applicants can capture images and information needed to evaluate risk or to validate assets used as collateral. The possibilities are truly limitless!
Do you think the emergence of technology in insurance will ultimately help attract a younger workforce?
I do believe that the emergence of technology in insurance will help attract a younger crowd to the industry. Technology, to an extent, is a concept with which my generation seems to be quite comfortable. Students that either chose not to study risk and insurance or have simply not had the opportunity to learn about the industry, regardless of their discomfort with the risk and insurance content, may now be attracted by the use of technology in the industry. Many of us students have learned to admire innovation and exploration of the application of newfound solutions. We want to be a part of the solution when we understand the goal.
Why did you choose to study risk management in college?
In some regard, I did not choose to study risk management. I intended to study finance and marketing. At St. Mary’s University however, finance and risk management are a combined major. Before I took a course in risk management, I believed it only to be a supplement to my education in finance knowledge. In some ways that remains accurate; my knowledge in finance has supplemented my knowledge in risk management and vice versa.
Has your perception changed on risk management and insurance?
I had little knowledge of risk management and insurance as a concept, let alone as this incredible industry rich with opportunity for students such as myself. My perception of risk management has completely transformed since I’ve had both formal courses and an immense amount of exposure to the industry, mostly through my involvement with Gamma Iota Sigma. I thought of risk management and insurance as this small, rather simple portion of business, a concept I needed to be aware of, but never more than that. Risk and the mitigation thereof, has become nearly my main focus when tasked to provide analysis, whether I am sitting in a finance or a marketing class.
The insurance industry historically has lagged behind when it comes to the adoption of new technology. What do you think it will take for the industry to get up to speed?
I believe the industry is making strides toward getting up to speed. Between the emerging technologies in the industry and the growing focus on attracting young talent, the industry is on the right track. I do, however, believe that this momentum needs to continue.
What is your favorite thing about risk management and insurance, and what do you hope to do with this skillset you’ve built?
I mentioned having intended to study finance and marketing. That came as a result of loving both the technical side of analyzing company performance and the idea of being stretched creatively. It was not until I took my first risk management course as a junior that I began down the risk management and insurance path. Risk management and insurance paired what I loved most about what I then considered my two majors—finance and marketing. I was required to understand how to make sense of the numbers in front of me, as well as be creative with my solutions. On top of that, by this point I knew that I wanted to work with people—whether that meant I would be in a collaborative space with co-workers or “client- facing,” I was not sure, but significant communication with others needed to be a part of my career. I come to understand that insurance is foremost a people business. Upon graduating, I am incredibly excited to enter a dynamic industry full of passionate individuals. I am both grateful and proud to be a product of the St. Mary’s University Risk Management Program.
Telematics, IoT, and the ability to make decisions based on real time data are changing the way organizations approach risk management. Where do you think the future of insurance is heading as more tech is injected into this space?
Technology will allow the industry to provide more effective service to consumers by streamlining the way insurance is purchased and claims are handled. It will also facilitate the industry’s ability to provide better risk mitigation to help prevent incidents or minimize their impact on consumers. Consumers will look to the insurance industry to not only provide protection against losses, but also provide guidance in effective risk management strategies to minimize incidents and losses.
This is the first Future of Risk conference that The Institutes has hosted. What sparked this decision and where do you hope to take this conference?
We noted that the insurance industry is at an interesting inflection point where technology advancement can enhance how the industry can service customers. As a provider of risk management and insurance education for more than 100 years, we saw an opportunity to help prepare the industry for changes that will ultimately benefit customers. So we decided to pull together our conference advisory board to help us craft a program filled with industry experts in blockchain, data analytics and risk tech.
Speaking of risk management, one could say brokers and carriers are transitioning from a focus on risk transfer to risk mitigation. Would you agree? What key ingredients do you feel winning commercial insurance business models will require?
Yes, I agree. There are two key things. One is to be able to process data, gain insights from the data, and formulate solutions for consumers that will make their lives and businesses safer. The second is that they will need to understand and communicate to consumers in a meaningful way.
Insurers and brokers largely view technology as an opportunity to cut costs, reduce friction and make more informed business decisions. Are there any aspects of the insurance value chain that technology ultimately cannot improve or replace? Do you think there can be an overemphasis on the opportunities technology creates?
There can be an overemphasis on technology. While technology can recognize patterns and draw insights into data it cannot replace human intuition and judgment. Most of the tech today, even advanced tech, is narrow in scope. Broad scope AI, for example, is many decades away. Human involvement is still crucial to understanding customers and conveying solutions to them.
We also need to be mindful of the data we collect so that we are thinking beyond the data collection and to how data will be used. There is a danger of focusing on collecting data without regard to whether or not it will be useful. Data is powerful, but it can also be overwhelming when not approached strategically.
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Today, families with loved ones who have intellectual and developmental disabilities, or IDD, have many more people, organizations and service providers on their side. IDD encompasses individuals with autism, downs syndrome, neurodevelopmental and adaptive functioning disorders, cerebral palsy and other varying abilities.
Caring for a person with IDD is challenging and costly. Traditional government funding sources for human services that assist vulnerable populations remains flat despite the fact that Americans are living longer than ever before and the number of people utilizing community services is growing. As people with IDD live longer, their care management becomes more complicated as they deal with general issues of aging such as dementia and nursing home care.
Obtaining health insurance is also a challenge. According to the National Disability Navigator Resource Collaborative, people with disabilities historically have experienced difficulty purchasing healthcare insurance because policies were prohibitively expensive and some insurers would not provide coverage for people with pre-existing conditions. An estimated 3.5 million people with disabilities did not have health insurance when the Affordable Care Act was enacted in 2010.
People with IDD also struggle to find the work that could alleviate some of these challenges. In its 2018 annual report, the Department of Health and Human Services acknowledged “unacceptable” employment gaps for Americans with disabilities. The Bureau of Labor Statistics reported 8 out of 10 people with disabilities were unemployed in 2017.
“One of our primary goals is improving the quality of life for society’s most vulnerable members: our developmentally disabled,” says Howard Siegel, chief executive officer of Irwin Siegel Agency in New York. “This touches upon everybody in America and their families.”
Irwin Siegel Agency was founded by Siegel's father in 1960. The elder Siegel was a passionate non-parent advocate of a local agency in Central New York called Sullivan County United Cerebral Palsy. In the early 1980's after Howard joined the firm, they provided the first policy to the New York State Association of Retarded Children, now called NYSARC. NYSARC had 60 operating chapters across New York and needed a consistent insurance program. Irwin Siegel Agency put together a set of standards and eventually became the managing general underwriter.
“We learned that service, true service, was important,” says the younger Siegel. More than 50 years since it opened its doors, Irwin Siegel Agency now specializes in intellectual and developmental disabilities, social service, behavioral health, addiction treatment, childcare and non-emergency transit.
Managed Care Making Waves
Over the past decade, several important trends in the human services industry have evolved, not only in how services are delivered, but also in the systemic infrastructure of how those services are managed.
There’s been a significant increase in the number of states moving to a managed care payment system for people with IDD, and that rollout is expected to continue over the next three to four years. As a Medicaid program, managed care implementation is at the state level, with the overarching goal being better quality and coordination of care through a capitated payment system.
But Siegel warns that states whose primary objective for moving to managed care is “cost containment” will struggle with the sustainability of those systems. “Our populations don’t support cost containment because these are lifelong issues,” explains Siegel, referring to the fact that typical wellness cost savers like exercise and regular doctor appointments don’t affect certain lifelong costs a person with IDD has. "And so there is a little bit more risk as you introduce managed care because the occupation speech and physical therapies, for example, don't change depending on the level of disability."
Siegel notes that states are focused on putting more people into supportive employment within their community. And while community integration is a worthwhile goal, it does increase potential claims. The more individuals who are taken out of controlled environments such as day programs, and placed into the community, the more complex the risk and exposure for organizations.
While this trend is potentially giving the end user, the person with the disability, more options, Siegel says it challenges the agencies that are running the programs. "There’s no way to know if they’re going to manage putting the right people into the right situations…These are the challenges that are going to be faced down the road. And those are the things that we really work with our clients on most.”
The total U.S. brokerage revenue of the top 15 brokerages, based on 1971 revenue, was $455 million. For perspective, today, as published in July 2018 by Business Insurance based on 2017 revenue, total U.S. brokerage revenue of $455 million would have equated to the 15th-largest brokerage on the list.
There has been significant movement among the top 100 brokerages over this 46-year period. Although from a deal count perspective consolidation might not be as prevalent in the top 100 as it is for the industry as a whole, there have historically been—and continue to be—many acquisitions of top-100 brokerages. We examined deal activity from 2009 to 2018, based on revenue reported for fiscal years ending between 2008 to 2017. During this time, there have been 154 unique brokerages that have been in the top 100. Of the 100 brokerages included on the 2009 list (based on 2008 revenue), 64 of them remained on the list in 2018.
Overall there has not been significant revenue growth, which is inclusive of organic and acquisitive growth, for most of these spots over the last 10 years, and the variation in who controls the revenue has been fairly consistent.Tweet
Overall there has not been significant revenue growth, either organic or acquisitive growth, for most of these spots over the last 10 years, and the variation in who controls the revenue has been fairly consistent. Further supporting the fragmented nature of the insurance brokerage market, the top 25 firms have controlled approximately 84% or more of the total brokerage revenue of the top 100 firms for the last 10 years, with the bottom 25% controlling only 2%-3%. However, when examining the underlying firms that make up these different quartiles, the prevalence and dominance of brokerages backed by private equity (PE) is significant in more recent years.
Many of the top 100 brokerages rely on acquisitions for growth, especially the aforementioned PE-backed brokerages. Considering the fragmentation that exists in the marketplace, it is interesting—though not surprising—that the top 100 firms account for the majority of the transactions. This percentage has continued to soar as PE-backed brokerages have entered the top 100.
Over the last 10 years, there have been at least 53 top-100 firms that have been acquired by a total of 19 unique buyers (with another announcement in January 2019, for Marsh & McLennan Companies’ pending acquisition of Bouchard Insurance, ranked 74th on the 2018 list). Peeling back the onion on these acquirers reveals a few trends.
- Marsh & McLennan Companies is by far the leading acquirer of top-100 brokerages, acquiring 12 top-100 firms (with, as mentioned, another scheduled to close in early 2019).
- USI has had a history of buying bank-owned top-100 brokerages, with four large bank-owned acquisitions since 2009. USI also acquired two other top-100 firms during this period.
- Gallagher also has six acquisitions of top-100 brokerages over the last decade.
- And last, but certainly not least, considering the relatively small number of public brokerages compared to the large volume of other buyer types, public brokerages have maintained a large market share of the acquisitions of top-100 brokerages.
Consolidation continues to play a large role in the makeup of the top 100 brokerages, and based on recent history, it appears it will play an increasingly dramatic role in years to come.
Unless otherwise noted, all revenue figures and revenue-related metrics are based on information published by Business Insurance in its annual “Top 100 Largest Brokers of United States Business” issue. This information is self-reported by brokerage submission and is not audited or verified by Business Insurance. The revenue reported is generated from U.S.-based clients, and to be eligible for inclusion in the report, brokerages must derive no more than 49% of their gross revenues from personal lines business. As the information is self-reported, Business Insurance publishes only the information that is reported to them.
Unless otherwise noted, all deal counts in this article refer to announced, U.S.-based transactions. MarshBerry estimates that only 15%-30% of transactions are made public.
When will the bubble burst?
This question has been hanging over the last few years’ M&A frenzy like a drone, watching—waiting for signs of a potential crash. Most of us in the insurance industry have at some point blinked and wondered if all this activity is too good to be true. Can these multiples really stick? (They have so far.) Will valuations continue to break records? (They are.) Will private equity continue to invest billions of dollars into insurance distribution? (It looks that way.)
We keep watching and waiting. But M&A transactions grow every year. And, companies we never expected to sell are doing just that.
The activity we’ve seen with low credit cost, high credit availability, private equity investment and impressive multiples seems like a perfect storm. Will the bubble burst as it did with the subprime mortgage and housing market, resulting in the subsequent collapse of market giants (Lehman Brothers) a decade ago? Is this high we’re riding going to nose-dive into the ultimate low? Is the deal pricing irresponsible?
Or, consider the fact that the insurance industry might have been undervalued for years—and private equity could continue to invest because of all the benefits that insurance brokerages know this industry offers: recurring revenue, resiliency in tough economic conditions and predictable returns.
Perhaps this “bubble” is really our new normal.
Betting Against the M&A Frenzy?
The reason we have been wondering about this so-called M&A bubble since about five years ago when activity began to pick up tremendously is probably because it hasn’t been too long since the economic collapse a little over a decade ago. We’re still predisposed to skepticism and caution when we see a market booming like insurance M&A has been recently.
What did we learn from this economic demise?
Lehman Brothers proved that even a very successful company—and in this case, a significant investment bank—can be on top of the world one year and bankrupt the next. From 2004 to 2006, Lehman Brothers’ real estate business made the firm one of the fastest-growing investment banking and asset management businesses. In 2007, it reported $19.3 billion in revenues and $4.2 billion net income. Record numbers. In 2007, Fortune magazine named Lehman Brothers the No. 1 “most admired securities firm.” That was just a year before it went bankrupt, in September 2008. In the end, Lehman Brothers—Mr. Big—was not too big to fail.
The movie The Big Short tells the true story of a group of investors who bet against the U.S. mortgage market after discovering through research how flawed and corrupt the market was. There are some people who are betting against what we’re seeing today in the insurance industry because of the incredibly high multiples, activity levels, and leverage ratios of the acquirers.
Too Sustainable to Fail
Some are saying that the current market is over-valued, and there are questions as to whether we could be getting ourselves into a similar economic situation as in 2008. Considering the flood of M&A activity and pricing we’ve seen in the insurance industry, it’s realistic to wonder if history could repeat itself—and this time, impact the insurance industry and players that seem “too big to fail.”
But a closer look at then versus now shows some stark differences. At the time of this writing, employment numbers are significantly better than they were 10 years ago, with a current unemployment rate of around 3.7%. The stock market is strong. Demand in the housing market is steady because of the healthy economy and robust labor market. So, the overall economic environment is not a mirror image of 2007-08.
But what about the multiples, the valuations, the prices that private equity and insurance brokerage buyers are willing to pay to acquire firms? Is there financial engineering in the works—is this pricing irresponsible?
So, back to that bubble. Will the insurance valuation and investment high we’ve been seeing lately ultimately result in a bust? The concern at a high level is that buyers in the marketplace are paying so much money and layering on so much debt that if the credit markets freeze and the economy stalls, there may be no more debt to have—and ultimately, the heavily leveraged brokers could fail. But here’s why we believe this is not likely to happen in the insurance industry. Say Agency ABC had 7x leverage on their balance sheet couldn’t borrow another dime to make more acquisitions or restructure their debt. The staunch reality is that they could do no more acquisitions and survive (or even thrive) as a viable business. Why?
Assume they hold on to approximately 90% of their business every year because of recurring revenue. The cash flows of an insurance agency are typically so strong that Agency ABC would still likely be able to pay down or pay off its debt in seven to ten years depending on their organic growth. Is this perfect? Of course not. Will the investors get a strong return? Probably not. Does it mean sellers would see less buyer appetite and lower valuations? Most likely. But it’s nowhere close to needing a bailout. Not by a long shot. Given strong profitability and recurring income, even a total “failure” is not going to completely take down a business that is strong, high-performing and running soundly. This industry is not like automobiles and homes where individuals can forgo a purchase or significantly downsize during an economically stressful time.
Now, an insurance business certainly can fail. If an owner runs the operation like a lifestyle business, does not invest in developing talent or technology, ignores complacent producers, has a “why fix what isn’t broken” mentality, and struggles with profitability, then yes, it could fail. This insurance business could fail in the sense that it will not perpetuate, or its business will be vulnerable to competition. It’s not sustainable.
But as for an actual bubble burst, that’s not something we expect to happen, even with the continuing record M&A activity, including last year’s 580+ transactions.
A New Normal
Last year’s M&A activity was the strongest yet in terms of the number of deals closed, and the size of those deals. Insurance business owners are asking themselves, “Should I sell now?” They’ve seen plenty of owners cash out with multiples those businesses would never have realized three years ago. Even average companies are getting higher valuations than the high-quality firms got in 2015. This dynamic is why some are wondering how long this activity will last—and how bad the industry will suffer if large firms that may be aggressively leveraged flop. (But back to our previous example, the fail may look more like a foul, followed by a rebound.)
Perhaps what we’re really seeing in this dynamic marketplace is a sustainable valuation adjustment as investors recognize the potential and stability of insurance businesses. They want some skin in the game. And, because of our industry’s cash flow model, conservative approach to risk, and dependable revenues, these investors know they’ll see returns. We’re not selling subprime loans here.
Rather than the proverbial bubble, what we very well could be experiencing is the new normal.
2019 and Beyond
We don’t have a crystal ball and we are not sure what the canary in the coal mine is to signal a turn in the market. Here is what we do know. Valuations and deal activity are currently at their highest levels on record for the industry.
In the first two months of 2019, we have seen six top 100 brokers announce transactions:
- Patriot Growth Insurance Services was formed on 1/1/19 with the aggregation of 18 organizations into a new company backed by private equity sponsor Summit Partners
- Alliant Insurance Services, Inc. brought on a new capital partner in Public Sector Pension Investment Board (PSP Investments)
- U.S. Risk announced a pending transaction with USI Insurance Services
- Relation Insurance Services has been acquired by private equity firm Aquiline Capital Partners
- AssuredPartners Inc. was reacquired by the private equity firm who founded the organization, GTCR LLC
- AssuredPartners also announced the acquisition of Tolman & Wilker Insurance Services, LLC
These transactions are likely just the tip of the iceberg for more large deals in 2019. Activity in the first few months continue to trend at the same levels of 2018. If early activity is an indication, the year could be another record setter.
As the economy remains strong, we expect valuations to continue at their current levels. It is possible that the economy may very well be the trigger we need to keep an eye on. Taxes or interest rates are often talked about as possible reasons for valuations to faulter. But the economy could be the most important influencer on our current good fortunes. As the economy continues to grow, acquirers are valuing businesses based upon their forward looking profit as opposed to the prior 12 months’ actual performance. There is a predictability in the growth that allows for more aggressive buyer behavior, and it’s likely to sustain at least through 2019.
Beyond 2019, we need to keep a close watch on economists and their predictions for the next recession. More money will likely continue to flow into the distribution space and demand should remain strong. If economic growth slows, demand may be able to keep activities and valuations high. However there is no way to predict how the buyers will react to slowing growth. It is hard to say where we will be 24 months from now but the next 12 look like much more of the same.
Trem is EVP at MarshBerry. Phil.email@example.com
Unless otherwise noted, all deal counts in this article refer to announced, U.S.-based transactions. MarshBerry estimates that only 15%-30% of transactions are made public.
David Schaefer, President and CEO, AHT Insurance
Why has your organization decided to remain independent? What are the most important factors in this decision?
Insurance brokerage is ultimately and fundamentally based on trust and a number of important promises. AHT firmly believes our independence is foundational to the promises we make to every client as it relates to service and our commitments to the partnerships we form with our clients. Losing our independence means a change in control of the business and an unambiguous surrender of the commitments we have made to our clients and our employees. Built to last,
AHT is structured optimally to provide every one of our high-performing professionals the opportunity to participate in the success of the organization. This fact contributes to our unusually high retention and long tenure of our professional staff as well as an unmistakable sense of teamwork and camaraderie. This consistency and professional latitude to always do what is right with absolute integrity is another important differentiator as our deliverable to AHT clients.
As a growing number of our competitors have lost their independence—along with the singular focus on serving the client—and are now also serving stakeholders seeking to take returns and value out of their organizations sooner or later, AHT believes there is a growing opportunity to serve a growing constituency of insureds and great insurance professionals who understand and appreciate the differences between these models.
How do you prioritize investment dollars, which are limited? What services or technology capabilities differentiate your agency from competition?
As a matter of highest priority, AHT’s continued investment in and development of key proprietary tools and deliverables—technology-based and otherwise—provide our clients with effective, efficient services that advance our clients’ related positions and goals established through their relationships with AHT. As with most professional services firms, our staff is our most valuable resource, and the firm devotes considerable resources on an ongoing basis in training and development. Our ownership structure and perpetuation plan, areas of deep specialization, and expertise are primary differentiators for the firm, along with our staff and relationships.
Are acquisitions a significant part of your company’s growth plans? How do you identify potential targets and compete against the most active acquirers?
In a manner of speaking, yes, but not in the classic sense. The competition of well funded, acquisitive organizations for insurance brokerages is intense, as everyone familiar with the industry knows. Through some first-hand experience and from what we have learned from others, regardless of the high-minded approach many sellers begin with as they dip their toes in the M&A market, in the end most sell to the highest bidder or near that, with little regard for the implications for their clients and their employees. The failure of serious, ongoing, sustainable perpetuation planning is nearly always the No. 1 driver to sell an insurance agency, despite the red herring of “more resources for our clients” that many sellers indicate is the primary driver to sell after the fact.
This is in spite of the fact that many of these organizations have survived, even thrived, on the promise of continuing independence and an opportunity for many of their next-generation best and brightest to own a part of the company and have a “seat at the table” at some point as a part of a perpetuation strategy. No wonder the industry has problems attracting and retaining youthful talent! AHT sees this dynamic as a wonderful opportunity to attract those professionals, cast out into acquiring organizations they never planned to join, with now-dead dreams of owning a part of the now-gone company they helped to build. These stranded entrepreneurs in search of a better business model—both individuals and teams from production, service and support—are AHT’s acquisition targets.
By building and continuing to grow a privately held, world-class brokerage operation that has a proven, sustainable perpetuation strategy, AHT has designed the perfect destination for like-minded insurance professionals who understand that this model we embody is an ideal for really serving insurance clients best. Leveraging a variety of connective technologies, AHT is agnostic to geography when it comes to employing these stars; we are about delivering a superior brokerage experience and service model to insureds who understand working with an owner is always better.
What do you see as the future of the middle-market brokerage, given the consolidation that has occurred in the brokerage space over the last number of years?
The future will be bright for those middle-market brokerages who remain committed to—and plan to perpetuate for—the long term and who understand the value that can be delivered through the independent insurance brokerage model. This model presents lasting, substantial and incontrovertible advantages a good segment of the industry’s best talent and many prospective clients understand, especially after experiencing the available alternatives. By focusing primarily on serving clients and not shareholders or debt holders, the sustainable independent agency, owned solely by its high-performing professionals, should thrive for the foreseeable future
Dan Keough, Chairman and CEO/Shareholder, Holmes Murphy
Why has your organization decided to remain independent? What are the most important factors in this decision?
Holmes Murphy was founded in 1932, and we’re currently in our fourth generation of leadership. What makes us unique is, when leadership changes from generation to generation, so does the ownership of our company. Being a privately held firm, we are accountable only to the long-term needs of our clients—that is our No. 1 focus. Our culture of private ownership fuels our passion to provide employee ownership opportunities and serve customers. We take purposeful steps to feed the entrepreneurial spirit within our organization. We believe we owe it to former shareholders, employees, customers and our communities to remain private.
How do you prioritize investment dollars, which are limited? What services or technology capabilities differentiate your agency from competition?
This is a difficult question in a growth-oriented company. Our leaders compete for investment dollars to expand our growth or meet our customers’ needs. Innovation fuels growth. We are always thinking and looking ahead to see what’s on the horizon and how it could be developed to meet or exceed our clients’ needs. Over the years, Holmes Murphy has created many startups, each one designed to fulfill our clients’ needs to drive down costs and/or create efficiencies.
Our captive and clinical capabilities differentiate us, as well as our expertise in several industry verticals. Most recently, we developed and launched SimplePay Health, which will be a game changer in the healthcare space. SimplePay Health eliminates the confusion and frustration with healthcare in America and replaces it with a new way of doing things. One way, in particular, is you can know the total cost of your medical care before you schedule an appointment.
With regard to technology, we are partnering with companies, are investing in companies, and have formed a team to survey the insurtech landscape to find opportunities. We believe innovation within our company provides employees with the opportunity to change the game, create wealth and drive a culture where ideas are welcome.
Are acquisitions a significant part of your company’s growth plans? How do you identify potential targets and compete against the most active acquirers?
Holmes Murphy focuses on acquisitions that include teams of top performers that either fit well within our geographic footprint or expand our capabilities. Additionally, we look for those companies that not only want to partner with us for growth and a love of the business but also fit our culture of being privately owned. Cobb, Strecker, Dunphy, and Zimmermann (CSDZ) is the most recent example of this. This transaction not only helped Holmes Murphy enter the Minneapolis market but also expanded our construction expertise.
What do you see as the future of the middle-market brokerage, given the consolidation that has occurred in the brokerage space over the last number of years?
I feel there will always be firms that are fiercely independent and committed to remaining private, like Holmes Murphy. Reaching a size that allows them to remain relevant and provide all the tools of the larger firms will be challenging. As a result, we may see more consolidation of privately held firms with other privately held firms. The opportunity is enormous and will attract the best talent.
Duane Smith, CEO, TrueNorth Companies
Why has your organization decided to remain independent? What are the most important factors in this decision?
When we formed TrueNorth in 2001, there were six partners who had the opportunity to experience a way of life that we wanted to preserve and pass down to the next generation. We were able to make a good living, build equity and have a quality of life that allowed us to be present with our families. We recognized that, with many of the aggregations that were occurring, the entrepreneurial opportunities that we experienced went away. Our vision statement, “To build a legacy company with an entrepreneurial platform that attracts, develops and coordinates high-performance talent,” has provided us with the ability to stay committed to and focused on remaining independent.
How do you prioritize investment dollars, which are limited? What services or technology capabilities differentiate your agency from competition?
One of the mantras from MarshBerry that resonated with us is: “If you run your company as if it is for sale, you won’t have to sell it.” We have developed an owner’s manual based on four critical indicators that must be in balance: profit, client experience, culture and growth. Profit can be too high at the expense of the other three or too low at the expense of the culture, client experience and growth. We define, measure and manage all four of the KPIs and hold our leaders and people accountable based on these results.
Are acquisitions a significant part of your company’s growth plans? How do you identify potential targets and compete against the most active acquirers?
We hired an individual from our industry three years ago to focus on acquisitions and organic growth. Annually we discuss our growth strategy and decide where to invest. Organic growth is generally preferred over M&A, but there are strategic M&A opportunities that can be attractive. With the high valuation multiples, we are currently focusing more efforts toward organic growth. We have developed a subset of our M&A strategy that is focused on smaller “County Seat” opportunities that are below the radar of many of the PE firms.
What do you see as the future of the middle-market brokerage, given the consolidation that has occurred in the brokerage space over the last number of years?
Consolidation in our industry can be positive. Providing value to our clients and our market partners is at the heart of what we do. Many agencies struggle to provide a value proposition beyond market access. As technology and access to information become more available, we must focus on value-added services beyond the traditional insurance product. Many of the larger aggregators understand this and are helping brokers provide value. What is lacking in many of the consolidation opportunities is an opportunity for equity and a forum to be innovative. Our answer to that is an entrepreneurial platform that allows high performers to have an equity interest in their respective profit center and develop innovative solutions to their clients’ problems.
The responses above are not the opinions or beliefs of MarshBerry and were supplied by each individual named. —Editor
Prior to consummating a deal, agencies and brokerages should evaluate the extent to which they will be able to leverage these partners to help boost the top line or contribute to the business in ways other than just the financial infusion.One of best ways to think about a financial partner is in high-level strategic terms rather than on a daily operating level. Your partners will be on your board of directors and will review the monthly and quarterly operational reports, but they will not typically be focused on daily decisions. Instead, they will focus on long-term strategic moves that increase value over years, not weeks. The right financial partner can link you with vendors or service providers that may be able to add value to your business, or they can help find talent in senior leadership functions that are outside of your core strengths (think of the high-level CFO or the strategic HR leader). But most of all, the partner should bring an analytical rigor and a level of accountability necessary for sustained long-term growth.
For example, let’s think about an investment to acquire revenue, which is inorganic growth. If your strategic plan calls for 10% inorganic revenue growth per year (in addition to organic growth), the financial partner can help fund this but only with a realistic, well-thought-out plan in place. The partner will want to know who is responsible for deal origination and who is responsible for closing. What’s the sales pitch to prospects? What’s the targeted market (e.g., niches, geographic, revenue size)? What’s the integration model post close? And once these are built out and the plan is put into motion, the partner will want to know what the acquisition pipeline looks like on a regular basis. Where talent is lacking, perhaps on legal or financial staffing, the financial partner may be able to connect you with talent in this space but will not be in a position to do the heaving lifting. This financial discipline will help increase the odds that the plan is successful and that the partners—all of them—achieve target returns.
One of best ways to think about a financial partner is in high-level strategic terms rather than on a daily operating level.Tweet
The key takeaway here is to make sure you have this discussion with your potential partners before you take on their investment. Create a list of the things you want in a partner and discuss each one, making sure you understand their skills and abilities. Also, be sure to review the investor’s version of this list so you are clear on their expectations of you as well.
GDP Outlook Still Positive
Despite 2018’s fourth-quarter struggle, strong economic growth is expected to continue into 2019, though at a slightly slower rate. The Federal Reserve Bank of Philadelphia’s survey forecasters predict GDP growth of 2.7% for the year, while the central tendency of Federal Reserve Board members’ projections falls in the 2.3% to 2.5% range (versus approximately 2.9% to 3.0% in 2018).
Real GDP growth is projected to remain above the average pace of the past decade. Economists from Wells Fargo expect growth to be backed by gains in consumer spending—driven by tax cuts and lower oil prices—and government spending, while slowing business investment and declining residential investment will constrain faster growth.
Borrowing Costs Rise
The Federal Reserve acted according to expectations for 2018, raising the federal funds target rate four times over the year. The federal funds rate has an impact on both short- and long-term interest rates. Long-term rates, which affect consumer (e.g., mortgage rates) and business borrowing costs, are impacted by several factors, including economic outlook, inflation expectations, rate expectations, and global demand and supply. If borrowing costs continue to rise, this may negatively impact business valuations. As of early 2019, the Fed indicated it will scale back on interest rates hikes this year.
Labor Supply Tightens
Labor conditions continued to improve throughout 2018, as the unemployment rate fell below 4.0% in April for the first time since December 2000 and finished the year at 3.9%. Industries that most contributed to employment growth over the year included professional and business services, leisure and hospitality, construction, healthcare and manufacturing. The employment rate is expected to further improve in 2019, with forecasters anticipating it falling into the 3.5% to 3.7% range. The labor participation rate—the number of adults in the labor force between the ages of 16 and 64 years old who are either employed or unemployed but looking for a job—registered at 63.1% in December 2018, generally in line with the trend of the past four years.
The unemployment rate is at its lowest point in decades and will intensify competition for key talent. Although labor costs are increasing at a slower pace than expected, there is upward pressure, which could impact agency and brokerage profitability.
Manufacturing Still Strong
Advanced estimates of new orders for manufactured durable goods rose to a seasonally adjusted $250.8 billion in November 2018, while year-to-date orders expanded 8.4% over the previous year. Orders of transportation equipment represented the largest driver of growth in 2018. The impact to the insurance distribution sector is constrained in our opinion.
The Institute for Supply Management (ISM) index, which reflects production and demand in the manufacturing sector, fell to 54.1 in December 2018 from 59.3 in November. This was the largest one month drop in a decade. While this does suggest a slowing pace of manufacturing growth, values above 50 are still indicative of expansion, reflecting that the economy grew for the 116th consecutive month.
Consumer Confidence Wanes a Bit
The Conference Board announced in December 2018 that the U.S. consumer confidence index was at 128.1, down from 136.4 in November. The Conference Board reports, “Expectations regarding job prospects and business conditions weakened but still suggest that the economy will continue expanding at a solid pace in the short-term. While consumers are ending 2018 on a strong note, back-to-back declines in expectations are reflective of an increasing concern that the pace of economic growth will begin moderating in the first half of 2019.”
Housing Construction Rises
Housing starts rose in November from the previous month, driven by a jump in the multi-family segment, up 22.4% (single-family starts recorded a 4.6% drop). The month did mark a decline in total starts year over year; however, on a year-to-date basis, total starts were up compared to 2017.
Tax Reform Bolsters Economy
The tax cuts passed in late 2017 supported increases in consumer and business spending throughout 2018. While the economy will continue to benefit from these tax cuts, the extra stimulus provided by the change will probably dissipate as 2019 progresses, with growth in consumer and business spending continuing at slower rates.
Impact on Insurance Distribution
Several major trends are affecting the insurance market in the near term:
- Rising property-casualty and health premium rates
- Significant increase in P&C annual net premium growth (+10.6% as of June 2018) driven by higher commercial lines pricing plus higher exposure base
- Solid surplus at P&C and health insurers
- Improved P&C combined ratio.
“The composite rate for property-casualty insurance in the United States rose 2.5% in the second quarter of 2018,” according to MarketScout. Rate increases were driven primarily by higher auto and trucking rates due to higher claims/losses. At midyear, policyholder surplus was strong at $749.3 billion. In addition, underwriting discipline appeared to improve with the help of technology and data analytics, resulting in better-contained losses. The combined ratio, a measurement of underwriting profitability calculated as the sum of incurred losses and expenses divided by total earned premiums, improved significantly—from 103.7 in 2017 to 97.3 in the third quarter of 2018.
There is potential for the current strong surplus and combined ratio to take a hit if higher than expected insured losses result from natural disasters. Current estimates on industry losses from Hurricane Michael and the California wildfires—the costliest disasters of 2018—fall in the ranges of $6 billion to $10 billion and $16 billion to $18 billion, respectively. While these losses would be enough to push total 2018 insured catastrophic losses well above the average of the past 20 years, total losses for the year are not expected to surpass 2017 levels.
Unless otherwise noted, all deal counts in this article refer to announced, U.S.-based transactions. MarshBerry estimates that only 15%-30% of transactions are made public.
1. Marsh & McLennan Companies (MMC) announced its purchase of Jardine Lloyd Thompson Group (JLT). JLT was traded on the London Stock Exchange and had revenues of just under $2 billion, adding almost 15% to MMC’s $14.8 billion top line. All in, MMC will end up paying more than three times revenue, assuming total enterprise value of $6.4 billion, which represents a 33% premium to where JLT stock was trading prior to the deal.
2. Brown & Brown announced its purchase of Hays Companies, a Minneapolis-based brokerage with revenues approaching $200 million. With revenues of just under $2 billion, Brown & Brown will add roughly 10% to its top line. Including potential earnout payments based on performance, the total paid for this acquisition could be up to $730 million, or over 3.5 times revenue.
3. MMC purchased Wortham Insurance, a top-40 U.S. agency (2017) with revenues over $130 million. Wortham is based in Houston, Texas, with locations in several cities across the state. The acquisition created a new division within Marsh & McLennan Companies, called “Marsh Wortham.”
4. During December, Acrisure, the most active insurance agency buyer since 2015, announced that several of its private equity partners had increased their investments in the business. The increase in investments from its partners implies an enterprise value of more than $7 billion, or over two times the value Acrisure garnered in 2016, when a $2.9 million management buyout was completed. Revenue has grown on an annualized basis since that time to over $1.2 billion from roughly $650 million, and the firm noted it planned to close more than 100 transactions during 2018. Although the company has several institutional investors, the majority (83%) of Acrisure stock is in the hands of its employees.
5. Hub International entered into an agreement to receive a round of funding from new investor Atlas Partners in October 2018. The transaction reportedly implies a total enterprise value of over $10 billion, which represents a valuation of approximately five times revenue. Hub’s current private equity sponsor (Hellman & Friedman) will remain the largest investor.
6. Crystal & Company, a top-40 U.S. brokerage in 2017, sold to Alliant Insurance Services during 2018. The agency had more than $160 million in revenues in 2017 and 11 locations, with its headquarters in New York City.
7. Ryan Specialty Group was founded in 2009 and offers specialty insurance and risk management solutions to agents, brokers, and insurers and their customers. Onex Corporation became its private equity sponsor in 2018 (Ryan Specialty was previously independently held). Ryan Specialty completed four transactions in 2018, three prior to taking on private equity investment and one following the investment.
8. Propel Insurance Agency, formerly known as Bratrud Middleton Insurance Brokers, was founded in 1923 and is based in Tacoma, Washington. Propel Insurance provides property, casualty, risk management, workers compensation, employee benefits and personal insurance products. Edwards Capital, dba Flexpoint Ford, made an investment in Propel Insurance during 2018.
9. Navacord was incorporated in 2014 and is based in Mississauga, Canada. It provides insurance brokerage and risk management services as well as employee benefits, group retirement and financial services to the corporate sector. Navacord received an investment from Madison Dearborn Partners in 2018.
10. After completing the acquisition of Wells Fargo’s commercial insurance division in late 2017, USI Insurance Services announced in March 2018 that it would be acquiring the insurance assets of another bank, KeyBank. Key Insurance & Benefits Services was formed during the 2016 KeyBank merger with First Niagara Financial Group. The business consisted of 350 employees across eight offices in the New York, Pennsylvania and Connecticut markets.
11. BB&T Insurance Holdings, a division of BB&T Corp., announced its acquisition of the Regions Insurance Group (Regions Insurance), a division of Regions Financial Corp. Regions Insurance included both its retail division and its wholesale division (Insurisk) in the sale to BB&T. Regions Insurance was a top-40 U.S. agency (2017) with revenues north of $135 million across 10 offices in the Southeast, Texas and Indiana.
12. At the end of 2018, Edgewood Partners Insurance Center (EPIC) announced its intention to acquire Integro Group Holdings, a top-25 U.S. brokerage with more than $200 million in revenues (2017). Integro has several specialty areas, including entertainment and sports, professional services, and transportation and logistics, among others. Integro had 22 offices throughout the United States. The transaction is expected to close in early 2019.
13. One regional insurance brokerage, Goosehead Insurance, took on a different kind of investor last year by going public with its initial public offering on the Nasdaq stock exchange in April 2018. The business uses a franchise model and focuses on organic growth opportunities.
For P&C insurers, “storms” take the form of poor underwriting discipline, sizable catastrophic losses, and financial/economic downturns. We are now 20 years from the industry’s last appreciable soft-market cycle of 1997-2001 and 10 years from the global financial crisis of 2008. It is true that the industry has experienced two recessions since 1999 and weathered large shock losses in 2005, 2011 and 2017, but these were managed rather adroitly.
The hard market, which lasted from 2001 through 2004 (and even beyond from an earnings point of view), substantially boosted the industry’s profitability. The resulting surge in surplus, helped also by several periods of strong net capital gains, well outstripped net premium growth, resulting in conservative net premium leverage and thus greater “capacity” to write business.
As is inevitable in such a capacity-rich environment, annual rates came under pressure and hit a trough in 2008. However, underwriting discipline never foundered—as happened in past market cycles—and over the past 10 years, we have witnessed a much gentler undulation in annual rate changes (see Exhibit 2). This has resulted in a sort of Goldilocks environment, upon which a number of brokers have commented favorably. In fact, Pat Gallagher reflected this in a 2018 analyst call:
Since 2004 the industry has notched seven periods in which underwriting profits supplemented net investment income.Tweet
Rate is really not impacting our results much. When you spread it across all that we're doing, some is up, some is down … But it's really a flattish market and it has been for about 8 years. And I'd also tell you, down 3%, up 3%, I would call -- I'd tell you is flat. I'm not going to lose an account, frankly, for 3%. But I'll lose an account for 23%. And I think that when I'm at 3% up, 3% down, which is now 1% up, 1% down, I can sit there with a client and talk about the fact that we've provided unbelievable service beyond the price of insurance.
One of the reasons for the industry’s financial outperformance over the past 20 years is its return to underwriting profitability. Exhibit 3 shows the components of income for the U.S. P&C industry since 2004. Before this period, one would have to look back to the mid-1970s to find an underwriting profit. In contrast, since 2004 the industry has notched seven periods in which underwriting profits supplemented net investment income. This is in part the result of large prior-year reserve releases into underwriting earnings, but attention to adequate rate in most lines of business has also played an important role.
Good Financial Shape
Exhibit 4 shows the ALIRT scores for the personal lines and commercial lines composites since ALIRT began tracking them in 1995. The red line represents the average ALIRT score for all P&C companies during this period (on a scale of 0-100), a level that reflects an average solvent P&C company. Because the ALIRT score is derived from 45 financial metrics that measure individual insurers on a holistic basis, these composite scores can be seen as taking the financial pulse of the entire industry over time.
The volatility that characterized the industry in prior periods has eased substantially over the past decade, with both our personal and commercial lines industry scores indicating average or above average performance since 2006. During this time, the composite scores dropped to average levels only in years with large catastrophes or a financial crisis (2008, 2011, 2017). As of the first nine months of 2018, the ALIRT scores for both composites were again near or above 60, which represents almost a full standard deviation above normal. In short, the financial profile of the U.S. P&C industry is indeed “shipshape.”
Fair Winds in 2019
As we look into 2019, we anticipate more halcyon days ahead. While ALIRT’s quarterly rate monitor (Exhibit 5) indicates that general U.S. premium rates are slightly less than adequate at present, the very gradual firming over the past year appears to be addressing that deficiency. The U.S. economy, despite some scary headlines, remains strong with historically low unemployment and should support continued demand for insurance coverage. Even interest rates have been cooperative, with yields across almost all bond classes rising over the past year, providing some lift to investment income.
Large catastrophic losses and economic/capital market downturns always remain a wildcard, but the industry’s substantial surplus position currently offers tremendous ballast for such eventualities.
David Paul is principal at ALIRT Insurance Research.
For the seventh consecutive year, buyers backed by private equity maintained their leadership status and actually increased their overall contribution to deal activity. PE-backed buyers accounted for 343 of the 580 total brokerage transactions in 2018, or 59% of deal activity. Of the top 20 buyers in the marketplace (which represented 67% of all transactions), only five (three public brokerages and two independent agencies) do not have private equity backing. Other independent agencies represent another 20% of all activity (or 114 of 580 announced deals). That means PE-backed and independent agencies, combined, made up the vast majority (79%) of all deal announcements in 2018. Interestingly, but not all that surprisingly in light of recent U.S. tax reform, public brokerages significantly increased their transaction activity—from 37 deals in 2017 to 61 deals in 2018.
High free cash flow, strong recurring revenue stream, a semi-required product, relatively low risk, and a highly fragmented market place—all fundamental attributes of insurance brokerage—continue to attract PE groups to the space. Coupling these factors with the low cost of capital and easy access to investable capital, valuations and total activity within the merger and acquisition marketplace continued to trend upwards.
The top five buyers in 2018 comprised four from 2017 and three from 2016, with another returning to the top five from 2016. Of these five top buyers, only one does not have private equity backing; however, it does have financial backing as a publicly traded company.
The top five most active buyers accounted for nearly 35% of all transactions in 2018 (200 of the 580).
1. Acrisure was again the top buyer for the fourth year in a row with 65 announced deals, compared to 72 in 2017. Historically, Acrisure has not announced the target name of acquisitions, and 2018 was no exception, with only a handful of target names released. Acrisure has communicated separately that it successfully completed more than 100 transactions during the year, as it has historically not announced all transactions to the marketplace. One notable acquisition was Acrisure’s purchase of London-based reinsurer Beach & Associates Ltd. from private equity group Aquiline Capital Partners, which invested in Beach & Associates Ltd. in 2014. This is Acrisure’s first European target.
2. BroadStreet has been consistently increasing its number of deals over the past few years, with 26 deals announced in 2015, 28 in 2016, 31 in 2017, and 37 in 2018, moving up from third most acquisitive in 2017. BroadStreet has completed approximately 341 transactions, including core partners and tuck-ins, since 2001, with a compound annual revenue growth rate since 2010 of 28%.
T3. Alera reentered the top five in 2018 tied for third with 34 announced transactions, more than doubling its 2017 deal count of 15. Alera was founded in 2016, when 24 independent firms (largely employee benefits focused) from across the country joined forces with help from experienced insurance brokerage investor Genstar Capital. Alera has a defined employee benefits focus; however, it is working to build out the property-casualty side of its business. During 2018, Alera announced five P&C-only acquisitions, which doubled its P&C deal count from inception to the end of 2017.
T3. AssuredPartners posted another strong year, with 34 announced transactions, up from 25 in 2017. It was announced in 2019 that Apax Partners, AssuredPartners’ current private equity sponsor, will sell a majority stake in AssuredPartners to GTCR (AssuredPartners’ former PE sponsor that exited in 2015). The valuation is estimated at $5.1 billion, which represents over 14.5 times EBITDA, based on $350 million of estimated EBITDA. It was estimated that when GTCR exited its investment in AssuredPartners in 2015, the transaction valuation was $1.7 billion.
5. Gallagher reported 30 U.S. deals during 2018, claiming the last spot on the top-five buyers list, sliding down one rung from 2017, when it announced 25 transactions. It was noted on a Dec. 11, 2018, special call that competition remains high for deals and it is anticipated that its blended multiple for 2018 would be between 7.5 and 8.5 times EBITDA, which is consistent with what Gallagher management communicated for 2017 acquisitions. Management also indicated that, as of December 2018, it had an acquisition pipeline of approximately $500 million in revenue either under term sheets or in the process of preparing term sheets.
Breaking the two-year trend of nine PE-backed buyers, 2018 saw “only” eight PE-funded buyers on the top-10 most-active list. There has been (and continues to be) a significant increase in PE-backed buyer activity, which was virtually nonexistent prior to 2007, when PE-backed buyers represented just 7% of total deal activity.
During 2018, four new PE-backed buyers entered the marketplace, for a total of 31 unique companies, compared to 25 in the 2017. With the addition of the four new PE-backed firms, this segment saw an 9% increase in total deals—to 343 total deals, up from 315 in 2017. The top 10 PE-backed buyers represented 46% of the total deal activity in the insurance agency acquisition space and 79% of the total number of deals backed by private equity.
Although there was a slight increase in interest rates during 2018, the availability and relatively low cost of capital (compared to historical rates) continued to drive PE-backed buyers to acquire insurance brokerages at an accelerated rate, pushing activity within the industry overall. With investors continuing to search for strong returns in a low interest rate environment, there continued to be heightened interest and demand among private equity in the space.
We also saw continued interest from private equity firms entering or expanding their portfolios within the insurance distribution space with first-time acquisitions made by the following PE-backed buyers:
Integrity Marketing Group (eight deals) was founded in 2006 and is based in Dallas. It distributes life and health insurance products. Integrity Marketing Group did not make its first acquisition until 2018; however, it received private equity funds in 2016 from HGGC.
Foundation Risk Partners (seven deals) is a Daytona Beach, Florida-based brokerage founded in 2017 with the acquisition of Corporate Synergies Group and Acentria Insurance. Foundation Risk Partners received an investment from Warburg Pincus in late 2017.
Ash Brokerage (two deals) operates as an insurance brokerage general agency based in Fort Wayne, Indiana, offering life insurance analysis and annuities analysis. The company also provides long-term care assistance services. It was founded in 1971. In 2017, it received an investment from Century Equity Partners.
XPT Group (one deal) was founded in 2017 and is headquartered in New York, It offers specialty line insurance brokerage and distribution services. It received a minority investment from B.P. Marsh (North America) Ltd. in 2017.
In addition, the following actively acquisitive firms significantly changed or added new private equity sponsors during 2018:
HUB International entered into an agreement to receive a round of funding from a new investor, Atlas Partners, in October 2018. The transaction reportedly implies a total enterprise value of over $10 billion, which represents a valuation of approximately five times revenue. Hub’s current private equity sponsor (Hellman & Friedman) will remain the largest investor.
Acrisure announced that a group of investors led by funds managed by Blackstone’s GSO Capital Partners and Tactical Opportunities businesses have significantly increased their investment. Partners Group also increased its investment. As part of the transaction, Harvest Partners became a new investor in Acrisure. In total, the three investors now have invested or committed to $2 billion of preferred equity in Acrisure. The investment implies a valuation for Acrisure of more than $7 billion. Acrisure remains more than 83% owned by its management team and agency partners.
It was announced in 2019 that Alliant Insurance Services will receive an investment from Public Sector Investment Board. With this investment, Alliant’s current capital partner, Stone Point Capital, will make an additional investment.
Independent agencies and brokerages completed 114 deals, or 20% of all activity, in 2018, which represents a decline in transactions of 20% from 2017, when independent agencies accounted for 142 transactions (or 25% of total activity). There were 82 buyers (down from 110 in 2017), with approximately 15% (12 total) completing multiple transactions and 44 announcing their first acquisition in 2018.
New Jersey-based World Insurance Associates announced eight transactions in 2018 (up from five in 2017), expanding beyond New Jersey and New York into Connecticut, Maine, Ohio and Pennsylvania. Two of the seven agencies acquired in 2018 were employee benefits only firms, which differs from 2017, when all acquisitions had some P&C business. World Insurance Associates specializes in transportation, hospitality, coastal properties and high-net-worth individuals.
Mechanicsville, Virginia-based Easley Hedrick Insurance & Financial completed its first acquisition during 2018 and ended the year with five acquisitions, all Virginia-based P&C agencies. Prior to the acquisitions, Easley Hedrick had 15 employees. It added 12 additional employees from the acquired agencies.
Needham, Massachusetts-based Kaplansky Insurance Agency announced four transactions during 2018. It completed nine transactions from 2015 through 2018, all of which are located in Massachusetts and have a P&C focus.
Florida-based Ample Insurance Company closed four acquisitions during 2018. Ample Insurance Company is an independently owned insurance agency made up of 19 “family agencies,” all of which have been acquired since 2015 and are located in Florida.
Insurica, based in Oklahoma City, announced four deals during 2018, two of which were in Texas with the other two in Oklahoma. Insurica is a top-100 brokerage, with reported revenues of approximately $97 million in 2017.
Chicago-based Ryan Specialty Group also completed four deals during 2018. Ryan Specialty was founded in 2009 and offers specialty insurance and risk management solutions to agents, brokers, and insurers and their customers. During mid-2018, Ryan Specialty received private equity capital from Onex Corporation.
Two agencies announced three transactions each.
• Utah-based Leavitt Group Enterprises announced three P&C acquisitions during the year: two in Washington and one in Utah. Leavitt is a top-100 brokerage, with revenues of almost $236 million in 2017.
• Houston-based Dean & Draper Insurance Agency completed three deals in Texas.
There were four other buyers that reported two acquisitions during the year.
Public brokerage activity was up 65% in total deal count during 2018 (61 announcements versus 37 in 2017) bringing the overall proportion of deals represented by public brokerages to more than 10%, up from 7% in 2017 and 2016. There were three public brokerages in the market during 2018, down one from 2017, when CBIZ closed a transaction. The public buyer field is down substantially from 2005, when there were nine active public acquirers.
Gallagher announced 30 U.S.-based transactions, up from 25 in 2017, both years’ activity earning it a place among the top five most active buyers. Gallagher also announced 10 international brokerage acquisitions.
Brown & Brown announced 24 transactions during the year, a significant increase from the seven deals announced in 2017. The most notable of these 24 transactions was Hays Companies, which reported 2017 revenue of $198 million.
Marsh & McLennan Companies completed seven U.S.-based transactions in 2018, compared to four reported deals from 2017. Subsidiary Marsh completed the acquisition of John L. Wortham & Son. Marsh & McLennan Companies also announced the acquisition of London-based Jardine Lloyd Thompson Group, which is expected to close in 2019.
As was anticipated based on U.S. tax reform, public brokerages are taking advantage of the reduced corporate tax rate and reinvesting those dollars into acquisitive growth. All indications point to a continuation of this trend.
Insurance and Others
This buyer segment includes private equity groups (not their portfolio companies), underwriters, financial technology firms, specialty lenders and other unclassified buyers. Activity within this buyer group increased slightly from 42 in 2017 to 45 in 2018. For the second consecutive year, the Insurance & Other buyers group represented only 8% of deals, which was fairly consistent with activity in 2016, when it represented 9%. Private equity groups accounted for 10 deals within this category. Insurance company buyers completed 15 deals, compared to 16 the prior year. Non-private equity, non-insurance companies (mostly credit unions, private investors and other undisclosed buyers) represented 20 deals within this category.
Banks and Thrifts
Banks and thrifts completed 17 acquisitions in 2018, down slightly from the 21 announced deals in 2017. This decline represents the third consecutive year that we have seen a decrease in the transactions done by banks and thrifts—part of the overall steady decline over the past decade as banks have either divested their insurance operations to focus on their core business or significantly slowed down their pace of acquisitions. During 2018, there were three notable bank divestitures of insurance operations: (1) KeyCorp’s sale of Key Insurance & Benefits Services to USI Holdings; (2) BB&T Insurance Holdings’ acquisition of Regions Insurance Group from Regions Financial Corporation (BB&T Insurance Holdings also rebranded to McGriff Insurance Services); and (3) Shore Bancshares’ sale of Avon-Dixon Agency to Alera Group. USI also had another notable bank and thrift acquisition that closed in November 2017, when it purchased Wells Fargo Insurance Services USA from Wells Fargo & Company.
There were 13 bank acquirers in the market in 2018 (four of which announced their first transaction), with four also completing multiple transactions. Salem Five Bancorp, Associated Banc-Corp, Eastern Bank Corporation, and FBinsure (owned by Bristol County Savings Bank) each announced two acquisitions in 2018.
The top 10 most active states represented 56% of the total deal volume in 2018. California remained the most active state, with 59 deals announced during the year, which is down 10 deals from 2017. Texas (56), Florida (52), Massachusetts (44), and New York (36) rounded out the top five target states in 2018. Massachusetts moved up from sixth in 2017 to replace Pennsylvania (ranked sixth in 2018) in the top five.
Line of Business
The breakdown of acquisition targets in 2018 by line of business almost mirrors that of 2017, with a slight increase in P&C firms offset by a similar decrease in multi-line firms. In 2018, P&C firms represented just under 55% of all target agencies, while employee benefits and consulting firms remained at 22% of targeted agencies. Multi-line firms represented the remaining 25% of announced transactions during 2018.
U.S.-based buyers were also active internationally, with 53 deals completed and announced, much higher than the 28 deals that were completed by this group in 2017. The majority of these transactions were completed in Canada (55%) and the United Kingdom (36%). Hub represented 24 of the 53 total deals, or over 45% of the total. Hub completed 24 deals in Canada during 2018, up from just five in 2017, driving much of the increase in year-to-year activity from international buyers. Gallagher also completed more transactions internationally in 2018, with 13, compared to eight in the previous year. Gallagher’s acquisition activity in 2018 was largely based in the United Kingdom, Canada and Australia. Notably, Acrisure completed its first international transaction in 2018, acquiring a firm in the United Kingdom.
In 2018, the number of announced transactions involving firms specializing exclusively in employee benefits and consulting (EB) was flat compared to the number of announced transactions in 2017. When looking at historical trends, however, there is a much more exciting story to tell. Five years ago (2014), 74 EB firms sold to a third-party buyer. In 2018, 126 EB firms sold. This number excludes the multi-line firms, which adds another 143 announced transactions involving some type of EB business.
Independent agencies and brokerages remained the top type of acquirer, while public brokerages have been less aggressive in the EB insurance space. Alera Group entered the market at the end of 2016 and quickly became one of the most active buyers in the EB space. In 2018, Alera announced 21 EB deals, which represents 17% of the total EB deals done in 2018. Digital Insurance (OneDigital) was the second most active acquirer of EB firms, with 16 transactions involving EB-specific firms. Acrisure fell from the top most active in 2017 for employee benefits to No. 3 on the chart, down 15 transactions from 2017. AssuredPartners, Gallagher and Hub International all tied for fourth in number of EB transactions. These top six buyers accounted for almost 53% of the total number of EB deals in 2018.
The employee benefits market has seen more change than other insurance markets in the last decade. A large part of this is due to changes in regulation; however, each year presents changes and challenges to all EB brokerages. Plan design, new voluntary products, cost containment strategies, bundling versus unbundling decisions, enrollment guide regulations, benefits administration technology, claim audit procedures, and data analytics techniques are constantly changing as employee benefits insurance continues to evolve into an art more than a science. Rates still play a factor, but more and more EB firms are becoming specialists in the industry. Frequently, human resource experts, nutritionists and wellness specialists, and even doctors and pharmacists, are on staff as consultants at larger EB brokerage firms. The philosophy behind this level of high expertise is that clients want the white-glove treatment with the strength and girth of a larger national firm but at the local level.
What is to come in 2019? On the very first day of the year, 17 independent insurance agencies and TRUE Network Advisors merged. Of those 17 agencies, 16 generate revenue from solely EB products. This newly formed national brokerage, Patriot Growth Insurance Services, entered the market eager to become a top player. We anticipate consolidation will continue and this will be another active year in the EB space.
Specialty distributor M&A activity the last couple of years has catalyzed a phenomenon whereby companies are combining a mix of operational platforms under one roof. (We define “specialty distributors” as managing general agents, managing general underwriters and program administrators—all referred to as “MGAs”—along with wholesalers.) It is an evolving distribution model, compared to historical norms, that may provide several, differentiating competitive advantages, including increased flexibility with distribution. The multi-model company, where several business models (e.g., brokerage, binding and program administration) are implemented throughout a company, has fogged the demarcation of “traditional” specialty distributor roles.
The multi-model approach is primarily a one-directional M&A event, with traditional wholesalers bolting MGA-type operations on to their models. For instance, Worldwide Facilities, a large wholesale brokerage located in Los Angeles, made five acquisitions in 2018 that diversified its product mix between transactional brokerage and contract-binding business.
That said, we are not suggesting that MGAs never consider adding a wholesale function to their model; however, we have observed this is happening less frequently in the marketplace. A multi-model approach that includes a wholesaler operation is a good defensive position because it potentially reduces volatility should an MGA lose its insurance paper.
The pace of reported specialty distributor M&A slowed in 2018, albeit slightly. At year-end 2018, specialty distributors accounted for 71 out of 580 total announced transactions, representing 12% of total announced deals. Compared to 2017, when specialty distributors accounted for 74 out of 557 total announced distributor transactions, representing 13.3% of total announced deals. Despite the slowdown, and barring any significant external events, we expect specialty distribution M&A velocity to continue at or near historical levels for reasons that are tactical, strategic and transformational—or potentially all three.
Gallagher (via Risk Placement Services) and Ryan Specialty Group continue to be leaders in specialty distribution acquisitions. Joining the ranks of leaders this year was Worldwide Facilities, which successfully consummated five transactions in 2018, up from zero the year before. Worldwide’s acquisitions represent excellent examples of not only product and expertise diversification but also measured geographic expansion. Wholesalers have been consolidating and continue to consolidate, and most now have binding authority operations.
Consolidation is blurring the demarcation of “traditional” roles—broking, underwriting, binding—in specialty distribution. The merger of Napslo and AAMGA, two large specialty distributor associations that combined in 2018 to form WSIA, further exemplifies the phenomenon. As growth goals loom large, management and corporate development teams have been forced to reconcile old acquisition strategies with new ones that undoubtedly include the evolved specialty distribution model that consists of a mix of binding and non-binding authority revenue.
Last year, we reported experiencing a shift in buyers, whereby established consolidators started pursuing investments in the specialty distribution sector (as opposed to mostly retail-focused distribution models). For example, Hub International (via Program Specialty Group), NFP, and Risk Strategies all made investments in specialty distribution platforms in 2017, and all three continued making investments in specialty distribution in 2018, albeit at a much slower pace.
Notwithstanding the impact of the recent hurricane activity in the Southeast and wildfires in California, 2018 was a good year for the insurance industry and specialty distributors. However, there are some concerns being raised about an economic slowdown, if not a full-fledged recession. If a recession is on the horizon, it would be prudent for specialty distributors to maintain their growth momentum by continuing to focus on improving operational efficiency, boosting productivity, and lowering costs with new technology and talent transformations, while customizing products and services to meet the evolving demands of a dynamic and emerging digital economy. Moreover, given the potential headwinds, it would also be wise to honestly assess the company’s focus as it relates to customers versus products. An economic downturn would likely exacerbate the already hyper-competitive dynamics of insurance distribution. Specialty distributors—and particularly wholesalers—will need to improve their standing on the insurance-distribution spectrum from transactional intermediary to customer-centric advisor. A customer-focused strategy should enhance their value proposition by giving customers a better understanding of not only what they are buying but also what they are protecting.
Despite the seemingly dark clouds just described, we believe the outlook for specialty distribution is mostly positive and the sector is poised for continued growth. Rates are firming in most lines (or at least holding flat), the exposure base continues to expand from an enduring economic cycle, and there continues to be high interest among market participants to procure insurance cover through the specialty distribution channel. Outside a major shock event that would invariably shake all industries, most specialty distribution should continue to thrive as management teams hone their underwriting savvy and leverage technology to bring new products to market quickly and efficiently.
2018 Valuations Step Up (Again)
Sale valuations from 2015 through 2017 remained historically high, though they had somewhat leveled off. Less than 0.25 times EBITDA separated the average deal values in these three years. However, 2018 saw an incremental move to higher prices paid, despite the belief that prices were stable and would likely remain that way. Compared to 2015, the maximum potential deal value was up more than 6% on average in 2018. Compared to 2012, maximum potential deal value is up nearly 30% on average.
Pricing Structure Breakdown
Two forms of purchase price are generally referenced: multiples of earnings before interest, tax, depreciation and amortization (EBITDA) and multiples of revenue. Here, we refer to multiples of EBITDA. To analyze transaction pricing, we’ll break the price down into three key components:
1. Base Purchase Price—The dollar amount paid at close plus the live-out (if any) the seller will receive.
Paid at Close: The amount of proceeds paid at closing, including any escrow for potential indemnification items.
Live-out: The amount a buyer may initially hold back but which is paid as long as the seller’s performance does not materially decline. This may also be paid at closing but could be subject to a potential adjustment. If the live-out is not paid at closing, this payment is usually made within one to three years, contingent upon delivering on the seller’s pro forma revenue or EBITDA.
2. Realistic Earnout—The amount of proceeds realistically anticipated to be achieved in the future based on a number of factors, including seller historical and expected performance, buyer and seller realistic discussion of earnout metrics, etc.
Realistic Purchase Price = Base Purchase Price + Realistic Earnout
3. Maximum Earnout—The additional earnout above the realistic earnout that, if achieved, would generate the maximum possible earnout payment. In certain circumstances where deals are not capped, this number represents the likely maximum identified through discussions with buyers and sellers.
Maximum Purchase Price = Base Purchase Price + Realistic Earnout + Maximum Earnout
In 2018, the market saw the biggest purchase price shift in the base purchase price paid to a seller. On average, the base purchase price paid in 2018 was 8.58 times EBITDA, compared to 7.97 times in 2017, an increase of more than 7.5%. At the same time, the realistic earnout, or the payment a seller could reasonably expect given its growth history and other deal attributes, was down slightly to 0.72 times EBITDA in 2018 from 0.86 times in 2017. The additional earnout value if a seller were to maximize its value potential did not change much year to year, as it was another 1.55 times EBITDA in 2018, compared to 1.53 times in 2017. All of these moving parts of purchase price yielded an average deal value including all components of 10.85 times EBITDA in 2018, compared to 10.37 times in 2017, or a 4.6% overall increase in value.
Seller-Type Purchase Trends
Agency and brokerage transactions are classified into three major categories: platform, stand-alone or roll-in.
Platform—A platform agency is typically a larger agency that has a well-established territory, brand recognition, seasoned professionals and a scalable infrastructure, among other attributes. The buyer of a platform agency is typically looking to establish a presence in a specific region or niche.
Stand-Alone—A stand-alone entity may be based on size or geographic location. The firm is large enough to maintain its physical presence but likely reports into a larger platform within the given region.
Roll-In—A roll-in transaction typically involves the sale of a small, privately held agency or book of business, which gets physically rolled into the buyer’s existing operations, either at closing or within a reasonably short period of time.
In 2018, purchase prices for both platform and stand-alone agencies increased, driving the combined average purchase price up as previously described, while roll-in agency pricing was down compared to the prior year. Specifically, platform agency transactions saw the largest increase. Base purchase price for a platform agency was up 6.7% during the year, from 9.15 times EBITDA to 9.77 times. Maximum deal value was also up 6.8%, to 12.43 times from 11.64 times in 2017. Maximum deal values for platform transactions were priced, on average, roughly 4.0 times EBITDA higher than a roll-in transaction, with about 2.75 times of this difference in the base purchase price and the remainder dependent upon performance after the close. This reflects the competitive environment as it relates to larger, more sophisticated brokerage targets. Stand-alone agency pricing was about 2% greater in 2018 in total purchase price, with about a 4.5% increase in the base purchase price and an overall decrease in possible contingent performance payments. Roll-in transaction value declined compared to 2017 and was lower than 2016 transaction values in this category as well.
Unless otherwise noted, all deal counts in this article refer to announced, U.S.-based transactions. MarshBerry estimates that only 15%-30% of transactions are made public.
Australia is an outlier, with business interruption ranking second to cyber, according to Allianz’s 2019 Risk Barometer report.
The typical business-interruption (BI) property insurance claim now totals over $3.4 million, Allianz data indicate. “Businesses face an increasing number of BI scenarios,” the report states. “Many can occur without physical damage but with high losses. Events such as breakdown of core IT systems, product recall or quality incidents, terrorism, political violence or rioting, and environmental pollution can bring businesses to a standstill, meaning firms may be unable to provide products and services.”
The main new risk of note—popping up in many sectors for the first time and worthy of a watchful eye at least through this year—is legislative and regulatory change.Tweet
The number-two worldwide concern again this year—by just a hair—is cyber risk, which includes cyber crime, IT failure/outage, data breaches and fines. “Insurers have seen a growing number of BI losses trigged by cyber incidents with industry claims exceeding $100 million,” the Allianz report states. “Many incidents are the result of technical glitches or human error rather than malicious acts.”
Natural catastrophes, changes in legislation, and market developments round out the top five greatest risks globally.
In Africa and the Middle East, measured as a region, market developments rose from fourth place in 2018 to the top spot this year, followed in descending order by political risk and violence (up from No. 3 last year), cyber (up from No. 5), changes in legislation and regulation (up from No. 7), and business interruption (down from No. 1), though South Africa ranked business interruption as the greatest concern.
Rankings by Business Size
While large and midsize enterprises rank business interruption as the greatest risk they face, cyber incidents are for the first time the greatest hazard for small companies (those with less than $283 million in annual revenue), rising from number two last year. Business interruption fell from the top spot to number five for small enterprises. New to the top-10 risk list for small enterprises were shortage of skilled workforce (tied for No. 8) and loss of reputation or brand value (at number 10). Climate change popped up for the first time as a top-10 concern for large companies, coming in at number eight.
The breakdown by industry sector is fairly intuitive, with those in technology, communications, aeronautics and professional services—including healthcare and financial among others—being most concerned about cyber and most others citing business interruption as their biggest risk. Natural catastrophes and climate change were tops for agriculture, while theft, fraud and corruption just edged out business interruption for number-one spot in the transportation industry.
The main new risk of note—popping up in many sectors for the first time and worthy of a watchful eye at least through this year—is legislative and regulatory change. Ranking fourth overall, it appeared for the first time in Austria and Canada and was the top concern in Australia and Nigeria. It also appeared for the first time in five industrial sectors: chemical, pharmaceutical and biopharma industry (No. 2 ranking in that sector); consumer goods (No. 2); engineering, construction and real estate (No. 2); entertainment and media (No. 5); and marine and shipping (No. 5).
For a full breakdown of the top concerns by region, country and industry, consult the Allianz Risk Barometer 2019.
With regard to M&A, culture is consistently ranked as one of (if not the) most challenging “people” issues in M&A…in any industry. So whether you’re a buyer, a seller or anything in between, you better be paying attention to the culture around you.
According to a 2017 Forbes article, “Why Company Culture Is Critical to M&A Success,” when mergers and acquisitions don’t live up to expectations, it’s often because there’s a misalignment between the two organizations’ management teams and cultures. “This friction can wreak havoc as the members of different groups assimilate to drive the performance gains that M&A strategies forecast,” warns the article.
When balance sheets are on the line, organizations of all sizes must understand how company culture plays a role. Failing to do so may be the difference between a great success or a colossal failure. “Organizational culture shapes the employee experience, which in turn impacts customer experience, business partner relationships and, ultimately, shareholder value,” reads a report by the Human Capital Institute. Finding the right fit is a two-way street for both organizations at the table.
Another topic that came to the forefront of our research was the role of technology in our business, and more specifically, its role as a driver of M&A. Take, for instance how tech is changing the game in the on-demand economy and elevating customer expectations. Or how it’s enabling new insights into risk and risk prevention through data analytics. These factors are driving M&A and investment decisions for many varied players.
“Culture is consistently ranked as one of (if not the) most challenging ‘people’ issues inTweet
M&As…in any industry.
The ability for technology to improve the customer experience and ultimately solidify the value proposition for the organizations looking to merge or be acquired is an attractive selling point. Integrating operational enhancements during a deal can help create value for clients in a different context than previously possible, can lead to new tools and products that empower brokers to better help customers along their journey, and can yield cost efficiencies, bigger profit margins and long-term success. These are some of the reasons mergers and acquisitions happen in the first place.
As M&A continues on this torrid pace and increasingly becomes globalized, so too, will the complexity of each deal. So where do you begin? A culture-first approach is a good place to start. Technology will keep changing and improving. At the heart of it all is remembering that commercial insurance brokerage is a relationship business—when working with clients and with potential partners. Whether you’re a seasoned dealmaker or just starting to ponder what your future might look like, be sure to find a reputable leader who will work with you to create a business strategy and shared culture that people are excited about. It’s your DNA, after all; create something you’re proud of.
The technology, pharmaceuticals and energy sectors led with mega-mergers, but few industries have been untouched by the urge to merge. Giants rule some sectors: for example, 60 of the world’s 100 largest shipping lines have disappeared since 1999. Industry and sector convergence are major themes. Valuations are higher than ever.
The ultimate goal of most mergers and acquisitions is the coveted notion of “synergy,” which, in practice, often serves as code for “cost savings.” Reduced expenses may be achieved through bulk buying, staff trimming, location consolidation—in general, by reducing the duplication of services within an enlarged corporation. According to Boston Consulting Group, which has tracked M&A deals since 1990, merged companies’ estimates of synergy savings have been on the rise since 2013. They exceeded the 10-year average of 1.6% of combined sales every year and peaked at 2.1% in 2017. Research by Deloitte has found that synergies are working: 88% of executives surveyed said their M&A deals are achieving expected returns on investment.
Vertical Integration Brings New Risk
Risk management and insurance spending is one of many areas where post-merger savings may be possible. But when the integration is vertical and clients shift their activities up or down their commercial food chain, combining divergent insurance programs is usually much more difficult than it may at first seem. Value in incumbent programs may be lost, new exposure may unsettle existing underwriters, and dramatic changes in risk profile may change a deal’s economics.
Because strategic acquisitions are often executed without thorough due diligence, theTweet
buyer may find out too late that it has gained unanticipated and unfamiliar risk
Consider a typical architectural engineering company. Traditionally, such firms simply developed building specifications and plans, then handed them over. Their risk profiles were relatively simple. In the United States today, however, more than 45% of architectural engineers now get involved in the building process itself, at the behest of their customers. Competition has driven architectural engineers to include additional services in their fee or risk losing the tender.
Increasingly, they are performing some of the hands-on work, including even assembly. They now visit job sites, which changes and extends their risk profile. If the completed construction project is flawed, the newly cast design-build architects may be responsible for rectification costs. Their E&O cover will require a very different scope, since the evolved architectural specialists are now potentially liable for much more. Their insurance must have the wherewithal to put it right, and their broker the foresight to identify the exposures.
The integration can go the other way, too, as a strategic rather than a competitive play. Suppliers within a manufacturing value chain may be (or may look) financially unsound. To secure their lines of supply, customers may simply buy them in an act of strategic vertical integration. That changes each firm’s risk profile, often dramatically for the acquirer.
Take, for example, a manufacturer of component parts for the automobile industry that finds itself in financial difficulty. The chief financial officer of a much larger car manufacturer may decide the most prudent course is to acquire its supplier in order to secure the flow of critical components. Because such strategic acquisitions are often executed without thorough due diligence, the buyer may find out too late that it has gained unanticipated and unfamiliar risk exposures.
In this case, the carmaker may have adopted a subsidiary that manufactures medical components. For the carmaker’s chief risk officer, product recall and liability risk in the medical sector will present a serious exposure and a new insurance challenge. A much larger company with far deeper pockets is also a greater target for compensation. The firm will have to present a very different liability profile and exposure to its underwriters. The CRO must now go to his specialist auto-sector insurance brokerage and ask it to solve a medical manufacturing exposure problem. Is that brokerage agile enough to keep that account?
Carrying multiple programs, even for a short time, may mean forgoing synergies.Tweet
Acquiring Specialty Exposures
Companies frequently acquire specialty exposures through the M&A process. Perhaps an acquired company comes with two corporate aircraft. The buyer now needs aviation insurance. Maybe it has overseas offices, and the buyer’s broker doesn’t do overseas. The enlarged company now needs to purchase and manage an international insurance program. Perhaps the incumbent carrier cannot support international risk, so this new subsidiary cannot simply be tacked on to the existing program. Meanwhile, the executives transported abroad to manage the new operation will need international travel and personal accident insurance and maybe even kidnap and ransom cover.
In this example, the broker must either construct a separate program and placement for the international risk or put the whole program out to tender to find another, probably larger brokerage, that can handle it. A European company acquiring a U.S. subsidiary will need a broker who can cope with U.S. workers comp risk and many other lines of business. The incumbent broker may need to find a partner to guide him through the local regulations and requirements, wherever that may be, or one that can tap into an international network. Even then, servicing issues will remain, alongside requirements for locally admitted policies. In the United Kingdom, employers liability, motor and some engineering coverages must be purchased locally. Britain also runs a national, mutual pool for terrorism cover that brings its own complications. All of these M&A ripple effects have financial implications. It also costs, in terms of management time, a difficult-to-quantify expense that is often overlooked.
If a business is purchased and rolled into an existing placement without extreme care, specialty coverage that underpins the business model of the acquired could be lost. Often the most mature insurance program, one placed with just one or two particular carrier partners, will be superior based on the length of the relationships and the incremental improvements made over the years to the coverage it provides. It can sometimes be critical, for example, to the saleability of an acquired company’s underlying products. Full due diligence is therefore essential, since ignoring special insurance arrangements can have far-reaching implications.
Should the disparate captives be merged? Should the new parent assume the risk?Tweet
Perhaps one or more of the captives should be shuttered, but legacy issues will remain.
Sometimes a merger is known to be heading toward the ultimate spin-off of at least three separate companies following their initial integration. For a period after the acquisition, they will work together under a single corporate umbrella. Risk managers and programs for the individual companies may remain in place up until the ultimate reorganization and division. This approach is particularly common for venture capital and private equity acquirers.
But in this situation the client and broker face choices. Carrying multiple programs, even for a short time, may mean forgoing synergies. One option is to maintain existing policies and programs and make the effort to persuade the relevant carriers that, despite the corporate changes, they should extend their coverage. Another is to create, structure and place a new, overarching program that sweeps in the new subsidiaries and achieves cost savings, knowing that down the road they will be swung out again. But that approach proves a challenge, since it may be difficult to find carriers willing to assume long-tail liabilities in exchange for a one-off premium payment in the absence of a certain opportunity to recoup potential losses. The broker must walk a tightrope. A collaborative approach between brokers, clients and markets is most likely to achieve the best result for all interested parties, including shareholders.
The presence of multiple captive insurers can make large corporate mergers even more complicated. Should the disparate captives be merged? Should the new parent assume the risk? Perhaps one or more of the captives should be shuttered, but legacy issues will remain. The easiest approach is to leave everything as it is and resolve issues through an accounting exercise. But if a new company is spun off and takes a legacy captive with it under a new management, despite having been formed for a different company and launched with different objectives, a new set of challenges may arise.
All of these hypothetical examples are in fact real and fall within the experience of John Eltham, head of North American business at Miller Insurance, the London-based specialist brokerage. The challenges will only multiply going forward, Eltham believes, and that requires brokers to be careful and informed. “We will see more M&A,” he says. “Japan’s economy is all about diversification. China, directly or indirectly through state influence, is looking to secure supply and influence. The Chinese sphere of influence is huge in Asia, and India will not sit back.”
One thing is sure: already brokers are feeling the effect of the huge consolidation trend sweeping industries worldwide and across borders. Larger, better-resourced brokerages may benefit, and the complex, sometimes labyrinthine insurance arrangements may be critical to the success of the underlying transaction.
Leonard heads the Leader’s Edge foreign desk.
Many transactions were based in part on dealmakers’ atypical interest in transforming their organization’s business and operating models, addressing technology (in the P&C sector) and more innovative customer service (in the L&H sector).
In a KPMG survey of 115 insurer CEOs, nearly 37% said they were looking to transform their business models through acquisitions, while 24% said they were looking to transform their operating models through acquisitions.
Other atypical M&A factors included deals to diversify topline income. (Diversification into traditional property-casualty markets has long been a driver of M&A.) Several acquisitions in the P&C sector, for example, involved target companies with reinsurance operations, third-party claims administration, program business and insurance-linked securities (ILS) operations. “Every insurer is looking for ways to grow the top line, which isn’t easy,” says John Andre, a managing director at insurer ratings agency A.M. Best. “What’s interesting is how they’re going about it.”
Pressure to Change
When you have too much money in the system, it ends up artificially depressing prices, commoditizing certain products, and creating a need to compete differently. Companies in both the property-casualty and life and health sectors are struggling with growth and pressured into figuring out how best to use their money.Tweet
In “going about it,” insurers have no trouble digging deeply into their plentiful capital coffers. Tracy Dolin, director and insurance sector lead analyst at S&P Global Ratings, cites an S&P survey saying industry surplus reached $790.7 billion on Sept. 30, 2018, up from $726.7 billion one year earlier. Net income also climbed to $50.7 billion, compared to $23.6 billion during the same period in 2017.
Overcapitalization comes with a price. “When you have too much money in the system, it ends up artificially depressing prices, commoditizing certain products and creating a need to compete differently,” says Mark Purowitz, leader of Deloitte’s insurance M&A and insurtech advisory teams. “Companies in both the property-casualty and life and health sectors are struggling with growth and pressured into figuring out how best to use their money.”
It seems they are diverting less of it toward stock buybacks, which fell from $11.7 billion in the first nine months of 2017 to $4.8 billion in the same period last year, according to S&P Global Ratings. “As capital for the sector keeps climbing and reaching record highs,” Dolin says, “there may be more compelling ways to deploy this capital that adds more value than just sitting on it or buying back shares.”
At the same time, organic growth has been limited in the industry, particularly among more mature insurance companies, says Ram Menon, a partner and global head of KPMG’s insurance deal advisory organization. Since the beginning of this decade, global GDP has increased by more than 20%, Menon says, while global premium volume has risen by a meager 9%.
Many of the M&A deals we’ve seen indicate insurers are looking for deals that help transform their business and operating models. One way to do that is to gain access to other companies’ innovation initiatives and emerging technologies.Tweet
The industry is also challenged by new competitors like reinsurers and investors in insurance-linked securities, in addition to market disruptions from emerging technologies. “Maintaining the status quo in such an environment is not a solution for sustainable growth,” Menon concedes. “Many insurers have come to realize that the traditional strategy of doing more of the same is simply not the best strategy. Many of the M&A deals we’ve seen indicate insurers are looking for deals that help transform their business and operating models. One way to do that is to gain access to other companies’ innovation initiatives and emerging technologies.”
Reaching New Markets
In all industries, M&A transactions can provide ample front-office and back-office benefits—reducing operating expenses, eliminating redundancies and increasing revenues. The thinking is that the combined organization will be greater than the sum of the individual parts, although these hoped-for synergies often look better on paper than in reality.
History shows that synergies are often difficult to achieve. We have only identified synergies as a proven strength to an announced deal 5% of the time since 2000.Tweet
“History shows that synergies are often difficult to achieve,” Dolin says. “In our research, we have only identified synergies as a proven strength to an announced deal 5% of the time since 2000. Quite often the goalposts move or are forgotten in the years after the deals are done.”
While insurers certainly gave high regard to perceived synergies in their 2018 deal making, many acquisitions also departed from more traditional aims. Markel acquired Nephila, an ILS manager that generates fee-based revenue through its management of more than $12 billion in insurance risk-bearing capital from 300 geographically diverse investors. “Platforms with ILS capabilities are attracting M&A attention, which may increase in the future,” Dolin says.
A decade ago, the ILS market was a novel way for carriers to cede risks to third-party investors. This is no longer the case; the market has cemented its role as an additional source of risk-bearing capital. “We’re not even calling ILS ‘alternative capital’ anymore, because we believe it’s here to stay,” Dolin says. “Certainly, this is a factor in reinsurance consolidation and may reduce the number of independent reinsurers standing down the road.”
AIG’s $5.5 billion acquisition of Validus, a Bermuda reinsurer and specialist insurer, also reflects interest in new revenue opportunities. Validus further diversifies AIG business to include a reinsurance platform and an ILS asset manager (AlphaCat).
Even giant M&A transactions like French insurer AXA’s $15.3 billion acquisition of commercial lines insurer and reinsurer XL Catlin (forming new carrier AXA XL) had elements of this trend. While the acquisition complements and diversifies AXA’s existing commercial lines insurance portfolio, it also delivers reinsurance capabilities and access to alternative capital. “The acquisition of XL rebalances AXA’s portfolio,” Purowitz says, “but it also gets them into new businesses, giving them a greater spread of risk and access to revenue through a different customer base.”
Reaching the Customer
Another way some insurers are trying to grow the top line is by gaining access and to new distribution markets and getting closer to the customer. The Hartford’s $1.45 billion acquisition of Aetna’s U.S.-based group benefits business (short-term disability, long-term disability, group life, and lead management) was driven by traditional M&A factors, such as larger market share, although the deal also involves an innovative distribution strategy. “The acquisition makes us bigger and stronger, significantly increasing our market presence,” says Mike Concannon, head of group benefits at The Hartford. “But the transaction also provided a new way to expand our distribution, selling group benefits through Aetna’s medical products sales team.”
On the life and health side of the industry, the bigger financial transactions were primarily in the health sector, where transformative objectives were similar to those seen in the property-casualty industry.
Cigna’s $67 billion acquisition of Express Scripts, for example, gives Cigna the opportunity to offer a more integrated package of benefits to its customers. Likewise, pharmacy chain CVS Health’s $69 billion acquisition of Aetna’s insurance business creates a new type of healthcare entity expected to have greater appeal to consumers. Goals include simplifying how consumers access care by making it local, accessible and less costly.
“Everyone is looking for the silver bullet,” says Deep Banerjee, S&P Global Ratings’ director and lead life and health insurance analyst. “In this quest, we’re seeing all sorts of post-transaction combinations of traditional and non-traditional players. The mindset in these deals is to better assist the needs of consumers through novel concepts like onsite doctors or nurses in a retail environment.”
Activity in the life sector, while fairly substantial, followed more traditional M&A aims, such as a focus on core competencies or building market share. Liberty Mutual’s two-part sale of Liberty Life Assurance to Lincoln National and Protective Associates for nearly $5 billion in capital and other financial components was one of the sector’s largest deals of 2018. (Lincoln Financial cited the development of a more powerful group benefits operation as a primary factor in the acquisition.) Other major transactions included the acquisition of National Teachers Associates Life Insurance by Horace Mann Educators and Resolution Life’s agreement to acquire the life insurance arm of Australia’s AMP Ltd.
The desire to harness the potential of emerging technologies like robotics, machine learning and predictive data analytics is also showing up as an M&A trend. (See sidebar: “Eyes on the Upstarts.”) “More than 60% of insurers now see disruption as an opportunity for growth rather than a threat,” Menon says, “with more than seven in 10 looking to M&A to help transform their organization in some way.”
All businesses and consumers nowadays expect efficient, fast and frictionless transactions. People don’t have the time or inclination to read and understand a booklet-thick insurance policy. They just want to know the basics from their broker or agent and trust in the product’s financial security. If insurers don’t satisfy these expectations, the fear is that some other entity—such as a big-tech company—will. “To bolster their competitive positions,” Dolin says, “we’re seeing carriers making technology-targeted bets in their M&A decisions.”
She points to the AXA XL Catlin deal and the addition of XL Catlin’s data analytics organization, led by chief data officer Henna Karna, to the AXA team. “Getting that data analytics team may have been a deal sweetener,” Dolin says. “It’s often cheaper to poach a top team than build one up from scratch.”
KPMG’s survey affirms this opinion, noting that one in 10 insurer CEOs are looking to acquire “new innovation capabilities” and “emerging technologies” via their M&A transactions. The Hartford’s acquisition of Aetna’s U.S.-based group benefits business fits this paradigm. “The deal gave us access to Aetna’s strong digital capabilities, helping to accelerate our technology strategy while reducing the costs we had anticipated were needed to upgrade our legacy systems,” Concannon says.
Technology is now another “key area of focus” for insurers in their M&A decision making,” Concannon says, and one that is “quickly becoming a competitive differentiator.”
“It’s an arms race out there,” he says. “All insurers are looking for ways to serve their customers with products closer to their needs at less cost. Technology is a way for us to process our transactions more efficiently, at less cost, with higher quality, and less friction for customers. Basically, you have three choices—you build it, rent it or buy it.”
Purowitz agreed the hunt is on among carriers to upgrade their legacy systems—and fast. “Few carriers are holistically using advanced technologies,” he says. “I’ve honestly encountered only a small handful on the front side using these tools to reach the marketplace and on the back side to reach into the plumbing. In today’s competitive environment, timing is essential.”
Nevertheless, Purowitz cautions insurers to be careful when considering technology assets in their M&A deal making. “Too many carriers rush into a deal without fundamentally knowing the problems they’re looking to solve with technology,” he says. “They’re pressured by FOMO”—the fear of missing out—“into feeling they have to do something. Their boards see competitors doing it, and that ratchets up the stress.”
He advises insurers to do “far more R&D” before acquiring a company for its technology capabilities. “The challenge is that the industry historically has not done this type of R&D all that well,” Purowitz says.
The Import for Brokers
As insurers combine in atypical ways to transform their business and operating models, brokers must prepare for the new competitive landscape that emerges. For the most part, observers are sanguine that brokers will continue to play important intermediary and consultative roles.
“The theory is that all these new technologies will disintermediate the middleman,” Menon says, “but the fact remains that the industry structurally has been built around insurance brokers for centuries. Newer generations may want to access insurance directly, but most of us will still prefer to deal with a broker or agent. And it’s not like brokers aren’t innovating. Many of the larger ones in particular are developing very innovative ecosystems to connect their clients with themselves and different carriers.”
Michael Brosnan, a partner and insurance transactions leader at Ernst & Young, has a similar view. “Some commodity stuff may fall off the edges for the brokers, but there will still be a need for the expertise they provide in different classes and for particular products needed in different industry sectors,” he says.
While Dolin agrees the likelihood of broker disintermediation is small at the moment, she is less sure how the different pieces of the insurance business will fit together in the future. “Generally speaking, every participant in the insurance value chain is dipping into each other’s territory, as we’ve seen in the recent M&A activity,” she says. “They’re all trying to protect their competitive position and value proposition, driving them into the offerings of others.”
“Where this will lead will be very interesting,” she acknowledges, “but it’s still too early to tell.”
Russ Banham is a Pulitzer-nominated financial journalist and author. firstname.lastname@example.org
With a doctorate in public health and master of business administration, over the last 10 years Rob Edwards has served in leadership roles in health policy and corporate development for a large health system, leading asset acquisition opportunities and joint ventures as well as developing networks to create access to specialty services for patients. Before that, he was appointed by the governor of Kentucky and secretary of health to various positions to help support modernization efforts in Medicaid, behavioral health and public health. We sat down to discuss M&A from the hospital perspective. —Editor
The basis of hospital mergers has historically been argued as a net benefit to patients because of diversification and scaling resources while consolidating negotiating power with health plans. Does this bear out from what you’ve seen?
First and foremost the thing to remember is, in order to heal patients in the most appropriate environments, hospitals are incredibly capital intensive. And the amount of dollars that it takes to be competitive in the inpatient business and the fact that we’re such a workforce-dependent industry, the perception might not always meet reality when it comes to hospital consolidation.
When hospitals get together, it is most of the time driven by the fact that we need bigger and bigger balance sheets to support the ongoing investment in technology and age of plant to make us competitive with consumers and the clinicians we must recruit to provide care.Tweet
When hospitals get together, it is most of the time driven by the fact that we need bigger and bigger balance sheets to support the ongoing investment in technology and age of plant to make us competitive with consumers and the clinicians we must recruit to provide care. And then the other piece is that hospitals—the inpatient business—are not very profitable. People see these big buildings and a lot of capital being spent, but most hospitals have a low-single-digit margin for their hospital beds. So the only way sometimes to grow is by merging or looking for merger partners of some kind. Some health systems, like UK HealthCare, have pursued a model of collaborating on service lines across broad geographies—such as cardiovascular care or oncology—which is a less capital-intensive model.
There has been a tremendous amount of research done that has looked at whether you can find scale or if scale helps drive down cost. While the evidence is a little bit mixed, I think there are really good peer-reviewed articles out there that say if hospitals merge you can find synergies in cost. You could also rationalize healthcare services a little bit so you don’t have duplication of very high-cost inpatient services. That is where good public policy matches good strategy. Then the question is, what is the effect of consolidation on price? Think about who our biggest payer is. Our biggest payer is Medicare, now, I think almost everywhere, followed by Medicaid. And there’s very little price variability in Medicare. There’s geographic variability, but Medicare is going to, in general, pay at the same rate regardless of if you’re consolidated or not.
So it does then come down to the commercial insurance space or the self-funded space. And there’s no doubt we need a lot more research to happen right there about the effect of consolidation, specifically on self-insured and fully commercially insured contracts. I used to talk about how the fact that, because we’re so heavily regulated, maybe the markets don’t work perfectly and it’s hard to disrupt healthcare. There’s no doubt that there’s more disruption than ever and the traditional margin making activities at hospital systems are being encroached upon by disruptors.
There is also disruption from the standpoint that these large national healthcare systems are starting to make inroads in direct-to-employer contracts so that traditional referral patterns of high-cost cases get disrupted and moved out of a traditional referral region and to a national health system of some kind.Tweet
In primary care, there’s finally some uptick in patients using apps on their phones and iPads to interact with primary care physicians and pediatricians. And those companies that are doing that are managing a greater number of scripts that are being written and then dispensed. And so I think at the consumer-to-physician level there is finally some disruption happening. There is also disruption from the standpoint that these large national healthcare systems are starting to make inroads in direct-to-employer contracts so that traditional referral patterns of high-cost cases get disrupted and moved out of a traditional referral region and to a national health system of some kind. The ancillary space—imaging, ambulatory surgery centers, outpatient surgery—as the certificate-of-need laws change, private practice physician groups and private equity groups are starting to play a bigger and bigger role in that space. Private equity is starting to deploy capital directly in the physician space and in the healthcare ancillary space. There’s all these threads in the healthcare industry where 10 years ago we talked about technology being a disruptor. But it never really showed up, so people stopped believing in it. Then it started to show up…and it’s all being driven by the fact that consumers are directly paying for a greater portion of the healthcare cost than ever before.
Is the effect on hospitals that they are losing some of the market?
If you talk about small, rural hospitals, they are going to continue to struggle and will depend on—in states like Kentucky—Medicaid expansion in order to sustain a margin of some kind. That means they must operate at a low cost. Small, rural hospitals will continue to look for ways to access capital for primary and secondary care because of the workforce and the cost to do it, again driving consolidation. So that is a world where the use of telemedicine for emergency medicine, primary care and psychiatry can work and help hospitals survive and continue to be an important economic driver in their local community. In large urban areas, these factors of disruption on the outpatient side are driving consolidation to try to protect margin and to have income to reinvest in the system. They will also continue to drive large health systems to be more specialty oriented or geographically oriented in order to build the infrastructure necessary to take care of the patients who need hospitalization. And there will always be a population—I think as long as we’re alive—that will need hospitalization of some kind with a lot of support and services.
What do you believe are the most important factors and determinants related to a hospital transaction?
I think this is true for all the industries you’re looking at, but culture fit and leadership. If you don’t know those two things are solid, you’re not going to have a good transaction. Every industry is littered with examples of where the cultures didn’t fit or there wasn’t true leadership o