Carrier Management Q3 2016

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Q3 2017


The Future of Insurance

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Survivors and Game-Changers: Carriers, InsurTechs Stake Their Claim in the Future Landscape

A global futurist and 26 insurance industry leaders—including 11 from the C-suites of traditional insurers and nine from InsurTechs—peer into the next decade, with common messages around “data,” “digital,” “AI,” “IoT,” “customer focus” and partnerships between incumbent carriers and tech startups defining their future strategies. But disrupters are still finding ways to change the game.

A View From the Outside: Global Futurist Uldrich Sees ‘Seismic Shifts’ for Insurance Industry Insuring the Future: Executives Plan for the Road Ahead Faces of the Future; New Frontiers Taking the Leap: InsurTech Leaders See Opportunity in Problem-Solving The Distribution Debate: How Will Insurance Products and Services Be Distributed in the Next Decade? What Will Insurance Leaders and Workforces Look Like in the Next Decade? More Views on the Future of Insurance Q3 2017 | 3

Features Q3 2017

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Trōv Founder Walchek: 7 Tips for Startups Partnering With Incumbent Insurers By Scott Walchek, Founder and CEO, Trōv Zurich NA CEO Foley: Why Now Is the Time for More White-Collar Apprenticeships By Mike Foley, CEO, Zurich North America Confessions of a Recovering Underwriter and InsurTech Founder By Chad Nitschke, Co-Founder and CEO, Bunker


Trust Your Team: Arch Capital’s CEO Looks Back Dinos Iordanou, Chair and CEO, Arch Capital Group, interviewed Industry Relevance and Expertise: It’s ‘Ours to Lose,’ Says Catlin Stephen Catlin, Executive Deputy Chair, XL Group, interviewed


Where Business Leaders Should Spend More of Their Time (But Don’t) By Jon Picoult, Founder and Principal, Watermark Consulting The Benefits of Followership By Andrew Laurie, Account Manager, KMRD Partners Inc. The Right Work at the Right Time By Marsha Egan, CEO, The Egan Group Embracing Mindfulness: Conquering Cognitive Overload in a Hyper-Digital World


Tech Making Insurance Obsolete, Exec Says; Risk Transfer No Longer a Large Nos. Game Social Inflation Is Back, Fueled by Lawyer Advertising and Other Factors: Assured Research Analysis By William Wilt, President, and Alan Zimmermann, Managing Director, Assured Research No Pain, No Gain: WannaCry Not Enough to Boost Cyber Insurance Pricing, Tighten Terms

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Features Q3 2017 VOLUME 4, NUMBER 3

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Breaking the Silence: RMS Releases Cyber Physical Model Scenarios Opinion: Traditional Insurers Must Embrace Cyber Physical Risk By Graeme Newman, Chief Innovation Officer, CFC Underwriting Limited The Great Cyber Debate: Product or Peril? By Shannon Groeber, SVP of Cyber/E&O, JLT Specialty USA Rating the Cybersecurity Rating Firms: How Accurate Are They? The Risk Associated With Manmade Earthquakes By Dr. Claire Pontbriand, Senior Scientist, AIR Worldwide Reinsurers Concerned About Cyber Risks Despite Growth Opportunities 3D and 4D Printing: Transforming Our World and the Trail of Liability


Unlearn, Relearn and Deep Learn or Be History: Carrier Implications of Machine Learning By Lakshan DeSilva, Partner and Chief Technology Officer, Intellect SEEC

Q3 2017 Critical Information for P/C Insurance Company Executives & Directors Publisher Mark Wells | CARRIER MANAGEMENT EDITORIAL Executive Editor Susanne Sclafane | Chief Content Officer Andrew Simpson | Editor Mark Hollmer | International Editor L.S. Howard | Copy Editor Kimberly Tallon | Contributing Editors Denise Johnson, Elizabeth Blosfield, Stephanie Jones, Amy O'Connor CARRIER MANAGEMENT DESIGN Vice President of Design & Production Guy Boccia | Graphic Designer Melissa Reese | CARRIER MANAGEMENT ADVERTISING/MARKETING Chief Marketing Officer Julie Tinney (800) 897-9965 x148 | Director of Marketing Communications Derence Walk | Chief Relationship Officer Gayle Wells | Advertising Coordinator Erin Burns (619) 584-1100 x120 | CARRIERMANAGEMENT.COM WEB Chief Technology Officer/Chief Innovation Officer Joshua Carlson | Web Developer Chris Thompson | Web Developer Jeff Cardrant | Web Developer Terrance Woest | Vice President-New Media Bobbie Dodge |

UBI Is a Failure By Matteo Carbone, Founder, The Connected Insurance Observatory

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Insurers Focus on Unconscious Bias to Improve Underwriting Results

Dark Data: The Data You Already Have But Aren’t Using (Yet) By Peter Bothwell, CEO, Predictive Data Solutions LLC Valuable Revenue Stream Hidden in Insurance Carrier ‘Data Exhaust’

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From the Editor

Back to the Future


uring a presentation about the potential of blockchain to transform the insurance industry, Dr. Magdalena Ramada Sarasota, senior economist for Willis Towers Watson, raised some provocative questions about the future. Speaking at a Casualty Actuarial Society meeting in May on the basics of distributed ledger technology, she explained that blockchain allows interactions “in a network of strangers—[with] people we don’t know, people we don’t trust, people that might have conflicts of interest...We are able to interact with them in a market, transacting value with no one overseeing that market.” In short, blockchain “is a sociological innovation,” she asserted. “It changes the way people…and firms organize themselves to interact in an ecosystem where intermediation is not necessary anymore.” That has implications for insurers, she revealed in her follow-up TED Talk-styled questions: “Given the way society is changing, given that we have IoT data, sharing economies, we have generations wanting to be on peer-to-peer networks and defining how they share as opposed to letting [insurers] mutualize risks, we need to ask ourselves: Where does this leave the insurance industry and the social value behind the industry? Will it leave us with pools of people that can’t get into those networks? Will it be too risky?” During her presentation, she described a familiar example of “flight insurance on the blockchain”—the idea of travelers paying a premium to have self-executing contracts pay them when flights are delayed. “Right now, we’re going for the low-hanging fruit, which is about efficiency, no reconciliation, smart contracts and automation,” she said. “But at the other end of the spectrum, we have the nirvana, and the most anarchic players investing in technology in blockchain to disrupt the industry are thinking about P2P insurance—‘Mutualization 101,’ going back 500 years and having networks of peers insuring themselves.” In recent years, incumbent insurers weren’t initially too concerned about the latest P2P startups, she suggested. “If five or 10 people want to pool together money and insure their friends, there’s nothing we can do about it,” they might say. But blockchain “can get that five or 10 to 200, 2,000, or 2 million. And networks of peers that don’t know each other, that don’t trust each other, that have conflicts of interest would be able to pool funds and regulate a market without an underwriter,” she said. “That has implications from a regulatory point of view and for us as an industry to ask ourselves what is our role in a world that may be disintermediated in that way?” For this edition, we asked more than two dozen industry participants to share their visions of insurance’s Tomorrowland and their roles in a changing landscape. While a handful also mentioned blockchain, and several touched on potential disintermediation of underwriters and brokers, none ventured quite as far as Ramada with her “back to the future” prediction. Fewer still allowed themselves to walk far onto the landscapes typical of science fiction writers, with only a brief mention of customers insuring robots, DNA and trips to outer space (p.46). With our questions limiting forecasts to the next decade, however, they focused in interesting ways on new data sources, emerging risks and valued partnerships between technologists and underwriters.

Online exclusive:

Related article: “What Is Blockchain and How Does it Work?”

Dynamis, a smart contract for P2P supplementary unemployment insurance, uses policyholders' social capital—the LinkedIn social network—to replace underwriters.

Susanne Sclafane, Executive Editor

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Leadership/Time Management

Where Business Leaders Should Spend More of Their Time (But Don't)


By Jon Picoult magine a place where executives could go to discover striking new ways to improve their business. It's a place where, just by visiting, the executives come away more energized and their employees become more engaged. This remarkable place exists in every company. Often, it’s just steps away from the executive offices, yet business leaders rarely explore it and, as a result, never enjoy the many benefits that a visit there accords. Where is this magical space, this location that’s a veritable treasure trove of business improvement insight? It’s in the trenches of your organization— the front lines, where the work gets done and the customer experience actually gets delivered. When was the last time you did more than a “drive-by” visit with your frontline staff? When was the last time you spent a half-day sitting beside customer service employees, listening to incoming calls and watching the staff handle customer requests? How about the last time you rode along with a sales rep, observing their interactions with new prospects, or shadowed a claims adjuster to better understand the decisions they need to make and the tools they possess to make them? If you’re like many business leaders, it’s probably been a long while (if ever) since you spent substantive time in the trenches,

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working alongside frontline employees. Unfortunately, while this is a task most managers recognize they should do, it usually gets pushed aside in favor of seemingly more pressing priorities. That decision likely reflects a misunderstanding about the true value of visiting the trenches, because business leaders who genuinely appreciate those benefits always seem to find the time to do it. Jeff Bezos (founder and CEO of, Herb Kelleher (co-founder and former CEO of Southwest Airlines) and Jim Sinegal (co-founder and former CEO of Costco) are among the very busy executives for whom visiting the trenches was a standard routine.


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Leadership/Time Management continued from page 10 What exactly are the advantages when executives regularly spend time in the trenches with frontline staff?

• It provides an unfiltered view of reality.

When you reside in the corner office, it can be difficult to obtain an unvarnished view of the business. Information tends to get sanitized as it moves through management layers. A visit to the trenches changes all of that. There are no filters, no messengers, no selective sharing of information. You see everything—the good and the bad. Plus, you get to see it all from two key perspectives: that of the employee and that of the customer. As a result, one emerges from a trench visit with a much clearer and more accurate picture of what it really feels like to be a customer—and the employee who serves them.

• It reveals internal impediments.

The vast majority of employees come to work wanting to do a great job for their company and its customers. However, despite their good intentions, employees often get tripped up by internal impediments that are out of their control— things such as inefficient business processes, inadequate IT systems, misguided metrics or incentives, poorly documented procedures, or weak crossunit collaboration. These “boulders” that stand in employees’ way become more readily apparent when witnessed from the trenches. It’s a sobering experience when executives see with their own eyes how deficiencies in workplace infrastructure are essentially sabotaging employees’ best efforts to do their jobs.

• It builds empathy and motivation.

While employees are unable to move those boulders from their path, management can, which brings us to the next benefit of spending time in the trenches. No business leader enjoys seeing employees or customers suffer. And so, when they observe pain points firsthand,

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it’s a very different experience as compared to learning about them from some antiseptic executive report or presentation. Suddenly, the human impact of those pain points becomes abundantly clear, be it in the form of disgruntled customers or frustrated employees. That helps executives empathize with these key constituencies and motivates them to take action. It creates an impetus for change, as executives seek to mitigate the frontline pain and create a better experience for customers and employees alike.

• It strengthens executive credibility.

While spending time in the trenches with frontline staff is important, so is what happens when the visiting executive returns to the corner office. Skilled executives make sure to take the insights they gain from such visits and translate them into specific, tangible management actions. That could be as simple as tweaking a business policy that stokes customer or employee angst, or it could be a more complex undertaking, such as enhancing the IT systems that frontline employees rely on to do their jobs. When executives take remedial action following a visit to the front line, they send a powerful signal to the workforce: You matter, and our job is to support your efforts. That’s an incredibly engaging message for employees and helps strengthen management’s credibility in the eyes of the staff.

• It humanizes business leaders.

Executive visits to the frontline trenches should be conducted in the most humble and unassuming way. This isn’t the time or place for pomp and circumstance. It shouldn’t be treated as some sort of regal visit by a VIP (nor should the executive expect such handling). Rather, it’s just an opportunity for one employee (albeit a high-ranking one) to learn more about the work of another employee. Provided executives approach frontline visits with this mindset, it can actually do wonders for humanizing company leaders in the eyes of the workforce. Instead of

viewing executives as detached monarchs who are oblivious to the realities of the front line, staff are more likely to see these leaders as regular people who are genuinely interested in learning more about how the organization really works.

Jon Picoult is Founder and Principal of Watermark Consulting, a customer experience advisory firm that helps companies impress their customers and build brand loyalty. As a consultant and keynote speaker, he has advised thousands of business leaders across some of the world’s foremost brands. He may be reached at, or follow him on Twitter @JonPicoult.

Amazon’s Jeff Bezos once said that he’s “not seen an effective manager or leader who can’t spend time down in the trenches.” Absent that exercise, Bezos noted, management falls out of touch with reality and their decisions become “abstract and disconnected.” This is why it’s not unusual for people to find Bezos working alongside his frontline staff, be it in a warehouse or a call center. Similarly, it became commonplace for Southwest employees to see CEO Herb Kelleher working at a ticket counter, fueling aircraft or loading bags onto a plane. And Costco’s Jim Sinegal was no stranger to the front line, as he typically spent 200 days a year in Costco stores interacting with employees. These revered CEOs all recognized that spending time in the trenches wasn’t a discretionary task. Rather, it was an essential element of their leadership approach—an invaluable instrument for cultivating business insight and bridging the chasm that typically develops between the corner office and the cubicles. As you think about where to focus your attention in the future, don’t discount the many benefits of venturing into the trenches. As Bezos, Kelleher and Sinegal discovered, spending time with your front line tends to be good for your bottom line.




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Executive Viewpoint Trōv Founder Walchek:

7 Tips for Startups Partnering With Incumbent Insurers Executive Summary: Tech startup Trōv is reinventing the insurance value-chain to offer customers a new way to insure their things: on-demand, for any duration, entirely from a smartphone. Here, founder and CEO Scott Walchek cites the importance of Trōv’s strong relationships with its underwriting partners, offering seven tips for partnering.


By Scott Walchek rōv is a tech startup that’s introducing the world to a new way to insure their things: on-demand, for any duration, entirely from a smartphone. We’ve had to reinvent the insurance value-chain—from customer engagement through claims—by leveraging tech at every point to make the experience meet the expectations of emerging generations. We’ve launched in Australia and the United Kingdom, and will shortly be in the U.S. Trōv assumes no underwriting risk; instead, we partner with established insurers in each territory that bolt their balance sheet onto our proposition. We collect premiums in the app, keep a portion for ourselves and share the remainder with our underwriting partners. We think that this is one

of the models that will endure the massive shake-up hitting the insurance industry as it leverages the key assets of both Trōv and our partners: rapidly deployable, massively scalable, user-centric tech and design from us; balance sheet and regulatory strength from insurers. We enjoy great relationships with our partners. That’s not to say we don’t experience aggravations and frustrations (in both directions). We do. But so far we’ve entered into several strategic business relationships with global insurance leaders—Munich Re, Suncorp, Sompo and Axa UK. More are in the works. Over the past couple of years we’ve learned a lot about the ingredients that contribute to an enduring and positive partnership. So, in no particular order, here are seven things we have learned:

1. Real innovation is driven top-down; be wary if you don’t have C-level support..

Heads of innovation (or similar titles du jour) are in vogue today, but watch out when fundamental financials get compressed. InsurTech is growing up amid a relatively profitable era in global insurance, with few major calamities to drain coffers. When that changes (and it will) and the fear of pinched profits returns to the boardroom, innovation may be sacrificed on the altar of margin efficiencies and viewed as a luxury of plenty.

2. Don’t do pilots; they

invite abandonment and indicate a lack of partner conviction. Many think

pilots are like test drives. They’re not. Pilots are more like rental cars, meant to be

driven hard for a short time and given back. If your partner wants you to do a pilot, be cautious. Short-term thinking and safety nets are the enemies of true innovation, and a pilot is usually fraught with safety valves, inadequate resourcing and near-term horizons. We learned we had to find a new way to measure time—not in linear terms of days or months but rather in software iterations. In other words, since we’re iterating our application based on learnings from, let’s say, customer engagement, then we need to measure how things are going based not on some arbitrary date but on our ability to impact the metrics with each iteration of our software. It’s a new way to think altogether. To be clear, one of your roles in the partnership is to assist the partner in making near-term failure an acceptable ingredient of long-term success.

3. Equity is a great leveler. One of the

best ways to assure that everyone pulls in the same direction is to invite partners to own some of your equity. Even though no partner owns more than a few percentage points of Trōv's equity, the alignment is palpable. For example, one partner—who also owns some equity—recently let go of an exclusivity business term, reasoning that they would benefit more from the potential increase in Trōv’s equity value if our technology were to be deployed beyond their application. We’ve found that selling some equity to partners aligns both P&L and balance sheet objectives, inviting goodwill and patient cooperation.

4. Anticipate that your champions will move on. Pay attention to the care and

feeding of relationships. Partners are people, partnerships are relationships, and relationships need tending. We found that holding regular (weekly or twice-monthly) video-conference check-ins with stakeholders is good relational hygiene.

5. Be sure someone wakes up every day thinking about your success. Someone

who wakes up every day knowing that their job and your success are intrinsically linked is a must-have. Besides managing the myriad deliverables attendant to your mutual business objectives, the person assigned to your success will be your surrogate during the serendipitous hallway encounters when a little defense of your proposition is needed. And they’ll be your local weather vane, measuring the subtle directional shifts so critical to a nuanced response in times of pressure or heightened scrutiny.

6. Repeat after me: Innovation is risky, costly and will take time. Meaningful

results should be measured over quarters, possibly even years. Be sure this is not only well understood by all stakeholders but also that it becomes something like a manifesto underwriting the partner’s intent to innovate with you. When results are slower than anticipated or another inevitable hiccup crops up, most incumbents will exercise an enterprise muscle memory that’s predictably reactive, protective and safe. A declaration of innovation serves as a reminder that what you’re doing is anything but predictable and that the right thing to do is to patiently learn, adapt and keep pressing forward. We’ve often had to remind partners that what we’re doing is entirely new and while viability is the ultimate goal, the transformation we’re

jointly seeking will challenge past practices.

7. Do a mandatory allhands review each quarter—C-suite not optional. This regular

confab is a good forcing function for any number of Scott Walchek is the near-term objectives (“let’s Founder and CEO of Trōv, have that ready for the quarterly review…”) and is the world’s first on-demand a time for reviewing, insurance platform. resetting and aligning around what you’re both trying to achieve. C-level participation is not optional; in fact, this is the optimal time to assure those who are in the day-to-day messiness of transformative innovation that they have permission to both make and live in that mess, that change takes time, and senior leadership has their backs.

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Q3 2017 | 15

Executive Profile


Arch Capital’s CEO

Executive Summary: With the culture of Hank Greenberg’s AIG molding his leadership style, and advice from Warren Buffett guiding his approach to decisionmaking, Dinos Iordanou moved from an aerospace engineering background to become chair and CEO of Arch Capital Group. With the retirement date from his CEO role approaching, Iordanou looks back on lessons learned and shares advice for future leaders with Carrier Management’s International Editor Lisa Howard.


By L.S. Howard ood communication and teamwork, creating a culture of collaboration, delegating to a team of experts, and doing what you love—these are just a few of the career leadership lessons named by Constantine “Dinos” Iordanou, chairman and CEO of Arch Capital Group Ltd. (ACGL). When his insurance career began 41 years ago, it didn’t take Iordanou long to get on the leadership ladder. After earning a degree in aerospace engineering from New York University, he was lured into the insurance industry in 1976, at the age of 26, by American International Group, which was recruiting engineers to help underwriters assess the risks associated with a relatively new line of business: satellite launch insurance. It was the beginning of the communications revolution, and insurance was needed for launch vehicles as well as for lifetime coverage of these satellites, said Iordanou, who is retiring as CEO of

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ACGL in March 2018, although he will continue as the group’s chairman. “They needed somebody with technical knowledge to advise underwriters on the risks associated with those activities; I was the engineer assigned to the aviation department,” he said in an interview with Carrier Management. Interestingly, Iordanou discovered that sometimes there was a divergence between his risk assessment for the launch vehicles and those assessments developed by the underwriters. “My assessment was akin to a failure rate of about 14-15 percent, while the underwriters were thinking in the range of 6-8 percent.”

“I’m a young 68 and my brain still works well, so why park it and waste it?” At that time, there wasn’t much historical data on these vehicles and research was sparse, so with such limited information, he explained, he tended to be more conservative in his approach. It turned out that Iordanou’s more conservative assessments were more accurate, which drew him to the attention of AIG’s CEO at the time, Maurice “Hank” Greenberg, who asked to meet the young engineer. “I think that was a break for my career because during that meeting, when I explained my assessments, I think Hank

photo credit: Christopher Galluzzo, Nasdaq Inc.

saw something in me that caused him to put me in the fast-track program at AIG— and I guess the rest is history,” he said. AIG’s fast-track program provided him with access to very senior people in the organization when he was in his late 20s and early 30s, including Greenberg, Thomas Tizzio and Elmer Dickinson. Tizzio ultimately became AIG’s senior vice chairman, general insurance, after a career with the company that spanned more than 38 years. Dickinson was chairman and CEO of American Home Assurance, an AIG subsidiary. (Both of these executives are now deceased.) “With that access came a lot of responsibility,” Iordanou said. Soon he was running a profit center where he had his first underwriting responsibilities—in the pollution legal liability department. By 1984-1985, when he was only 34/35 years old, he was running the liability team for AIG’s domestic brokerage business. “That’s the brilliant part of Hank. If he thought you were capable, he didn’t care about how old you were or if you had sufficient experience,” Iordanou recalled. “As long as he thought you were smart, you were a hard worker and you were going to make good decisions,” then the door opened to career opportunities. When asked who his career mentor was, Iordanou quickly answered, “Hank Greenberg.” Iordanou worked his way up at AIG, ultimately becoming a senior vice president at American Home Insurance Co., an AIG subsidiary. He subsequently moved to Berkshire Hathaway Group, where he served as president of the commercial casualty division. He held various senior roles at Zurich Financial Services between 1992 and 2001. In 2002, he joined Arch Capital Group (US) as CEO. The following year, he was named CEO of ACGL and became its chairman in 2009.

Team of Experts

Iordanou said leaders are only as strong as the teams they surround themselves with—a lesson that obviously has stuck

“If you promote openness, you’re going to get openness. If you promote collaboration, you’re going to get collaboration.” with him from his early days at AIG. The best leaders know how to delegate and rely confidently on the expertise of their teams, he said. You may be the best leader, but you’re not the best specialist on anything. You’re not the best underwriter, claims professional, lawyer, accountant or actuary, he added. Senior leaders need to depend on their teams of specialists “who have years of experience and expertise in their subject matter,” he noted. “If you don’t have the right expert, then you need to change the expert.” If a CEO starts making legal decisions “instead of ratifying legal decisions made by the legal department, he is making a mistake.” While the senior leader needs to have sufficient knowledge, ability and intellect to make sound judgments, at the end of the day, a lot of decision-making gets done by subject matter experts, he said. But this doesn’t mean the CEO relies blindly on his or her team. “You’ve got to get knowledge by asking the right questions, but you have to have confidence in the people who surround you,” he affirmed. “That’s been the culture at Arch, and it has served us extremely well.”

Corporate Culture

Iordanou said corporate culture is very important to the success of an organization and begins with the CEO. “If you promote openness, you’re going to get openness. If you promote collaboration, you’re going to get collaboration,” he affirmed. “If you have a good culture and a good working relationship with your senior management

team, it eventually permeates through the organization,” which ensures good teams are in place further down in the company. A good, collaborative culture promotes better decision-making, he added. “At the end of the day, in the financial services industry, the only thing we manufacture is decisions, so the quality of our decisions will determine how well the organization does—or how badly it does,” Iordanou said. “I talk a lot internally that we have to create a culture of collaboration, a culture that allows free flow of information—all with the simple goal to make sure that the myriad decisions we make as an organization every day are good-quality decisions.”

Listening Well

When asked to give advice to young underwriters who are starting their careers, Iordanou tells them to listen well and attempt to learn something new every day. “If you’re not a good listener, you won’t reap the advantage of all the experience that is around you in your day-to-day interactions with your superiors, your peers and even your subordinates,” he said. “As long as you listen and keep an open mind, you can learn from all different types of people within the organization.” In his early career at AIG, Iordanou learned a lot from the senior managers at the company. “If I hadn’t been willing to absorb and digest their knowledge, I

“If you don’t have the right expert, then you need to change the expert.” wouldn’t be where I am today.” Being a good listener was also the theme of advice he received from the “Sage of Omaha,” Warren Buffett, when Iordanou worked at Berkshire Hathaway. Buffett lives in Omaha, Neb., because, as an investor, he wants to maintain the

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Q3 2017 | 17

Executive Profile continued from page 17 independence of his thinking, but he doesn’t make his decisions in a silo, explained Iordanou. “His advice to me was that independent thinking doesn’t mean you isolate your thoughts from discussions with people you respect and trust—what they think about a particular situation,” he said. Before Buffett makes decisions, he listens to the people he respects and trusts. Then he leans back in his chair, puts his feet on top of his desk and thinks it through, Iordanou said. “When you have to make a tough decision, get a lot of input and give yourself enough time to think it through,” he continued. “If it makes sense to you, you do it. If it doesn’t, you don’t do it.” He said he has followed this advice many times in his career. After getting the input, at the end of the day, “you have to make the decision and you have to have the independence.” Buffett also doesn’t make his decisions hastily. “Give yourself enough time to think things through. A lot of people are way too busy and rush too much when they have to make decisions.”

Enjoying What You Do

Iordanou said he has very much enjoyed his career in the insurance industry—which is another key to success: doing what you love. “If I hadn’t enjoyed what I was doing from the early days, I wouldn’t have been successful in my career,” he emphasized. “For me, underwriting, assessing risk and taking risk was a passion. It makes the days go by fast. You go to work and you enjoy what you’re doing. You get good at something when you enjoy what you’re doing.” In fact, Iordanou still enjoys getting involved in underwriting deals because “that’s what gets my juices flowing.” And from his early days in the industry to his current role, he has always found it to be a fascinating business—in part because of its importance to the global economy, as the catalyst for global commerce. “No one would invest hundreds of millions to build a building if it couldn’t be

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photo credit: Don Pollard

insured against fire,” he continued. “No one would invest in corporations if they didn’t have liability coverage to help them withstand the financial burden if something goes wrong. Ships won’t sail without cargo and hull insurance. Planes won’t fly without liability insurance. I could go on and on.” Working as an underwriter allowed Iordanou to learn a lot about different kinds of industries and how they worked— ranging from the chemical industry, to pharmaceuticals, to the automotive industry and beyond. “Over the years, you get exposed to a lot of different industries, which I found very fascinating.”

Succession Planning

While his interest in the industry is unabated, Iordanou said it’s important that he “make room for others who were instrumental in helping build this company to have an opportunity to get to the top level.” “I’m not one of those individuals who said, ‘I’m going to be the CEO until I die.’ In my view, that’s not the proper approach,” he noted. “CEOs should be able to do well for the company’s shareholders, and while building the company, be cognizant and

work diligently to make sure they have able successors who, in due time, will take the baton and run the company.” By the time he retires as CEO next year, Iordanou said he will have run the company for 16 years, and he wants a little more time to spend with his grandchildren, to pursue charitable work, golf and travel the world—this time for pleasure rather than business. He’s an avid soccer fan; he used to be a professional player when he lived in Cyprus before he moved to the U.S. “I’ll spend more time watching the teams live, instead of just on television.” However, Iordanou is only planning to be semi-retired and will keep some businessrelated irons in the fire. As the ongoing chairman of ACGL, he will continue to be a senior adviser to the management team and hopes to limit his workload to about 15 working days a month. He will continue as director for Verisk Analytics and plans to join another board. Iordanou said that will be enough to keep his business brain stimulated but will reduce his current “crazy business schedule” to perhaps 100 days a year. “I’ll be 68 years old when I retire in March, but I’m a young 68 and my brain still works well, so why park it and waste it?”

Executive Viewpoint

Zurich NA CEO Foley:

Why Now Is the Time for More White-Collar Apprenticeships


By Mike Foley ollowing the Trump administration’s “Workforce Development Week,” I’m particularly appreciative of its support for apprenticeships as a way to spur job growth. There simply aren’t enough skilled workers to go around. Many sectors, including our own, have neglected to consider apprenticeships as a way to fill this gap. We shouldn’t anymore. Apprenticeships are currently underutilized in the U.S. despite having a proven record of good outcomes for workers in other regions, including Europe. There were about 505,000 U.S. apprentices in training in fiscal year 2016, a figure much smaller than the 13.3 million students enrolled in four-year colleges last year. Those who complete the training are well rewarded. According to the DOL, 90 percent of Americans who finish apprentice training land a job, and their

average starting salary is $60,000 compared to the $49,785 average for new graduates in 2016. With these encouraging figures, you’d think more businesses would embrace apprenticeships as a way to develop talent and encourage job creation. But many companies—notably professional and financial services firms—continue to neglect them despite looming talent shortages. Of the more than 8,000 active apprenticeship programs registered with the Labor Department, almost half are in the construction industry and 20 percent are in manufacturing. Other sectors need to take up the mantle and develop the next generation of talent through apprenticeships. Despite millions of unemployed Americans, the insurance sector faces a major talent gap, with nearly 400,000 employees expected to retire from the insurance workforce in the next few years, according to the U.S. Bureau of Labor Statistics. Moreover, recent studies suggest

millennials are not particularly interested in working for insurance carriers, which is creating added pressure on insurers to rethink their recruiting strategies. Instead of screening out résumés across professional services, we need to screen in new talent and expand the pool beyond candidates with a four-year degree. The DOL counts the number of current financial and professional services apprenticeships at an astonishingly low 70. Zurich North America started an apprenticeship program a few years ago, working to bring the Mike Foley is Chief European apprenticeship Executive Officer for Zurich model—known for training North America and is a people in trades such as member of Zurich's skilled manufacturing but Executive Committee. also used to train whitecollar workers—to the U.S. We currently have 31 apprentices and have made the commitment to train at least 100 by 2020. The curriculum includes three days of on-the-job training at Zurich and two days of classwork at William Rainey Harper College. Others in the insurance industry, including The Hartford and Aon, have followed our lead, and we hope more professional services firms doubledown with their own programs. Apprenticeship programs can change the dynamic of how people think about career paths in the United States. They offer clear economic benefits by helping businesses meet the demand for skilled workers while providing better job and pay prospects for those involved.

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CONFESSIONS of a Recovering Underwriter and InsurTech Founder

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Executive Viewpoint Executive Summary: Chad Nitschke, a co-founder of Bunker—the first contractrelated insurance marketplace for contractors and small businesses—describes his journey from the traditional insurance industry to become “CEO of a website.” Moving past his frustration with the established industry, building an InsurTech isn’t as easy as media reports suggest. Instead, it takes dogmatic stubbornness and drive to turn a vision into reality, he writes, also describing the importance of testing prototypes with customers and learning to understand the language of investors.


By Chad Nitschke o…you’ll be CEO of a website???” That was my parents’ confused reaction two years ago, after I spent 30 minutes walking them through the rationale behind why I was going to leave the traditional insurance industry and launch Bunker. To date, that was hands down my worst pitch meeting— my parents. The good news: I’m now affectionately known as “CEO of a website” to the team.

Rooted in Frustration

I often get asked why I started Bunker. Throughout my career, I was fortunate to work for several leading carriers in a variety of great roles. The answer to why I left is rooted in frustration. I was frustrated with the lack of change in the insurance industry; frustrated knowing the $5 trillion global industry should be better. I was frustrated living in San Francisco and watching startups in every other area of financial services drive innovation—banking, payments, lending— while insurance was at risk of getting left behind. I was frustrated that from inside the industry it felt like we were perpetuating more problems for customers than we were solving. I didn’t want to be part of that anymore, and candidly I didn’t feel like I fit in. It seemed clear the better path for me would be to step outside the traditional industry, get

off the sidelines and build my vision.

The Idea Is the Easy Part

Before deciding to start Bunker, I spent most of 2013 and 2014 immersing myself into the startup ecosystem, absorbing as much as possible. Meeting with entrepreneurs, offering to help, reading blogs, listening to podcasts and even investing in startups. This served as great motivation, but more than that it provided a bit of a blueprint for approaching something I had never done. It’s true what they say: The idea is the easy part. Being roughly two years into building Bunker, I’ll go on record to say this is a massive understatement. From the outside, press articles make it appear easy and oddly linear—you raise capital, build some tech and sell at a unicorn valuation. This couldn’t be further from the truth.

From the outside, press articles make it appear easy and oddly linear—you raise capital, build some tech and sell at a unicorn valuation. This couldn’t be further from the truth. I’m not sure of the best analogy, but pushing a boulder uphill seems to fit. If you stop for a day, you’re lucky if the boulder stays in the same spot. More often than not, it will start rolling back downhill. Sometimes it literally rolls over you. It takes dogmatic stubbornness and drive, but that’s personally one of the

things I love most about it. And now I have more admiration for anyone building something new. It’s cathartic and rewarding to work extremely hard, building something that solves a significant problem for your customers. I knew I wanted to focus on small business insurance. It’s a massive segment of the market and significantly underserved. Customers are hungry for better solutions. The bigger question was how. How should the problem be solved? How should we go to market? How could we drive real change in a $5 trillion industry? We still joke about the next step in the company—and by company, at that point I basically mean myself, a terrible Powerpoint and a conviction to make insurance better. I knew I needed to start alpha-testing different ideas and concepts, but I needed someone to build clickable prototypes. When I asked a friend if he had any ideas, he suggested I talk to his friend Dan. I then

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Executive Viewpoint continued from page 21 proceeded to ramble about how I really needed to find someone “like Dan.’’ My friend shook his head and corrected me: “You don’t need someone like Dan; you need Dan.” That friend was Kevin Kiser, who later joined the team as head of client solutions. Dan is Dan Feidt, a UX/design expert who started down the path of helping as a side project but then became convinced of the opportunity and joined as a co-founder and head of product design.

Talking to Customers

Dan and I spent over six months building and iterating on prototypes. We’d brainstorm models. He’d build a prototype. Then I’d take that and demo it for any prospective customer that would talk to me. We knew we wanted to build something different. Taking the offline process and moving it online isn’t the future. I also wanted to make sure we solved for customer acquisition costs. Selling anything to small businesses is expensive, and pouring Chad a mountain of venture Nitschke is Co-Founder funding into search and CEO of Bunker, engine marketing and headquartered in San social to acquire Francisco, Calif. After customers wasn’t the spending 15 years at type of company we leading insurance carriers, wanted to build. We he left the traditional don’t believe that industry in 2015 to launch model will be contract-related insurance sustainable over the marketplace Bunker, along long term. with Insure.VC, an angel We alpha-tested fund focused exclusively on prototypes over and InsurTech. In addition to over until we started to his background in the learn about a feature in industry, he’s now been on one of the prototypes both sides of the fence, that everyone loved. raising venture capital for Engagement for that Bunker and investing in feature was off the several InsurTech startups. charts. Over and over Reach him at chad@ we heard, “I like what you’re doing—but we

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Members of the Bunker team: Dan Feidt, Chad Nitschke and Kevin Kiser really love this feature. Whenever that is ready let us know, because we want to start using it.” That feature was smoothing the process when insurance was required by contract— which, as it turns out, drives more than 50 percent of all SMB insurance purchasing. It was invaluable feedback and gave us the conviction we needed to start writing and shipping code. It’s not uncommon for an MVP (minimum viable product) to form around a product feature vs. trying to build a boil-the-ocean solution. It’s like chess: Think far ahead but make one move at a time. I can’t stress enough how valuable it is to build and test prototypes with customers that you expect to use your product. It is without a doubt one of the most important things we’ve done to date as a company and is core to launching anything new. Not only did we end up building something we never would have discovered on our own, but it also paid significant dividends from a business development perspective. We built relationships with more than 75

enterprises that represent hundreds of thousands of small businesses. They all loved what we were doing, and several turned out to be our first beta customers.

Translating Investor Feedback

One of the next steps in our journey was the fundraising process. We were very lucky to find great partners for both our seed round and Series A. You can change a lot about a startup, but you really can’t undo your cap table. It’s critical that you find supportive investors you really identify with as partners. Like everything with a startup, fundraising was a learning process. It’s one thing to read never-ending blogs on the topic, but when you have your first final partner meeting, the pressure is real. I failed the first time in our seed round, and it was wrenching to go back and tell the team. I felt like I let them down. But you pick up and move on—smarter, better and tougher. One interesting takeaway for me was how to interpret investor feedback.

Although a lot of investors pass, they rarely say “no.” (A few do, and you later learn to appreciate those quick noes.) Instead, you often have to read signals. One example: When you get to the end of a meeting and an investor asks, “How can I help?” That’s code. Translation: The meeting is over and they’re almost certainly passing. They know how to help. You want capital; they want to invest in great startups. That said, investors don’t have much of an incentive to say no. They are ultimately optimizing for optionality—the option to invest. If you get a term sheet the next day from an investor they respect, they may all of a sudden want to invest. A founder described the process to me like a high school dance—and he was exactly right. It’s usually hard to get that first dance, but once you do, then everyone is interested.

going to look quite a bit different 10 years from now. It’s anyone’s guess what that will be, but the exciting part is that it’s up to us—founders, InsurTech employees and industry professionals—to shape what that

future will be. I always tell the team that if Elon Musk can build a plan to colonize Mars, we can surely improve an industry that is made up of paper, people and promises.

When you get to the end of a meeting and an investor asks, “How can I help?” That’s code. Translation: The meeting is over. Generally, unless an investor meeting ends with a clear next meeting being scheduled or a commitment to discuss at their next “Monday Partner Meeting,” it’s best to move on and assume it’s not the right mutual fit. Instead of spending time trying to convert noes, it’s almost always best to move on and keep driving forward.

Evolving From Building a Great Product to Building a Great Company

Now that we have money in the bank and launched a post-beta product with customers, it all comes down to execution. Execution is about hiring and building a team better than you and ensuring they’re set up for success. Internally we refer to this part of our journey as evolving from building a great product to building a great company. It’s an exciting time. I’m biased, but I definitely believe the insurance industry is OCTOCM002.indd 1

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‘Ours to Lose’

Says Catlin Executive Summary: Stephen Catlin looks back on a time when underwriters were kings at Lloyd’s and the industry’s only recruits were the sons of existing participants. The London market has changed, but perhaps not enough, he tells CM’s International Editor Lisa Howard, identifying areas of process inefficiency and an unproductive focus on past rather than future risks among the obstacles setting the industry up for competition from outsiders.


By L.S. Howard fter 44 years in the insurance business, Stephen Catlin is retiring at the end of 2017. While he’ll be retiring from his role as executive deputy chairman of XL Group, he emphasizes that he won’t be retiring from the industry—just entering a new phase of work. He hasn’t quite figured out what he’ll do, but one thing is clear from interviews and recent speeches: He will not be spending idle days on the golf course. He might start a new company, but it won’t be Catlin 2— another Catlin Group. “There are lots of changes going on in the industry, and it’s going to need people who are prepared to truly embrace change and benefit from it. That could mean anything or nothing for me. We’ll see what happens,” he said in an interview. Catlin has spent a good deal of time recently reflecting on his long career, partly because of his impending retirement. In addition, he and James Burcke have collected some of the

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reflections in a book they have written. The book, “Risk & Reward—An Inside View of the Property/Casualty Insurance Business,” was published in July. (A former insurance journalist, Burcke worked most recently as head of corporate affairs for Catlin Group Ltd.) It details industry developments and challenges, as well as Catlin’s business ethos and leadership lessons, providing perspectives on the industry—past, present and future. Catlin joined BL Evens & Others on Syndicate 264 at Lloyd’s at the age of 19 in 1973 as an office junior. By 1982, he became a deputy underwriter. Just two years later, he founded Catlin Underwriting Agencies Ltd., which later became part of Catlin Group Ltd., which was acquired by XL Ltd. in 2015. That’s only a brief synopsis of his career. Last year, he became chairman of the Insurance Development Forum (IDF), a public-private partnership designed to help bridge the “protection gap” for developing nations. He will continue that role after he retires from XL Group.

“Having started as a small Lloyd’s syndicate without a fax machine or a photocopier, Catlin [Underwriting] became a multibillion-dollar company employing 2,500 people in 25 countries. That is what I call a successful startup!” These words of praise came from Nikolaus von Bomhard, former chair of the board of management at Munich Re, who provided a forward to Catlin’s book. “And over time, Stephen has become a highly

esteemed insurance heavyweight to whom the industry rightly listens,” said von Bomhard. With a book fresh off the press, Carrier Management picked Catlin’s brains about the industry he loves.

Social Value of Insurance

Looking back at his early career, Catlin said he regrets that no one sat him down and told him the value of insurance. While he eventually did work it out for himself, he said he nearly left the Lloyd’s market two or three times in the early years. “I couldn’t figure out whether Lloyd’s was a value creator or just a big gambling casino. The truth of the matter was that, at that time, it was probably a bit of both.” He explained that some Lloyd’s underwriters in those days regularly traded “gambling policies” that were actually wagers disguised as legitimate insurance— until these policies were banned in the 1980s. To his credit, Catlin refused to get involved and instead focused his efforts on true risk transfer products, which provide real social value by supporting global commerce. While such gambling policies are a distant memory for Lloyd’s, according to Catlin, there is one thing that hasn’t changed: The insurance industry still doesn’t know how to communicate how it provides value for people and businesses. “The world as we know it today wouldn’t work very well without insurance. If there was no insurance, you wouldn’t be able to drive a car. You couldn’t fly in an airplane. You couldn’t travel on a ship, nor could a ship carry cargo. You couldn’t attend a sporting event. In most countries, it would be impossible to obtain a mortgage on a house,” said Catlin in a passage from his book. While the industry historically has been really poor at communicating what it does, it is getting better, he said. He pointed to the fact that the insurance industry is now “an employer of choice among students graduating from first-class universities around the world.” During the interview, Catlin said he is

“staggered at the high caliber of the people who apply to come into the industry, which is very different than when I started.” At the time, Lloyd’s had few university graduates, and many people entered the market because their fathers and grandfathers had worked there. When he joined Lloyd’s, the underwriter was king. “In those days, the active underwriter could do almost whatever he wanted—and he often did. Some people benefited from that autonomy, and others lost out big time.” That’s no longer the case. There are more requirements for accountability and transparency in the current market. “A Lloyd’s business is accountable to its shareholders and regulated by the Franchise Board; there was much less accountability in the old days.” Further, he noted, very few women worked in the market in the 1970s because women were not allowed in the underwriting room until the end of 1973! “Looking back, that seems outrageous,” he said in the book. Although great strides have been made since that time, Catlin said much more must be done to increase the role of women in the industry because they are “still grossly underrepresented,” especially in management positions. “During the latter years of Catlin, we had a 50/50 ratio between male and female employees worldwide, but the percentage of women fell away quickly as the pay grade increased,” he said. “A truly heterogeneous workplace is far superior to one where everyone talks the same, looks the same and thinks the same,” he went on to say. “Over the years, I observed that meetings attended by both men and women tended to be more productive than male-only meetings. The quality of the debate increased, people tended to treat each other with more respect, and a greater range of opinions were exchanged. “When I joined Lloyd’s, it had an atmosphere very much like a stuffy private club: few women, virtually no minorities and many people from a posh, upper-class

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Executive Profile continued from page 25 background,” he wrote in his book. “Thankfully, Lloyd’s—and the entire insurance industry, for that matter—has moved on. The insurance industry is now based on meritocracy and an individual’s capability; the industry now attracts people from all walks of life. This can only be for the best,” he added. An industry remains more relevant, when it attracts the best people—male, female, from all ethnic origins, he said. Indeed, the industry’s relevance in a changing world is a prevalent theme for Catlin. During the interview, he predicted that the industry is due for some reasonably radical change, “which I think is needed.” Over the past 40 years, the industry has made tremendous progress in areas such as modeling, claims handling, capital management, its professionalism and the level of talent it attracts. “The one area that

An Insider’s View “When I joined Lloyd’s, it had an atmosphere very much like a stuffy private club: few women, virtually no minorities and many people from a posh, upper-class background.” “I think everyone would agree that no other city in the world has the depth and breadth of the expertise that exists in the London market. That is a prize for us to lose, not to keep.” “The one area that hasn’t moved on much during that 40-year period is what I call ‘process’: how insurers and brokers obtain data, handle data and process data.”

hasn’t moved on much…is what I call ‘process’: how insurers and brokers obtain data, handle data and process data,” he said in the book. “Frankly, we are still pushing paper around to a ludicrous extent. In London, brokers show up at the Lloyd’s underwriting room or insurers’ offices carrying huge files of paper. We are still entering the same data at nearly every point from initial quote to policy issuance. The whole ‘process’ is unbelievably inefficient.” As a result, the cost of the transaction is too high, and “if we as an industry don’t sort out this issue in a reasonably short time frame—let’s say five years—someone else will.” He pointed to the success of Amazon as a cautionary tale. “Amazon has absolutely transformed the retail book market by doing things a different way, which was more efficient,” leading to the closing of book stores across the globe. “I think everyone would agree that no other city in the world has the depth and breadth of the expertise that exists in the London market,” he said. “That is a prize for us to lose, not to keep.” As a result, he warned, London has to look at its cost base “to make sure we can remain competitive in what is an increasingly competitive marketplace.” Turning to the relevance that comes with “making certain we meet the changing needs of our clients,” Catlin warned that the risk landscape has changed dramatically for customers. The biggest concern of the management of Fortune 500 companies used to be with its physical assets, such as property and equipment, which for many years represented about 80 percent of their value,

he said. However, a similar group of companies today would probably say 80 percent of their value is associated with soft assets such as intellectual property rights or data, rather than physical assets. “If the insurance industry is to remain relevant to society over the next 20 or 25 years, it must embrace the new risks to which society will be exposed,” he said in the book. “We must be at the forefront of understanding those risks and finding solutions to mitigate them. The big obstacle, however, is that insurers’ thinking tends to focus on what has happened in the past rather than what might happen in the future.”

Systemic Cyber Risks

Another major concern for Catlin is with the industry’s potentially systemic exposure to cyber risks and cyber attacks that affect diverse industries across the globe. “Because the pace of change is so fast, it’s hard for us as underwriters to keep up with that change and to understand the risks that we are undertaking,” he told

Carrier Management.

A systemic cyber attack would hit the entire global economy, given the interconnectivity of data systems, and could present losses that are “bigger than the total market capitalization of the industry.” The result, he said, is that the industry wouldn’t be able to honor its promise to pay—its fundamental reason for existing. “The real challenge for the insurance industry is how insurers can offer meaningful cyber insurance coverage to clients—both in terms of scope and policy limits—without bankrupting themselves,” he said in the book. One solution would be for governments to provide the ultimate financial backstop when society is hit with a “truly catastrophic cyber-related loss, such as complete disruption of the Internet for a prolonged period.” Another “crucial” solution would be to draft clear policy wordings, so that cyber is excluded if it’s meant to be excluded.

Key to Leadership: Honest Self-Appraisal


ood leadership is essential if companies are going to successfully navigate the challenges ahead, Stephen Catlin told Carrier Management during a recent interview. Some of his leadership lessons include: acting confidently, no matter how great the stress; choosing your fights; learning how to deliver difficult messages; and being brave when difficult decisions are necessary. “Leadership is leadership, whether you’re running a company with thousands of employees or whether you’re simply a mother or father trying to set a good example for your family,” he wrote in a book he has just authored giving an insider’s view of the industry. “Some of my biggest regrets in life relate to times when I have led badly, which usually means that I behaved poorly in a certain situation or that I have been unnecessarily unkind to someone.” Indeed, he told Carrier Management that one of the true signs of a leader is the ability to own up to a mistake. And the first step is to admit it to yourself. He learned a powerful lesson about the ability to self-appraise when he and Sir Graham Hearne, the former chair of Catlin Group, flew to New York City on a Saturday about 15 years ago to meet with the company’s private equity partners. Catlin got the feeling that they wanted to sack him because they didn’t like the way he was managing the company and were second-guessing his management decisions. During the long, very rancorous meeting, Catlin said he was becoming “increasingly frustrated by the style and nature of the questioning.” “I thought to myself: ‘I’ll take this for another 30 minutes, and if it doesn’t stop, I’m going to walk out the door and will take the consequences of that action.’”

Perhaps it was telepathy, said Catlin, but within seconds of his coming to that conclusion, from nowhere, the chairman began shouting at these executives, knocking them down verbally one by one, “as if it was a 10-pin bowling alley.” In a weird turn of events, by the time the chairman was finished with his tirade the equity partners were “backing me to the hilt,” Catlin reported. In the elevator after they left the meeting, Catlin thanked Hearne for his support because they had achieved what they needed. But when they got into the car en route back to the airport, Hearne put his hand on Catlin’s arm and said, “Stephen, I could have done that better.” “I was just spellbound by that remark. He had come out of the meeting having won, but his immediate reflection was, ‘I know I’ve won, but I could have won in a different way,’” said Catlin. “The ability to self-appraise and recognize, even when you’ve won, that maybe you could have done it better and then be able to verbalize that to people around you so they can learn from your experience, is by far the best way of going forward.” It takes honesty and integrity to acknowledge when you’ve made a

“Even the greatest leader in the world is not perfect, each with strengths and weaknesses. We can learn from both.” mistake—sometimes at a personal cost— but it has tremendous value, Catlin stressed. “The bottom line is that people learn the most from the mistakes they make, not by the things that they get right. To learn from a mistake, a leader must take ownership of the mistake, first and foremost. To be an effective leader, you must communicate to those around you that you have made an error, you’ve learned from it and the actions you plan to take to make sure the mistake doesn’t happen again.” He said he has had a lot of mentors, and each one has taught him something different. “We can all learn from other people’s experiences. Even the greatest leader in the world is not perfect, each with strengths and weaknesses. We can learn from both.”

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Personal Development

The Benefits of

Followership Executive Summary: The P/C insurance industry employs more followers than leaders, but without followers, there are no leaders, notes KMRD’s Andrew Laurie. Here, Laurie offers some thoughts on how to help employees become better followers, ultimately moving our industry to a better, brighter future.


By Andrew Laurie eaders get all the credit. Nearly 100,000 soldiers and sailors followed Alexander the Great during his Asian Campaign. Yet his is the only name we remember. Countless individuals worked day and night, weekdays and weekends to make the iPhone a reality. But who receives credit other than Steve Jobs? While you could probably fill a mediumsized city with individuals who have served more than 300 billion McDonalds hamburgers, founder Ray Kroc is the only one of them we memorialize. In Emanuel Leutze’s famous painting (who knew that name until this moment?) “Washington Crossing the Delaware,” the resolute leader leans in while his unnamed oarsmen gamely push through water and ice. The great man, who is often composed of equal parts daring, charisma and unfailing confidence, naturally draws our attention. Those who follow him just as naturally fade into the background. While I have no intention of questioning our need for leaders in just about every

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human endeavor, I would like to join with others in shifting some of the credit (and, in some cases, blame) to the often-forgotten people who follow

these leaders. Earlier this year, The New York Times featured an article titled “Not Leadership Material? Good. The World Needs Followers.” Susan Cain, the author, wrote: “Our elite schools overemphasize leadership partly because they’re preparing students for the corporate world, and they assume this is what businesses need. But a discipline in organizational psychology called ‘followership’ is gaining in popularity.” (Editor’s Note: Susan Cain is

the author of “Quiet: The Power of Introverts in a World That Can’t Stop Talking” and a founder of Quiet Revolution.) Cain continued, “Some focus on the ‘romance of leadership’ theory, which causes us to inaccurately attribute all of an organization’s success and failure to its leader, ignoring its legions of followers.” When we count the number of employees working at our largest corporations, our need for them to cheerfully follow someone else’s lead becomes clear. IBM: 380,300. General

president before becoming the 41st president. If these men were unable to follow the lead set by their superiors, their own missions would have ended in failure. Early last year, Forbes magazine featured an article titled “Why Followership Is Now More Important Than Leadership.” The author, Rob Asghar, seeded these thoughts regarding leadership and followership:

• Good followers nurture good leaders.

Consider the situation in which a company hires a new leader. This leader may possess all the personal and professional attributes to help the company achieve success. However, it only stands to reason his or her first few months will be spent climbing a learning curve. Generous followers can help the new

Don’t pass over candidates who possess otherwise excellent qualifications due to a perceived deficiency in leadership qualities.

Motors: 225,000. Toyota: 348,877. Chaos would ensue if each of Microsoft’s more than 120,000 employees reports for work each morning while imagining him or herself a mini-Bill Gates or Steve Ballmer, rather than dedicating themselves to the execution of strategies put into place by Microsoft’s leadership team. Even accomplished leaders must be skilled followers. Although Norman Schwarzkopf led all coalition forces during the Gulf War, he followed Chairman of the Joint Chiefs of Staff Colin Powell, who followed Secretary of Defense Dick Cheney, who followed President Bush, who followed Ronald Reagan as his vice

leader quickly climb this curve so he or she can begin to make a positive difference for all members of the organization. By understanding that success depends on followers’ goodwill and guidance, a skilled, thoughtful leader will consciously solicit it.

• Good leaders nurture followers. Who

doesn’t applaud the young man or woman who appears ready to assume the mantle of leadership? They get placed in offices with a clear line to the corner office and are assigned glamorous accounts. The skilled leader, though, will also support valuable employees who do not seek the spotlight. These individuals may be better suited to leading with their brains or emotional IQ, rather than through force of will and personality. Good leaders

nurture all followers, not just those who are most easily seen. Bishop Fulton J. Sheen, who enjoyed a wide radio and television audience during the past century, would remind his listeners and viewers, “There is no pleasure without pain, no Easter without Good Friday.” We can add to this there are no leaders without followers. If one cannot exist without the other, we must conclude both are equally valuable. We must also conclude both deserve our support.

Andrew Laurie is an Account Manager at KMRD Partners Inc., a risk and human capital management consulting and insurance brokerage firm with locations in the Philadelphia region serving clients worldwide.

Our insurance industry enjoys the good fortune of employing a great many talented followers. State Farm: Over 65,000. Liberty Mutual: Over 50,000. GEICO: 36,000. Progressive: Over 25,000. Willis Towers Watson: 40,000. Aon: 50,000. These six companies alone employ more than 250,000 followers. By establishing programs to help these employees become better followers, we will be leading our industry to a better, brighter future. I suggest we remember the following: • Technology, for better and worse, challenges our industry as we plan for the future. We must depend upon our leaders to dedicate proper amounts of strategic resources if we are to claim a leadership role in this future. We must equally depend on the followers who will make thousands of decisions and take thousands of actions as they deploy these resources. By nurturing these followers, we are increasing the likelihood they will make good decisions joined by proper actions. • When interviewing job candidates, keep in mind the overwhelming majority of new recruits will be hired to follow rather than to lead. This is not to suggest select individuals who assume followership

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Q3 2017 | 29

Personal Dev. continued from page 29 positions won’t also be called upon to lead. For example, individuals who follow the lead set by senior management may also lead internal departments. They may also lead committees and internal initiatives. What I am suggesting is don’t pass over candidates who possess otherwise excellent qualifications due to a perceived deficiency in leadership qualities if you aren’t interviewing for a leadership position. • Just as too many cooks crowd the kitchen, too many leaders will inevitably crowd the corner office. Properly managed businesses strike a delicate balance between leadership and followership. • By placing undue emphasis on the importance of leadership, we diminish the importance of followership. Followers will always vastly outnumber leaders. It will never make sense to nurture the few while overlooking the many. • By fetishizing leadership, we run the risk of perpetuating a destructive caricature. The forceful leader who makes quick decisions and takes no advice is a popular trope. However, it describes only one leadership style and so is one-dimensional. It also discourages a brave, open, healthy dialogue between leaders and their followers. • Develop reward and recognition systems to encourage skilled followership. These will help remove the stigma from dedicating oneself to being a good follower. Plus, because followers will always outnumber leaders, these mechanisms will help followers take pride in their accomplishments while casing their frustrations over their failure to assume leadership positions. There can only be one boss.

Managing Your Time

The Right Work at the Right Time Executive Summary: Honor your energy level. That’s just one of the tips delivered by Professional Coach Marsha Egan, who advises that doing the most important task first thing in the morning isn’t right for everyone. Here, she also explains why it makes sense to think about long-term goals before setting daily to-do lists. Self-management is key to time management, she writes.

In considering how best to maximize your productivity, let’s think about selfmanagement, priorities, energy level, time available and the need to set boundaries. I have always believed that time management is really priority management, which leads to the bigger perspective of acknowledging that it is really life management. It is not just about

By Marsha Egan

The longer view you have,

ime management is not only about setting up systems to process and prioritize work. It is also about choosing the right work at the right time and avoiding work or distractions that sap your ability to get good work done.

the clearer you can be


with your priorities.

Each year a great many books, articles and podcasts offering tips on how to become an effective leader are added to an already mountainous pile. Since we need leaders to achieve great things, I welcome them all. However, I would hope thinkers increasingly turn their efforts to strategies and advice regarding followership during the years ahead. After all, somebody has to get the work done.

30 | Q3 2017

how to process your daily “to-do’s.”


Being clear on your priorities allows you to make choices about how to spend your time. But believing that you are in charge of how you spend your time enables you to select the right work at the right time. A lot of the time management struggles I see come from people choosing other people’s work and filling other people’s needs at the sacrifice of their own. This is why self-management and believing that you control your own time management is key to taming your productivity struggles. When you take control of managing your time, you are the one to turn off your cellphone. You are the one to close down the computer screen when you need to work on an important project. You are the one who assesses the priority of a new task presented to you before agreeing to take it on. While it sounds so simple, many people who struggle with time management find themselves letting other people set their direction rather than believing that they can and should set their own direction.

Priority Setting

Choosing the right work is key to life success. In other words, be in touch with the priorities that enable you to reach your personal, professional or organizational goals. Priority setting could be the subject of its own extensive article. Here is my best tip: One of the most important keys to setting the right priorities is to extend your view. The longer view you have, the clearer you can be with your priorities. By establishing long-range goals, yearly goals, quarterly and monthly goals, successful people can hone their daily to-do lists to assure that they are working on those tasks that will bring them closer to their extended view goals. I like to recommend that people set monthly and weekly goals before they start working on their daily action lists. This way those daily to-do’s become tied to the longer-range successes.

Energy Level

One thing that many people miss in trying to master their priority management is that choosing the right time to work on tasks is critical. Everyone has energy cycles, but they are not all the same. Some people are more productive in the morning, some are night owls, and some peak during the day. When you know and honor your energy cycle by choosing the times that work best for the tasks at hand, your result will most likely be higherquality and more efficiently achieved. I cringe when I see time management

Time management is really priority management, which leads to the bigger perspective of acknowledging that it is really life management.

tips that say things like, “Do your most important task first thing in the morning.” While this may be the appropriate time for a “morning person,” it could be disaster for the person whose energy cycle is very low in the morning. This is why, when you plan your day, you should schedule tasks that require your best energy and creativity to be consistent with that best energy level.

Time Available

Assessing the time you have available and choosing the task that can be done in that time is also key to getting things done. It is silly to start work on a big project if you have only 10 minutes before your next meeting. But if you have a small part of that big project that takes only 10 minutes, go for it! And for larger projects that need your full attention for a larger block of time, schedule that time and remember to take into account your energy levels.

Marsha Egan, CPCU, CSP, PCC, is a Success Strategist and CEO of The Egan Group Inc., a Nantucket, Mass.based professional coaching firm. An ICF Certified Professional Coach and Certified Speaking Professional, she is a leading authority on workplace productivity and interpersonal success strategies. She is author of “Inbox Detox and the Habit of Email Excellence” (Acanthus 2009) available on Amazon and at http:// Egan is also a former president of the CPCU Society. She may be reached at marsha@

Set Boundaries

Priority management is about making choices. Sometimes making choices means honoring your boundaries. You may have to say “no.” You may have to say “not now.” Setting boundaries is saying “yes” to yourself while being respectful of others. It is about recognizing that you are entitled to your own time, honoring your space and protecting your well-being. It is about empowering yourself to take responsibility for your time and feeling comfortable doing so. That includes how you manage your priorities—and your life. That’s what doing the right work at the right time is all about.

Q3 2017 | 31

Managing Your Time/Personal Development

Executive Summary: “The support for mindfulness from our CEO makes our employees feel like it’s OK and has encouraged them to participate,” according to the chief medical officer of MassMutual, one of several life/health insurers helping to share the benefits of mindfulness-based training with its workforce. In addition to reducing the consequences that stress has on physical health, experts note that the qualities of leaders—focus, objectivity and balanced decision-making—are exactly the characteristics defined through mindfulnessbased meditation.


By Claire Wilkinson nsurance leaders play a key role in building resilience by helping communities to mitigate the impacts of climate change, disaster and many other global risks. But in today’s disruptive, ever-changing business environment, how

32 | Q3 2017

can insurance leaders become more resilient so they can better inspire and motivate their teams, improve business performance, and ultimately take care of themselves? The answer, at least in part, may lie in mindfulness, or in mindfulnessbased training, a practice being increasingly accepted and practiced in C-suites and beyond.

What Is Mindfulness?

John Kabat-Zinn, founder of the Mindfulness-Based Stress Reduction (MBSR) program at the University of Massachusetts Medical School, defined mindfulness as: “The awareness that arises through paying attention, on purpose, in the present moment, non-judgmentally for the cultivation of wisdom and compassion.” Andy Lee, chief mindfulness officer at Hartford, Conn.-based health insurer Aetna

and a mindfulness practitioner for almost 20 years, offers a layman’s definition: “Mindfulness is paying attention to the present moment and doing it in a way that is open and receptive.” Recent research by Bain & Company posed the question: What makes a leader inspiring? One surprising result: Centeredness was the most important attribute. In its brief “How Leaders Inspire: Cracking the Code,” Bain defined centeredness as “a state of greater mindfulness achieved by engaging all parts of the mind to be fully present.” “While a growing number of companies offer optional mindfulness programs to promote health and workplace satisfaction, our research shows that centeredness is fundamental to the ability to lead,” Bain said. “It improves one’s ability to stay level-headed, cope with stress, empathize with others and listen more deeply.” According to Caroline Chubb Calderon, founder and CEO of Switched On Partners, a company that works at the intersection of innovation, mindfulness and high performance, two critical trends driving the requirement for mindful leadership are cognitive overload and hyper-digitization. “At no other time in history have leaders had to deal with as much complexity as today. The geopolitical climate, 24/7 news streams and an onslaught of information

significantly impair our ability to make balanced decisions, to innovate, be resilient and maintain high levels of socioemotional awareness critical to leadership,” Chubb Calderon said. The result? The most effective executive function areas of the brain—the prefrontal cortex—are reduced, and the brain moves into fight/flight/freeze mode, with long-term repercussions. Science-based research shows that just eight weeks of mindfulness training can reverse this trend and literally reshape the brain, thickening the prefrontal cortex and increasing the anterior cingulate cortex, the area of the brain responsible for self-regulation. “This is a very compelling reason why mindfulness is becoming part of the corporate agenda,” Chubb Calderon said. Companies such as Google, Apple, Target and General Mills have recognized the benefits and have adopted mindfulness or meditation as part of their employee wellness packages. In the insurance world, the concept of embedding mindfulness into corporate culture has been gaining traction for a while.

“Motivating people with data and statistics is helpful, but being aware of emotional states and being fully present in the moment allows us to communicate more fully to people.” One of corporate America’s most wellknown mindfulness practitioners is Aetna CEO Mark Bertolini. Bertolini’s path to mindfulness began after a horrific skiing accident in 2004. Left with a serious spinal cord injury and in constant pain, he began exploring alternative healing remedies such as meditation and yoga. When he

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Q3 2017 | 33

Managing Your Time/Personal Development continued from page 33 returned to work and when he mindfulness program was became CEO, he wanted to launched in 2015 and started share the value of mindfulness out by sending employees with employees. Aetna short “mindful minute” video launched a pilot program in tutorials on the corporate 2010 that taught mindfulness intranet site. The idea was to techniques and practices. give them “a taste of Participating employees showed mindfulness” to decide if it significant improvements in was something they wanted perceived stress. to try. Interest was With the success of the pilot, surprisingly high. Aetna expanded the program to “The support for make it available to all mindfulness from our CEO employees. Since then, more makes our employees feel than 13,000 Aetna employees— like it’s OK and has about one-quarter of the encouraged them to company’s workforce of participate,” Dr. Coplein said. 50,000—have participated in its In partnership with the mindfulness-based wellness University of Massachusetts programs. Participating Medical School, MassMutual employees have experienced a began offering free four-hour 28 percent reduction in their introduction to mindfulness stress levels, a 20 percent courses for employees and an improvement in sleep quality eight-week course during the and a 19 percent reduction in workday to teach pain. Aetna estimates the mindfulness-based stress approximate dollar return, in reduction. More than 600 terms of productivity alone, at MassMutual employees more than $3,000 per person enrolled in the initial classes. per year. Since then the program has The company’s commitment Health insurer Cigna Corporation has developed a relaxation pod using expanded to offer mindfulness to mindfulness hasn’t stopped virtual reality designed “to enhance relaxation and reduce stress.” courses via a live, virtual there. Aetna appointed Lee to The pod uses Oculus technology to transport users to a simulated classroom so that employees the newly created role of chief environment—think a Zen garden or a woodland campsite— at all sites can participate. mindfulness officer in 2016, accompanied by guided meditation. Not surprisingly, given the reporting directly to Dr. Harold Photo from Cigna rapid development of Paz, Aetna’s chief medical technologies, mindfulness officer. In this role, Lee seeks to meditation practices are bring mindfulness and its benefits more center will host external speakers and increasingly being offered online, virtually deliberately into the workplace culture so courses. Programs are offered both live and and via apps such as Headspace, Calm or that the company’s employees can be less virtually so that Aetna employees located Happify. Some companies offer employee stressed, more engaged and more effective anywhere can participate. discounts to these apps. at work. He is also working to develop new Springfield, Mass.-based life insurer In another innovative development, products that encourage mindfulness for MassMutual is another company where the health insurer Cigna Corporation has Aetna’s 25 million members. passion and support for mindfulness came developed a relaxation pod using virtual Most recently, at corporate headquarters, from the top. CEO Roger Crandall reality. The pod uses Oculus technology to Aetna’s Mindfulness Center opened June 1, meditates daily, as do several members of transport users to a simulated 2017. Lee said the center offers a space the senior executive leadership team, and environment—think a Zen garden, or a where employees can drop in and practice it is not unusual for them to facilitate woodland campsite—accompanied by mindfulness during the work day. breathing exercises at employee meetings. guided meditation. Mindfulness activities are held three to Dr. Claudia Coplein, MassMutual's chief According to Dr. Steve Mastrianni, senior four times a week and eventually the medical officer, said the company’s principal technologist and director of

34 | Q3 2017

healthcare innovations at Cigna, essentially the pod is designed “to enhance relaxation and reduce stress.” Early results are promising. In two pilot studies at major corporations where each pod participant completed a 30-minute meditation session per week, Cigna saw an average two-point drop in blood pressure over six months. Chronic stress has a significant impact on individuals’ physical and mental health, so it makes sense that companies are seeking ways to reduce it. Highly stressed individuals are at greater risk for many health conditions, including coronary heart disease, some cancers, diabetes, depression, anxiety and obesity. The International Labor Organization estimated that 30 percent of all work-related illness is due to stress, accounting for $6.6 billion of losses in the U.S. alone. So, in today’s overloaded, highpressured and disruptive business environment, what forms of practicing mindfulness work for leaders? According to Chubb Calderon, beginning a mindfulness meditation practice could be as simple as taking one breath. “It is so hard to ask a leader with a full plate to start a new practice around mindfulness. One breath could be the key. Then they may be willing to take a second breath,” she said. Transition times between meetings or rare downtimes may also offer an opportunity for senior executives to take five to 10 minutes to pause, breathe, train their attention on the present moment and settle into stillness, she added. Dr. Coplein makes the point that mindfulness meditation doesn’t involve burning incense, chanting or adopting a new religion. Rather, it’s about paying attention to the breath. Once a daily practice is established, you might bring mindfulness into daily routines such as when walking or during employee meetings. Many experts suggest that mindfulness can be incorporated into practically any activity throughout the day.

What Are the Key Benefits for Leaders? Researchers have shown that

mindfulness training helps to improve executive focus and concentration, decreases mind-wandering, reduces stress and anxiety, and increases emotional resilience and innovative thinking. Aetna’s Lee suggests one of the key benefits is that mindfulness meditation boosts emotional intelligence, which is a key leadership skill: “Being aware of your own emotions and taking into account the emotional states of others is very important when influencing teams and being a leader. Motivating people with data and statistics is helpful, but being aware of emotional states and being fully present in the moment allows us to communicate more fully to people.” MassMutual’s Dr. Coplein said that many of the qualities and behaviors we associate with leadership—such as focus, observation, objectivity and balanced decision-making—are “precisely the characteristics defined through mindfulness-based meditation.” Another important benefit is the development of resilience. “Most leaders are expected to perform well under pressure. Knowing where stress comes from helps executives build resilience, decreasing anxiety so that they can perform better under stress,” she said. Chubb Calderon added that selfreporting measures by mindful leaders indicate many benefits, including the ability to maintain their equilibrium, increased mental agility, more insightful innovations and a heightened ability to cultivate an environment of trust, compassion and connection.

Are There Any Downsides?

Several of the executives interviewed cautioned that mindfulness isn’t for everyone. For vulnerable individuals, especially those who have suffered some kind of trauma or PTSD, an intensive mindfulness meditation program may not be advisable, for example. Also, while more companies are offering mindfulness activities as part of their employee wellness programs, several executives noted that participation should

be a choice and not mandatory. Claire Wilkinson is a Overall, it appears that as freelance writer, editor mindful leaders embrace a and communications broader definition of wellconsultant. View her being in their companies, this profile on LinkedIn: in turn can increase https://www.linkedin. participation and engagement com/in/claireof the workforce, which can wilkinson-73567b5/. then translate into measurable improvements in health outcomes and business performance. The mindfulness movement is catching on. According to the recently released eighth-annual Employer-Sponsored Health and Well-Being Survey from the National Business Group on Health and Fidelity Investments, some 35 percent of 141 large and midsize companies surveyed now offer mindfulness classes or training programs, up from 22 percent a year ago. Chubb Calderon has observed “a seachange” in terms of the willingness of corporations and individuals to give mindfulness a try. For those executives open to practicing mindfulness, long-term impacts can be powerful: “Mindfulness really is one of those highly individual techniques that can unlock human potential to a different level.”

Find out more about Mark Bertolini’s journey to mindfulness. • In the Feb. 27, 2015 New York Times

article “At Aetna, a CEO’s Management by Mantra,” by David Gelles. • On the website, article and video titled “For this CEO, mindful management means yoga for employees,” May 15, 2015, reported by Paul Solman. Some of Aetna’s insights about mindfulness are available in these sources: • “Building a Culture of Mindfulness,” a Feb. 22, 2016 LinkedIn post by Mark Bertolini. • “What is Mindfulness?” PDF available on Aetna’s website at employer/commMaterials/documents/ Roadmap_to_Wellness/mindfulness.pdf

Q3 2017 | 35

Future Trends

If you set out to compete with

In a decade, our venerable,

Insurance companies are

incumbents and think you

well-established carriers

resilient, and they can

can do something 10 percent

with legacy systems and

continue to be resilient if

better than Liberty Mutual,

cultures—if they manage to

they move quickly and

you’re doomed to fail.

survive—will be


anachronistic. 36 | Q3 2017

The Future of Insurance Who said it?

The quotes along the bottom of this page are taken from articles published on pages 38-51 and a companion series of articles on The Future of Insurance published on The speakers of these quotes—and more—are identified on our website at

If you could wake up an

Digitally interconnected

We are on the tail end

underwriter or broker from

operations represent the

of insurance companies

1686, it would take only a

most comprehensive, agile,

going “digital.”

few days to get them up to

innovative, creative and


emotionally connected way of conducting business.

Q3 2017 | 37

Future Trends

Survivors and


Carriers, InsurTechs Stake Their Claim in the Future Landscape

Executive Summary: With messages around “data,” “digital,” “AI,” “IoT” and “customer focus” common among both incumbent carrier executives and InsurTechs peering into the future, partnerships between the groups are one potential strategy for moving ahead in the next 10 years. But disrupters are still finding ways to change the game, according to one InsurTech leader, Lemonade’s Daniel Schreiber, who predicts his company will ultimately be 10-times better and will garner a distinct data advantage in less than half the time.

By Susanne Sclafane


uring an insurance conference in late March, a chief executive officer shared the following separate ideas with an audience of InsurTech leaders and analysts:

“If you set out to compete with incumbents and think you can do something 10 percent better than Liberty Mutual, you’re doomed to fail.” “Insurance is not a necessary evil; it is a social good. Why is it not perceived that way? Why do [insureds] feel so entitled to stick it to the man when they’re making claims? Why do they feel such an adversarial relationship when this is a sector that is doing so much good for the economy, so much good for people—standing by them in their time of need? Why does that not find expression?” The speaker—somewhat surprisingly— was Daniel Schreiber, co-founder and CEO of Lemonade, the much-talked-about InsurTech focused on using behavioral science and artificial intelligence to disrupt the insurance industry. Unless you were in the live or virtual audience watching his address at the Silicon Valley Insurance Accelerator’s Core Systems and InsurTech FUSION conference in late March, you might not have guessed it was Schreiber, whose company has been known to criticize the insurance industry for being

38 | Q3 2017

antagonistic, annoying and opaque and is also a highly conspicuous example of a disruptive InsurTech on a path to displace traditional incumbents insurers. On the pages preceding this article, we have published some quotes from CEOs of incumbents and founders of InsurTechs without identifying who said what. The leaders wrote these ideas to Carrier Management in response to a group of questions about the Future of Insurance, which we emailed in July. Which responses came from the startups and which ones from veterans of the insurance game? It’s hard to tell. There is a sameness about the answers, which blur together around key themes recognized by legacy carriers and newbies alike: • That a connected world will allow insurance players to transition to roles of preventing accidents rather than insuring them. • That digital initiatives will bring them closer to their customers. • That automation and machine learning will help increase efficiencies. Taking our cue from Standard & Poor’s Director Tracey Dolin-Benguigui, who predicted that “the P/C insurance industry

will look very different in the next 10 years than it has in the last 30” at an S&P conference earlier this year, we asked leaders of new firms and old to share their visions of the industry between 2017 and 2027. Specifically, we asked: What major changes do you see on the

horizon for the industry in the next 10 years? What will insurance companies, leaders, the industry and its workforce look like? What risks will they insure? How will insurance products and services be distributed?

Nine InsurTech leaders, five traditional carrier CEOs, six more carrier executives and another half-dozen experts with ties to the industry (service providers, investors and legal advisers) responded, with 22 of the 26 mentioning the benefits of “data,” 19 referring to efficiencies to be gained from “automation” or “AI,” and a dozen describing the promise of a connected world (the “Internet of Things” and sensors). Aiming for the same things and reading the same tea leaves, nearly everyone talked about customer-centric business goals and an evolution of carrier businesses toward the adoption of what some termed “prevention as a service” models. QBE NA CEO Russ Johnston combined the two themes in one insight: “The industry will increasingly need to move beyond our traditional risk transfer role and deliver more holistic risk solutions to customers. The companies that will perform best in this regard will be the ones that follow a rule that never changes: build the strongest partnerships with customers.” For incumbent carriers and reinsurers, a different set of partnerships—with the InsurTechs—was another common theme. “We believe that for carriers open to partnership, many of these new firms bring the talent, energy and fresh perspective necessary to accelerate the industry’s adoption of emerging technologies and data sources,” said Christopher Swift, chair and CEO of The Hartford.

Disrupters Still Among Us

Not everyone is embracing the spirit of kinship and moving forward together. Within the responses of InsurTech leaders,

words like “anachronistic” and descriptions of an “impersonal,” slowmoving cohort of established players showed up sporadically. “In commercial insurance, we are now more likely to observe innovators going around traditional carriers instead of working with them,” wrote Mike Albert, co-founder of Ask Kodiak, a startup building a new platform for commercial P/C distribution. Even though one facet of Ask Kodiak’s business platform serves insurers (helping them share business appetites with distributors), the handwriting is on the wall for some, he suggested. “As business models continue to evolve, brokers and startups alike are beginning to cut out legacy carriers so that they can innovate in how products are underwritten and distributed.” Schreiber, who was not one of our respondents, believes his company—and another well-known disrupter, Google— will have some clear advantages over existing insurers in just a few years. “Lemonade today is at a data disadvantage. We’re a six-month-old company. Our incumbents have been around for a billion [SIC] years. [But] within a year we’re going to be at a data advantage relative to the insurance companies. Three or four years from now, I think it will be an orders of magnitude difference,” he said at the SVIA conference. As for Google, he didn’t predict when or if the tech giant might try to capitalize on its data advantage. Leading up to this conclusion, he began by reviewing existing industry financial metrics—expense ratios, fraud costs and loss adjustment expense ratios—and laying out Lemonade’s goal of becoming a company that is 10-times better. Explaining the quote set forth at the top of this article, he said: “If you set out to compete with incumbents and think you can do something 10 percent better than Liberty Mutual, you’re doomed to fail. The paradox of a startup [is that] your chances of doing something 10-times better are better than doing 10 percent better. Ten-times better is setting out to do something different; 10

percent better is playing the same game. And my chances of outplaying incumbents at their own game is close to nil.” He added: “If you want to beat Kasparov, challenge him to a game that isn’t chess.” Schreiber focused particularly on the high costs of fraud facing the industry today—a direct consequence of the lack of trust that customers have in their insurance companies. “The perception that insurance companies don’t want to pay claims drives behavior,” he said, explaining why the “social good” isn’t recognized and why otherwise well-behaved individuals engage in insurance fraud. Expanding on the idea of game-changers, Schreiber later shared these insights about Lemonade, Google and the importance of gaining trust—and access to data—as winning formulas for future insurers: “My calendar is on Google. My email is on Google. My SMS is on Google. I make my voice calls through Google...I do that willingly. And I trust them. And I know they use that to advertise to me, and I’m just fine with that. And I’m not an outlier. This is commonplace. “If Google wanted to become an insurance company, they would be the most absolutely formidable—they would crush the industry. The knowledge that they have about people’s behavior and their ability to correlate that with different outcomes is staggering,” he said. He continued: “My cellphone has so much information on it. Forget what Google has. Just the sensors that it’s collecting. It knows when I’m away from home, when I’m sitting, whether I charge my battery conservatively. When it goes down to 90 percent [of power left], do I quickly plug in? Or do I let it go down to 3 percent? “Am I an early adopter of technology? Do I stay with the same phone for years?” Finally, he asked: “Which insurance company is going to be able to access [my data] in the way that Google accesses it? “Would I trust an insurance company the way I trust Google? The answer today is categorically no...There isn’t the alignment

continued on next page

Q3 2017 | 39

Future Trends continued from page 39 of incentives. I don’t feel they’re on my side. I feel they’re in a confrontational relationship with me. “I have to actively give permission to Google to access that stuff, and I do so willingly,” he said. “When State Farm asks me, ‘Will you do that?’—well, you can answer that question for yourself.” Although Schreiber’s tone indicated that a negative answer was obvious, carrier executives responding to our questions would likely disagree, given their stated commitment to partner with customers and meet them on their own terms. “Trust,” Schreiber said, “is a precondition to getting access to those sensors. Those

sensors are a precondition to getting access to data. And only the ones who have that data can apply the machine learning to do the next generation of underwriting.” This explains Lemonade’s focus on behavioral economics and transparency. Schreiber believes that insurers pinning their hopes of innovation and gamechanging business models “at the foot of technology” are misguided. “Anybody can go out and build an app,” he said, inviting listeners to reflect on a final question: “whether the incentive structures and the trust systems are in place in order to elicit [the response] of the customer to get consent to use the information in a way

that will be truly game-changing for insurance.” Schreiber isn’t the only observer placing his bets on the Googles of the world—or other technology behemoths that hold the keys to the treasures of data and connected devices. Futurist Jack Uldrich throws Tesla into the mix as well in the accompanying sidebar. Insurance executives and other InsurTech founders speak for themselves on the pages that follow, where we have digested some of their answers to our questions about the future. Full responses from all 26 industry respondents are published on

A View From the Outside: Global Futurist Uldrich Sees ‘Seismic’ Shifts’ for Insurance Industry “We'll see more change in the next 25 years than we’ve seen in the last 100,” a futurist told insurance professionals at a meeting in late 2014. Jack Uldrich, speaking at a Casualty Actuarial Society meeting, highlighted sensors, robotics, nanotech, big data and 3D printing among tech trends to watch back then. In addition to seeking opinions from over two dozen participants in the P/C industry about changes on the horizon impacting their businesses in the next 10 years, Carrier Management asked Uldrich for his vision recently. He wrote: “The confluence of three major technological trends will generate seismic shifts in the P/C insurance industry. Specifically, exponential advances in artificial intelligence, the Internet of Things and big data will lead to the creation of new, unconventional competitors; spawn the formation of new business models; and create a market for new insurance products. Tesla’s spring 2017 announcement that it was considering offering custom coverage to its consumers best encapsulates the coming change. Tesla understands the massive amounts of data that the automobile’s sensors (IoT) are gathering can now be harnessed by

40 | Q3 2017

sophisticated algorithms (AI) to prevent an estimated 90 percent of all accidents. In turn, the company can increase the value proposition of owning a Tesla automobile by “baking” a 90 percent reduction in insurance premiums into its annual maintenance costs instead. (Tesla is already doing this on a limited basis in China and Australia.) Tesla isn’t the only threat. Amazon’s new artificial intelligence platform “Alexa” and Alphabet’s “Google Home” are already connecting to homeowners’ alarms, sensors and cameras. It is only a matter of time before those companies— and others—also get into the P/C insurance business, predicating a new business model on the idea that they can prevent a large number of accidents from ever occurring. One significant consequence of these trends is that on the rare occasion when accidents do happen, the impacts will be more catastrophic. Cyber threats to people’s sensor-laden “smart” homes, “smart” buildings and “smart” automobiles pose a significant future risk. Those insurers that can most effectively determine the probability and cost of these cyber risks will win in the future. And I predict continued

advances in AI, supercomputers and, perhaps, even quantum computing will substantially aid the winning organizations’ actuarial models. In the next 10 years, I also expect steady progress in the blockchain platforms (i.e., distributed digital ledgers) will lead to innovative new peer-topeer insurance models while accelerating growth in 5G wireless technology, mobile computing, 3D manufacturing and renewable energy will spur extraordinary global growth. As a result, many individuals—especially in developing regions around the world—currently not in the market for P/C insurance will become consumers as they join the middle class and come to appreciate the prudence of insuring newly acquired assets.

Jack Uldrich is a global futurist and author of 11 books, including “Foresight 2020: A Futurist Explores the Trends Transforming Tomorrow.” He is a frequent speaker on technology, change management and leadership. He has addressed hundreds of corporations, associations and nonprofits on five continents. A former naval intelligence officer and Defense Department official, he served as director of the Minnesota Office of Strategic and Long-Range Planning. His forthcoming book is “Business as Unusual: How to Future-Proof Yourself Against Tomorrow’s Transformational Trends, Today.”

Future Trends Insuring the Future:

Executives Plan for the Road Ahead

Christopher Swift, Chair and CEO, The Hartford: Technology is transforming our industry in ways we are only beginning to appreciate, impacting the nature of risk, operations, customer engagement and the way we work. Data, for example, is making us smarter and changing the way we underwrite and price risk, deliver better claim outcomes, and transform the customer experience. Automation in the form of robotics, artificial intelligence and machine learning presents a unique opportunity to increase speed, accuracy and cost-effectiveness, making it easier to do business. Automation could impact up to 25 percent of insurance positions over the next decade—jobs that today involve routine, rules-based transactions. The future workforce will instead focus on impactful, high-value customer-facing activities. Not surprisingly..., Silicon Valley is turning its sights on insurance. There are a growing number of new companies looking to transform the industry in areas such as risk mitigation, analytics and distribution. We believe that for carriers open to partnership, many of these new firms bring the talent, energy and fresh perspective necessary to accelerate the industry’s adoption of emerging technologies and data sources.


: What major changes do you see on the horizon for the property/casualty insurance industry in the next 10 years? What will insurance companies, insurance leaders, the industry and its workforce look like in the next decade? What risks will they insure?

Kathleen Reardon, CEO, Hamilton Re: Consider industries that we’ve underwritten for decades…that are on the verge of irrelevance because of technological disruption. Think of the impact 3D printing is having on manufacturing. Or the paradigmshifting potential of the Scanadu Scout, a medical tricorder prototype reported to measure heart rate, temperature, blood pressure, oxygen level and provide complete ECG readings, all through its sensor. Futurists say such devices will render most hospital, healthcare and doctor’s services obsolete. The implications for the insurance industry’s workforce are profound. What role does the underwriter play when algorithms can analyze data and select and price risk at the speed of light? Partnerships fusing the insurance, technology and financial industries— InsurTech and fintech companies—are creating a new corporate landscape. In a decade, venerable, well-established carriers with legacy systems and cultures—if they manage to survive—will be anachronistic. However, far from representing a doomsday scenario, the fourth industrial age will spur true innovation, greater efficiency, relevant products, streamlined distribution— hallmarks of a truly client-centric industry.

Mike Foley, CEO, Zurich NA: Insurers that use data to garner insights and are large enough to have scale will stand out from the pack. Right now, the advancement of analytics coupled with underwriter judgment is driving better risk selection and pricing. We know underwriters who use insights from models to augment their decisions have better outcomes. After conducting a recent study of underwriters’ decisionmaking, we found that individual pattern recognition is not always sufficient in today’s complex world. We set them up for success by having the right technical capabilities available to them. At Zurich North America, we developed nearly 30 predictive models that are being used today in claims, underwriting and for prospecting… Digitization and automation alone are not keys to success. What really matters is how we connect with our customers and gain a clear understanding of their needs. Our strategic focus is on the customer. Our success comes when we make our technical capabilities a competitive advantage, develop relationships that build trust, and deliver propositions and capabilities that reflect what our customers value. continued on next page

Q3 2017 | 41

Future Trends continued from page 41

Russell Johnston, CEO, QBE North America: The power of technology to drive change and disrupt traditional industry models will continue to have a paradoxical effect on the industry. It will give us more tools to collect and analyze data to price certain risks, but it will also accelerate the pace of change and give rise to unknown risks. Who would have thought several years ago that a cyber event could potentially equal the losses from a major hurricane? Businesses will need help to manage these “unknown unknowns,” yet insurers will be challenged to assume risks that historical methods of calculating risk and return won’t reliably evaluate. Insurers will need to continue to evolve the means and methods they use to assess and assume risk at the same time the risks will continue to evolve, but I have faith that we will do just that. One hundred years ago, with the advent of mass production of the automobile and spread of in-home electricity, there was limited accessible data to support how these changes in the risk landscape would impact the industry. But the industry adapted. I am optimistic we can do the same today, but it will require thinking differently. The industry will increasingly need to move beyond our traditional risk transfer role and deliver more holistic risk solutions to customers. The companies that will perform best in this regard will be the ones that follow a rule that never changes: build the strongest partnerships with customers. Only then can you best understand their needs and help them have confidence to achieve their ambitions…The industry’s historical orientation around product will need to evolve to a more solutions-based approach. To match the pace of change, specialized teams will need to be more fluid, and nimbly assembling partnerships will allow companies to constantly adjust the optimal mix of technical experts and industry specialists tailored to the needs of each customer. The historical norm of outright ownership of all products and services will have to evolve to a more flexible approach to solution-based outcomes. As collaboration and skills-tracking technology improves, the options for assembling these teams will become less about location and more about having the right skills and experience for each client situation at a specific time…

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Tony Kuczinski, President and CEO, Munich Re, US: The very nature of risk is changing, along with the tools we use to assess, manage and mitigate it. How big is this change? A 2017 survey of industry insiders, regulators and observers conducted by PwC and the Centre for the Study of Financial Innovation (CSFI) found that change management is the biggest risk facing the global insurance industry over the next two to three years…Success in this environment demands perpetual innovation and the ability to reimagine the world of risk. Yet, this must come at a time when many in our industry are saddled with business models that haven’t changed much in the last 200 years. Going forward, innovation will help our industry shed historical encumbrances, such as legacy IT systems and relatively low customer focus, to ultimately expand the boundaries of insurability. It will lead us to embrace new business models that are more datareliant, customer-focused and service-driven. For example, who would have imagined the accelerated pace of mobility, now moving well beyond telematics to the realm of autonomous driving? Or that the legal realities of widespread drone use would so quickly create a substantial market opportunity? Ultimately, our industry has two choices: We can put our heads in the sand, which I believe will lead to our demise, or we can jump into the fray and leverage the transformations around us to create new products that meet customers’ changing needs and address more complex risks… As insurance startups not only continue to emerge but to mature and scale over the coming years, we will need to fully engage in order to build on today’s ongoing advances in customer experience, engagement and acquisition and help to drive the changes to how insurance products are designed, priced and operated. We must provide our clients new insight, access to new technologies and tools for distribution, and service and product opportunities that will help them adapt to a changing market and enhance their business opportunities. Clearly, the future of our industry, and of commerce, belongs to those who innovate.

Emerging Risks/Future Trends

Tech Making Insurance Obsolete, Exec Says;

Risk Transfer No Longer a Large Nos. Game


By Joseph S. Harrington “

ill technology make insurance obsolete?” That stark question was posed by William Hartnett, a former Microsoft and ACORD executive, in his opening address to the 2017 Global Insurance Symposium, held April 26-27 in Des Moines, Iowa. The annual event was sponsored by a coalition of Iowa insurers, reinsurers, system vendors, university insurance departments and the state’s insurance department. Citing the exponential growth and declining cost of computing power, Hartnett said that “a lot of technology today is getting to the point where it’s essentially free.” Hartnett, who led Microsoft’s financial services operation for more than two decades, projects that, by 2023, a sum of $1,000 will be able to purchase all the cognitive capability of a human brain. Just two years later, in 2025, that $1,000 will be able to purchase the equivalent of the cognitive capabilities of all the human brains on Earth. The implication for insurers, he

said, is that risk control will be embedded in “smart” devices that will monitor and regulate where we live and work and how we travel. Eventually, the level of an individual risk will be identified with such precision that the “law of large numbers,” long the foundation of insurance pricing, may become irrelevant. “We can get down to a risk pool of one,” Hartnett said. “That doesn’t sound like insurance to me. If we’re not doing insurance anymore, let’s just admit it.” Attendees at the GIS also heard from InsurTechs that have developed ways for incorporating smart products into risk management and insurance applications. These innovators were assisted, in part, by the Des Moines-based Global Insurance Accelerator, a consortium enterprise developed to support innovation in insurance. Among the innovations described were capabilities for “do it yourself” property inspections using smartphone video, instant placement of coverage for bicycle rideshares,

“We can get down to a risk pool of one. That doesn’t sound like insurance to me. If we’re not doing insurance anymore, let’s just admit it.” William Hartnett streamlined access to personal data in compliance with privacy laws in different countries and even an app for identifying potential successors as an agency owner prepares to retire. If, as in these cases, insurance itself becomes a small part of a larger risk management operation, that is not a bad thing, said Rob McIsaac, an analyst with Novarica, during a panel discussion on corporate strategy. “Insurance can stop being the thing you call on when bad things happen and become the thing that stops bad things from happening,” he said. “These interests are perfectly aligned.” Joseph S. Harrington, CPCU, ARP, is a Chicago-area business writer and communications specialist. From 1994 to 2016, he served as director of corporate communications for the American Association of Insurance Services (AAIS).

Q3 2017 | 43

Future Trends

Faces of the Future;



ine executives from InsurTech upstarts responded to Carrier Management’s invitation to imagine the Future of Insurance. Not surprisingly, many of their visions of the future revolved around the business models that shape their companies. Together, the InsurTech CEOs and founders represent some of the faces of the future. Below, we introduce the executives and their companies. Mike Albert is the Co-Founder of Ask Kodiak, a startup building a new platform for commercial P/C distribution. https/

According to the company’s LinkedIn page, Ask Kodiak is the commercial insurance version of, providing brokers with a simple (and free) way to search for eligible carrier markets, and carriers with a digital marketing platform and unique analytics about agents and brokers searches. Albert served in P/C insurance industry senior leadership roles for nearly two decades. He specializes in the art of application design and user engagement experience.

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Tim Attia is the CEO and Co-Founder of Slice Labs Inc., which provides an on-demand, pay-per-use insurance platform for the on-demand economy. Designed for customers, Slice aims to reimagine insurance through design, data and technology, delivering instant protection in affordable, bite-size chunks when customers need it, with no hidden costs. Slice officially went live with sales of on-demand insurance policies to homeshare hosts in more than a dozen states in May 2017, with a unit of Munich Re providing the coverage. A proprietary pay-per-use policy for Uber and Lyft drivers is also available on a test basis, covering drivers from the time they turn on the rideshare app until they turn it off. Attia and Slice Co-Founder Ernie Hursh both previously worked at Bolt Solutions, a successful digital distribution platform for P/C insurers.

Ilya Bodner, a startup enthusiast, is the

CEO of Bold Penguin, a commercial insurance agent portal dedicated to making business insurance simpler for customers, agents and carriers. http://boldpenguin.


Bodner has tinkered in the insurance industry for 14 years. He started as a captive insurance agent, becoming the principal and opening up two Allstate offices in central Ohio. He continues to innovate by launching ventures that deal with solving for the complexity that exists in the current way we buy, manage and think about insurance. He has started multiple companies with a heavy focus on InsurTech initiatives. His three latest companies are innovating in digital marketing, direct-to-consumer acquisition and agent tools. Adam Cassady is the Co-Founder and CEO of Tyche Risk. https://www.tycherisk.


Through an interactive platform, Tyche delivers undiscovered information to commercial casualty underwriters to help them make smarter decisions. By blending open data and a client’s own proprietary data with machine learning, Tyche builds predictive claims avoidance models that can help shrink the riskiest fractions of their books of business.

Cassady is a former insurance coverage litigator who says that lawsuits over health issues linked to the microwave popcorn flavoring chemical Diacetyl, and the corresponding insurance claims, sparked the idea for a model that would provide better risk insights to underwriters.

Chris Cheatham is the Co-Founder and

CEO of ClaimKit Inc. As CEO, he leads a team focused on developing the RiskGenius product. Under his leadership, RiskGenius is empowering insurance professionals (underwriters, brokers and everyone in between) to review insurance policies faster with Technology Enabled Policy Review. Powered by machine learning and natural language processing, Technology Enabled Policy Review breaks policies down into categorized clauses. Before launching ClaimKit, Cheatham worked as a claim insurance attorney for five years in Washington, D.C. He holds a bachelor’s degree in political science from the University of Kansas and a juris doctorate from the University of Texas at Austin. Guy Goldstein is the Co-Founder and CEO of Next Insurance. He is the former CEO of Check, a mobile payment company that was eventually sold to Intuit for $360 million. Goldstein and his Next Insurance co-founders started the company to fix a problem they discovered while starting up Check—that it took too much time and energy to insure their company. Next aims to transform the experience

for small-to-medium business insurance with a tailored, personalized approach. Goldstein has 20 years of experience in technology, product development, management and strategy, with prior stints in corporate development and R&D at HP software and Mercury Interactive. He once served as a fighter pilot in the Israeli Air Force, holds bachelor’s degrees in business and computer science, cum laude, from the Tel-Aviv University. Mike Greene is CEO and Co-Founder of Hi Marley. Hi Marley enables insurance companies to engage and “delight” their customers at scale, and to significantly reduce the costs of servicing them through artificial intelligence with a human touch. Greene has over 18 years of experience as an innovator in the insurance industry. He has worked with over 50 insurance companies globally to assess challenges and provide business and software solutions. Previously, he helped launch Futurity Group (acquired by Aon), a software and services company focused on P/C claims. Post-acquisition, he co-led the Inpoint Claims practice at Aon. Greene was formerly an Associate Partner with IBM’s Global Business Services and began his career as a management consultant with Accenture’s Insurance Practice. Rashmi Melgiri is the COO and Co-Founder of CoverWallet, an InsurTech startup focused on simplifying insurance for small businesses. https://www.

CoverWallet combines data, design and technology to help businesses deal with their insurance from their phone or online.

With an intelligent assessment system and concierge-like service, CoverWallet aims to save time and provide peace of mind, making it simple to buy and manage insurance. Before founding CoverWallet, Melgiri was a strategy consultant at the largest North American telecom, media and technology consulting group, Altman and Vilandrie & Co. She has worked with several startups including Visible Measures and portfolio companies within Comcast Interactive Media. She has a bachelor’s degree from MIT and an MBA from MIT Sloan. Rebecca Wheeling Purcell is CEO and Co-Founder, Schedule It, which provides software for insurance adjusters to map, route and schedule their claims along with on-hand personal scheduling assistants to make calls for adjusters when claim volume peaks. https://

Wheeling spent years as an independent insurance claims adjuster. After trying many solutions to manage her claim load efficiently without success, she decided to create one. Her vision was to train scheduling assistants to handle all the administrative tasks involved in daily mapping, calling and scheduling, allowing adjusters to focus on their adjusting work and grow their claims volume. Schedule It combines proprietary technology and an expertly trained scheduling team, helping adjusters close claims faster and offering carriers and independent adjusting firms more visibility into claims.

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Future Trends

Taking the Leap:

InsurTech Leaders See Opportunity in Problem-Solving


By Susanne Sclafane nsurTech leaders answering Carrier Management’s questions about the major changes they see on the horizon for the property/casualty insurance industry for the most part answered a slightly different unasked question first:

What’s wrong with the insurance industry today, and what needs to change in the next 10 years to fix it? In the view of Adam Cassady, co-founder and CEO of Tyche Risk, industry loss ratios and loss adjustment expenses are too high. The failure of established carriers to relax their beliefs in the “art” of underwriting have prevented downward movement in those financial items. The road won’t be easy, he suggests. “Machine learning technology and its proponents will butt heads with hard-won but increasingly anachronistic insurance industry orthodoxy that the core competencies of underwriting and claims management are art and are not amenable to fundamental transformation through data science.” Cassady maintains that “while each exposure and each claim is unique, the laws—both natural and human—governing those exposures and claims are increasingly both knowable and known. Machine learning technology enables us to discover, describe and deploy knowledge of those laws, and do so quickly.” The benefits will be many for those who

46 | Q3 2017

can move past the art vs. science debate, he noted. “Those who leap ahead in this area will have bigger books because they will be able to quote submissions much more quickly and triage to improve hit ratios. Those books will have better loss ratio characteristics because risk segmentation will be far better. “Claims generated from those books will have lower loss adjustment expenses,” said Cassady, a former insurance coverage litigator. He reasoned that carriers

Adam Cassady “In the near future, humans will still be steering the ship of underwriting and claims management. But those carriers that, in 10 years, have not fundamentally rethought how those humans function in relation to already deeply deployed machine learning technology…will be at a significant disadvantage compared to competitors,” he said. “The size of the disadvantage will be a function of how successfully cultural friction in the industry slows the integration of machine learning technology.”

embracing machine learning technology “can avoid costly and pointless disputes and needless discovery by communicating claims settlement offers that are north of what the carrier would ultimately have settled at, delighting and doing right by their policyholders while still saving money on loss adjustment.” An added bonus: “Overall expense ratios will creep downward as the productivity of new hires, enabled by machine learning technology, dramatically improves.” To former claims insurance attorney Chris Cheatham, CEO of ClaimKit Inc., the insurance policy itself is a root problem in

the industry—and machine learning is an answer there as well. His team has developed the RiskGenius Platform, applying artificial intelligence to insurance policies. “Carriers struggle to keep track of their forms and endorsements. Brokers can’t identify changes to policies fast enough. Regulators have trouble approving new products in a timely fashion. And consumers don’t bother reading their policies,” he said. Insurance policies “are the most important part of an insurance transaction, [but] most parties to an insurance policy don’t really know what is in their policies.” While the push to go “digital” is taking hold—Cheatham believes we are at the “tail end of the movement”—he noted that even though “most policy documents are now electronic,” these documents contain unstructured data: both the clauses and the financial data. “This means that insurance professionals have trouble locating and understanding the information in a policy. “All of this is about to change because of machine learning. With smart algorithms, insurance policies will be broken down into clauses and financial data. In the short term, this means more parties will be able to review and understand insurance policies in a timely fashion,” Cheatham said. “In the long term, this will enable true ‘smart contracts’ as individual clauses and limits are tied to the blockchain and IoT,” he predicted. Rebecca Wheeling Purcell, CEO of Schedule It, is focused on the inefficiencies in the claims adjustment process—having had firsthand experience handling a mounting volume of claims during a successful career as an independent

Rebecca Wheeling Purcell “Looking out five years or more, there will be less ‘boots on the ground’ as more aspects of the claim process become automated or streamlined, such as routing of claims to available adjusters,” she said, responding to Carrier Management’s invitation to look into the future.

insurance claims adjuster. Wheeling’s firm provides two solutions: proprietary technology and an expertly trained on-hand team of personal scheduling assistants, helping adjusters close claims faster and offering carriers and independent adjusting firms more visibility into claims. Personal scheduling assistants handle all the tasks associated with mapping and routing optimized inspection routes, scheduling inspections and documenting claim files. “The increased of use of artificial intelligence combined with analytics utilizing data that carriers already have in-house will also have a significant impact on customer experience and streamlining the claim process,” she said, addressing a second problem area—and the need to improve customer satisfaction for policyholders. “Additionally, policyholder/ claimant participation in the claim process will continue to increase, with smart carriers offering premium discounts based on participation.”

Responding to Customers

Moving away from problems inside of insurance companies, six other InsurTech leaders also focused on the issues that crop up when they reach outside their walls to deal with customers—ultimate buyers, in some cases; agents and brokers, in others. Today’s customers are “instant individual[s] who want what they want when they want it,” said Tim Attia, CEO of Slice Labs, almost summarizing the thoughts of the rest of his peers. Focusing on the “when they want it” idea, Ilya Bodner, CEO of Bold Penguin, a commercial insurance agent portal, said:

“Everyone wants to purchase things online the way they do from Amazon. The insurance industry may never reach that high bar, but we can always get better.” Rashmi Melgiri, COO of CoverWallet, an InsurTech startup focused on simplifying insurance for small businesses, noted that shoppers of all kinds have “indicated a strong willingness” to move online—“to trade certain positive aspects of the agent model, such as not having to compare options or fret the details, in exchange for the ability to save time and money.” “What we expect to see in the coming years is a continuation of what happened in travel—with the majority of relatively simple customer scenarios moving to a few online players. There will still be a role for high-touch service, in some cases supported by technology, particularly for complex or high-value products,” she predicted. According to information on the CoverWallet website, Melgiri and the firm’s CEO and co-founder, Inaki Berenguer, are both “tech entrepreneurs who worked in software startups in the past, building easy-to-use online products for consumers and enterprises.” Because they were “frustrated with how opaque, highpressure and time-consuming the management of commercial insurance was, [they] decided to build a better experience for other business owners and a concierge service for them,” the website introduction says. “Businesses need a single, central location to rely on for everything from understanding their risks to managing their policies,” Melgiri told Insurance Journal in an interview last year. “Shopping and managing insurance policies from multiple brokers can be really painful,” she said.

What Else Do Customers Want?

Next Insurance CEO Guy Goldstein and

Slice's Attia believe customers want more customized products. Today’s insurance industry “lacks personalization, with risk factors and underwriting still relatively generic,” Goldstein said. Referring specifically to business insurers, he added, “We still have catchall insurance types such as general liability, inland marine, employee liability etc.” Rashmi Melgiri “What we expect to see in the coming years is a continuation of what happened in travel—with the majority of relatively simple customer scenarios moving to a few online players. There will still be a role for high-touch service, in some cases supported by technology, particularly for complex or high-value products,” she predicted. “What we should have is insurance that is tailored to a plethora of subcategories, such as insurance for an Indian restaurant, insurance for a wedding photographer or insurance for a litigation lawyer. As insurers are able to compile more sophisticated and in-depth data about risk, it will be easier to tailor the insurance needs to the specific customer.” Attia has a similar view. “Insurance products must be tailored and designed for the digital age with the customer experience at the forefront of everything,” the leader of Slice Labs said. Expanding on his view that “instant individuals” will demand better service, Attia described customers’ desires for “around-the-clock access to clear and simple relevant information related to product features, pricing and claims.” He said he foresees usage-based pricing and insurance models, increased transparency in claims communications, the unbundling of commercial package policies among the paths to meeting this demand. And then there’s “personal protection insurance—for what insureds are doing when they’re doing it,” he added. “Insurance carriers will insure risks as the

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Q3 2017 | 47

Future Trends continued from page 47 individual is faced with them—in real time, on demand. In other words, policies will be risk-specific rather than comprehensive, and will be sold on-demand,” he said. In addition, customers want to work with companies they trust, suggested Mike Greene, CEO of Hi Marley, delivering comments similar to Lemonade’s Dan Schreiber in outlining a key problem for the insurance industry. (Schreiber’s comments, made at a conference rather than in response to Carrier Management’s questions, are included in the lead article of this feature on page 38.) “When most people think about a longterm relationship founded in trust, their insurance company usually isn’t top of mind,” Greene said. “But what if insurance were to become more ‘trusted’—and even ‘loved’—in the future? “What would need to happen for a customer to say, ‘I love my relationship with my insurance company; I can’t imagine switching?’” he asked, giving a clue to what Hi Marley, an InsurTech still largely in stealth mode, is all about. “Some key elements would probably include greater transparency to allow customers to pursue lifetime value over price, products that are simple and complete, and coverages that are adaptable to better fit the unique ‘lifestyles’ of individuals and companies.” Like many other respondents to Carrier Management’s call for future imaginings, Greene believes that artificial intelligence will begin to take on a bigger role in our industry in the next decade. “AI pushes the envelope on the entire concept of insurance and will eventually allow the better insurance companies to engage with customers proactively across the entire risk life cycle—from identifying the most appropriate insurance coverage at the start and adapting along the journey, to engaging with clients and across industries to mitigate risk, and offering conciergelevel service to make the customer whole in those moments of truth.” “With AI as part of the conversation, I believe we have an opportunity to renovate an entire industry,” he said.

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Novel Products, New Risk Takers

While Attia sees commercial insurance packages being taken apart and unbundled to meet very specific needs of customers, Greene isn’t so sure that’s an enduring trend. “I think what we have seen in other industries will also hold true in insurance. There are a lot of new niche products experimenting with different facets of the industry, but this added complexity can make it harder for the customer to keep track, leading again to a demand for simplicity.”

“What we should have is insurance that is tailored to a plethora of subcategories, such as insurance for an Indian restaurant, insurance for a wedding photographer or insurance for a litigation lawyer.” Guy Goldstein, Next Insurance “I could see a day where the industry is insuring and protecting individuals and their lifestyle with no gaps, no overlap and one premium,” Greene said. “At the end of the day, every strategy comes down to delighting the customer.” Wheeling offered an imaginative view of insurance coverage that could be designed by forward-thinking carriers in coming years. “Policyholders will need to insure robots, DNA and trips to outer space, for example. Perhaps in the future insurance will be available for unborn children or grandchildren, or for marriage before one is even married,” she said. Like Attia, whose firm sells on-demand insurance policies to homeshare hosts and is in the testing phase for a proprietary payper-use policy for Uber and Lyft drivers using a rideshare app, Mike Albert, co-founder of Ask Kodiak, sees innovative coverages coming in personal lines—in the

form of low-friction, time-of-need purchasing. But Albert sees obstacles to innovation coming on the commercial insurance side of the business. “Limitations imposed by those carriers, some technical (e.g., the absence of business partner APIs), some procedural (e.g., onerous underwriting questionnaires), create too many constraints for those seeking to do something inventive or streamlined on the distribution side,” he said. “Big innovations in commercial lines will include the emergence of innovative new structures meant to bear risk in lieu of and in addition to traditional carriers,” he predicted. More pointedly, he said: “We are now more likely to observe innovators going around traditional carriers instead of working with them. Even though many write very standard lines, we see entrepreneurial companies in distribution setting up businesses that are more like MGAs, so as to have more complete control of the underwriting and pricing process for the products they’re marketing.” He added: “Capacity is a commodity, and these businesses demonstrate that. While traditional E&S players and even some U.S. carriers are providing it for this first generation of digital players, opportunities will emerge for new businesses designed for the sole purpose of bearing risk and delegating it to digital partners. “As business models continue to evolve, brokers and startups alike are beginning to cut out legacy carriers so that they can innovate in how products are underwritten and distributed. We’ll see more online everything and a much more difficult and competitive marketplace in which to build brand equity. “No one company will ‘win’ insurance. Distribution and customer experience will be headlined by technology, but the category standouts will back up tech with human touch and expertise in elegant and efficient ways,” Albert concluded. The complete responses provided by these nine InsurTech leaders to Carrier Management’s questions about the Future of Insurance are published online at

The Distribution Debate:

How Will Insurance Products and Services Be Distributed in the Next Decade?


n the face of a world dominated by the digital experience, what role does the broker or agent play? What kind of trusted adviser must you be when product development is being reinvented in real time?”

Carrier Execs Weigh In Christopher Swift, Chairman and CEO, The Hartford:

We believe the new entrants looking to disintermediate brokers and agents often underestimate the difficulty of customer acquisition and the value of advice. Most business customers—all but the very small—will continue to look to their agent or broker to counsel them through risk management, purchase and renewal processes.

Trent Cooksley, Head of Open Innovation, Markel Corporation:

Insurance products and services will be distributed however the customer demands. I am a believer in the trusted local agent and the direct model. There has to be a clearer line of sight in the buying process for the customer through to the risk taker, however. Transparency will lower friction in the process and should reduce expenses.

Bobby Bowden, EVP, Chief Distribution and Marketing Officer, Allied World: There will be blurred lines between product and distribution. The question, “Who controls the customer?” will be asked more often. We will see an evolution of key roles—where clients gain more direct access to the product and more support in their risk management strategies while engaging the consultative services and added value that brokers provide throughout the process.

Keith Wolfe, President US P/C, Regional and National, Swiss Re:

The diverse and embedded infrastructure for selling insurance is tougher to disrupt than most people think. That said, there are success stories around direct technologybased options to better engage today’s connected customer. Ease of use and transparency are key to winning direct market share for these innovators.

The questions raised by Kathleen Reardon, CEO of Hamilton Re, in her response to Carrier Management’s call for future forecasts don’t have easy answers. Reardon didn’t offer any, but others did weigh in on the question of our headline.

InsurTech Execs Counter

Ilya Bodner, CEO, Bold Penguin: D2C will certainly gain more market share,… but predominately, insurance will remain too regulated and too geographically fragmented to completely drop a broker or agent. Adam Cassady, CEO, Tyche Risk: There

will be fewer insurance agents and brokers because the workforce is aging out. But those that remain will be more productive, enabled by technology. InsurTech online/direct distribution platforms will evolve— first toward MGAs with the pen and then toward fronting carriers working directly with reinsurers…

Guy Goldstein, CEO, Next Insurance:

There is little doubt that the entire insurance process will be direct and online. There will no longer be a need for a mediator (in this case, an agent) between the insurance provider and customer as this online system will allow the customer to buy, maintain and handle claims all in one place.

Tim Attia, CEO, Slice Labs: P/C

insurance will increasingly be distributed through alternate sources: embedded in the product covered; non-insurance distribution channels; single-peril/single-object distribution.

Q3 2017 | 49


THE NEXT DECADE? Dr. Henna Karna, CDO, XL Catlin,

says, “Leaders and managers will need to understand how to self-service, analyze and discern information with speed and accuracy in a digital environment; evaluate trends and benchmarks while they enter the environment (not months later); and calibrate—or even redirect— go-to-market strategies as information becomes visible... “Data science skills will become staple and organically grown. Career paths will go from ladders to lattices, and [companies] will have a unique opportunity to cultivate innovative data, analytics and technology skills across dozens of new capabilities.”

Pranav Pasricha, CEO, Intellect SEEC, sees significant elimination of

labor-intensive “basic processes and therefore a reduction in the headcount of insurance companies—perhaps down to about one-half to one-third of the current workforce…AI and big databased front-end platforms can eliminate or significantly reduce the need for the agents and underwriters for all but some of the most complex products. Roboadvice platforms can do much better holistic risk and needs assessments to recommend products. Big data platforms can virtually eliminate application forms

50 | Q3 2017

and the whole process of checking and assessing them. Machine learning-based tools can do automated underwriting.” “In this environment, most of the skillsets that will be required will be data scientists (as against actuaries), UX and visualization and machine learning experts (as against agents), and some deep domain and risk engineering specialists (rather than traditional underwriters). “Leaders will need to become significantly more technology- and data science-savvy, and will need to manage a smaller but more specialized set of individuals who will expect a very different form of organizational alignment and motivation.”

an increasingly diverse workforce and less promotion-by-attrition. “Recruiting and retaining talent will remain an issue for insurers, especially with the lure of InsurTech startups drawing away creative personalities.”

Rebecca Wheeling Purcell, CEO, Schedule It, believes “automation will

companies will increasingly be populated by ‘digital natives,’ which will be essential to crafting the type of user experiences that most of us have come to expect and some experiences we haven’t even thought of yet. Insurers will invest in data scientists, machine learning experts, IoT architects, blockchain engineers and subject matter experts with experience in deep learning and virtual reality.”

invade the insurance industry, with bots taking over many customer service functions, handling simple underwriting inspections and empowering more selfservice claims.”

Ilya Bodner, CEO, Bold Penguin, says, “The insurance industry of the future will begin to better reflect the policyholders they insure, remote workers empowered by cloud, mobile and IoT technologies protecting modern, on-demand risks.”

Mike Albert, Co-Founder, Ask Kodiak, focusing on carriers, says, “A

more competitive environment will drive

Keith Wolfe, President US P/C— Regional and National, Swiss Re,

believes that “data science is rapidly becoming a core skillset that we need more of in the industry. That means folks without skills in data mining or analysis will likely be at a disadvantage in five years.”

David W. Miles, Co-Founder and Managing Partner, ManchesterStory Group, says, “In a decade, insurance

Arun Balakrishnan, CEO, Xceedance, says, “If underwriters are

liberated from manual, repetitive tasks, the institutional knowledge inherent to the position can be leveraged to make machines and software-augmented risk assessment even smarter.”

Future Trends More Views on

The Future of Insurance


Lloyd’s underwriter from the 17th Century might feel right at home in the insurance industry of 2017, one executive believes. But in just three years, the industry will be unrecognizable to those working in it now, adds the CEO of a software provider. Bobby Bowden, chief distribution and marketing officer for Allied World, and Pranav Pasricha, CEO, Intellect SEEC, are among 26 executives and industry experts who answered Carrier Management’s invitation to imagine the industry's future. Throughout this edition, we have shared some of their forecasts, but space limitations prevent us from publishing them all. Below, we have digested a few more highlights by topic. The entire collection of full responses will be featured on in late August.

take that long to change the landscape. This is the ‘Exponential Age.’ Internet business models took 10 years to take hold in insurance; mobility took about three to five years; and AI, machine learning and big data will be even faster.”

The More Things Change...

The Promise of Digital

“The industry has not had a big change since the inception of Lloyd’s in the 1600s. Actually, if you could wake up an underwriter or broker from 1686, it would take only a few days to get them up to speed. Although there is a lot of discussion about our industry looking very different in 10 years, the core of our business will remain the same, particularly for risk management size accounts. Clients will continue to look to their insurers to support their businesses and to respond to the crises they face.”

-Bobby Bowden, EVP, Allied World

Seismic Change

“The insurance industry will change more in three years than in the last 30, and the disruption that is about to hit us won’t

-Pranav Pasricha, CEO, Intellect SEEC

Big Data

“Insurers typically have access to more information in one glance than an individual’s doctor, banker or financial adviser.”-Arun

Balakrishnan, CEO, Xceedance

“Because they make a customer-centric approach possible, digital capabilities can restore a level of humanizing interaction between large enterprises with the individual touchpoints that has not been financially lucrative or manageable with scale in the past.”-Dr. Henna Karna, XL Catlin

Promise of Connectivity

“By using new collection methods, such as drones and sensors,...businesses will be able to carry policies based on accurate usage [of connected devices] instead of traditional annual or multiyear


Breen, SVP, Argo Group


“As the industry ramps up use of big data, it will likely lead to disaggregation... What that will mean is that the industry will split into specialists who collect data; others who analyze and build models using data; those who use analyzed data and models to provide underwriting expertise; and yet others who assume risk and hold capital for it based on the collection, analysis, modeling and underwriting of others.”

-Vikram Sidhu, Partner, Clyde & Co

“The ability to achieve good results through better risk selection derived from data is a particular opportunity for specialty carriers to become even more specialized. Niches within the industry will become even more focused as analytics allow the industry to “slice and dice” into microsegments.”

-Jeff Richardson, SVP, One Beacon

Insurance Group

Q3 2017 | 51

Emerging Risks

Social Inflation Is Back, Fueled by Lawyer Advertising and Other Factors: Assured Research Analysis Executive Summary: Social inflation, marked by a rising propensity to sue and higher jury verdicts, is a growing threat to the property/ casualty insurance industry’s profitability, according to Assured Research Analysts William Wilt and Alan Zimmermann. Here, they describe three relevant trends pushing social inflation to levels not seen in two decades. Among them is increased lawyer advertising fueling litigation activity in several U.S. metro areas.


By William Wilt and Alan Zimmermann y the spring of this year, the financial press was filled with articles documenting the pause in numerical and medical inflation. But few outside the insurance industry are discussing—or maybe even aware of—social inflation, which is climbing. An inflection point in loss cost trends, fueled by social inflation, could actually be the No. 1 threat to the property/casualty insurance industry’s already marginal profitability, according to a June 2017 Assured Research report. Evidence is mounting that social inflation is rearing its head after a nearly 20-year hiatus.

late 1990s and early 2000s. It has dropped out of most actuarial datasets, we suspect, and its re-emergence could lead to reserve deficiencies and inadequate pricing of new and renewal business. In our June 2017 research report, Assured Research analyzes three relevant trends, providing hard evidence that the risks of social inflation are real and deserving of attention by all insurance professionals. 1. Judicial vacancies at federal and state levels.

2. Legal services advertising. 3. Growth in the litigation funding asset class. We summarize some of the highlights of our analysis here. (The full report is available to Assured Research subscribers at

Trump Can’t Control Social Inflation: Judicial Vacancy Analysis

P/C insurance professionals have long

What Is Social Inflation?

There is no one commonly accepted definition of social inflation, but most would agree that it contains elements of changes in the propensity of the legal system to interpret contracts broadly or to reward plaintiffs with rising levels of awards. Social inflation also encompasses the trend of claimants to involve an attorney in their claim—or to file a claim or lawsuit in the first place. With exceptions in a few segments, social inflation has been benign since the

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Trump administration has to fill—129 current vacancies, plus 22 future ones—and be too quick to assume that the current, pro-business president can entirely remake the federal judiciary. It’s not that simple. We scrubbed data from the U.S. court system and found that 60 percent of those 151 total vacancies were created by judges appointed by Republican presidents. Again, our main message is not that federal appointments don’t matter to businesses and insurers but rather that even though the president has many vacancies to fill, the majority are replacements of Republican-appointed judges.

believed that social inflation is better controlled under Republican presidents. This stems from the view that vacancies in the federal judiciary will be filled with conservative judges likely to stay within the four corners of the contract when hearing cases with ramifications for P/C insurers. Based on our examination of federal and state courts as well as channel-checking with knowledgeable professionals, we have concluded that state courts matter more to insurers than do federal courts. Federal courts are important, of course, particularly in social matters such as immigration, privacy and the role of the federal government in the lives of citizens. And interestingly, insurance coverage matters are often tried in federal courts, although our sources suggest that the judge’s political stripes probably matter less in this area

since the decisions are largely technical. But to our main point, some may hear the large number of federal vacancies the

Advertising for Legal Services Is Rising

Many professionals will have heard insurance executives comment on the

continued on next page

Q3 2017 | 53

Emerging Risks continued from page 53 rising propensity to sue and higher jury verdicts adversely affecting insurance costs, particularly in major metropolitan areas. Proprietary data, supplied by mass tort intelligence firm X Ante, reveals that accelerating advertising spending may be fueling those trends. From 2013-2016, both the number of ads and dollars spent were up about 6 percent per year across the United States (see charts on page 53). Some individual metropolitan areas show even stronger trends.

Insurer RLI specifically called out the New York/New Jersey market in its firstquarter conference call (see related sidebar below). X Ante’s analysis shows what may have sparked the commentary. From 20132017 (full-year projected from first quarter), the number of ads jumped 12 percent per annum, and spending rose 6 percent per year in the New York media market. Los Angeles isn’t far behind, and even in a smaller but growing media market, such as Orlando, Fla., advertising trends are moving up. For Los Angeles, the number of

ads grew 10 percent per year, on average, and spending rose 7 percent. In Orlando, the comparable figures were 7 percent per annum for the number of ads and 8 percent for spending dollars. (Charts available online at Experience has taught us never to underestimate the plaintiffs’ bar. Where advertising for legal services is on the rise, we assume that is because the law firms are experiencing and anticipate a favorable return on their investment—rarely good news for insurers.

What Insurance Execs Are Saying


uring year-end 2016 reports and first-quarter 2017 conference calls of property/ casualty insurers, executives of publicly traded insurers advanced similar views about social inflation. • RLI Chief Operating Officer Craig Kliethermes, in response to a question about the source of adverse development in the commercial auto line for RLI in first-quarter 2017, said that half of it came from the New York/ New Jersey area. The specialty insurer is carefully watching “plaintiff-friendly metro areas,” he added. Elaborating on factors driving up commercial auto severity and carrier caution, he said: “The plaintiffs’ bar has become very aggressive, particularly in certain metro areas where you have more congestion, you have more drivers or more distracted pedestrians…They used to be willing to settle on the courthouse steps…[Now] they are willing to roll the dice in front of the jury because they’ve gotten emboldened by a few big verdicts, particularly in the commercial auto space.” • Evan Greenberg, chair and CEO of Chubb, sees commercial auto insurance impacted, as well. “Anything with wheels on it has inflation,” he said during a first-quarter 2017 earnings call.

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Greenberg also expressed concern about inflationary effects on loss costs in professional lines, including mergerobjection class actions impacting the directors and officers liability line. “There’s not a merger that goes down where there isn’t a lawsuit filed on both sides: ‘You paid too much; you paid too little,’” he said, noting that even if the cases are settled for “nuisance money, it’s still money and it increases the frequency.” In addition, employment practices liability insurance is also being targeted, with more claims evident in higher-paid professions. “It seems as part of layoffs today that...another benefit you get is a payment from an EPL suit.” Greenberg outlined drivers of litigation inflation beyond populism and judicial appointments stacking more liberal courts in the last few years. Focusing most of his remarks on an aggressive plaintiffs’ bar, he said: “There are more plaintiff bar law firms, more boutique law firms who are like ambulance chasers and out to make a buck.” It’s not restricted to one industry, such as health care, he said, dismissing media reports focused on singleindustry targets.

today there are dozens being led by people who worked for that handful now out on their own, all “going to work every day with an ambition to make money and create new theories of liability against corporate America.” Keogh also highlighted the potential impact of litigation funding in the United States, the U.K. and Australia. “There are funds that are attracting some serious money to fund the litigation in the D&O world, which obviously creates more frequency and severity in this business than we’ve seen before.”

• John Keogh, Chubb’s COO, said whereas 15 or so years ago a handful of plaintiff law firms drove the litigation,

And we suspect the growth in advertising for legal services is connected to rapid growth in the assets backing thirdparty litigation funding—the third leg of social inflation.

Out of the Shadows: Third-Party Litigation Funding on the Rise

We believe third-party litigation funding will become a big business in the United States for the simple reason that it fits the needs of multiple parties: plaintiffs, law firms and long-term investors.

• Jack Roche, president of Hanover Agency Markets, sees longer-term changes impacting both commercial multiple peril and auto business at The Hanover Group. “This quarter is really no new news. What we’ve been experiencing is an uptick in bodily injury severity in the auto lines, and then most recently slips, trips and falls, for the most part seen in major metropolitan areas. There has been a progressive uptick in attorney involvement, which kind of manifests itself in a variety of different ways, including higher medical run-ups, occasionally higher awards.” • Doug Elliot, president at The Hartford, reported that legal representation is up slightly on commercial claims his firm has analyzed, “but not in big numbers.” “What I do see, though, on our data is a quicker trigger to litigation, particularly, at the moment, around auto liability and also general liability. So, we’re watching those cases that are with representation and how quickly they’re going to litigation,” he said during a firstquarter conference call.

Litigation funding is a practice whereby specialized investment firms provide funds to either plaintiffs or their lawyers to pursue litigation. The payoff comes if the plaintiff wins a monetary reward, in which case the investor gets a percentage of the return. When we first looked at the business two years ago, the emphasis was chiefly aimed at single-case plaintiffs in exchange for a percentage of any awards. In an important development, litigation funding specialists have been raising outside funds, thus increasing the amounts available for investment. Now, with more funds available, the investment emphasis is on entire litigation portfolios whereby the funding companies advance funds to law firms in return for a percentage of the returns on all the litigation across the law firm’s book of business. This strategy not only diversifies the risk in the litigation funding firm’s portfolio but also allows for much larger amounts of money to be put to work. There have been numerous fund raises in the last few years: • Gerchen Keller Capital, which was acquired last December by London-based Burford Capital, the largest litigation funder, has raised over $1.0 billion in the three years since its founding. • IMF Bentham, an Australian firm that has been steadily increasing its presence in the U.S., recently teamed with a subsidiary of Fortress Investment Group to create a

$150 million fund that could be expanded to $200 million under certain circumstances. • Canadian firm Balmoral Wood Litigation Finance is in the process of raising a $150 million fund that would invest across a spectrum of litigation specialists, exemplifying the growing maturity of the business. We also expect litigation funding to expand because it fits the changing economics of law firms. This growing asset class provides working capital to law firms, which is used to finance increasingly complex and researchintensive lawsuits. Over the long term, insurers and plaintiff firms have a symbiotic relationship: activity by plaintiff firms drives demand for insurer products. But in the near term, well-funded law firms could be a thorn in the sides of insurers, leading to more frequent and costly claims.

William Wilt is President of Assured Research LLC, a research and advisory firm focused exclusively on the P/C insurance industry. Reach Wilt at william.wilt@

Alan Zimmermann is Managing Director of Assured Research LLC, a research and advisory firm focused exclusively on the P/C insurance industry. Reach Zimmermann at alan.zimmermann@

Compiled by William Wilt and Alan Zimmermann of Assured Research and Susanne Sclafane and Andrew G. Simpson of Wells Media.

Q3 2017 | 55

Emerging Risks

No Pain, No Gain:


Not Enough to Boost Cyber Insurance Pricing, Tighten Terms


By Susanne Sclafane ncreasing competition in the cyber insurance market is keeping prices for coverage below where they probably should be, experts said at an industry conference that took place just days after the WannaCry ransomware event made global headlines. Representatives of two insurers and a reinsurance broker speaking at the RMS Cyber Risk Seminar on May 16 explained that current market prices don't include an adequate catastrophe load for cyber events with the accumulated loss potential equivalent to that of hurricanes in the property-catastrophe world. “This question has been hotly debated at AIG. As someone that sits in the ERM function, I'm often fighting with the first line about [whether] the prices we're charging [are] adequate to fund the eventual cat that we'll see. That's the key question,” said Anthony Shapella, risk officer for liability and financial lines at American International Group. Shapella was responding to a question from panel moderator Peter Ulrich, an RMS senior vice president, about whether cyber insurer margins are keeping pace as premium rates decline and covers expand. “We charge for expected loss—what we expect to pay in a single year. Over and above that, we have to hold capital to fund the cat event that we know will happen. And the key question becomes how much capital do we need to set aside and what's the cost of that capital,” Shapella said.

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“That needs to make its way into the price, and today I feel like the market hasn't priced it in the way that it should be priced. I think we need to get there [and] tools like the RMS tool are going to be helpful in educating the brokers [and] educating our clients that this cat risk is real,” the insurer risk executive said, referring to RMS's Cyber Accumulation Management System (CAMS), first released in February 2016. “Events will also help educate them— things like WannaCry and MongoDB, like

Dyn, like SWIFT,” he said, referring to two cyber extortion events, a denial of service attack impacting thousands of Internet service companies at one time and the attempted cyber bank heist of nearly a billion dollars, all occurring in 2016. Lori Bailey, global head of special lines for Zurich Insurance Group, noted early in the session that such events are helping to move the needle on demand for cyber coverage but not cyber pricing. Confirming a figure of $3 billion that Ulrich tossed out as the volume of premiums for “affirmative

cyber” insurance coverage today, she said that prior to WannaCry, popular estimates projecting $8-$10 billion in three years seemed aggressive to her. “Sitting here today, I don't think it's that unreasonable,” she said, reassessing the projections in the aftermath of the WannaCry event. The WannaCry incident “has sparked a lot of interest. It's sent out a warning call to a lot of companies to say ‘this can impact you, this will impact you’— even those industries that historically did not think they could be at risk for it in that nontraditional space, [such as] hospitals in the UK, for example.” On the other hand, barriers to attaining the promised $10 billion number include a glut of supply on the carrier side. “I read an article last week stating that 70-80 carriers in the U.S. are offering cyber coverage… There is a lot of capital that's flowing into this market. That is going to keep pricing down.” Ulrich said he'd heard talk of rates heading down—albeit only 10 percent or less—while coverages broaden. “Absolutely, we do see that. It's the simple law of supply and demand,” Bailey affirmed. “The more markets you have, the more that's going to drive down rates on its own. Despite the fact that we see a spike in ransomware, we saw a spike in retail incidents a few years ago, all the new entrants to the market are keeping the pricing down, which as a retail insurer is very frustrating because there are certain segments that are more exposed than others. We do see these waves of claim fact patterns, but we're not able to drive the rate that we would necessarily like to see in the market to compensate for those.”

Refining Models

Following Shapella's assessment that pricing lacks an adequate provision for catastrophes, Bailey described the difficulty that carriers and modelers face in wrapping their arms around the magnitude of cyber risk accumulations at any given time. “We don't know what the ceiling is in terms of events. We think we know, and

continued on next page

Frequency of Cyber Breach Attacks Down: RMS Report While it may seem like more cyber breach attacks are being reported than ever before, the number of breach events in the United States has been declining over the last three years, an RMS expert said during a recent conference. “Overall, we’re actually seeing a slight tailing off in the overall number of events,” Andrew Coburn, an RMS senior vice president, told risk professionals gathered at the RMS Cyber Risk Seminar in May, referring specifically to trends in data exfiltration—one of five types of IT risk RMS models in its Cyber Accumulation Modeling System. (The others are cyber extortion, cloud compromise, mass denial of service attacks and financial theft.) Online sources, such as technopedia, define data exfiltration as the unauthorized copying, transfer or retrieval of data from a computer or server. And Coburn said that 60 percent of cyber insurance claims are for data exfiltration. But the frequency drop is not cause to celebrate. “Most of the [frequency] reduction is coming from smaller-scale events,” he revealed. “We’re seeing a reduction of smaller data losses and an extension in size and types of events that can be possible,” he said, also noting that accidental internal losses are no longer the biggest drivers

of data loss. Referring to a frequency graph for the past 10 years, which shows a peak in 2013 followed by slight dips for each succeeding year, and a graph of average breach sizes over the same period (both published below), he noted that before 2012, less than 5 percent of events involved more than one million data records. That’s now up to over 9 percent.The average size has actually more than doubled since 2012, he said, noting that the average breach size was 270,000 records in 2012; in 2016, it was 850,000. Coburn reported that the dollar costs of the data breaches are increasing as well, noting that the average cost per record of a data breach over 100,000 records has more than doubled since 2010 as a result of increasing regulatory fines and procedures, growing costs of compensation, and escalating legal complexities in dealing with identity loss. RMS has built an overall cost inflation trend of 15-25 percent into its modeling, he said.

Q3 2017 | 57

Emerging Risks continued from page 57 then another event comes along and that increases the ceiling even more,” she said. In fact, RMS updated CAMS this year to reflect lessons from real-world data breach events, DoS attacks and other “IT risks” impacting standalone cyber insurance policies—policies that affirmatively offer coverage for these events (referred to by the panelists and RMS representatives as “affirmative cyber” insurance products throughout the half-day conference). Earlier in the day, RMS Senior Vice President Andrew Coburn walked attendees through revisions RMS has made to five CAMS loss scenarios potentially covered under standalone cyber policies— simply because situations thought to be remote stresses back in February 2016 have already played out, in some cases more menacingly than originally imagined. “At this time last year, it was not clear that cyber was a systemic peril. We had people who were saying it was actually more like a fire peril” and criticizing RMS for the severe assumptions in its stress tests. “You guys are scaremongering with your accumulation scenarios,” critics said, according to Coburn.

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As an example, he noted that Version 1 of the model released in February 2016 had a scenario of cyber financial theft, imagining a large number of attackers breaking into a so-called “system of trust” to order false transactions, resulting in thefts up to $1 billion and an average loss per bank of $3 million across hundreds of financial services institutions. Just six months later, reality caught up. The “SWIFT Lazarus Cyber Heist” was an attempt to steal $951 million in about 30 individual fraudulent transactions, with an average $4.5 million loss per bank across dozens of institutions. An imagined cat scenario for a mass DDoS attack wasn't far off either, Coburn said, revealing a modeled event envisioning “a scaling up of botnet firepower” by infecting broadband TV subscribers, ultimately impacting hundreds of ecommerce companies and online banks with 100-gigabit-per-second attacks. In October 2016 in the Dyn DDoS attack, what actually happened was indeed a huge scaling up of botnet firepower using IoT devices like webcams and baby monitors. “What we didn't get right was the scale of the firepower—1,200-gigabit-

per-second attacks on tens of targets— actually an order of magnitude larger than our attack scenario,” Coburn said. Later, he described another new feature of CAMS in V2.0—an expected loss baseline calculation for data exfiltration incidents based on the pattern of loss occurring over the last six years—aimed at giving carriers a handle on average annual losses by insured company size and business sector for various breach sizes. “If you play that all through, we believe that U.S. companies [are] paying out about $5.3 billion in data exfiltration losses,” he said, referring to ground-up economic losses. “We estimate the insurance industry is paying out about $2 billion out of that $5.3 billion,” he said.

Cat Exposure Underappreciated

Even with efforts from modeling firms like RMS or brokers like Willis Re to help estimate cyber risk aggregations across insurance portfolios, a true understanding of the potential accumulations may be lagging among cyber underwriters, according to Alice Underwood, an executive vice president of Willis Re, who leads the reinsurance broker's analytics team in North America. Although cyber insurance market participants have progressed from simply adding up limits to understand maximum exposures, the development of accumulation scenarios is still in its infancy and subject to continual upgrades, Underwood, Bailey and Shapella noted. “I do often draw analogies to the property-cat world, [and] where we are [is] maybe sort of pre-Hurricane Andrew with respect to cyber modeling,” Underwood said, noting that such analogies aren't always useful for cyber underwriters, who typically come out of the professional liability side of the business and aren't familiar with the AAL and PML (average annual loss and probable maximum loss) concepts that are so commonplace in the property-cat world. “While we've had instances like the WannaCry event, like the Dyn situation, none have caused a lot of pain for the insurance industry as a catastrophe. It does

give people pause. You start to think about it. We continue to refine our ability to quantify these scenarios,” she said. Bailey said Underwood was “spot on” in her description of the evolution of awareness of cat potential among cyber underwriters. “I have been underwriting cyber since it came out in 1999 at AIG. I came up on the professional liability side. We didn't look at accumulation; it was never part of our vocabulary. We never had to. And really, until the last several years, the market wasn't even big enough to think about accumulation risk,” Bailey said. In addition, the Internet of Things “wasn't a topic at that point in time. So, we weren't talking about cyber in the context of it being a peril; it was more cyber as a distinct product,” she said, alluding to another hot topic at the seminar: silent cyber, the potential for cyber attacks on operational (OT) systems to cause damage to commercial and residential property instead of just disrupting IT systems. These OT attacks could give rise to losses under traditional property policies that are “silent” about exclusions or affirmative coverage. (Related article, p.60) Mindsets have changed for quite a few underwriters, Bailey said. The introduction of models have helped them try to put parameters around these types of events. “Historically, we might have just added up the limits and said that's our maximum exposure,” she said. Shapella traced a similar evolution at AIG. “Five years ago, we were doing this in a very simplistic way: get all the limits into a database, aggregate them, look at them by industry sector, slice and dice it, and then try to think about what could go wrong. [Now], we're going beyond that to develop some distinct scenarios,” he said, noting that AIG partnered with external cybersecurity firms to help develop “plausible but realistic scenarios.” When the risk professionals at AIG started running those scenarios against the insurance portfolio, underwriters had reactions reminiscent of fearmongering critiques that Coburn described following the initial introduction of CAMS. “The first

line would say, ‘You guys are way overcooking it. There's no way you could hit that many companies in a single attack.’” The underwriters had a point. In fact, AIG's historical claims data painted a different picture, revealing that most large cybersecurity failures were “idiosyncratic 'one-offs,' materially impacting a single company,” AIG revealed in a research report published in May 2017 titled “Is Cyber Risk Systemic?” At the RMS conference, Shapella explained that the underwriter pushback and the need to think more deeply about systemic cyber risk prompted a December 2016 survey of 100 cybersecurity professionals that forms the basis of the new research report. Among other things, the survey found that nine out of 10 global cybersecurity and risk experts believe simultaneous attacks on multiple companies are likely in 2017, with half foreseeing attacks on five to 10 companies as highly likely and more than 10 percent predicting a better-than-even chance that at least 100 companies will be attacked at the same time. With survey respondents including chief information security officers, technology experts and forensic investigators, and others also weighing in on questions about which industries are most likely to be swept into a systemic attack (financial services ranked highest) and the most likely event scenarios (mass DDoS causing business interruption), Shapella said AIG has started to use survey input and actual event data to judgmentally ascribe return periods to deterministic stress scenarios. “A bank DDOS is not a 1-in-50 event. It happened in 2012. We had 10 large U.S. banks that got DDOSed at the same time…” Underwood said the same kind of evolution took place for some property-cat risks, including European windstorm some years back when probabilistic models hadn't yet been built and broker guesstimates served as a starting point for assessing the risk.

Underwriting Tension

Bailey and Shapella both expressed concerns about coverage expansions that

are moving in opposition to expert forecasts about systemic cyber risk. Referring to the RMS estimates of roughly $5.3 billion in expected economic losses from data breaches annually, with only $2 billion in insured losses, Shapella said deductibles, exclusions and sublimits explain part of the difference. But now, “we're seeing sublimits for systemic coverages expand—and expand in a big way,” he said, offering coverage for outsourced service providers as one example. When “a company relies on a third party to host part of its network or puts an application out in the cloud, historically, the insurance industry did a good job of keeping reins on that [by] sublimiting it pretty heavily. I see that loosening up, and from an ERM systemic risk modeling perspective, those are the types of things that worry me,” he said. Bailey agreed. “Underwriting discipline is a real challenge in this area, but one that we have to be very true to in order to expand thoughtfully,” she said. In her view, the insurance industry, as a whole, tends to be very reactive. “If a certain industry has a lot of losses, then all of a sudden you see a lot of changes on the underwriting side to respond to those. But we don't necessarily think about other industries and what the next type of incident is going to be.” Bailey continued: “Certainly we did see many carriers try and sublimit. But when you don’t see incidents happen for a while, again those reins do loosen. And all of a sudden there’s a big claim that comes out, and everything tightens back up again.” Underwood recommended that insurers use the models to do sensitivity tests to determine the impacts of small changes in coverage terms on aggregate exposures. For example, “the waiting period for business interruption could make a huge difference because most interruption events that happen are corrected very quickly. Companies get their systems back up most of the time.” She said the impacts of limits and deductibles have been shown to be “very significant” when Willis Re runs scenarios through its model.

Q3 2017 | 59

Emerging Risks Breaking the Silence:

RMS Releases

Cyber Physical Model Scenarios


By Susanne Sclafane frightened truck driver dodging a barrage of bullets fired from the assault rifles of a drugsmuggling criminal gang doesn’t seem like the obvious description of the final stages of a cyber attack. But the real-life scenario that played out after the driver unwittingly picked up a cargo container that should have been filled with fruit or construction materials but instead held cocaine and heroin is one of the events sparking the growing interest of property, marine, energy and industrial insurers in “cyber physical” losses, a risk modeler revealed recently.

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During a Cyber Risk seminar held by RMS in May, Christos Mitas, vice president of model development, clued attendees in on what in the world the shooting had to do with cyber hacking as he detailed a new “port interruption” scenario in Version 2.0 of RMS’s Cyber Accumulation Management System. The scenario is one of five new cyber physical loss scenarios now included in the RMS system. According to Mitas, the real-life event was a cyber attack on the port of Antwerp that lasted two years. It started with criminals—“just plain old criminals that wanted to bring arms and drugs into Europe”—who hired hackers to break into the port management system of the

Belgian port. “They didn’t use anything extremely sophisticated. They did that via spear-phishing,” he said, referring to a technique where hackers send out emails that trick recipients into clicking links that give them access to target company networks. “Once they had access into the port, they manipulated the cargo details and they hid cocaine, heroin and weapons in cargo containers that otherwise had trivial stuff like bananas or timber,” Mitas said, noting that the operation went on for many months. The truck driver was an unplanned participant who caused the plot to unravel. He mistakenly got one of the

containers that had the illegal material. “One of the criminals that was supposed to pick up the cargo container really freaked out and started shooting.” The ensuing police investigation uncovered the entire operation and shut it down. But it’s still a worrisome scenario for marine and property insurers, which may or may not include coverage for cyberrelated cargo theft and business interruption in their non-cyber policies. Throughout the half-day conference, speakers referred to cyber physical loss accumulation scenarios now included in CAMS—port interruption, cyber-induced fires in commercial buildings, business blackouts (regional power outages stemming from cyber attacks on power grids) and hacks into control systems that could trigger oil rig explosions or fires at industrial processing plants—using the term “silent cyber” risks. The “silent” descriptor refers to the fact that many traditional insurance policies covering property damage, theft and business interruption do not have specific exclusions for situations where cyber attacks on operational technology (OT) cause losses, nor do they have clear grants of coverage. Insurance policies that specifically cover cyber events or attacks on information technology (IT)— sometimes referred to as network, security and privacy policies and other times as standalone cyber or “affirmative cyber”—typically have carried an absolute bodily injury and property damage exclusion.

Tianjin-Type Losses

As both traditional and affirmative cyber players examine their ability to take on or exclude cyber physical risk, RMS aims to provide a tool to help them assess their current exposures with the new cyber physical scenarios in CAMS. For the port-interruption scenario, cargo losses in

excess of those recorded for one of the most impactful recent non-cyber events for insurers are possible, Mitas said, referring to the August 2015 Tianjin explosion. Before counting up potential loss damage figures, Mitas described the imagined port-interruption scenario in CAMS, which starts with a criminal gang seeking financial gain. Outlining each phase of the attack, the scenario envisions that hackers are hired by the criminals to take advantage of vulnerabilities of the port management system that were discovered and published in hacker chat rooms. The criminals target two or three major ports and four specific types of cargo contents: consumables, electronics, pharmaceuticals and jewelry. Once into the system, the hacking group can scramble shipping orders and mislabel cargo containers, allowing the criminals to take possession of the ones they want. A year into the process, the Port Authority catches on to the fact that rates of mislabeling have been much higher than in a typical year. The gang, realizing it has been discovered, wreaks havoc in

the port, increasing the level of mislabeling and falsification of the documents to cover its tracks. The port management system needs to be taken offline, the three targeted ports need to close for days as the rightful cargo owners are identified and the damage assessed. “During that time, perishable goods get spoiled, the port authorities face breach-of-privacy claims, and as the forensic team comes in to clean up the whole mess, there’s severe damage that has been discovered, loss of business and of course loss of reputation,” Mitas said. How much damage? Using an industry exposure database supplied by marine cargo modelers at RMS for the three largest ports for which RMS has cargo value data—Shanghai, Singapore and Rotterdam—the total economic ground-up loss that RMS computed by running this scenario through the second version of CAMS was $5.7 billion, “which is the same order of magnitude of the Tianjin explosion,” Mitas said, referring to just the cargo loss piece for both events. (Editor’s Note: At the time of the event, Guy Carpenter estimated losses between $1.6 billion and $3.3. billion.) But the marine cargo line isn’t the only one impacted, Mitas noted. While cargo theft and perishable goods loss represent more than two-thirds of the economic losses, Mitas displayed a pie chart revealing 16 percent of the losses in the directors and officers liability insurance line, 8 percent for business interruption, 5 percent for technology errors and omissions, and smaller amounts for incident response and regulatory costs. Before Mitas described the makings of the port-interruption scenario, Éireann Leverett, senior risk researcher at the University of Cambridge Centre for Risk Studies, gave equally vivid descriptions of other potential cyber physical losses, showing seminar attendees “how to use a mouse as a weapon of mass

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Emerging Risks continued from page 61 destruction” to blow up an oil rig or trigger an industrial facility explosion and “how to set fire to a thousand buildings.” In each case, the key is malicious manipulation of information or logic—temperature and pressure values on sensors or logic that tells switches and valves when to open and shut in industrial processes, for example. In the case of the office fires, manipulation of firmware in common brands of laptops makes it possible “to create a thermal runaway on lithium batteries,” Leverett said. When an attack is coordinated to occur on a specific night, even small numbers of overheated laptops can create an accumulation problem for insurers if the charging laptops are unattended in multiple buildings. Part of Leverett’s presentation was ripped from the headlines, and part came from his prior experience working as a penetration tester for IOActive doing ethical hacking into the systems of oil, gas, electrical and water facilities. “Getting access to this equipment is relatively easy from the point of view of the penetration tester; there are harder targets in the world in terms of computer systems. Causing them to explode or causing damage is a lot harder. But it is possible. It can be done,” he said as he presented a guidebook for creating destruction remotely for seminar attendees. One of the headline risks Leverett described involved a disgruntled employee who disabled the leak detection alarms for three offshore oil platforms. The hacker, Mario Azar, worked as a consultant in what’s called a network operation center. When he lost the position and wasn’t offered a permanent one, he still had access rights to the control systems, allowing him to shut the alarms. “This could have indeed ended up killing all of the people on the rig had they been poisoned, had they had a leak at the same time,” Leverett said. Explaining that NOCs more typically manage up to 50 rigs in a cluster, controlling pipeline monitoring, positions systems and safety alarms, he noted that the RMS cyber physical stress test for oil rigs imagines the operator taking

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Silent Attacks and Cyber War: What Cyber Insurance Experts Worry About


uring the RMS Cyber Risk Seminar, RMS SVP Peter Ulrich asked cyber insurance market participants what keeps them up at night. Here’s what they said. Lori Bailey, global

head of special lines for Zurich Insurance Group: “For me, having

come up through the affirmative cyber market, I think as a company and an industry we have a pretty good handle on the exposures and the aggregation and everything around affirmatively what we say we cover. What keeps me up at night is the silent piece—it’s the proverbial ‘we don’t know what we don’t know.’ “We think with some of these recent cases that we know where, what policies, what coverages may be impacted. But we don’t know what the next one is going to be…It’s just that unknown of what’s next—be it incident, be it coverage, be it the attack vector, you name it. There’s a lot of uncertainty. As a person, and as an

over the systems to inflict damage on multiple rigs.

Where’s the Coverage?

At a separate session of the RMS conference, insurer and broker representatives addressed questions about traditional property insurers that might potentially be on the hook for cyber physical losses. Moderator Peter Ulrich, an RMS senior vice president, wondered whether these insurers could try to put exclusions on their non-cyber policies. “On paper, absolutely,” said Lori Bailey, global head of special lines for Zurich Insurance Group. “If there’s something you

insurer, that is what worries.” Anthony Shapella, risk officer for

liability and financial lines at American International Group: “I’m worried about

war, frankly—war between two very significant nation states. “With this WannaCry attack, the allegation of North Korea potentially launching it, and the fact that Russia was most impacted [and] the fact that Russia is very unhappy. The kind of prospect of a major global conflict on a scale that we haven’t seen at least in my lifetime, that worries me unbelievably, and probably more than any insurance thing that I sit at my desk and worry about.”

Alice Underwood, executive vice president of Willis Re: “New devices that you’re just not thinking about…Nobody was thinking about the baby monitors or refrigerators being recruited to launch a DDoS attack. What’s the next thing we’re we’re not thinking about that can be leveraged?”

don’t want to cover in a policy, you put an exclusion in and make it very clear that you don’t intend to cover that.” But there are challenges in trying to do that “in practice” for older forms out in the market, she continued. “You haven’t historically excluded it, but now [you] go in to exclude it [and] you are essentially implying that you were covering it at some point in time. You’re going to get a lot of pushback from [insureds] who say, ‘Wait a second. You’re taking something out of my policy, or you’re now going to offer me a new product that I have to pay extra for to affirmatively cover this.’” She noted that affirmative cyber

products have always historically had an absolute bodily injury and property damage exclusion. “Because it came out of the professional liability world, it was always very much designed for financial loss and very specific named peril network security and privacy events.” Bailey said the market is in the early stages of cyber emerging in other products besides an affirmative policy. “We are starting to see it [cyber coverage] emerge now in marine policies, property policies, liability policies. There’s still a lot of work to be done [to quantify] how much is actually there, and what exactly. In some cases, it’s a purely defensive mechanism; in others, they’re being a bit more proactive around actually giving affirmative cyber cover, but usually it’s limited to certain perils. “So, there’s a lot of flux really in the market right now. And I think where you’ll start to see the market really diverge is those that stay in that more traditional security/privacy traditional affirmative cyber vs. more of an all-risk type approach, which is where I think ultimately you’ll certain markets to go, over the longer term.” From a customer perspective, Anthony Shapella, risk officer for liability and financial lines at American International Group, said clients are pushing for affirmative coverage in each and every policy. Basing his assessment on conversations he’s had with AIG cyber underwriters, he said clients are demanding this “because they don’t know exactly what the ultimate cause of loss will be and they want assurance that they’re

going to get coverage.” Shapella gave the example of car manufacturer Renault suffering a business interruption loss during the WannaCry event. “This peril [cyber] can hit companies at so many different angles, and they want assurance that no matter [how] they get hit, they’re going to have coverage,” he said, noting that an auto maker that makes self-driving cars will want assurance that if the mechanism they use to make a car drive itself fails and someone is injured, then there’s going to be coverage. The impact of WannaCry and other cyber attacks on IT systems on the affirmative cyber market and RMS’s existing IT risk scenarios in CAMS were the main topics of the panel discussion. (See related article, p. 56) Addressing cyber physical, however, Alice Underwood, an executive vice president of Willis Re, said that “every manufacturing company is an IT company these days because there are very few sophisticated products that don’t have

“Cyber is the first peril

we’ve seen really transcend itself across all these

different lines of business.”

some relationship to the Internet of Things.” “As far as what the [non-cyber] insurers are doing, there’s a spectrum. There are insurers who are not thinking about it. They think because they’re not writing specific cyber insurance policies that they don’t have cyber exposure, which is totally not true, especially if they’re using old forms” without exclusions. “There are [others] putting endorsements on but neglecting to add those new exposures to their aggregation calculations,” she said. Bailey believes a culture shift is taking place in the industry. “Historically, we’ve got property underwriters that underwrite property, casualty underwriters that write casualty and professional liability underwriters writing professional. Cyber is the first peril we’ve seen really transcend itself across all these different lines of business.” “As difficult as it is for a cyber underwriter to look at BOP or property damage perils, it’s been difficult for property underwriters to understand cyber exposures. So, there’s been a lot of cross education…Markets are getting better about that. They’re starting to share, but culturally that’s just not something that historically they’ve done.”

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Emerging Risks

Opinion: Traditional Insurers Must

Embrace Cyber Physical Risk Executive Summary: Cyber affects all lines of insurance, and traditional insurers must accept that it is a fundamental part of their underlying exposure, writes CFC Underwriting Chief Innovation Officer Graeme Newman. The unique skills of cyber underwriters lie in their understanding of non-physical damage, loss of data and privacy breaches. To insure against tangible property damage, brokers should instead turn to property carriers, he advises.


By Graeme Newman he burgeoning cyber insurance market is at a critical point of inflection. After 20 years of product evolution, with most mainstream carriers finally settling on a common core set of coverages, the status quo is being challenged. As our world

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becomes more connected the prospect of cyber attacks resulting in serious physical damage looms larger. But how should the insurance market address these new exposures? The property insurance market was created as a by-product of the Industrial Revolution. Modern manufacturing and mass property ownership created a need for insurance products to protect the value stored within tangible assets such as buildings, plants and machinery—assets that were at increasing risk from physical perils such as fire, theft and flood. The cyber insurance market was created as a byproduct of the Technological Revolution. Modern computing and the explosion of data creation and storage created a need for insurance products to protect the value stored within intangible

The last person a client would want to call in the event of a major explosion at their offshore rig is their cyber insurer. assets such as data, intellectual property and software applications—assets that are increasingly at risk from intangible perils such as malware, hacking and corruption. In essence, these two markets are a direct mirror of each other. And yet neither seems fully prepared to accept the exposure of a cyber attack causing destruction of a business’s physical assets and consequential disruption to its

operations. Like the property insurance market in the 1800s, the cyber insurance market in 2017 has begun to flourish. The increasing recognition of the value of intangible assets and the awareness of their vulnerability has caused the market to mushroom in the last 18 months. Total premium spend has grown by more than 50 percent and several industry experts estimate the market’s size to be more than $2.5 billion globally. And yet this premium base is still only a tiny fraction of the current P/C market and is certainly not enough to provide the kind of capacity that would be required to insure the physical assets of our national critical infrastructure or to protect against widespread physical damage and destruction. Nor do cyber insurers possess the appropriate claims infrastructure to support such events or the underwriting experience required to understand the profile of loss presented by a physical damage event. That leaves it to traditional insurance markets. However, they have been worryingly slow to assess and understand the impact of the Technological Revolution and ultimately to provide affirmative cover for the changes it has created. This is despite the fact that the reality of the risk is still far lower than all the other perils they insure combined. In most cases, the threat of physical damage or bodily injury from a hacking attack is not even a remote possibility for 99.9 percent of their portfolio. Instead they choose to hide behind blanket industry standard

Aggregation risk is misunderstood…Our computing networks have never been more diverse. “electronic attack” exclusions such as CL380 and its half-baked derivatives. In today’s world, this is both unacceptable and impractical. Businesses should not be made to purchase yet another form of insurance, particularly when existing products and markets are well equipped to handle the exposures. Fears among property insurers have been driven by the potential for aggregation that cannot be modeled using their standard tools. But this risk is misunderstood. Yes, modern networks and connected devices mean our systems can all talk to each other. But at the same time, varied operating systems, different application baselines and the multitude of configurations mean our computing networks have never been more diverse. Attacks designed to cause physical damage are complex and expensive to pull off and invariably must be highly targeted in order to be effective. The fact is, systemic risk is a feature of most insurance lines, and current modeling techniques still leave a lot to be desired when dealing with complex multidimensional risks such as terrorism, flood or economic downturn. Ultimately this explains the presence of government backstops such as TRIA, which serve to encourage insurers to accept risks that they cannot perfectly model. In December last year, the U.S. Department of the Treasury clarified that standalone cyber risk also falls under the act. To date, the cyber market has proved remarkably resilient in the face of several major systemic events, including data breaches at major cloud service providers, global malware outbreaks, state-sponsored espionage and centralized attacks against core Internet

infrastructure. In addition, capacity is flooding into the market, with over 60 different insurers offering standalone products. Limits of over $500 million can be achieved by building layered programs, meeting the needs of more than 99 percent of the world’s companies. Claims experience and competition are working hand in hand to guide the development of products to provide an effective and essential source of risk transfer for companies of all sizes across all industries. However, for the cyber market to survive, it is essential that it remains focused on the protection of intangible assets instead of tangible ones. The unique skill and knowledge of cyber underwriters lies in their understanding of how to contain and manage non-physical damage, loss of data and privacy breaches. The last person a client would want to call in the event of a major explosion at their Graeme Newman is Chief offshore rig is their Innovation Officer of CFC cyber insurer. Underwriting Limited, a In order to insure Lloyd’s managing general against tangible agent based in London. He property damage, may be reached at brokers should instead gnewman@ turn to their property carriers. To insure against acts of terrorism, they should turn to their terrorism markets. And to insure against acts of war, they should turn to the war and political violence markets. As an industry we must stop referring to these risks as “cyber” simply because they involve the use of technology at some point. Cyber is not a peril; it is part of our infrastructure like power, water and telecommunications. It affects all lines of insurance, and traditional insurers must accept that it is a fundamental part of their underlying exposure. It should be understood and embraced, not simply excluded.

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Emerging Risks

The Great Cyber Debate:

Product or

Peril? Executive Summary: Questions about whether cyber is a product or a peril are increasing. Here, JLT Specialty USA’s Shannon Groeber outlines the limitations and advantages of both views, suggesting insureds will ultimately benefit from broader appetites of both the property and cyber underwriters for the risk.


By Shannon Groeber sk a cyber liability expert to describe the market and you’re likely to hear words like “dynamic, “innovative”—even “radical.” And they wouldn’t be wrong. The cyber market has grown as a result of the agility and creativity of all participants in responding to client demand. But the standalone cyber market isn’t alone in that agility. Other “traditional” products have been expanding appetite

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and terms to recognize the global shift toward connectivity and vulnerability to debilitating cyber attacks. Reinsurance markets are the silent—though becoming more vocal—backbone of the industry. The support of the reinsurance market has been critical in facilitating innovation, while also forcing a level of analysis that hadn’t been possible in the early days of cyber insurance. All of this is to the buyer's benefit until the patchwork of coverage in various policies becomes disadvantageous to the entire ecosystem. In recent years, cyber crime and speculative financial loss coverage resulting from theft of funds and trading losses has been an area of opportunity but also debate between cyber and crime insurers. Coverage for terrorist acts using cyber means is also a hotly debated question. Although cyber policies haven’t

had to respond to a certified terrorist attack, broad language under the guise of a terrorism exclusion has cast a negative shadow on the likelihood that they would respond. Cyber insurers have begun to offer coverage for the physical consequences of cyber incidents while at the same time property carriers are also expanding appetite and resources in response to cyber events that threaten physical assets. This evolution has forced the question: Is cyber a peril or a product? And who should be responding? The proliferation of complex and concerning cyber attacks—beyond the ubiquitous data breach that led to more buyers, increased limits sought and premiums streaming into the market in 2014—have forced insurers of all shapes and sizes to evaluate their product suites,

manufacturers have not been significant contributors to the cyber market yet. As devices become more connected—whether for the use of an end consumer or to fuel industry or infrastructure— companies that are facilitating the interconnectivity have to analyze a Source: Figures compiled new threat that previous by JLT Specialty and JLT generations of devices did not Re for the April carry. Achieving contract certainty Viewpoints report, through an expansion of the peril “Unlocking the potential versus introduction of an entirely of the cyber market.” new product offers efficiencies. Hurdles in drawing clear boundaries between property and earthquake, and one that they weren’t cyber products are the situated to offer. More recently, however, unique and complex fact carriers have emerged with offerings that patterns of cyber events, capitalize on their years of property loss and the potential that data and collaboration with adjusters and one attack could result external resources in an effort to meet in a number of different client demand. loss impacts, supporting The question remains, however, whether the argument that cyber Shannon Groeber is Senior they actually were right all those years ago. is a product and not a Vice President of the Cyber/ When a company suffers a significant peril. Analysis of a E&O Practice at JLT variety of complex cyber Specialty USA. Reach her at breach impacting its ability to conduct attacks that have Shannon.Groeber@JLTUS. business, the investigation is technical and threatened or com. far-reaching. It requires a completely compromised property different suite of service providers to have also introduced assess and diagnose and imposes a loss insurable events under a typical cyber impact that to date has largely been highly policy: extortion or ransomware demands confidential. In short, there should be a question of what resources complement or business interruption complaints on the the cyber insurance coverage provided in a part of customers or clients. property policy and whether they are the While these hurdles are easy to right resources. overcome, it isn’t achieved without a good Cyber carriers on the other hand have deal of thought and effort. What is clear is access to loss data—at least in theory. The that cyber risks and concerns are not only reality is that property damage and prevalent now but will continue to business interruption costs have been escalate. Companies will not be able to borne by the company without a proper sustain the debilitating impact of these home to finance the risk for nearly all of cyber risks without insurance and the life cycle of the standalone cyber reinsurance support. But collaboration and product. As carriers on both sides begin to innovation made the cyber market what it collect and analyze more data, we expect is today, and as long as all participants in to see more shifts in appetite as a result. this market maintain those qualities, The Internet of Things also acts as a insureds can continue to benefit from the unique catalyst, forcing carriers to take an broadening appetite of both the property affirmative position. As an example, and cyber underwriters.

Some growth estimates for the cyber insurance market would put overall premiums in the $8-$10 billion range by 2020, rising to $20 billion near 2025.

whether they are labeled cyber or not. Decling investment income for the entire market has also led carriers to turn to cyber products as an opportunity for growth. Still, the cyber market pales in comparison its property and casualty brethren. While the cyber market is estimated at $600-$750 million, with growth expectations the property market can offer upward of $500 billion in total limits (for all the perils covered under property policies). Growth is incumbent on building a sustainable market, not only with support of data and tools but also of the reinsurance market. As resulting losses begin to merge and even overlap, whether caused by flood or cyber attack, cyber markets will struggle to control aggregation to the same degree that property carriers can with their massive comparative size. It is becoming clearer, however, that non-cyber underwriters have been overexposing themselves without asking appropriate questions or collecting a commensurate premium. On the flip side, cyber carriers are requiring far more underwriting data and premium dollars to accept these “emerging” exposures—both routes that can threaten the sustainability of insurance coverage for cyber perils. Property markets historically pushed the “cyber product” argument—that cyber attacks require a very different response than that of a physical peril such as flood or

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Emerging Risks


HOW ACCURATE ARE THEY? Executive Summary: Cybersecurity rating firms are helping insurance buyers and sellers gauge relative risks between companies. But while these firms analyze large swaths of cybersecurity data to score companies, their technology and processes are still proprietary, leading some users and analysts to proceed with caution.


By Russ Banham n just a few years, a growing crop of cybersecurity ratings firms has sprouted to assess the vulnerability of businesses to withstand cyber attacks, scoring them on a scale from good to bad. Key markets for the firms are insurance carriers and brokers, each using the ratings for different reasons. The insurance sector has long been eager to get a more refined sense of cyber risks on an industry-by-industry basis to more closely underwrite the exposure. The challenge has been paucity of data, given that cyber attacks are a relatively new phenomenon, with the types of incidents evolving faster than the ability to predict the next one. This makes it hard to get a clear and confident sense of the potential financial costs to risk insurer capital. Consequently, insurers have been wary— some would say too wary—in underwriting cyber risk policies with broad coverage terms and conditions. The complexity of the threat is so large and unwieldy that insurers struggle in modeling and quantifying potential loss frequency and severity. That’s where the cyber risk rating firms enter the picture. InsurTech startups like Cyence, BitSight,

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SecurityScorecard, Cybernance, RiskRecon and others have formed to improve insurers’ understanding, identification and measurement of cyber risks. In scoring their risk assessments, the firms provide a simple rating using numbers, letters, or red and green traffic light symbols. The ratings firms are not to be confused with cybersecurity consultancies that do a deep dive into a company’s network and systems to posit shortcomings. Rather, the firms provide a non-invasive way to assess a company’s exposures, giving a sense of how it might manifest itself to the hacking community, a group that includes nationstates, terror organizations, hactivists and old-time hackers seeking bragging rights. The firms’ utility is wide-ranging. Carriers use the ratings in underwriting deliberations and to determine aggregate cyber risk exposures across the books of business. Some insurers also offer the ratings firms’ benchmarking capabilities to their insureds as a service, helping companies compare their cyber risk preparedness and technical defenses to those of peer competitors. Brokers, on the other hand, leverage the ratings to bolster the argument why a client needs to buy cyber insurance. The ratings also are useful in advising cybersecurity improvements to earn superior insurance treatment. This is all well and good, assuming the cybersecurity ratings are accurate. As the recent WannaCry and Petya ransomware attacks demonstrated, hackers are in the business of confounding the world’s best cybersecurity professionals. Assessing a company’s risk exposure with a simple letter grade may serve a purpose, but only

if the underlying methodology is robust. How foolproof are the cyber ratings firms? “They’re able to see a lot of information out there to assess relative degrees of vulnerability, but I’m not sure they’re at a stage where they can make accurate predictions,” said Tracy DolinBenguigui, director and insurance sector lead at S&P Global Ratings, which rates insurer credit risk.

She adds, “Insurers shouldn’t be overly reliant on the scores as the sole basis for underwriting decisions. They’re just another tool in the toolbox.”

Different Strokes

The cyber risk ratings firms are not cookie-cutter service providers. According to their websites, SecurityScorecard and BitSight are focused on assessing the technical defenses of a company, whereas Cyence is more engaged in quantifying the potential financial outcome of a cyber incident. Some overlap is to be expected. “We don’t really see ourselves competing with BitSight and SecurityScorecard,” said George Ng, Ph.D. (Economics/UC Irvine), Cyence’s Chief Technology Officer and co-founder. “We’re an economic modeling platform. Customers like insurers can do an individual company analysis, looking at various metrics and assessment indicators

focused on the organization’s cyber risk in financial terms—its ultimate economic exposure.” Ng formerly worked as a research scientist at DARPA. BitSight, the first cybersecurity ratings startup, touts multiple uses of its scores by insurers. “Our product is being used by the largest insurers to develop much-needed cyber risk policies,” said Samit Shah, BitSight insurance solutions manager. “We also help underwriters write a policy at certain limits, terms and conditions. On the reinsurance side, the ratings help them negotiate better reinsurance terms, unlocking more capacity at better pricing for the market, which is a good thing for insurers and their customers.” Shah makes a good point. All companies are eager to transfer their cyber risks. The challenge has been the wariness of insurers and reinsurers to absorb their exposures. If the insurance industry can get a better

“You know these stores that sell mattresses based on a score that tells you just how hard or soft you like the mattress? Then you buy it, take it home and still sleep uncomfortably. Well, that’s how you sell a lot of mattresses.” Max Solonski, Blackline sense of cyber risks, the market potential is staggering. A report by Allianz projects double-digit growth figures on a year-byyear basis reaching more than $20 billion by 2025. (See p. 66 for more projections.) Cyber ratings firms are in business to do just that. Still, some insurers are carefully validating. “We’re still in the exploratory phases and continue to refine our use of cyber ratings solutions to address underwriting, enterprise risk management and data analytics,” said Russ Cohen, Chubb vice president of cyber services. Nevertheless, the giant property/casualty insurer is partnering with the ratings firms to provide a value-added cybersecurity benchmarking service to customers that buy its cyber insurance policies. “Policyholders can view their security scores and their comparative relationship to other companies in their sector for a period of 12 months,” said Cohen. This service also allows cyber policyholders to monitor third-party vendors, which can be a pathway for hackers to invade a company’s network and systems. (An HVAC vendor was the entry point for the massive Target data breach in 2014.) Scores on three vendors are delivered for a 12-month period. “The outside-in perspective of these solutions

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Emerging Risks

“An analogy is you raise a son continued from page 69

and send him out into the

can be a virtual canary in the coalmine, giving policyholders insight into what might be happening on their internal network without them even knowing about it,” Cohen said.

world, wishing you could see

Interest and Intrigue

context, that’s what these

Chubb did not disclose the name of the cybersecurity rating firm with which it has partnered, considering this confidential information. Several other insurers declined the opportunity to be interviewed for this article. Two insurance brokers using the firms’ scores in different ways agreed to an interview, with one, Lockton, preferring not to divulge the name of the provider for proprietary reasons. “We have relationships with a couple of the ratings firms for their specialized services, which are valuable to our clients,” said Michael Born, vice president and account executive in broker Lockton’s cyber technology practice. Asked for an explanation of this value, Born cited the broker’s enhanced ability to help clients understand their cyber risk exposure. “Companies want to know the likelihood of a cyber attack and the

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everywhere he’s going, which you can’t. In a cyber risk firms do.” Robert Parisi, Marsh financial impact, but the data to provide this information is hard to come by,” he said. “Depending on how deep the assessment goes, the ratings firms can tell us how up-to-date a client’s firewalls are to withstand an attack. This gives us an opportunity to reduce their risk.” By improving a client’s risk profile, the broker is in a better position to place the business with insurers at optimal terms, conditions and pricing. “Underwriters get a

better sense of how attractive the client is from a cyber insurance standpoint,” said Born. “When we go out into the markets, we can assure the best deal.” Added up, the ratings firms help brokers sell cyber insurance to clients. As Born put it, “We use the scores modeling the client’s exposure from a likelihood and financial impact standpoint to say to the company, ‘Here is the potential cost if you don’t insure, and here is the cost if you do insure.’ They now see the benefits of buying the cyber insurance.” Broker Marsh has had a relationship with Cyence going back two years to help its clients get a better sense of their cyber attack vulnerability. “The firm mirrors how the outside world sees the company, in terms of where its data is traveling to and from and who it does business with,” said Robert Parisi, Marsh managing director and cyber practice leader. This outside world is the hacking community. “An analogy is you raise a son and send him out into the world, wishing you could see everywhere he’s going, which you can’t,” said Parisi. “In a cyber risk context, that’s what these firms do.” Marsh relies on Cyence in several ways. For example, the broker receives the same volume of information on a client’s cyber exposures as the insurance markets receive

when viewing the company’s risk profile. “When you apply for a mortgage, it’s good to know what your credit score is before you go to the bank,” Parisi said. Cyence also can run a report on a client’s cybersecurity practices relative to its peers, whose names are anonymized in the document. For example, a financial institution with $1 billion in annual revenue would be compared to other financial institutions of similar size. The report evaluates the motivation for hackers to attack the company and its resilience in financially surviving the incident. Asked how Cyence comes up with the assessment, Parisi said he was not at liberty to provide it. “That’s very much an internal discussion,” he said. “You’d need to ask the providers.” We did. Unfortunately, the answers were not all that specific. While the ratings firms collect and analyze large swaths of cybersecurity data to score companies, the particular technology and processes to do this work is proprietary. This caution is understandable, given a need to keep this information from the hacking community. Nevertheless, the lack of transparency in how the firms devise their ratings is troublesome from a trust perspective. Another concern is whether or not the ratings capture the full cost of a cyber incident. “One of the limitations of these models is whether or not they’re really capturing the contingent business

“Insurers shouldn’t be overly reliant on the scores as the sole basis for underwriting decisions. They’re just another tool in the toolbox.” Tracey Dolin-Benguigui S&P Global Ratings

“Depending on how deep the assessment goes, the ratings firms can tell us how up-todate a client’s firewalls are to withstand an attack. This gives us an opportunity to reduce their risk.” Michael Born, Lockton interruption of a ‘cybergeddon’ attack, since this is where the really big losses for companies reside,” Dolin-Benguigui said. “Contingent business interruption is not an insured loss in many cyber risk policies. Consequently, the insured portion of a ‘cybergeddon’ attack would add up to mere basis points. There might be a need to broaden the scope of the tool to capture the economic loss.” To get a better sense of the ratings firms’ value, we reached out to the chief security officer of a software company outside the insurance industry. Max Solonski is entrusted with overseeing the data security of the thousands of global and midsize customers of BlackLine, a provider of cloud-based financial and accounting software. He was familiar with one of the cyber ratings firms, having researched it on behalf of a customer, and cognizant of the others. “Here’s what I think— cybersecurity risk management must address so many fastchanging risks, all of them important from an insurer underwriting perspective,” Solonski said. “The cyber ratings firms use complex

mathematics in their scoring methodologies to offer a perspective that might have some correlation with actual risk, or might not.” As an analogy, Solonski pointed to the metrics produced by catastrophe modeling firms: “These firms provide useful information to insurance companies, noting that a particular region has a ‘onein-100-year’ chance of experiencing a major earthquake. However, this doesn’t mean that once an earthquake hits the area another ‘one-in-100-year’ event won’t happen the following year.” In other words, just because an insured is given a great cybersecurity score today doesn’t mean the company won’t be hit by another major incident tomorrow, particularly if it is a new type of cyber attack. Solonski also questions if a rating firm partnered with a broker or carrier may score a company higher on the risk scale to encourage a cyber insurance buy. “You know these stores that sell mattresses based on a score that tells you just how hard or soft you like the mattress? Then you buy it and take it home and still sleep uncomfortably. Well, that’s how you sell a lot of mattresses,” he said. Still, he sees value in the scores as another mechanism to improve a firm's cybersecurity. He advised businesses that receive a score to have its veracity checked by a cyber risk consultancy. Down the line, Lockton's Cohen believes the cyber ratings firms will prove their merit. “The historic challenge in underwriting cyber has been the very small pool of exposure and claims data to draw dependable conclusions,” he said. “These new solutions,...on average, have about a good three years’ worth of decent data to work with. In time, there will be much more information out there that they can add to their databases, making scores vastly more reliable in gauging a company’s cyber risks.”

Russ Banham is a veteran financial and technology journalist and best-selling author who writes frequently about insurance and risk management.

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Emerging Risks

Executive Summary: AIR Worldwide’s Dr. Claire Pontbriand describes developing science behind induced earthquakes and hydraulic fracturing. She explains that reinjection of wastewater fluids into disposal wells is of greater concern than the initial fracking activity. Fluid pressure diffusing from the wastewater injection activities can increase pore pressure along existing nearby faults, bringing them close to rupture.


By Claire Pontbriand n recent years, earthquake rates in regions of the historically seismically quiet central and eastern U.S. have risen at a remarkable pace. According to the latest research and scientific consensus, the culprit stems from impacts of wastewater disposal or enhanced oil recovery processes in deep injection wells—common procedures in oil and gas production. In September 2016, a magnitude 5.8 earthquake near Pawnee represented the largest recorded earthquake in Oklahoma. The M5.7 2011 Prague, Okla., earthquake resulted in over $10 million of insured losses. Other potentially induced earthquakes have

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also caused damage. There are many questions surrounding these events in assessing their hazard and risk. What is the maximum possible magnitude of earthquake? What risk does future seismicity—the occurrence and distribution of earthquakes—pose to exposure in the central and eastern U.S.? Most induced temblors are small, but they have been occurring in greater numbers and larger events have been recorded. In addition, considering what we know about seismotectonics—the relationship between historical earthquakes, faults and rock deformations driven by the active processes of plate tectonics—in the region, we cannot rule out the prospect of M7.0 or larger earthquakes in the

central and eastern U.S.

Increased Seismicity

Fracking—hydraulic fracturing—is a technique used to increase the rate at which oil or natural gas can be recovered from deep in the earth. Slurry is pumped into wells at high pressure to fracture the rock and stimulate production. Waste fluids from fracking and other industrial activities are sometimes pumped deep underground into porous rock at disposal wells. Although fracking does stimulate very small earthquakes, it has not been linked to damaging larger magnitude earthquakes in the U.S. at this time. It is the injection of wastewater into deep disposal wells that is the greater cause for concern. Thus, although this hazard is often referred to as fracking risk, that is a common misnomer.

The cumulative number of potentially induced earthquakes of M2.7 or larger in the induced seismicity source zones (represented by green polygons) identified in the U.S. Geological Survey 2016 One-Year Model, 1962–2015. (Figure: AIR; Earthquake Catalog Source: USGS) Over the past eight years, areas in the central U.S. where wastewater injection occurs—regions with historically low seismicity—have seen a remarkable increase in the frequency of earthquakes. In northern Oklahoma and southern Kansas, as well as regions in Colorado, New Mexico, Arkansas and Texas (see zones in figure above), the average instance of earthquakes of M2.7 and greater has risen from less than four per year from 1962– 2008 to 210 per year from 2009–2013, a period during which these methods became widely used. Increases in detection capabilities and continued seismicity result in over 3,250 per year from 2013-2015. There have been several examples of relatively larger induced earthquakes that have caused property damage, including the 2011 sequence of M5.0–M5.7 quakes in Prague, Okla.; the 2011 M5.3 earthquake in Trinidad, Colo.; the 2011 M4.7 earthquake in Guy-Greenbrier, Ark.; the 2012 M4.8 earthquake in Timpson, Texas; and the M5.8 quake in Pawnee, Okla., in 2016.

Establishing the Connection

a major role in affecting the pressures acting on faults, and there is some correlation between high injection rate wells and seismicity. The argument is that an increase in pore pressure (the pressure of groundwater within the rock) may alter the state of friction and reduce the shear strength (the strength of the fault surfaces against failure through earthquake rupture) or the state of stress on preexisting stressed faults, bringing them close to failure. The cascading sequence of three 2011 earthquakes (M5.0, M5.7 and M5.0) near the Wilzetta oil field in Oklahoma is probably the best-known event that fit this description, bringing attention to the previously unknown Wilzetta Fault Zone as a hazard in Oklahoma. In some cases, seismicity has been correlated with injection wells at distances of several kilometers, suggesting that influences of changing pore pressures from wastewater injection can be farreaching in permeable ground. In a dramatic reversal of its long-held position that they are due to natural causes, the Oklahoma Geological Survey (OGS) announced in 2015 that it is “very likely that the majority of recent earthquakes, particularly those in central and north-central Oklahoma, are triggered by the injection of produced water in disposal wells.” They added that “an

Earthquakes are ground shaking caused by a sudden movement of rock in the earth’s crust. They occur when accumulated stress (the force acting on the fault plane) overcomes the friction holding continued on next page one block of rock against another along the fault and one block slips relative to the other, rapidly releasing the pent-up energy. Our understanding of the connection between wastewater injection and increased Diagram showing oil production and oil extraction from the production seismicity is still formation (left side) and reinjection of resulting wastewater fluid into developing. It is deep injection wells below the production formation (right side). Fluid now generally pressure diffusing from the deep injection well can increase pore accepted in pressure along existing nearby faults, which can trigger induced scientific circles seismicity. (Source: USGS that fluids can play induced/myths.php)

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Emerging Risks continued from page 73 increase in the frequency of earthquakes can be observed to follow the oil and gas plays [activities] characterized by large amounts of produced water.”

What Is the Frequency of Induced Earthquakes?

Without knowing of the existence and dynamics of stress/strain conditions (forces and deformations at work on the fault plane) of hidden subsurface faults and the nature and scale of pore pressure changes the question is difficult to answer. For one thing, stress changes at depth due to fluid injection may be transient, depending upon the state of fluid injection at the wells and the physical properties of the subsurface. The sequence of the 2011 Prague, Okla., earthquakes suggests that the state of stress on certain segments of that complex fault system has reached a critical state due to the mixed effects of induced high pressure fluid injection and stress changes from induced earthquakes. A study of these temblors published in 2014 by Sumy and others indicates that Coulomb stress changes (alterations to surrounding material caused by local deformation events) from the first induced M5.0 event are consistent with triggering the larger M5.7 event less than a day later. Accordingly, the study concluded that the total volume of fluid injection does not limit the maximum magnitude or numbers of potential future earthquakes as once thought. The hazard posed by larger induced earthquakes is different from that of natural ones, in part because induced seismicity acts on much shorter time scales. Although high-injection rate wells (those pumping more than 300,000 barrels of wastewater a month into the ground) are more likely to be associated with earthquakes than lowerrate wells (Weingarten et al., “High-rate injection is associated with the increase in

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U.S. mid-continent seismicity,” published in Science in 2015), in general there is no simple predictor between influences caused by human activity (e.g., injection rate, cumulative injected volume, wellhead pressure, injection depth, etc.) and timing or magnitude of induced earthquakes. Clear correlations have been noted only in a few cases.

What Is the Largest Possible Magnitude We Can Expect From Induced Events?

Some seismologists argue that the size of the initial earthquake depends upon the area impacted by the change in pore pressure and the scale of pore pressure change. However, there are others who argue that changing the state of stress on pre-existing faults in the vicinity of injection wells can trigger earthquakes beyond the fluid reach and, under favorable conditions, can lead to larger earthquakes than observed so far. In such situations, if the size of the preexisting fault can accommodate larger magnitude earthquakes, an induced earthquake could change the state of Coulomb failure stress on nearby fault segments and trigger larger magnitude earthquakes. This seems to be what happened in Oklahoma in 2011.

Can They Be Prevented?

Researchers, the federal government, energy companies and regulatory agencies are working to reduce the frequency and strength of induced earthquakes. Some states are regulating or monitoring the wastewater injection process to control the rate of induced seismicity. In February and March 2016, for example, Oklahoma Corporation Commission’s Oil and Gas Conservation Division (OGCD) ordered injection wells in a huge swath of central and northern Oklahoma—where the greatest concentration of increased seismicity has been observed—to reduce injection volumes by 40 percent. In response to the M5.8 Sept. 3, 2016 quake, disposal wells were shut in and ultimately the OGCD designated a 1,116-square-mile area of

interest around the epicenter of the quake and extended restrictions to 67 wells. Researchers at Stanford University mapping the natural geologic stresses across Oklahoma and Texas have learned that not all faults may slip in response to moderate pressure increases. The hope is that the stress maps they are developing can be matched with fault maps to indicate areas where wastewater injection will be least likely to trigger earthquakes.

The Risk to Property

The central U.S. areas we have been discussing are historically perceived as low seismicity areas. As a result they are at risk. Many parts of Texas and Kansas require no seismic resistance in building design, and most of the other states have only minimal Dr. Claire Pontbriand, requirements. For Ph.D., is a Senior Scientist example, a large at catastrophe modeling proportion of homes firm AIR Worldwide. in the southern states (20-36 percent) consist of masonry veneer, which are not designed to withstand seismic shaking; they are weakly connected to wood studs and vulnerable when subjected to earthquakes. Furthermore, most of the areas experiencing larger magnitude induced earthquakes have very low earthquake insurance penetration, suggesting that awareness of earthquake risk is low. Nevertheless, damage has been experienced and claims have been made. To help assess the risk, AIR has incorporated an Induced Seismicity Model for the Central and Eastern U.S. in the 2017 update of the AIR Earthquake Model for the U.S. Whatever their cause, induced earthquakes pose risk to life and property. Time and improved seismological data will tell if the measures being taken to reduce the number of induced earthquakes will be effective.

Reinsurance/Emerging Risks

Reinsurers Concerned

About Cyber Risks Despite Growth Opportunities Executive Summary: Experts from Aon Benfield and Willis Re sound off on how reinsurers are responding to the changing cyber market.


By Mark Hollmer yber risks continue to morph and grow rapidly around the world, spurring ever-increasing demand for insurance. Some broker experts who follow the sector see reinsurers eager to grow to help insurers meet those market demands. Others see them holding back and not growing at the same rate as their insurer counterparts based on worries over what the market has become. These changes are in play, they say, both for reinsurers who cover those cyber insurers writing cyber specifically, and reinsurers covering property writers who may have cyber exposures under their policies.

Reinsurers Who Cover Cyber Insurers

“Reinsurers are relatively more concerned about accumulation risk than they were,” said Andrew Newman, Willis Re’s president and global head of Casualty. He said that while the market has grown, reinsurers’ capacity to take risk has not done so at the same rate as the insurance market, where coverage has expanded in areas including business interruption, contingent business interruption and other at least theoretically systemically exposed business. According to Newman, as the dollar value of the market has grown for cyber to the $3 billion to $4 billion range, reinsurers have become much more concerned about accumulation risk, with more constraint around capacity and the ability of the insurance market to feed capacity than when cyber was a $1 billion marketplace. When the cyber market was smaller,

Most property policies cover cyber attacks if they result in a direct physical loss by a covered peril and reinsurance treaties follow subject policies, Henriques said. Newman explained it was mostly a data breach market, mostly focused on offering coverage for loss of data rather than loss of control—the direction the market is heading now. He said that reinsurers have become more focused on accumulation risk than

continued on next page

Reinsurance/Emerging Risks continued from page 75 they were, based on changes that have resulted from the original cyber policy, which covered narrower areas such as data breach, where claims tended to be more ad hoc and unconnected to other policies, and where loss was the cost for credit monitoring. Loss also addressed costs of notification related to loss of data, he said. “But in the course of the last two or three years, the insurance policy reinsurers are protecting [has] expanded,” he said. Newman argues that insurance policies are seen now as much more systemic, with exposure to additional areas such as business interruption relating to data breach and ransomware/malware coverage. He said cyber risk today is viewed as interconnected in a greater way, though few models at present are sufficient to address and resolve the higher focus on catastrophe accumulation risk that is increasing within the modern cyber risk management framework. Bill Henriques, co-head of Aon Benfield’s Cyber Practice Group, said he sees reinsurers’ appetites for cyber as a product growing steadily and confidently. “We see more dedicated staff at reinsurers developing expertise in cyber

“We see more dedicated staff at reinsurers developing expertise in cyber reinsurance.” Bill Henriques, Aon Benfield

reinsurance,” Henriques said. “Some of this talent tends to be housed within professional liability teams and some have dedicated cyber business units.” Reinsurers see the evolving market as a series of growth opportunities, Henriques

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said. Standalone cyber treaties offer opportunities to grow but also help better monitor results through a single product line. At the same time, he said, reinsurers are willing to underwrite a carrier’s cyber business within multiline treaties, which are typically comingled with professional lines. Reinsurers are also looking to monitor their aggregation from certain large risks, he noted, “as they participate on multiple treaties that have exposure to the same insured risk through a tower of insurance.” Additionally, he said, reinsurers seek to track their exposures to systemic risk events if they happen across a cyber portfolio, such as when a large ransomware attack hits a number of different insurers among the same client group. Reinsurers do worry about systemic risk, and Henriques said some seek loss ratios caps or event caps in treaties, though some will support uncapped structures depending on the industry concentration and the types of insureds in a given portfolio.

Reinsurers Who Cover Property Insurers With Cyber Exposures

Newman said that reinsurers’ appetite for coverage in this area is similar, in that the fear of risk accumulation is hampering greater growth. This applies to the property insurance market in general, he said, which is facing pressure to change its position of generally not looking to provide cover for data as tangible property. Newman said that some predict that a cyber policy will ultimately mutate into a combined property policy that covers business interruptions and supply chain failure stemming from data breach or systems failure, covering loss of control rather than loss of data. He said that insurance clients increasingly need this kind of coverage in an era where data can be the most valuable asset and data failure can pose a significant threat to their operations. But accumulation risk is alarming for insurers and reinsurers, he

“Reinsurers are relatively more concerned about accumulation risk than they were.” Andrew Newman, Willis Re noted, due to challenges in precisely measuring accumulation risk. The lack of precision, again, is due to the lack of historical data and evolving cyber threats, specifically in the context of modeling the more severe cyber risk scenarios. Newman added that problems apply to both active and passive cyber threats, but noted that reinsurers will become more confident if they can get a handle on their loss accumulation in a particular risk event. If they can’t, then reinsurers will manage their accumulation worries by using loss ratio caps or occurrence caps in the same way as they seek to manage extreme property catastrophe threats or other systemic threats. Henriques, meanwhile, said that covering cyber exposures within property reinsurance treaties is an emerging issue still being dealt with. “At the insurance policy level, cyber coverage under a property policy varies widely,” Henriques said. “Most property [insurance] policies cover cyber attacks if they result in a direct physical loss by a covered peril. Reinsurance treaties, he said, “follow subject policies for cover as a result of direct physical loss to property occasioned by a cyber attack.” Henriques said there aren’t very many property treaties yet negotiated to specifically include cyber coverage for nonphysical damage cyber loss. “This is an emerging issue, and we expect, as cyber coverage is expanded under property policies, that the reinsurance market will need to adapt further,” he said.

Emerging Risks/Future Trends 3D AND 4D PRINTING:

Executive Summary: If an end user modifies a design, who has the design exposure, and how is any resulting liability apportioned? These are just some of the liability questions that will arise as 3D and 4D printing methods transform manufacturing, construction, medicine and other industries, a Swiss Re underwriter said at a recent industry conference.


By Joseph S. Harrington or insurers wondering whether to cover risks from 3D printing, you probably already are, according to Bob Weireter, senior underwriter of casualty treaty business for Swiss Re. “3D printing has moved beyond being a promising technology to being a major technology,” he said at the Casualty Actuarial Society's 2017 Ratemaking and Product Management Workshop in March. He reported that more than 12,000 3D printing units valued at $5,000 or more have been sold in the U.S. While most people have only seen 3D printers produce plastic toys and trinkets, they have evolved to produce complex products from ceramics, metals and other substances— including living, organic tissue for human medical implants. Among the recent displays of 3D printing capabilities are cars manufactured principally of printed parts by California-based Local Motors and the construction in 17 days of a multistory office in Dubai from printed components. As Weireter explained it, 3D printing is an “additive process,” wherein layers of material are laid down to create different objects. This contrasts with traditional manufacturing that creates objects by “subtracting” them from larger amounts of material through cutting or molding. That

Transforming Our World and the Trail of Liability

means less materials and less waste for 3D. Other impacts include shorter product development cycles, more customization of end products and reduced need—if not elimination—of complex supply chains. Still, there are challenges to overcome. To achieve economies of scale in development, Weireter said, increased speed and the ability to produce items with multiple components are needed. Nonetheless, he said, the 3D industry has advanced to the introduction of 4D printing, with the fourth dimension of production being time—i.e., a component’s ability to change over time. Weireter explained that 4D printing can create objects constituted at the molecular or “nano” level to adapt to changes in conditions. As examples, he stated that a 4D pipe can be designed and created to expand or contract in response to changes in water pressure. Similarly, “printed” bricks can be designed to shift building stress under different conditions. 4D printing can even produce medical implants that change shape and position as a person’s body changes over time. While exhilarating to contemplate, 3D printing raises a host of product liability concerns. For example, Weireter said, now that pharmacies can “print” compounds they need to develop certain drugs, do they become pharmaceutical risks? What if 3D

printing applications allow physicians to produce medications in their offices, or individuals in their homes? These are examples of potentially severe exposures requiring careful underwriting and Joseph S. Harrington, rating consideration, CPCU, ARP, is a ChicagoWeireter said. Even a area business writer and hobbyist printing simple communications specialist. toys can create liability if From 1994 to 2016, he parts break and are served as director of swallowed by a child. corporate communications He explained that 3D for the American printing blends and Association of Insurance disperses the three Services (AAIS). principal functions of manufacturing and the resulting liability: design, manufacturing and warnings. If an end user modifies a design, who has the design exposure, and how is any resulting liability apportioned? If the end product has a defect, how do you pinpoint the source of the error? “Who is who in this chain of events?” Weireter asked. “In 3D printing, a lot of people take on aspects of design and manufacturing.” In a related sense, “traceability,” the ability to identify which process in which facility caused a product defect, becomes complicated and difficult with 3D printing. “It creates a gray area between CGL and professional liability.”

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Future Trends: Machine Learning

Unlearn, Relearn and Deep Learn or Be History:

Carrier Implications of Machine Learning Executive Summary: Engineers and data scientists with no experience in insurance can transform the industry simply by getting hold of the data and adopting cloud-first strategies, writes Lakshan DeSilva, CTO of Intellect SEEC. Here, he explains how the evolution of machine learning from not working to neural networking has gotten us to this point.


By Lakshan DeSilva omething weird happened recently: My mum asked me if I had heard of this thing called machine learning (ML). Other than thinking she is hanging out with the wrong crowd, it got me thinking how mainstream ML has become. However, this “new oil” hasn’t always been so hot, with some false starts involving Turing and visions set at Dartmouth in 1956. The first false start began when computers sought to translate English to Russian using artificial intelligence (AI) techniques, an effort that ultimately failed due to the intricacies of language. Minor progress was made in the 1970s by constraining the use case (“Micro-

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Worlds”), but when the capabilities were not able to be applied outside of the lab setting, this second attempt was eventually deemed a failure. A new approach in the 1980s—where Expert Systems attempted to mimic the work of doctors, teachers and chemists to create a clever computer—showed promise but failed given its linear approach. One expert system was not able to build the next expert system.

Unlearn, Relearn, Deep Learn

Fortunately, between the 1980s and today, something changed. Since then, AI and machine learning have subsequently begun to revolutionize various industries. How did we find success? First, our approach changed. For example, by using data, we took the domain experts (and their biases) out of the equation and replaced them with neural networks. The AlphaGo win is a great example, not because AlphaGo beat Grand Master Lee Sedol but because the combination of moves was seemingly silly and not one humans had ever played against. In fact, Lee Sedol may have

learned more in playing a machine than he had playing a human. The engine for this new approach is deep learning, a method based on the data structure of the human brain and inspired by biology, not statistics. In other words, deep learning takes a lot of the expertise and tacit knowledge out of the equation— which was traditionally used in more regression-based models—and turns it into a game of data and computational power. The approach is “data up” and not “domain down.” This has real implications for insurance carriers. Previously, if you wanted to build something for the insurance industry, you would hire agents, underwriters or claims people first. These days, engineers and data scientists with little to no experience in insurance can transform the industry simply by getting hold of the data. Compounded by the fact the best data talent is being recruited by tech-based giants and their startup counterparts, this has real implications for legacy carriers.

Fuel the Mind: Explosion of Data

If ML is the engine, data is the fuel. For years, statistical techniques have relied on narrow sets of heavily curated data, partly because the ability to process and understand them has been limited. With the advent of big data and the Internet of Things (IoT), there is a new set of patterns to be discovered. This explosion of data is another example of disruption within the insurance industry. For insurance companies, the general linear modeling techniques of the actuary is just one of the many weapons available to solve the core risk problem. The tradeoff in “what risk you understand up front” and “what you will understand through the life of the policy” through the IoT opens up the market to pay-as-you-go policies and loss prevention opportunities. Even carriers working on batch-based big data systems are being surpassed by streaming IoT and real-time big data. This is not something emerging InsurTech startups are targeting.

Speed of Thought: Low Cost Computation Software and Hardware

Previously, if you wanted to build something for the insurance industry, you would hire agents, underwriters or claims people first. These days, engineers and data scientists with no experience

Graphics processing units (GPUs) have been developing for 30-plus years. The impact they have on ML is that their parallel computational Lakshan DeSilva is Partner ability reduces training and Chief Technology iterations from months to Officer at Intellect SEEC. He days. Add to this the scale may be reached at lakshan. of big data cloud desilva@intellectdesign. infrastructure that can be com. provisioned quickly and cheaply—such as TensorFlow, Kafka and other Apache products—and you see how easy it is for a nimble startup to compete with a multibillion-dollar company. There is no longer a technology barrier to entry. Too many insurance companies and vendors opt for in-premise solutions, citing inadequate and outdated policies. Any company not explicitly moving to a cloudfirst ML strategy in the next 12 months and cloud-only ML strategy in the next two years will simply not be able to compete. Many InsurTech startups are exploiting this inability of legacy carriers to move to a cloud-first ML strategy in order to create new business models, products and markets. There are a variety of reasons carriers should be adopting ML capabilities, but the above remain the most pressing justifications. What’s more? These necessities have incentivized tech-based startups with no experience in the insurance industry to throw their hats into the ring. Legacy carriers can’t afford to wait. They must unlearn, relearn and deep learn today.

in insurance can transform the industry simply by getting hold of the data.

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Unconscious Bias

to Improve Underwriting Results Executive Summary: How much should an underwriter trust his or her instinct versus data and models? Insurers and reinsurers like The Hartford and Gen Re are looking into the question of how unconscious biases factor into decisions as they seek the right balance between gut answers based on experience and objective input from data-driven models.

By Denise Johnson

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ocusing on the reasons behind decision-making has prompted some insurers to question whether certain judgments affect underwriting decisions in a negative way. Morris “Mo” Tooker, head of Middle Market for The Hartford, has examined how emotions can subconsciously lead underwriters to judgments that they might not have made if they relied strictly on data and computer models. While working at a prior position at Gen Re, Tooker was part of a group that worked with external consultants to identify unconscious bias in the underwriting process. “There were many places where the brain was jumping to an automatic conclusion based on the emotion, based on a preconceived notion, based on any number of things where, ultimately, if we had an underwriter who had the time or at least some awareness of the unconscious bias they were having at that point, [that underwriter] might make a slightly different decision,” he explained. They found 12 distinct biases that could occur during the underwriting process. Berto Sciolla, executive vice president and North American treaty manager, The Mutual Practice for Gen Re, said the insurer has been using unconscious bias

“Until we helped people understand and define biases, we couldn’t acknowledge them and try to work around them.” Berto Sciolla, Gen Re

training in its underwriting department for five years. Sciolla explained that when emotions run high, people tend to hyperfocus. This can be beneficial or restrictive and affects an underwriter’s ability to see the wider context. “What we talked about was familiarity with the language, familiarity with the behavior,” and then whether or not they were biasing or manifesting themselves in our decision process, Sciolla said. He said the process allowed underwriters to offer honest feedback without being contentious.

Potential Underwriting Bias

Tooker said three of the most common biases out of the 12 associated with underwriting insurance are obedience to authority, loss aversion and outcome bias. While the first two are self-evident, Sciolla defined outcome bias as overweighting past outcomes as justification for decisions

©2017 The Hartford. Classification: Publicly Available; for approved external distribution. No part of this document may be reproduced, published or used without the permission of The Hartford.

that could lead to a restricted risk appetite. He said another type of bias, snap and stick, is based on snap judgments and can narrow underwriting opportunities. Less experienced underwriters will be freer of bias than underwriters with several years of experience under their belt, said Sciolla, noting that Gen Re’s program targeted employees with 20 to 25 years of experience. So, how much should an underwriter trust his or her instinct versus data and models? Both said that the two go hand in hand. In the past, Tooker said underwriters were rewarded for decisions based on gut instinct. That’s okay, but how they arrived at a decision should be examined. “I think the ideal picture for me, and this is not a statement for The Hartford, but it’s a picture for me, is that we’re going to put as much data in front of the underwriter and we’re going to get an underwriter who is as clued into his or her propensities as they can be,” Tooker said. That should lead to a good outcome, he said. If either is missing, it will likely lead

to a suboptimal outcome. Sciolla said that if instinct is applied universally across an opportunity—from beginning to end, rather than only initially—it is still a good thing.

How Can Underwriters Overcome Bias?

Tooker said one way that underwriters

“The ideal picture for me is that we’re going to put as much data in front of the underwriter and we’re going to get an underwriter who is as clued into his or her propensities as they can be.” Mo Tooker, The Hartford

can overcome bias is by conducting a premortem that includes two questions: What does success look like? What does absolute failure look like? “What those two questions will allow you to do is to get a lot of the biases out that may be under the surface that you’re not aware of, that will hold people back from making certain decisions or making certain commitments,” Tooker said. Another way underwriters can identify bias is by conducting a post-mortem, analyzing the result and recording the facts in writing as seen at the time. “The twist for us, on that one, is to make sure that you are recording the facts as they were seen at the time because what we have found is that people’s memory of the situation gets rosier or gets more dour,” said Tooker. “It doesn’t stay objective.” New habits can also help underwriters overcome bias. “If you…have an unconscious bias at a certain point in the underwriting process, it’s become habit for you. You don’t even know you’re doing it,” Tooker said. “If we

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Q3 2017 | 81

Underwriting continued from page 81 can insert a new habit and put a break at that point where we know that the unconscious bias is coming in and force people to have a slow-thinking moment… and get people to take a step back and think about why they just made that decision, [then] we introduce a new habit.” Insurers can overcome bias within their organizations by offering education on how employee judgments can impact decision-making. Sciolla said that training has to start with identifying, defining and educating the underwriting team on what it is and whether it exists. “Until we helped people understand and define them [biases], we couldn’t acknowledge them and try to work around them,” said Sciolla. Communication is integral to parsing out bias. “In order to be able to talk about underwriting biases, you’ve got to have a process by which you can get honest feedback about what biases you have,” said Tooker.

If an insurer decides to undertake the process on its own and create a bias identification program in-house, some bias may remain. “I think anybody who owns the process, who’s been involved in creating the process, is unlikely to see some of it,” Tooker said. “I think what we would do going forward is take people from outside the unit who have the background and have them go through the same process because they’re going to see things, now that they’re trained, as they put a fresh eye on a process. They’re going to see the biases more quickly than other people might.” According to Tooker, identifying bias in one department led to a parallel understanding of its applicability in improving diversity and inclusion. “We’re finding those same things that we’ve been trying to go after in the underwriting process are and will have an impact in how we advance the diversity

inclusion agenda,” he said. “If we can get more diverse opinions in the room, obviously we get better decisions on an underwriting perspective,” Tooker said. Tooker said there is growing interest in expanding training to other departments. “I’m talking to the legal department next month about this, too. You think about how the same biases show up in just about any process because we have an emotional reaction and all of a sudden, the emotional reaction shuts off certain parts of our brain in terms of thinking unconsciously,” he said. “I can see it being rolled out much more broadly.” The concept doesn’t just apply to insurance underwriting. Companies like Google and Facebook have incorporated it into their employee training programs. Government entities are seeing the benefit too. In April, the California Department of Insurance announced it was training its employees in bias awareness.

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Future Trends

UBI Is a Failure But Telematics Insurance Is Working Extraordinarily Well

Executive Summary: Matteo Carbone, founder of the Connected Insurance Observatory, describes best practices of insurers using telematics technology successfully in the Italian auto market, where better insureds selfselect discounted coverage and suites of services, providing insurers with 20 percent lower claims frequency than non-telematics insurers.


By Matteo Carbone nsurance telematics has been out there for more than 20 years. Many insurers have tried to play with the technology, but few have succeeded in using the data available from connected telematics devices. The potential of this technology was misunderstood, and best practices have remained almost unknown, as it was not common in the insurance sector to look for innovation in other geographies, such as Italy, where progress has been made.

Innovation Fits and Starts

Before focusing on this telematics success story, the broader topic of innovation in the insurance sector is worthy of attention. Back in 2015, only a limited amount of space was dedicated to the insurance sector within some fintech reports. But in the last two years, the interest in insurance innovation has grown in an unexpected way: Billions of dollars have been invested in insurance startups; there are now many innovation labs dedicated to helping incumbents experiment with new

approaches; numerous startup accelerators dedicated to the insurance sector have popped up; many insurance carriers have created internal innovation units; and each week there are many conferences dealing with this topic. When talking to an insurance professional it is common to hear admiration for some of the new fullstack insurance startups and the desire to see these changes concretely adopted by incumbents. On the other hand, I’m starting to hear a new wave of disillusion in the discussion about insurance innovation. It hasn’t been infrequent in the last few weeks to participate in discussions on the lack of traction of InsurTech initiatives, the failure of some of them, or InsurTech startups radically changing from their original business models. I am enthusiastic about insurance innovation, and I have dedicated my career to this area. It is unthinkable for an insurance company today not to pose the question of how to evolve its own model by thinking about which modules within its value chain should be transformed or reinvented via technology and data usage. In a world that tends toward hyperconnectivity and the infiltration of technology into all aspects of society, I’m firmly convinced all insurance players will be

InsurTech—meaning they all will be organizations where technology will prevail as the key enabler for the achievement of strategic goals. Starting from this premise, I’d like to focus on two main points: 1. The ability of the insurance sector to innovate is incredibly higher than the image commonly perceived. 2. While not all InsurTech innovations will work, a few of them will change the insurance sector as we know it. In support of the first point, consider, for example, the trajectory of digital insurance distribution. The German Post Office first experimented with remote insurance sales at the beginning of the 1980s in Berlin and Düsseldorf using Bildschirmtext (data transmitted through the telephone network and the content displayed on a television set). Coming back to our time,

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Future Trends continued from page 83 almost 60 percent of auto insurance coverage is sold online in the UK insurance market and comparison websites are the “normal” way to purchase an auto insurance policy. In few other sectors is one able to see a comparable penetration of the digital distribution. In the health insurance sector, the South African insurer Discovery demonstrates incredible innovation as well. Over the last 20 years, the insurer has introduced new ways to improve policyholders’ lives using connected fitness devices to track healthy behaviors, generate discounts, and deliver incentives for activities supporting wellness and even healthy food purchases. Discovery has been able to replicate this “Vitality” model in different geographies and different business lines and to exploit more and more usage of connected devices in its model each month. Vitalitydrive by Discovery rewards drivers for driving knowledge, driving course attendance and on-road behavior with up to 50 percent back on fuel purchases at certain stations. Going forward, which innovations will work? Over 12 months ago, I published my four Ps approach for selecting the most interesting initiatives on the crowded InsurTech space. I believe initiatives will have a better chance to win if they impact: • Productivity (generate more sales). • Profitability (improve loss or cost ratios). • Proximity (improve customer relationships through numerous customer touchpoints). • Persistency (account retention, renewal rate increase).

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Those InsurTech initiatives will make the insurance sector stronger and more able to achieve its strategic goal: to protect the way people live.

Connected Insurance

One InsurTech trend able to generate a concrete impact on all four Ps is connected insurance. This is a broad set of solutions based on sensors for collecting data on the state of an insured risk and on telematics for remote transmission and management of the collected data. In a survey of ACORD members by the North American Connected Insurance Observatory (an insurance think tank I created earlier this year), 93 percent of respondents stated this trend will be relevant for the North American insurance sector. It’s easy to understand why. We live in a time of connected cars, connected homes and connected health. Today, there is more than one connected device per person in the world, and by some estimates the figure will reach seven devices per person by 2020. (Cisco Internet Business Solutions Group, “The Internet of Things: How the Next Evolution of The Internet Is Changing Everything,” April 2011.) The insurance sector cannot stop this trend; it can only figure out how to deal with it. Moving to the concrete insurance usage of connected devices, the common perception of UBI is not positive at all. This is the current mood after years of exploring the usage of dongles within customer acquisition use cases, where the customer

The North American Connected Insurance Observatory is a think tank started earlier this year, consisting of more than 16 insurers, reinsurers and tech players, formed to discuss the insurance IoT opportunity and to promote a culture of innovation. The European Connected Insurance Observatory is an insurance think tank started in Europe in 2016, consisting of almost 30 international insurance groups, institutions and technology firms.

installs a piece of hardware in the car for a few months and the insurer proposes a discount based on the analysis of his/her trips. This partially (only for a few months) connected car approach is based on the usage of data to identify good drivers, with the aim of keeping them as clients through a competitive price offered for the future. In 2015, around 3.3 million cars in the United States sent in data to an insurance company in some way, representing less than 1.5 percent of the market.

A Telematics Success Story

In contrast, another market used telematics in a completely different way— and it succeeded. Almost 20 percent of auto insurance policies sold and renewed in the last quarter of 2016 in Italy had a telematics device provided by an insurer based on the IVASS data. The European Connected Insurance Observatory

estimated that 6.3 million Italian customers had a telematics policy at the end of 2016. Some insurers in this market were able to use the telematics data to create value and share this value with customers. The most successful product with the largest traction is based on three elements: • A hardware device provided by the insurer with auto liability coverage, self- installed by the customer on the battery under the car’s hood. • A 20 percent upfront flat discount on annual auto liability premium. • A suite of services that goes beyond support in the case of a crash to many other different use cases—stolen vehicle recovery, car finder, weather alerts—with a service fee around €50 charged to the customer. This approach is not introducing any usage-based insurance elements but is an approach clearly able to satisfy the most relevant needs of a customer: • Saving money on a compulsory product. Research shows that pricing is relevant in customer choice. • Receiving support and convenience at the claims moment of truth. Insurers are providing a better customer experience after a crash using the telematics data. Just think of how much information can be gathered directly without having to question the client. • Receiving services other than insurance. That’s something roughly 60 percent of insurance customers look forward to and value, according to Bain’s research on net promoter scores published last year.

Let’s analyze this approach from an economic perspective: • The fee to the customer is close to the annual technology cost for the hardware and services. The €50 represents more than 5 percent of the insurance premium for the risky clients paying an annual premium higher than €1,000. This cluster represents less than 5 percent of the Italian telematics market. The fee is more than 10 percent of the premium for the customers paying less than €400. This cluster represents more than 40 percent of the Italian telematics market. • The product is a constant, daily presence in the car, with the driver, with no possibility of turning it off. While it assures support in case of a crash, it is also a tremendous deterrent for anyone tempted to make a fraudulent claim, as well as for drivers engaging in risky behavior otherwise hidden from the insurer. • The telematics portfolio has shown on average 20 percent lower claims frequency on a risk-adjusted basis than the nontelematics portfolio, based on the analysis done by the Italian Association of Insurers.

(Editor’s Note: The author has noted in various forums that drivers with relatively good risk profiles willingly “self-select” for telematics-based coverage, explaining the lower claims frequency.)

• Insurer best practices have achieved additional savings on the average cost of claims by intro-ducing a proactive claims management approach as soon as a crash happens and by using the objective reconstruction of the crash dynamic to support the claim handler’s decisions.

• A suite of telematics services is delivered to the customer, along with a 25 percent upfront discount on the auto liability premium. Best practices allowed carriers to maximize Matteo Carbone is return on investment in Founder of the Connected telematics technology by Insurance Observatory. using the same data coming from the black box in order to activate three different value creation levers: value-added services paid by the customer, risk selection and loss control. The value created was shared with the customer through the upfront discount. The successful players obtained a telematics penetration larger than 20 percent and experienced continuous growth of their telematics portfolios. These insurers were able to orchestrate an ecosystem of partners to deliver a “customer-centric” auto insurance value proposition, satisfying the three main needs of customers—or at least those of “good” customers. Compared with many approaches currently being experimented with in different business lines around the world, where the insurance value proposition is simply enlarged by adding some services, this InsurTech approach is also leveraging the insurers’ unique competitive advantage—the insurance technical P&L—to create a virtuous value-sharing mechanism based on the telematics data.

Q3 2017 | 85

Data and Analytics


The Data You Already Have But Aren’t Using (Yet) Executive Summary: Insurance carriers have a lot of dark data hiding in plain sight. Here, actuary Peter Bothwell notes that while carriers are starting to use NLP text mining to turn their unstructured dark data in claim notes and underwriting evaluations into structured data, even system logs contain valuable dark data. The system log data can be used by operations managers and application developers to optimize carrier policy, billing and claim operating processes.

By Peter Bothwell

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ighty-five percent of the matter in the universe is invisible to us, and little is known about it. Scientists call it “dark matter.” Dark matter interacts with the rest of the universe—in fact, scientists say that we would not exist without it—but it does so in very mysterious ways. The same is likely true of much of the data that your organization produces and saves. Although it exists and interacts with your business, the business itself is largely unaware of its potential value. Hence, today it remains “dark data.” If you can be one of the first to find and use your dark data, you have an opportunity to create real competitive advantage. The concept of dark data is becoming widely used and accepted. Gartner defines dark data as “information assets that organizations collect, process and store in the course of their regular business activity but generally fail to use for other purposes.” Wikipedia goes on to say: “The ability of an organization to collect data can exceed the throughput at which it can analyze the data. In some cases, the organization may not even be aware that the data is being collected.” (Original source: “The API Briefing: the Challenge of Government’s Dark Data,” www., U.S. General Services Administration, June 17, 2015 by Bill Brantley) That doesn’t mean dark

data itself is becoming widely used. Like its dark matter doppelgänger, it goes largely unseen and undetected by those of us analyzing the business. Some dark data is hiding in plain sight. Many organizations have built their systems and databases in silos. This is technically not dark data because we know it’s there and its value is easy to see. It behaves like dark data, however, because we are not able to bring it together with the data nearby that would unlock its full potential value. It is tantalizingly close but might as well be dark. New data management techniques and data integration tools such as Master Data Management (MDM) have started to help some companies overcome this challenge, but for those with legacy systems and databases it remains a formidable barrier to making full use of our data’s value. Some data that was dark not long ago, such as claim notes and underwriter evaluations, have started to come into the light thanks to character recognition and text mining products. Optical Character Recognition (OCR) software allows us to turn paper documents into digital documents that can be read by a computer using Natural Language Processing (NLP) software. NLP text mining represents a major advance over simple word recognition. It can not only find a word like “ambulance”

With the right process mining tools, analysts are finding they can quickly generate process maps that once took teams of people days or weeks to create and can also identify deviations from the expected workflow that produce both problems and serendipitous benefit.

in claim notes but also discern the context. It allows us to distinguish “ambulance refused” from “ambulance used.” Companies are starting to use these tools to turn their unstructured dark data into structured data that can build claim triage, severity and litigation models. Still, we have only just started to understand how much data is locked away in our paper documents and text files. Much of the data in claim notes, underwriter evaluations and risk engineering surveys remains dark. If you have not started to mine this data, you are missing a great opportunity. However, that is only the start of our dark data. Most of our operational systems log every interaction. These system logs are known to our IT department and are even occasionally examined by them to identify system errors and network problems, but that data remains dark to the business world. That doesn’t mean it has

no business value. Bright data scientists have discovered that, although these logs are massive, dense and cryptic, they can be mined. It’s called process mining, and it can be used to better understand our work processes, diagnose problems and ultimately optimize both the process and the system that supports it. With the right process mining tools, analysts are finding they can quickly generate process maps that once took teams of people days or weeks to create and can also identify deviations from the expected workflow that produce both problems and serendipitous benefit. This type of mining is not new to the digital world, where digital marketers and website developers use their logs to better understand and optimize how customers interact with their websites. Why wouldn't it be just as valuable to operations managers and application developers as

they seek to understand and optimize their company's policy, billing and claim operating processes? The ability to optimize processes for those servicing our customers should be at least as valuable as optimizing the self-service processes our customers use on our websites. It's all part of the customer experience. There is likely still more dark data of which we are unaware. The fun—and reward—for all of us is continuing to find, understand and put to use the dark data that currently hides just out of sight.

Peter Bothwell is CEO of Predictive Data Solutions LLC. He was formerly the VP of Commercial & Group Benefits Data Science for The Hartford. Bothwell is a Fellow of the Casualty Actuarial Society and a member of the Leadership Advisory Council of The CAS Institute. Bothwell may be reached at

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Data and Analytics

Valuable Revenue Stream Hidden in Insurance Carrier

‘Data Exhaust’ Executive Summary: A data point as simple as the number of auto insurance policies sold in a day is valuable “data in the wilderness” for Wall Street investors looking for indicators to gauge the health of the economy. The CEO of Quandl explains how his company helps insurers make good money by selling the information.


By L.S. Howard he chief executive officer of Quandl is on a mission to let insurance companies know that their data is valuable and professional investors will pay them for it. But a lot of insurers are oblivious to that fact. “We’d like to unlock the value of that data by creating a new source of revenues for insurers,” said Tammer Kamel, CEO of Quandl, a Toronto-based data platform that gathers financial, economic and alternative data for investment professionals. “The revenue insurers can receive for data falls right to their bottom line. There is

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no cost to the insurance company. It’s just extra money for doing very little,” he said. For more than five years, Quandl has taken “data exhaust” from a variety of industries and sold it to investors who are looking for market signals on which to trade. The company focuses on alternative data sourced from “the wilderness”—in other words, data that Wall Street doesn’t normally see. “We find undiscovered data, package it in a way that investors can use, and sell it to them to generate revenue for us and our data partners.” Insurance companies’ data definitely falls within “my definition of data from the wilderness,” Kamel affirmed.

Auto Data From the Wilderness

Just over a year ago, Quandl first opened its doors to insurance industry data, beginning with a partnership with a U.S. auto insurer. “The insurance company came to us and said, ‘We’re interested in learning how we can monetize our data through a partnership with you.’” The two companies sat down together to

discuss some ideas and came up with a plan. Now, a year later, this company provides daily reports to Quandl about how many auto policies it has written. The reports are repackaged and sent to investors who can use it for trading. “This insurer is making money in an innovative way by taking their data exhaust and sending it through us and ultimately on to professional investors,” he explained. The insurer doesn’t provide information about who is buying the cars. “They just report the number of policies written for various car manufacturers. That’s it—one number per day,” said Kamel, emphasizing that no customer information is revealed so the insurer’s business is not compromised in any way. “It turns out that this is very interesting information for Wall Street because it correlates with new car sales in general,” he said. “When people buy a new car, the next thing they do is buy an insurance policy.” This creates a window into how many new policies are being sold each day—and thus how many cars are sold across the U.S.

Future Trends manufacturers, he said.

Homeowners Insurance

Tammer Kamel is the founder and CEO of Quandl, a venture capitalbacked data platform based in Toronto, Canada. Prior to founding Quandl, Kamel advised and evaluated many of the world’s leading hedge funds on their technology and infrastructure during a 15-year career at Citibank, Simplex Asset Management and the Iluka Group. This is powerful information for Wall Street, which typically gets such data on a monthly basis. “That’s an example of an insurance company taking its data exhaust and turning it into more revenue for the firm. They don’t have to do anything other than give us access to the data and we send them a check,” he said.

Economic Indicators

“Any unique data that professional investors can access has the potential of giving them an advantage vis-à-vis their peers and vis-à-vis the market as a whole,” Kamel added. “If you know something about a company, a part of the economy or a commodity that others don’t know, you can profit from that by trading on that information.” The number of new cars being sold in America is an important economic indicator as well as an indicator of the performance of auto or parts

The housing market is another key economic indicator. “Insurers have a very good understanding of activity in the housing market because every house that is bought is ultimately insured, usually around the time that it changes ownership.” As a result, Quandl is currently looking in the “wilderness” to find an insurer with homeowners insurance data to sell. But it doesn’t have to stop at homeowners, Kamel said. Anything that insurers insure provides interesting data for investors, he said, pointing to the example of coverage for luxury goods or commercial shipping. “There are probably things that could be done with their data that they haven’t even thought about.” And just because Quandl has one data partnership with an auto insurer doesn’t mean a second or third insurer couldn’t be introduced as partners. “More insurers provide more coverage, which increases the accuracy on anything you’re already tracking,” he said. “There is lots of room for growth.” The potential for profit is huge as each investor will pay up to $1 million to Quandl for a powerful data set, which Quandl shares with the data partner. The portion varies with every partner, Kamel said. While that may seem like a lot of money, Kamel explained that these investors manage billions of dollars, which means they need to make hundreds of millions of dollars in profits. “Spending $1 million to make $10 million can be a very sensible decision.” Kamel emphasized that no information about its insurance partners is ever revealed by Quandl. “The identity is protected so the information only can be used for its intended purpose and not to get an inside track on how any particular insurance company is doing.” In line with this confidentiality, Quandl also doesn’t reveal how many insurers it works with, only that it’s “currently a small number.”

Getting Ready for AI:

A 5-Step Practical Approach for Insurers


By Michael Clifton I, or artificial intelligence, is rapidly proving its business worth across many industries— and insurance is no exception. AI can enable smarter ways to sell, whether powering robo-advisers for investment management or adding greater intelligence and efficiency to underwriting processes. AI also can help insurers better understand changing market dynamics, competitor activities, and customer needs at a very granular level. Given the extraordinary possibilities, many insurers are making AI investments. But hype-driven, illinformed investments can lead to loss and disappointment. Before deploying AI, insurers must frankly and fully assess their organizational maturity and market appetite.

How Ready Is Your Organization for AI?

Insurers typically land in one of three stages of AI readiness: foundationally intelligent, incrementally intelligent or institutionally intelligent. Foundationally intelligent insurers rely heavily on traditional processes and legacy systems. Many still have a limited online and social media presence and tend to resist organizational change. AI can help these businesses address some elementary techno-business issues. Chatbots that use smart configurations (rules as compared to natural language processing) and personal financial trackers

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Future Trends continued from page 89 and advisers with rules-based configurations can help these companies streamline processes and gain more efficient marketing, lead management and sales efforts. These rules-enabled and easily configured AI solutions are cost effective and lay the groundwork for the next level of intelligence. Incrementally intelligent insurers are already invested in the digital journey and in IT solutions that help them understand customer needs and behaviors. These insurers use multiple channels and touchpoints to reach customers and prospects and deploy targeted marketing, gamification, social media, mobile solutions and analytics to enable “pull” marketing techniques. Companies at this level can build a strong AI foundation on existing investments and begin deploying more sophisticated AI tools to offer and manage a seamless customer experience across multiple channels. Tools include virtual sales assistants that manage basic routine work, such as emails, meetings, lead searches, etc., and automated algorithms for needs analysis. The algorithms can be deployed across all customer-facing channels and work in tandem with more sophisticated robo-advisers. Institutionally intelligent insurers are using technology now to solve business problems. They typically have advanced point-of-sale capabilities, straight-through processing functionality and a single view of customers across all channels. These insurers want to continue improving the customer experience and discover new routes of upselling and cross-selling through better customer data and interaction mining. They are ready to explore complex AI solutions, including a dynamic underwriting model based on machine learning to enhance contextrelevant decision-making; claims

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transformation through intelligent prediction and adjudication; and contact center modernization through voice recognition and interactions mining.

The Five Challenges of AI

Whether using AI to improve basic business processes or sophisticated natural language processing and data mining solutions, insurers must address five AI challenges. Tackling these will help them manage expectations and help deliver promised results.

1. A strong foundation.

AI platforms must be exposed to huge volumes of domain-specific information covering all possible business scenarios so the AI solution can learn from this data as well as new transactions and interactions. Insurers must ensure they have an appropriate training dataset, one that is large and varied enough to teach and train the AI solution. So, if an AI solution is aimed at the contact center, it must be fed a wide variety of customer query and response data that informs expected workflows.

2. The glitch risk. AI systems introduce the risk of unpredictable, even bizarre errors that are not easily resolved through root cause analysis. When a machine is incorrect, it can be wrong in a far more dramatic way, with more unpredictable outcomes, than a human could. Further, AI solutions must learn to understand the difference between intentions and taking all commands literally—understanding gained only with human feedback and guidance. Insurers must expect to invest a significant amount of human time for painstaking training, configuration and management.

3. Stakeholder readiness. Insurers will

need to carefully manage the impact of AI on their workforces, an issue to consider in tandem with assessing how ready

customers are to work with AI solutions. Will customers trust a machine’s recommendation for a longterm financial decision? How will an emotional customer react when addressed by bots and AI? Will customers find Michael Clifton is Senior the AI system is reliable Vice President of Insurance and accurate compared Strategy and Ventures for to traditional processes? Cognizant, a global As insurers realign professional services advisory, operations and company transforming contact center teams clients’ business, operating with AI solutions, and technology models for keeping the customer the digital era. experience at the forefront will help guide how tasks, jobs, management practices and performance goals should be redesigned to get the most from AI and humans.

4. Privacy concerns, regulatory hurdles.

Because AI solutions require that every interaction and transaction be recorded for machine learning, data privacy and security regulations will be a continuing issue. Insurers need to invest in information security and data privacy policies, procedures, methods and tools designed to prevent data breaches and unauthorized use of data.

5. Technology refresh. AI will work more

efficiently when an insurer’s IT landscape has been simplified and modernized. Insurers will need to evaluate the complexity of their IT landscape; the level of integration among various systems and applications; progress in digitizing processes; and the availability of data. By assessing their readiness and learning AI limitations, insurers will be poised to augment human workers, expand revenue, build advisory excellence, improve operating efficiencies and create engaging customer experiences to transform the industry over the next decade.

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