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September 30, 2008

The Wrong Argument for OFC

Score a round for the National Association of Insurance Commissioners (NAIC) for their knockdown of optional federal charter (OFC) proponents writing in the Wall Street Journal. Federal legislators John Sununu, Tim Johnson, Melissa Bean and Ed Royce led with the chin by arguing for OFC based on the demise of AIG in "Insurance Companies Need a Federal Regulator," on the Journal's editorial page, Tuesday, Sept. 23. Sandy Praeger, president of the NAIC and Kansas Insurance Commissioner, delivered a devastating counterpunch in the Journal's letters to the editor on Friday.

There are sound arguments (I do not say conclusive ones) for OFC, and the authors made some of them. For example, they wrote: "the state-based system drives up the price of insurance, because it is costly to comply with 50 different sets of regulations." However, given the meretricious pretext of the article, the threat scenario it presents ends up being an exercise in question-begging. It says:

Unless Congress provides an alternative to the state-based regulatory model, it is likely that the federal government (i.e., American taxpayers) will be forced to pay for more bailouts in the future.

One hopes readers familiar with the insurance industry would have responded, "But why?" AIG has long been seen as sui generis; and in any case, what exactly does its failure have to do with the viability of state regulation? As Commissioner Praeger wrote :

…AIG is not an insurance company, it is a federally-regulated holding company under the jurisdiction of a federal regulator…And its problems arose under the watch of a federal regulator.

Sununu, et al., buried the acknowledgement deep in their piece that "AIG policyholders are, of course, secure," without elaborating. Of course they were! But why, exactly?

While insurance companies are exposed to the credit crisis as institutional investors, their fortunes stand in stark contrast to their industry peers because of the conservative regulation to which they have been subject under the state-based regulatory regime — as Commissioner Praeger insist.

The legislators' piece argues that, "The preservation of our pre-eminence in the global markets depends on a modern regulatory structure that can handle the complexity of today's businesses." Seems reasonable; so far so good. But it adds, "And OFC will provide a safer, more cost-effective regulatory environment for our economy and for our consumers." Well, this is not a very strong argument to make at a moment when federal regulators have presided over an unprecedented financial disaster while state regulators are in a position to hold their heads high.

From within the world of insurance technology, OFC has appeal: it would eliminate the very onerous and costly task of compliance with multiple state regulations. It would also tilt the competitive playing field in favor of companies with scale. Whether that's just show business in a free market or whether it would be accompanied by damage to consumers is not something I care to argue about here. What is clear is that the companies that would benefit from OFC have influence with the authors of the Journal's editorial piece. By associating the collapse of AIG with the question of OFC, they were practically begging Commissioner Praeger to make the following point:

On Capitol Hill, proponents of federal insurance regulation are supported by large insurers who seek the same level of oversight as the investment and commercial banks that are at the heart of … the broader market turmoil. Unfortunately, these special interest groups seem intent on reducing insurance regulatory oversight – which has, time and again, proved to provide appropriate consumer protection – for their own economic ends. That's how we got into this mess.

Posted by Anthony O'Donnell at 09:07 AM | Comments

September 26, 2008

AIG Fallout: Pricing and Risk Management

The failure of AIG creates the appearance of the financial crisis reaching beyond the banking and securities industries into the heart of the insurance industry. And yet, as those within the industry understand, this is a misleading impression: the AIG debacle had more to do with the insurance industry reaching into securities than the other way around. Hence the eerie spectacle of AIG's insurance subsidiaries humming away profitably on their side of a regulatory wall, while the holding company suffocated in the adjoining room, so to speak, choked for cash as its credit default swap business' assets plunged in value. However, the failure of the largest insurance company in the world cannot fail to affect the industry to one degree or another. One possible consequence is that the flight of AIG's customers could cause at least a temporary stiffening in the P&C market.

An Advisen briefing written by David Bradford, the firm's executive vice president and editor-in-chief, speculates that if there is a "stampede" by AIG policyholders spooked by the holding company's failure, it would likely precipitate a "sudden, short-term uptick in commercial insurance rates." In the absence of such a reaction, the briefing continues, "prevailing soft market conditions are unlikely to be affected."

Customers may cool down, but a study by the Insurance Journal showed that their initial reaction was alarm. Of 1,000 agents and brokers surveyed, 44 percent said their policyholders had requested they shift their account to another carrier, and 62 percent said they expect to place less business with AIG. Commenting on the survey, Datamonitor analyst Jonathan Steiman says that even if these policyholder sentiments prove durable, a shaky economy may yet blunt their potentially beneficial effects on pricing. If AIG policyholders remain calm, the soft market will surely endure. As the Advisen's Bradford puts it:

AIG's losses under credit default swaps have no impact on statutory policyholders' surplus, which equates to "supply" in the insurance supply-and-demand equation. The insurance industry remains overcapitalized, which barring a massive natural catastrophe should continue to exert downward pressure on rates at least through 2009.

In short, there doesn't seem to be much of a silver lining to the present financial cloud, at least for the insurance industry. At least those of us connected to the industry can take comfort that things aren't worse – as today we witness the largest bank failure in history, with Washington Mutual joining the bone yard of fallen titans.

If there is one glimmer of benefit resulting from the AIG debacle and the financial crisis in general, it is that it is likely to accelerate the evolution of risk management technology solutions. Earlier this year, a Datamonitor survey of 200 global insurers found that 61 percent of life insurers and 47 percent of non-life insurers said they were planning to increase investment in risk management and compliance systems in 2009. "While these are healthy figures, Datamonitor anticipates even greater spending in light of the recent events," says Jonathan Steiman, in an Olympian understatement.

In a recent note I commented that risk modeling technology can be used to mask reality as well as reveal it. However a more sophisticated blend of art and technology will be indispensable to the development of a more comprehensive and secure approach to risk management. That in turn will power not only a more efficient insurance industry but a less vulnerable financial services industry overall, as we rebuild from the ruins of the present catastrophe. Prudent regulation will play an important role in averting future folly-induced financial disasters but, as Datamonitor's Steiman argues, technology will play a critical role in reshaping the way financial institutions manage risk:

…next-generation risk management systems must be able to quickly capture and evaluate complex transactions from every corner of the enterprise. In short, vendors have an opportunity to differentiate themselves by grasping the new realities of risk and designing relevant solutions.

Posted by Anthony O'Donnell at 09:27 AM | Comments

September 25, 2008

Next-Generation Alternative Sourcing: Defining a Road Map for Reaping the Rewards

By John P. Varricchio

Understanding when and where to seek new sources

As the soft insurance market and credit crisis continue to pressure margins and return on equity, insurance companies are looking to accelerate operational improvement initiatives. One such initiative is alternative sourcing. Many financial services organizations, including insurance companies, have already achieved benefits from outsourcing and offshoring traditional back-office functions, such as elements of IT and call centers. In a new wave of alternative sourcing, insurance companies are evaluating sourcing options for more complex tasks, such as actuarial support, billing and collection and claims adjudication.

However, one lesson companies across industries have learned is that unexpected pitfalls can ultimately outweigh the benefits by disrupting internal operations, triggering unanticipated additional expenses, and eroding customer satisfaction and brand strength. As companies contemplate expanding or revising alternative sourcing, they need to understand and account for the associated risks. It is also crucial that they not only map out the initial implementation, but also plan for the management and maintenance of the program after a function is outsourced.

Strategic context of alternative sourcing

Alternative sourcing is still sometimes looked at as a tactical measure to reduce costs, but companies come to realize that alternative sourcing is best approached in the strategic context of pursuing longer-term strategic objectives.

Deciding to focus on specific market segments, or customer service, or operational excellence, or product innovation must influence sourcing strategy as much as acquisition and internal growth strategies. This is particularly the case with the potential sourcing of higher-value, less commodity-type processes that are integral to achieving a specific strategic objective but can carry additional risk. Longer-term strategic considerations must be aligned with the attractive shorter-term cost benefits.

Roadmap to success

Successful alternative sourcing requires a comprehensive lifecycle approach that links business strategy with candidate processes, functions, service provider selection and contract development. Companies with the best alternative sourcing experiences are those that take a disciplined approach throughout planning and execution and then follow through with consistent measurement of results. This exactitude must be applied to navigating the numerous choices surrounding alternative sourcing, including strategic alignment, operating models, vendors, locations and measurements.

A four-part roadmap can help companies execute a successful alternative sourcing strategy:

Concept: Insurance carriers embrace alternative sourcing for a variety of reasons, including cost reduction. Regardless of the specific driver, it is difficult to select a sourcing option without having clarity on the current baseline cost and service levels of the process or activity and the potential impacts of moving it to an alternative location. A business case is needed that lays out current costs and service levels. Activity based costing is usually helpful in determining the baseline cost structures for insurance processes, back-office functions and operational areas. This analysis also provides insight into the RFP vendor selection process and eventual service-level agreements (SLAs) and contract arrangements. Often overlooked is the cost of the new governance structure and associated future costs for the insurer to support the new sourcing model.

Plan: Prior even to selecting a vendor, a company must develop a front-to-end plan for how it will handle the outsourcing. This includes thinking through an organizational and outsourcing model(s) and approaches for the governance and management of the relationship, designing controls and performance metrics, and assessing technology and infrastructure needs. Particularly for managing sourcing activities within a business unit, it is important to establish roles and responsibilities at both the unit and corporate levels.

Transition: It is imperative to establish a seamless transition process as early as possible that first identifies the most likely top risks and then addresses the longer-term program management and risk management responsibilities. Vendors' experiences with other clients, practical guidance they offer for scoping the transition work, and transition support should be important considerations in selection. In the planning and transition phase, vendor personnel should spend time at the company meeting staff and learning about the culture.

Monitor: Internal controls and regulatory compliance checks are critical, but so are performance metrics and structured communications. Performance targets stipulated in the SLA must be built into the dashboards the company and its vendor use to monitor SLA compliance. Focusing on quality and continuous improvement is just as critical as tracking the direct and indirect risks that sourcing arrangements entail. While a company can move work to other locations, the ultimate responsibility for quality and risk remains within the organization.

Eyes wide open

While the potential benefits are compelling, it is crucial for insurers to understand the risks of alternative sourcing so they can successfully reap the rewards. Companies must ensure their sourcing strategy utilizes a comprehensive lifecycle approach that allows insurers to align and support their strategic goals.

John P. Varricchio is a Principal in the insurance sector of Ernst & Young LLP's Financial Services Office. He is based in New York City and can be reached at +1 212 773 7645

Posted at 07:36 AM | Comments

September 24, 2008

The Downfall of Traditional Communication Channels

According to a report released last week by Nielsen, nearly one in five American households will not have a home phone line by the end of the year. To many, I have a feeling that this is a surprising finding, but it shouldn't be. Landline phones are quickly becoming an unnecessary expense. What can one do on a landline phone that they can't with their cell phone?

As far as insurers are concerned, I think the important lesson here has little to do with the downfall of landline telephones and copper wires, and a lot more to do with distribution channels and marketing communications.
There is always a lot of talk in the industry about reaching the next-generation of insurance customers and how to best reach them. The industry needs to make sure that its not making decisions around tomorrow's customers using yesterday's methods.

It's a simple enough concept, to be sure: don't market to young people, don't survey young people, don't provide customer service to young people via out-dated channels like direct mail or phone banking, etc. Unfortunately, old habits can be tough to be break.

Look at the television advertising, for instance. For years, television shows have lived and died by their Nielsen ratings, but do such ratings still provide advertisers with an accurate measurement of a show's popularity? Until the last few years, Nielsen ratings didn't take into account students watching television on college campuses. The ratings also used to ignore new technologies such as DVRs and new ways to view content such as streaming video. Many would argue that the company still hasn't figured it all out. (I prefer to think that this is why something like "Two and a Half Men" is still on the air, while "Arrested Development" is not.)

As a result, it seems to me, many shows that are popular among young adult viewers tend to be under-valued. Take for instance Family Guy, an animated show on Fox that was actually cancelled due to its low ratings. It wasn't until the show posted extremely impressive DVD sales that Fox execs realized that they had miscalculated the show's worth and decided to put the show back on the air.

Politics provide another example. How accurate is polling data, which traditionally only covers landline telephones, if (according to the Nielsen report) 48 percent of heads of household between 25- and 34-years-old use only cell phones?

Are these issues that directly affect insurers? No, not exactly. Still it is food for thought. I know a lot of carriers are exploring and investing in new channels for distribution, marketing and service. Many times though, I get the impression that those projects don't enjoy maximum support from business partners or that they are considered ways to supplement primary, more tradition channels.

Sooner that many think, those traditional channels could become obsolete. Ask yourself, if someone told you ten years ago that 20 percent of the country wouldn't be using landline phones, would you have believed them?

Posted by Nathan Conz at 10:15 AM | Comments

September 22, 2008

It’s Better to Know What You Don’t Know: Step 4 – Insights Through BI Innovation

By John Lucker, Principal, Deloitte Consulting

It has been three years since I wrote a series of Insurance & Technology articles on creating enterprise-wide information inventories (Step 1), preparing enterprise-wide information (Step 2) and leveraging analytics as a key differentiator (Step 3). The goal for this series was to articulate some pragmatic ideas that could be used as grounding points for initial objectives to make data available for advanced analytics. With or without the ideas in these articles, if your company has spent the past few years scouring the enterprise for internal and external data, cleaning and normalizing data and implementing and training various personnel on your BI tools, how are you now doing with using all that you’ve done? Are you generating ROI from these efforts? Have you moved beyond the technology required to do this and worked to create an organizational culture of BI innovation?

Unfortunately some companies would say that some successes have been realized but not enough has been done to create a culture of BI innovation. So if this is the case with your company, what can you do about it posthaste? Some recommendations for moving forward are deceptively straight forward – focus on what matters most, proceed methodically, be creative and hurry up!

However, it’s OK to pause briefly to take a breath, assess the situation and challenge the path you are proceeding down to determine if some course correction may be needed. In the spirit of continuous improvement it is important to engage in disciplined and creative thinking, to take the blinders off, if necessary, and rethink any shifting priorities and take advantage of the organizational experience to date.

Inevitably your company has worked hard to create all the parts and pieces necessary to make BI come alive. It is not unusual for a company to experience some organizational exhaustion from the work leading up to this point. Make sure you have the right people with the aptitudes, passion and personalities for innovative activities. Be sure they are experienced in your business and have access to all the necessary information and BI tools. And then give them their assignment – talk to their colleagues throughout your organization, people from all levels and functions, and pick their brains. Ask them about their vexing business problems, aggregate people’s ideas and circulate the lists of ideas to gather feedback. Sort through all of this, remove duplications or obviously straightforward items, and finalize your recommendations for next steps.

It has often been said that time can best be spent learning the things you don’t already know or the things you want to know rather than continuously refining things that are known or have become routine. But you must also be aware of the things that leadership thinks it knows but may not be true. These are often the ‘facts’ that are potentially misunderstandings or myths and that absent a disciplined challenging or validation of the facts can actually jeopardize success versus create opportunity for the organization.

BI is about providing leaders with the information and insights that will help improve business performance with better decision making. So, before proceeding onward, do yourself and your company a favor. Be sure that you are asking hard innovative questions. Don’t settle for the easy stuff but really push the thinking. Tie that thinking and the items on your list back to the strategic objectives of your organization and the risks that could prevent the organization from being successful. Be aware of current events and the state-of-the-company and be sure your thinking ties to them as well.

With all that has been going on in the financial and insurance world lately, asking and answering hard questions predicated on fact, data and analytics has never been more important. Those companies that have been able to organize their data in ways that allow them to monitor and analyze their business in multiples of dimensions, slices, tranches, and levels will be able to better understand underlying issues and risk with greater precision. Only with the right tools, the right training, the right people, and the right culture of BI innovation can you become better at the alchemy of business – turning information lead into information gold.

Posted at 10:07 AM | Comments

September 19, 2008

Getting Privacy Right in Pay-Per-Drive

Our recent report on Real Insurance's mileage-only pay-per-drive policy raised, once again, the question of what it will take to get drivers to use such programs. Industry observers have predicted the resurgence of telematics (the monitoring of driver behavior via telemetry) but privacy concerns continue to shape insurers' pay-per-drive strategy, as the Real Insurance example demonstrates. The Australian insurer bypasses the "Big Brother" fears associated with telematics-based pay-per-drive programs by dispensing with telemetry all together and relying instead on customer-reported mileage alone.

Progressive´s convenient MyRate device represents an improvement on more costly "black box" technology that has hampered adoption.

Progressive has struck a different balance, dispensing with location information, but keeping the telemetry. The Mayfield Village, Ohio-based insurer has also addressed cost concerns that dogged Norwich Union's use of Progressive's patented methodology and technology: getting the "black box" that registered the telemetry proved prohibitively expensive.

Through its MyRate program, Progressive supplies a small, portable device that can easily be plugged into the on-board diagnostic (OBD) port of many car models built after 1996. The device delivers a much richer portrait of driver behavior than Real Insurance's mileage-only plan by recording mileage, braking and acceleration, and time of day. The device periodically transmits that information wirelessly back to Progressive.

With MyRate, Progressive has struck a compromise: the insurer loses valuable location information that it could use for underwriting purposes, but the carrier thus reassures customers uneasy with the idea of their insurer (or anyone else privy to the recorded information) tracking their every move.

Will that be enough for Progressive's Pay As You Drive to take off this time? Though the carrier has not reported any business metrics, Progressive claims that customer adoption has been promising. MyRate is now available in seven states and one out of three eligible drivers (e.g., those whose car has an OBD port) have accepted Progressive's offer to use MyRate, the carrier says.

Posted by Anthony O'Donnell at 08:44 AM | Comments

September 17, 2008

Reflections on the AIG Bailout

This Wednesday was a historic day in the insurance industry as the Federal Reserve agreed to an $85 billion bailout of AIG. It was also a historically busy day for many of the industry's analysts as everyone from clients to those (ahem) no-good-media-types that were looking to get their questions answered. Fortunately, a few had time to speak to I&T.

In the insurance technology space, analysts wouldn't say that Enterprise Risk Management (ERM) technologies could have prevented the financial crisis that many companies find themselves in, but some did suggest that the current situation should serve as compelling evidence of the need for wider adoption of ERM and analytical tools, as well as better corporate governance around risk.

"One thing we have to keep in mind is that AIG is such a huge, diverse, complex, decentralized organization. In that regard, you could almost say that they are one of a kind," says TowerGroup's Karen Pauli. "Some of this doesn't have to do with technology. It has to do with AIG's appetite for risk in the past and the development of their unique product offerings in a very unusual way."

Even so, Pauli says that insurers should regard the AIG bailout as a lesson around the need for ERM technology. Despite financial difficulties, it will be important for insurers to avoid cuts in predictive analytics projects that help improve decision making and add a certain level of objectivity to the process.

"Technology wouldn't make everything perfect, but ERM technology coupled with analytics and strong corporate governance could have made a difference in AIG's ability to detect all the places where they were exposed to subprime issues," suggests Pauli.

"The biggest impact [of the AIG bailout] will be on insurers strengthening the technology solutions, and staff skill sets, which allow them to understand their financial market risks -- of their investment portfolios, for asset/liability matching, and for hedging various guarantees embedded in their products," adds Donald Light, a senior analyst in Celent's insurance practice.

Analytics could play a large role in that strengthening, but insurers need to commit to objective processes, says Deloitee's John Lucker, who discussed the subprime mortgage crisis in broader terms, rather than addressing AIG specifically. "A vast body of practical and accepted research exists for how credit and financial health correlate and cause certain business and individual behaviors," Lucker explained. "It is well established that effective use of these insights can be predictive of a variety of business situations or outcomes. When companies disregard or deviate from these insights, any subjectivity or randomness in their actions can cause an adverse result - it's the objectivity of the properly designed analytics that helps to smooth decisions to a more favorable overall outcome."

(Aside: As my colleague Anthony O'Donnell pointed out earlier, objectivity is required in not only a firm's commitment to risk models, but in how those models are conceived.)

Perhaps, as a result of continuing financial woes and the AIG wake-up call, insurers will rededicate themselves to ERM and gathering the data necessary to make those models viable. Previously, it's possible that more could have been done.

"In the past, insurers and reinsurers who asked for too much information about risk were considered too hard to do business with," Lucker says. "Recent events make it clear that understanding individual components of business is vital and essential. We're seeing now that knowing more about risks through more robust data and advanced analytics can result in better underwriting, pricing, book management, and ERM. And some insurers and reinsurers are becoming more willing to ask for more data by insisting that producers do a better job of gathering data about risks as well, sometimes without regard for ease of doing business concerns, because in some cases there is too much money and risk at stake."

TowerGroup's Pauli, meanwhile, says that gathering the data isn't the problem so much as it is turning that data into useful information. "Most carriers ask [for] an excruciating amount of information anyhow. The leaders augment that with information available from vendors. It's not necessarily asking for more data. It's aggregating that data to solve actual business problems," Pauli says.

To avoid further turmoil, Pauli says that insurers will have to restore some of the discipline that has left their organizations. Years of good results have left most carriers well capitalized and with their reserves in good shape. That's a good situation to be in, for sure, but one that has led to less stringent underwriting and pricing practices.

"People have lost their discipline. You need predictive models and analytics and you need to bring those things to decisioning so that people won't get 'creative,'" Pauli says. "At the carriers that have brought that into their organization, executives can sleep at night. The ones that are doing things manually or in siloed environments are not."

Posted by Nathan Conz at 06:09 PM | Comments

Risk Modeling and Wishful Thinking

If one wanted to identify a single factor that has had the greatest influence in the current financial crisis it would be poor evaluation of risk. Many people, especially those outside the financial industry who manage risk in their own businesses, are now asking how Wall Street's professionals could manage theirs so catastrophically, especially considering the potential consequences.

The debacle also raises the question of the role of technology. One can easily understand "irrational exuberance" or plain greed skewing risk calculation, but financial services today rely on computers to perform vastly complex calculations that can plot the probability of outcomes and precisely evaluate risks. Or so we thought.

The fact is that risk modeling, like so many other control methods, can be used to mask as well as reveal reality. As useful, indeed as indispensable, as risk modeling is to project future probability it is nevertheless subject to one of the cardinal maxims of information technology: garbage in, garbage out.

No financial experience is necessary to realize that "subprime" mortgages were an especially risky instrument to commoditize, or that risk multiplies as the left side of leverage ratios increases. In late 2007, notes Robert Samuelson, Lehman Brothers' leverage ratio was about 30:1; Fannie Mae and Freddie Mac ran ratios as high as 60:1. Samuelson comments:

It wasn't that Wall Street's leaders deceived customers or lenders into taking risks that were known to be hazardous. Instead, they concluded that risks were low or nonexistent. They fooled themselves, because the short-term rewards blinded them to the long-term dangers. Inevitably, these surfaced. Mortgages went bad. The powerful logic of high leverage went into reverse.

The self-deception Samuelson describes is not surprising in itself, but it becomes troubling when one reflects that self-deception was incorporated into pseudo-scientific arguments for the viability of risky investments. Sellers and buyers could defend their actions because they could prove that the investments made sense through risk modeling.

Thus they present a cautionary tale about the abuse of risk modeling. In the first place, if the assumptions of risk models are wrong, their output will be too. Also, as David West, senior vice president of Valen Technologies observes, the number and quality of sources of input will affect the reliability of output. "A consortium approach to data acquisition and subsequent modeling is necessary to avoid building models that have very limited scope," he says. Furthermore, models have limited shelf life. As the multiple factors influencing risk change, the risk of a given investment may also change, and sometimes dramatically.

On top of all these challenges and limitations, "models do not give black and white predictions – everything is described in varying shades of gray," West adds. "Yet banks and insurers want clear-cut decisioning."

Of course decisions themselves must draw a clear line. However, that line can be drawn under the influence of prudence or wishful thinking. Financial services companies exercising due diligence will refine their risk modeling competence and increase their use of sources to make their models more complete. But the distinguishing characteristic of the best financial services professionals will always be good old common sense.

What else explains the fact that some insurers have been decimated by subprime exposure and others have escaped unscathed? Some months ago, the CEO of one of the nation's largest life insurance companies told me how his company had avoided subprime exposure. He said:

"We never thought it made sense to lend money to people who couldn't put any money down and couldn't afford to pay for the mortgage, no matter what all the models were saying."

Posted by Anthony O'Donnell at 09:12 AM | Comments

September 16, 2008

A Mystery Player Enters the Individual Health Market

Don't be surprised if the topic of direct health insurance is covered soon in the pages of Insurance & Technology. As Norvax (the company behind gohealthinsurance.com) SVP of business development Fred Karutz told me recently: "Every major insurance company is looking at the individual market and how they are positioned from a product, distribution, ease of doing business, technology and branding [standpoint]. There is a realization with most insurance companies that you have to take off your 'group hat' when you're talking about the individual marketplace because everything is different."

As insurers figure out the individual market for themselves, new competitors are emerging from obscurity. NextStudent -- a student loan firm that has, well, suspended its student loan business in the midst of the country's recent economic struggles -- announced recently that, along with an unnamed partner, it will begin to offer short-term health insurance to college students and recent graduates.

From a press release:

Recent graduates may no longer be eligible for coverage under their parents' health plans, and with unemployment at a five-year high and companies continuing to cut back expenses, it will likely take longer for new graduates to find jobs with health benefits. Families with children still in college may find NextStudent's student health plans offer better coverage and are more cost-effective than some school or family health plans.

"We're expanding our reach and taking on different business lines to assist our core customer base as we wait for the right time for us to re-enter the student loan market," said Jack Wallace, Executive Vice President.

Perhaps one big difference in how the individual market will develop will be the emergence of niche players like NextStudent. Traditionally, health insurance hasn't been marketed to individuals, so it's possible that health insurers aren't as adept at reaching targeted segments of the population as they could be. As the individual market emerges, however, that will have to change.

Even as employer-provided health care declines, it remains the dominant channel through which Americans receive coverage. As a result, success in the individual market will depend not upon reaching the broadest possible audience, but upon successfully targeting certain segments of the population that are most likely to be seeking individual coverage.

To this reporter, NextStudent is a relatively unknown company. That certainly doesn't doom the organization's chances in the individual health market. It does, in my opinion, limit it in certain ways.

College students and recent grads (and indeed many from other demographics) are very likely to prefer to purchase individual insurance online. They trust the Internet as a distribution channel, but that doesn't mean they trust any organization that pops up in a Google search.

This is where established insurers need to capitalize. If they are able to develop strong and functional web presences around individual health insurance quotes, a few established carriers will be in position to leverage their trusted brands and become an early leader in a developing market. While some are on the right track, I don't think any such carriers have emerged. Many have partnered with sites like www.ehealthinsurance.com and the aforementioned www.gohealthinsurance.com, but I think it will be more interesting to see what happens when a big carrier ventures out on its own.

Posted by Nathan Conz at 12:25 AM | Comments

September 10, 2008

Lessons Learned from Microsoft's Bill Gates/Jerry Seinfeld Ad Spot

I’m not at all sure that it is accurate to describe Microsoft’s latest ad campaign, which recently kicked off with a television commercial starring both Jerry Seinfeld and Bill Gates, as viral marketing. After all, viral campaigns don’t start out with national TV spots featuring two of the world ‘s most famous individuals.

Still though, I find it interesting that the campaign’s first ad has received so much negative attention from blogs and the online media. First, here’s the ad:

And second, here’s the popular criticism: 1.) The ad isn’t funny 2.) Jerry Seinfeld doesn’t appeal to younger viewers and 3.) The ad doesn’t really mention Microsoft or Vista. Here’s how InformationWeek’s Paul McDougall sums it up:

The ad shows Seinfeld helping Microsoft chairman Bill Gates buy shoes at a discount store. Gates opts for a pair called The Conquistador. "They run very tight," Seinfeld warns. It does not get any funnier than that.

But it's a remarkable, 90-second second encapsulation of why Microsoft is going to have a tough time thriving in the Web 2.0 world, where consumers--not agencies and marketers--decide what's in.

For starters, what does the decision to use a 54-year-old, white, multimillionaire comedian, whose show went off the air ten years ago, as the centerpiece of a campaign that's supposed to give Windows a hip new image and help Microsoft reconnect with younger buyers, tell us about the company?

Mostly that it's dominated by middle aged white guys who made their own millions more than a decade ago and who are woefully out of touch with America's changing demographics and any generation that doesn't go by the initials BB.

These guys probably still think the Fonz is cool.

The extent of online criticism is reminiscent of the online backlash that’s usually reserved for ill-conceived and/or misleading viral campaigns. And, after drawing that comparison, I find myself in a state of confusion. What’s so bad about this commercial?

It’s not Seinfeld’s finest work, but I chuckled a few times. Isn’t that really all you can ask for from a TV commercial? Considering some of the other stuff that invades my living room during commercial breaks, I’d say Microsoft did an OK job.

And I don’t necessarily think Seinfeld is that misguided of a choice. It’s not like they pulled Gallagher out of 1985. Seinfeld and his television show reached across many generations, including a group that is now entering its mid-20s (I should know).

What’s really at play here is something that insurance companies -- especially those looking to launch marketing campaigns -- might what to keep in mind. And that is that the online community does not judge marketing campaigns and other corporate efforts on a stand-alone basis. I suspect that bloggers and other online pundits aren’t necessarily reacting negatively to the Seinfeld ad simply because they dislike it from a content perspective, but because they have a negative opinion of Vista.

For example, not too long ago, Microsoft made the cool choice when it partnered with comedian and part-time Daily Show contributor Demetri Martin for an ambitious marketing campaign. In many ways, it was everything that the Seinfeld campaign is not -- it was younger-skewing, made heavy-use of the web, and funnier (I think, anyway). To date though, the campaign with Martin hasn’t taken off.

The lesson here for insurers is that, on the Web especially, a company’s reputation (in the case Microsoft, we’re talking about Vista; for an insurer, we’re talking about customer experience) precedes itself. If prevailing wisdom, accurate or not, suggests that your product or service is less-than-stellar, any attempt to connect with consumers in a less-than-conventional way is likely to be viewed through a harsh lens. (I doubt GEICO’s caveman spots, for instance, would seem as funny if everyone was under the impression that the carrier’s web site crashed during the quoting process.)

I have never used Vista. So I can’t speak with any authority on its strengths or weaknesses. Still, I do know that a series of negative Vista reviews and reports has given the OS a bad rep that has permeated popular opinion. If recent reports are any indication though, Microsoft has taken strides to improve Vista’s performance and fight the stigma currently attached to it. If those efforts are successful, perhaps Microsoft’s subsequent Seinfeld spots will be better received.

Posted by Nathan Conz at 05:38 PM | Comments

IFRS Compliance: Technology Architecture is Key

By Larry Danielson, principal, Deloitte Consulting LLP

The SEC's recent release of its IFRS (International Financial Reporting Standards) Roadmap set insurance companies on a course headed for early adoption, which means preparation has to begin today. Understanding the technical accounting involved with adjusting financial statements for the three year period prior to conversion, as required by the IFRS Roadmap, is clearly only the starting point. Execution and success will depend on understanding and implementing the appropriate financial and reporting technology architecture.

The SEC's criteria that companies must meet to qualify for early adoption is identified in the IFRS Roadmap and points to 110 US filers that will be eligible; while these companies were not named, it is clear that insurers are among them. IFRS has been normal operating procedure for many insurers with international operations since the European conversion in 2005. Even so, IFRS – especially for life carriers – has always been a bit more complicated for insurers because of the nature of insurance contracts: how risk is defined, the length of the term and how the contracts are valued. The "manual journal entry" approach of using a spreadsheet to make IFRS adjustments simply may not be good enough to provide the necessary, and uniquely complicated, financial controls for global insurance carriers.

For many insurers, the first step will be to review their financial systems and decide if a new software version is necessary. Since nearly all insurers use third party software for their financial system solutions, opening an early dialogue with vendors will help determine what strategy to pursue. Based on historical experience from earlier accounting regulatory changes such as demutualization and Sarbanes-Oxley, a broad spectrum of software changes maybe be necessary and range from minor reporting changes to requiring a new system entirely.

Internal coordination is another component of a successful conversion plan. IT executives need to communicate with their CFOs and develop an understanding of how the financial reporting function will change overall. Key areas for consideration will include reserving, actuarial projections and evaluations, and product modification (i.e. insurance contracts and investment products).

Consider potential product modifications. Not only do insurers have to decide if IFRS will lead them to introduce new products and discontinue others, they will have to re-file with the government for the appropriate regulatory approvals required with any changes. And then, on top of that, they will have to modify their product distribution systems.

Another issue is IT platform changes, which can be time intensive. It is vital to identify adjustments early on and consider IFRS' critical impact on downstream and upstream data systems. It is important to take a data-centric approach and focus on how the data itself will be affected. For example, the product systems will need to capture new information for IFRS reporting. Reserving will be another area that may need substantial system modifications to account for how contracts are evaluated and the changing timeframe.

The difficult experiences of some European companies that didn't prepare appropriately for the IFRS conversion, or an unpleasant memory of the Sarbanes-Oxley rollout here in the US, should be enough of an incentive to begin planning now. But the bigger enticement should be the fact that early IFRS adoption may provide a competitive advantage. And in a mature industry like insurance, any advantage to grow should be seized.

Posted at 08:24 AM | Comments

September 08, 2008

The IT Workforce: A Security Risk?

Both in the pages of Insurance & Technology and on I&T's web site, I've devoted considerable coverage to insurers increasing need to recruit and retain top IT talent. Turns out though, that it might be more important for carriers to watch employees going out the door than those coming in it.

While I was busy mourning the loss of Tom Brady for the season, my colleague Anthony O'Donnell passed along this piece of information from Strategy Page: a survey of Britain-based network administrators revealed that a large majority would reveal IT security secrets if they were ever unexpectedly fired from their jobs.

from www.strategypage.com:

...a British survey of network administrators (the people who run the networks, and Internet access, in large companies) revealed that 88 percent admitted they would take company Internet secrets (passwords, system layout and the like) with them if they were ever suddenly fired...

...the knowledge that so many key corporate Internet specialists would spirit away such a treasure trove (and sell to an Internet crook or Cyber War organization) if they were fired, gives Internet gangsters and Cyber War specialists a small group of people to zero in on. Turn one of these disgruntled ex-employees, and you get the Internet keys-to-the-kingdom for a large organization.

Now, if you'll excuse me, I'm going to spend the rest of the day convincing myself that Matt Cassel can lead the Patriots to the Super Bowl.

Posted by Nathan Conz at 06:04 PM | Comments

Assessing Black Hole Risk

Technology is great for modeling risk if one starts with the right assumptions. But sometimes those assumptions are hard to come by. Take the admittedly extreme example from this CNN story. Some people think what a certain small group of scientists is about to do could destroy the world.

The fear is that the world’s largest particle accelerator, about to be activated several hundred feet below the French/Swiss border, could cause a black hole that could swallow up the earth. The accelerator will attempt to replicate the conditions of less than a millionth of a second after the Big Bang, according to the article, and some people have evidently taken legal action to have the experiment stopped.

Physicists acknowledge that the accelerator could, in theory, create black holes, but one John Huth, quoted in the article, says assertions about the possibility of earth-swallowing black holes are “baloney.”

The article reports that Huth said in a recent interview that even if the accelerator created small black holes, and even if one such black hole were stable, “it could just pass through the earth without being detected or without interacting at all.” Said Huth:

“The gravitational force is so weak that you’d have to wait many, many, many, many, many lifetimes of the universe before one of these things could [get] big enough to even get close to being a problem.”

That sounds more reassuring than the reporter’s conditional “could” in the paragraph above, but it points to the need of underwriters to rely on specialists in order to adequately assess risks.

For my part, I’m willing to adopt Huth’s insouciance and bet any sum of money that the world won’t in fact disappear into a void when the accelerator is turned on. Any takers?

Posted by Anthony O'Donnell at 12:39 PM | Comments

Honoring Fannie & Freddie's Critics

The collapse of Fannie Mae and Freddie Mac was a long time coming. Sentimentality about the companies' mission to extend the possibility of homeownership to the masses masked their problematic position in the marketplace. That made it easier for interested parties to dismiss Fan and Fred's critics and it made it politically difficult for those critics to have their message heard dispassionately. Well, those critics now have their vindication, however bittersweet.

Yesterday afternoon Representative Ed Royce (R-Calif.) issued a sober "told you so" that included the following language:

For the better part of a decade I, along with some of my colleagues in Congress, have been calling for a stronger regulator for Fannie Mae and Freddie Mac. Because of their implicit government backing, Fannie and Freddie took on excessive risk over the years, becoming two of the largest most complex financial institutions in the world.

How can it be that Royce and his colleagues strove so long and hard to such little effect? Yesterday's Wall Street Journal report offers an interpretation.

Though Fannie and Freddie were created by Congress to help prop up the housing market, they have long been owned by private shareholders seeking to maximize profits.

The result was crony capitalism under the guise of public welfare, in the view of Paul Gigot, editor of the Wall Street Journal's editorial page. Gigot called attention to serious problems within Fannie Mae and Freddie Mac in Feb. 2002 through an editorial written by Susan Lee. Published with the provocative title "Fannie Mae Enron," the piece resulted in a hail of attacks both against the Journal and against Gigot personally.

Gigot's competence was called into question, not only by then Fannie Mae CEO Franklin Raines, politicians and fellow journalists, but also from the Wall Street firms that profited from doing risky business with Fan and Fred.

Gigot put his journalistic neck on the line and paid dearly for it. However, when it became clear earlier this summer that Fan and Fred were headed for collapse, Gigot had his vindication. The column he published on July 23, entitled "The Fannie Mae Gang," is a must-read for anyone who seeks insight into the human machinations behind the Fan and Fred disaster. Documenting the corrupt relationships that allowed this catastrophe to happen, Gigot concludes:

The abiding lesson here is what happens when you combine private profit with government power. You create political monsters that are protected both by journalists on the left and pseudo-capitalists on Wall Street, by liberal Democrats and country-club Republicans…

Posted by Anthony O'Donnell at 09:25 AM | Comments

September 03, 2008

Hurricanes, Civilization and Insurance

During last night's activities at the Republican National Convention, one of the speakers made a poignant observation to the effect that while Hurricane Gustav, didn't turn out to be another Katrina, some people suffered just as terribly as if it had. The speaker was talking about fellow Americans, but owing to what I've been writing about, my thoughts turned to the people of certain Caribbean nations that have been hit in quick succession by at least three significant storms.

Yesterday Hurricane Hanna hit the island of Hispaniola, which has already suffered the ravages of Tropical Storm Fay and Hurricane Gustav. Owing in significant measure to the soaking caused by the previous storms, yesterday's floods and mudslides killed 25 people in Haiti. Those losses come after Tropical Storm Fay killed at least 14 people on Hispaniola during the storm, and Hurricane Gustav killed 22. The immediate effects of these storms were by no means representative of the full toll, as exemplified by a bus accident in Haiti caused by flooding that was reported to have killed another 50 people. The storms are likely to affect agricultural production for some time to come and leave many individuals worse off for the foreseeable future, among other infrastructure-related, longer-term effects.

I'm not bothered that these tragedies get less attention in the American media: it's natural for local media to focus on local concerns. It is heartbreaking, nevertheless, to reflect that the inhabitants of Haiti and other Caribbean countries lack many of the capabilities that the United States enjoys both in preparing and responding to major storms. Poor infrastructure and often flimsy dwellings make life worse for Haitians and others during hurricanes, and so does a lack of insurance coverage.

If one were to look at a map of insurance coverage around the world one would see huge gaps in the geography. This is because many people simply can't afford insurance or the risk factors make the proposition of insurance unviable. Insurance is a blessing of material civilization that enables the more fortunate of us to take measures to secure our property and protect our families. However imperfectly the industry performs when it comes to fulfilling its commitments at the time of claims, it nevertheless provides a vital benefit. Those who work in this industry, including those who staff its information systems, should feel some pride in contributing this service that makes our civilization more secure.

Perhaps someone will find this observation banal or overstated, but I insist on the point. There is a tendency, especially during election campaigns, to dwell on what could and perhaps should be better. But we do well also to reflect on the myriad benefits we take for granted and which could easily change for the worse.

Posted by Anthony O'Donnell at 09:15 AM | Comments

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