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Risk Management
Megatrend Watch

Four manageable risks that will impact the insurance industry in 2019.
  • Louie Castoria and Mary Jo Barry
  • March 2019
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Key Points

  • The Situation: Insurers must be aware of new risks and trends that will come to the fore this year.
  • Consider This: Develop telecommuting opportunities; hire military veterans and millennials; switch to a collaborative construction claims process; and encourage diversity and inclusion throughout the industry.
  • Seize the Moment: Getting ahead of these megatrends will have a payoff in the future.

 

Many large risks are outside the insurance carriers' control, but there are some major trends that are within control, or at least their influence, and which can dramatically affect their fortunes for good or bad.

Here are four manageable megatrends nearing their tipping points. Insurers who manage them well will look back on 2019 as the year that made a difference.

Real Estate Isn't the Business of Insurance

Unless a business is subletting office space, each dollar spent on its occupancy costs comes off its bottom line, and for most employees, every hour commuting is lost productive or personal time.

Why force workers to commute? The insurance industry does not run an assembly line or NFL team, where employees must be present to be productive. Some insurers have adopted work-from-home policies and shared offices (hoteling) to reduce the need for office space or have opened satellite offices closer to suburbs.

The trend away from paying for office space is most visible in service companies. A survey conducted in 2015 and reported by the London Business School's Global Leadership Conference found that 35% of the respondents predicted that half their employees would be working remotely by 2020. FlexJobs, a connector of workers with virtual companies (ones that mostly or completely operate remotely) currently identifies over 51,000 such companies, most of them in the tech sector, human resources services and education. Does telecommuting change the company's culture? Social interaction can be partly maintained through regular video check-ins and meetings. Many people maintain close friendships across states and continents, making rare times together in person even more valued.

The trend to decrease physical office space will be driven by the prime motivator—economic efficiency—but will have positive side effects for employees and their families.

The Millennial Migration

The insurance industry hasn't had much luck recruiting millennials as employees, but that is about to change. A Pew Research Center study found that by the end of 2020 there will be 400,000 unfilled job positions in the U.S. insurance industry. Within the next three years, 25% of the industry's professionals will retire. Yet, the study also found that only 4% of millennials expressed interest in working in the insurance industry.

Eventually, the laws of physics will come into play: A vacuum of filled jobs and a surplus of eligible workers will reach equilibrium. Not every millennial will develop an online company that Facebook or Google will buy for $1 billion. Others will have to find work.

The insurance industry is ideally suited in many ways to millennials' goals. Studies of this demographic in the workforce show several common characteristics:

  • Millennials value mobility more highly than stability. They are willing to jump ship for higher compensation or opportunities to rapidly advance.
  • Many carry staggering long-term student loan debts, restricting their ability to buy homes, start families and enjoy pastimes.
  • Millennials have never known a world without the internet. According to Ad Age, 85% own smartphones and spend 25 hours per week, on average, using them.
  • Millennials want to work in a company that is a good corporate citizen. Pat Wadors, LinkedIn's former chief of recruitment, reported in a LinkedIn article that half of all applicants asked about the company's mission before asking about their compensation.

Millennials are eager to do something meaningful, though they do not want their job to define them. So-called work/life integration is when the job supports the employee's personal and family goals.

With those characteristics in mind, it becomes clear why the insurance industry is a great place for millennials to make their careers.

With 400,000 job openings and many more on the horizon, insurance will be the Land of Opportunity, especially when it loses its most senior and best-compensated people to retirement.

At its core, insurance is about helping people and businesses get through adversity. Insurance people are protectors and often the second responders at tragedies. It is work one can be proud of.

Insurance carriers and brokers generally provide good benefit packages: exactly what a young family needs to get started. They also are clean and green businesses, especially as paper files migrate to electronic formats.

Insurance is a contact sport. Millennials are all about contacting other people. They are the most communicative, globally aware generation in history. If they make a good impression they can be the most effective mass-media marketers any company could want. They also are adept at making and maintaining relationships with the touch of a keypad.

A related trend is student loan debt relief as a job benefit. The Oct. 18, 2018 issue of Forbes, had a headline: “Student Loan Repayment Is the Hottest Employee Benefit of 2018.” According to the article, 44 million Americans have student loan debts totaling $1.5 trillion.

Only mortgages constitute a larger portion of the total U.S. consumer loan debt. Some companies have begun offering monthly student loan repayment benefits in addition to other compensation. Student loan repayment is a strategy to recruit and retain young professionals.

However, most careers in insurance do not require advanced degrees. Many insurance certifications can be completed online through the Insurance Educational Association and similar nonprofit organizations at a fraction of the cost of one year of a post-graduate degree program.

Another idea: Hire veterans. Those who protected our country in the armed services often gravitate toward first-responder professions. Their instincts to safeguard others, their experience in teamwork and familiarity with hierarchical organizations make them ideal to be second responders in the insurance industry. If they don't have insurance training, make their tuition an employee benefit. Don't we owe them that?

The trend to decrease physical office space will be driven by the prime motivator—economic efficiency—but will have positive side effects for employees and their families.

Defects, Construction and Otherwise

Finding innovative solutions to recurring and high-cost claims is an emerging trend in the insurance industry.

A familiar example: A major construction project is discovered to have various defects in its design, materials and construction—everything from the soil compaction to the rooftop solarium. Claims are made and lawsuits are filed.

The insurance industry responds, each carrier appointing a different law firm to defend each insured, attend nearly every deposition and to do whatever a court-appointed special master orders them to do. Concerned about uncovered aspects of the claim, each carrier appoints coverage counsel to monitor developments in the consolidated case and attend settlement conferences and mediations.

What's wrong with this picture? Everyone from defense counsel to the special master is being paid by the hour, and is engaged in an antiquated, labor-intensive pre-trial process in a case that probably will never see a jury. It's like using a thousand catapults to launch a peanut into space.

A March 1, 2017, Judicial Arbitration and Mediation Service's newsletter article, “Collaborative Construction Claims Process” describes a system that may resolve construction defect cases more efficiently. The goal: to reduce the fees and costs charged by counsel, expert witnesses and court-appointed referees.

In a collaborative construction claims process, attorneys and parties identify the defects in the project then engage in alternative dispute resolution processes to address each defect and the parties' responsibilities.

Some defects might be solved through early, direct negotiation, others through mini-arbitrations, mediations or settlement conferences.

The process is typically initiated by counsel: “To facilitate this form of ADR [alternative dispute resolution], a construction lawyer doesn't necessarily need any new skills. …The lawyer must be more of a problem solver and consensus builder than a litigator who can identify win-win opportunities for the parties[.]”

The insurance industry can jump-start this kind of change through its own collaborative processes. The industry can ascertain who the insured contractors and subcontractors are, their roles in the project, what their policy limits are, their contractual indemnity obligations and any unusual coverage issues.

With this information in hand, insurers can begin to fit the puzzle pieces together, and determine what judicial processes, if any, are needed before discrete aspects of the case can be resolved.

Or, they can start arming those catapults.

Insurers can also economize by, ironically, hiring more lawyers.

Sometimes the lawyer who is most familiar with the judges and jury pool is not in a firm that has a crack appellate practice team, an expert e-discovery vendor, a wizard at settling cases, an experienced public relations adviser, or a subject matter expert in the substantive area of law.

Through careful coordination and creative engagement agreements, the insurer can create a team with the skills needed in high-stakes cases, with minimal duplication of effort. Like President Lincoln's cabinet that was examined in the biography, “Team of Rivals,” lawyers in competing firms can collaborate for their common client's and their firms' common good.

Diversity and Inclusion Hits D&O

Any discussion of megatrends would be incomplete without the #MeToo movement and calls for increased diversity and inclusion in business leadership roles.

These movements have not yet effected changes in many C-suite offices. As reported by Forbes in a Feb. 22, 2018 article, their main effect has been to send upper-tier executives to diversity and inclusion (D&I) and anti-harassment training. That's progressive, but not yet progress.

The article cites a trend toward higher premiums and deductibles for employment practices liability insurance for entertainment, high-tech and some other industries. But inflation in EPL insurance costs is a deductible business expense, not a change in behavior.

The need for inclusivity will be felt beyond the EPL insurance premium. It will be felt directly in boardrooms where discriminatory practices may have been decried, but are still applied. The tactics will be familiar: boycotts, election challenges and shareholder derivative suits when misconduct erodes the bottom line.

Here the insurance industry can be an agent for change by its example and by including in premium pricing the true cost of harassment and discrimination claims.

Next Steps

Opportunities abound for those who recognize large-scale trends they can manage or influence.

  • Take steps to better leverage real estate utilization.
  • Clearly state the alignment between the insurance industry's core values and those common in the millennial generation.
  • Adjust personnel policies accordingly and hire military veterans.
  • Use creative alternatives to shortcut the most expensive types of litigation, using collaborative processes and selecting “lawyers, not law firms.”
  • Monetize the value of a nondiscriminatory workplace, rewarding those who practice what they preach about diversity and inclusion.

Perhaps we're wrong in these predictions. But we don't recommend that you bet on it.

 

Best’s Review contributors Louie Castoria and Mary Jo Barry are partners at Kaufman Dolowich & Voluck, LLP. Barry is co-managing partner of the firm’s New York City office. Castoria (San Francisco) is co-chair of the firm’s national Professional Liability Practice Group. They can be reached at LCastoria@KDVlaw.com and MBarry@KDVlaw.com.


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