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A publication of the Insurance Accounting & Systems Association

theInterpreter ®

WINTER 2015

Vol. LXXXVIssue IV

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Where is Big Data Now?p. 12

Debunking Cyber Mythsp. 15

Planning for an Inflection Pointp. 28

INTERVIEW: The Funny Economistp. 8

LOOKING AHEAD

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WINTER 2015 x Vol. LXXXV x Issue IV

Winter 2015 3

36 Association News• Committee Spotlight • National Volunteer Profile • IASA Scholarship Program

departments

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cover story p.8An Interview With a Funny Economist

contentsPUBLISHED BYINSURANCE ACCOUNTING & SYSTEMS ASSOCIATION, INC. (IASA)3511 Shannon Road, Suite 160P.O. Box 51340Durham, NC 27717-3409Phone: (919) 489-0991Fax: (919) 489-1994Email: [email protected]

VICE PRESIDENTMARKETING & COMMUNICATIONSRod TraversThe Nolan [email protected]

EDITORStephanie [email protected]

ART DIRECTORMichael MolanphyVaradero Communications, [email protected]

SUBSCRIPTION INFORMATIONTricia StillmanDirector – Member & Volunteer ServicesIASA International Office(919) 489-0991 [email protected]

PUBLICATION INFORMATIONIASA’s Interpreter is published quarterly, and is available at the general subscription rate of $35.00 per year for members and $45.00 per year for non-members.

REPRINT INFORMATIONNo part of this publication may be reproduced without written permission of the publisher. Reprints of Interpreter articles are available from the publisher and may be coordinated through the editor of this publication.

Copyright 2015 by IASA. All right reserved.Note: The news expressed in Interpreter articles and columns reflect the opinions of individual authors and should not be construed as carrying the endorsement of the Insurance Accounting & Systems Association (IASA) or its staff. Additionally, use of this publication, the name “IASA,” or the name “Insurance Accounting & Systems Association,” for personal promotion or recruiting purposes is strictly forbidden. Violations will be prosecuted or reported to the National Association of Personnel Consultants and appropriate licensing authorities as deemed warranted by IASA. Violations will be published for the information of our member companies.

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columns

6 President’s Message2015 – We are “ALL IN”

7 From the Executive DirectorManaging Business Uncertainty Like a Vegas Oddsmaker

5 EditorialStrategy Here and Now – Rod Travers

feature story32 Tax Solutions Corner

by Joanne Kearbey, Sarah Stubbs, and Margarete Chalker

34 Getting Started With Social Media

by Darin Reffitt

35 Keynote Speakers

by Stephanie Leicht

looking ahead12 Big Data/Complete Outlook

by Cindy Maike

14 Emerging Technologies

by Denise Garth

15 Debunking Cyber Myths

by Janeen Blanton

16 2015 Predictions & Surprises

by Frank Conde & Jason Gingerich

18 Planning for an Inflection Point

by Stephen Webersen

26 IT Spending in 2015

by Martina Conlon

28 Chapter Outlook 2015

by Chuck Gunkel

31 IASA Industry Pulse

by Don Macfarland

2014-2015 IASA VOLUNTEER MANAGEMENT TEAMPRESIDENTForrest E. Mills, Jr.Guaranty Income Life Insurance Company

PRESIDENT-ELECTTim Morgan The Republic Group

CHIEF FINANCIAL OFFICERTom EwbankThe Ewbank Group P.C.

CHIEF INFORMATION OFFICER Mary Ellen FreyermuthCatholic Relief Mutual Insurance Company

VICE PRESIDENT – BUSINESS SHOWMargaret HornEverest Reinsurance Company

VICE PRESIDENT – CHAPTERSChuck GunkelSwift Print Communications of St. Louis LLC

VICE PRESIDENT – e-LEARNINGCeleska FredianelliQBE

VICE PRESIDENT – EDUCATIONBeech TurnerAssurant Specialty Property

VICE PRESIDENT – INDUSTRY RELATIONSLaurie MackloskyThe Travelers Companies

VICE PRESIDENT – MARKETING & COMMUNICATIONSRod TraversThe Nolan Company

VICE PRESIDENT – MEMBERSHIPDottie AugustineAON Benfield, Inc.

VICE PRESIDENT – SEMINARSCarlos CorreaLiberty International Underwriters

VICE PRESIDENT – VOLUNTEER DEVELOPMENTKaryn Spaude

IASA GOVERNING BOARDPRESIDENTForrest E. Mills, Jr.

PRESIDENT-ELECTTim MorganThe Republic Group

BOARD CHAIRBeth MercierThe Travelers Companies

CHIEF FINANCIAL OFFICERTom EwbankThe Ewbank Group P.C.

CHIEF INFORMATION OFFICERMary Ellen FreyermuthCatholic Relief Mutual Insurance Company

AT-LARGE BOARD MEMBERSSonia Cliffel Miguel EdwardsFirst American Allstate Insurance Equipment Finance Company

Darby O’Neill Brian OllechPrinceton Insurance The Warranty Group

Linda PaolucciTIAA-CREF

ASSOCIATION STAFFEXECUTIVE DIRECTORJoseph P. Pomilia

VICE PRESIDENT – CONFERENCES & EVENTSMargaret M. McKeon

DIRECTOR OF EXHIBITSKim Morris

DIRECTOR OF MEMBER & VOLUNTEER SERVICESTricia Stillman

DIRECTOR OF OPERATIONSGina H. Jolly

MANAGER, MEMBER SERVICESSheila White-Smith

CHAPTER SERVICES COORDINATORAngie Gurganus

ADMINISTRATIVE ASSISTANTKaitlyn Jolly

The insurance industry’s most prominent conference offers educational, industry relations and career development opportunities for new and experienced professionals across all lines of business and critical functional areas, including: accounting, finance, investments, operations, risk, and systems/technology.

u More than 80 educational sessions

u 200+ product and service exhibitors

u Three discipline-specific super sessions

u Exclusive executive roundtable events

u Inclusive networking opportunities

Plan now to join IASA in Las Vegas next June!

GO TO IASA.ORG FOR MORE INFORMATION!

REGISTER TODAY u JUNE 7-10, 2015 u LAS VEGAS, NEVADA

Keynote Addresses by PEYTON MANNING on Monday, June 8

CONDOLEEZZA RICE on Tuesday, June 9

ROD TRAVERS is Executive Vice President at The Nolan Company, a management consulting firm specializing in the insurance industry.












Welcome to the Winter 2015 edition of IASA’s Interpreter. In this edition we focus on issues facing

our industry now and in the near future. These topics are likely on your radar already but if not perhaps they should be. Our topics include the state of the economy, cyber security, finance and investments, emerging technologies, managing expenses, and more. Our authors and contributors have done a great job of bringing their knowledge, experience, and perspectives to these timely issues. We hope you and your colleagues find them valuable as you manage through the issues of the day at your own company.

And speaking of looking ahead, I’d like to touch on the matter of strategy. It’s common practice for business leaders to assemble their teams annually to review and renew company strategy. Every company should have a clear strategy that is revised as business conditions and market factors evolve. And every company leader should be able to articulate that strategy. At the same time, I think the annual strategic planning ritual could benefit from a bit of tactical reality being infused into the process.

Sometimes strategic planning sessions can drift off into the world of ideals. That’s in part by design. It’s necessary to set the “idea permission meter” pretty high so that strategic discussions can at least explore what is within the art of the possible, even if those ideas aren’t exactly within the realm of practical. What I think sometimes gets lost in those discussions is the reality of today’s challenges. For example, let’s say a company is struggling with the hindrances of outdated legacy systems; however, they don’t let that stop them from conceiving a mobile-heavy service strategy — one that their legacy systems cannot realistically support. They charge ahead, fueled by competitive imperatives. And by the time next year’s strategy session rolls around, they rationalize all the compromises

they made on that mobile service model because practicality got in the way. I think they would have been better served if someone said, early on, “Wait a minute; we can’t even modernize our own core systems. Why are we tackling something even more aggressive when we haven’t solved yesterday’s problems?”

Being the “reality check” czar can sometimes be an unpopular role, but it’s important. There is risk in taking action, just as there is risk with inaction — and that risk is compounded if you ignore important facts. As you embark on your next strategic planning exercise, consider these guiding principles:• Be realistic about today’s (and yesterday’s)

unresolved problems. Don’t forget “here and now” as you contemplate the future. Does your strategy depend on competencies or resources you don’t have? If yes, don’t let that stop you; instead, solve for those limitations. Consider new talent, additional capacity, partners or outside help.

• Distinguish aspirations from specific objectives.• And to paraphrase Voltaire, “Don’t let

perfect be the enemy of good.”How would you improve the traditional

strategic planning process? As always I welcome your thoughts at [email protected].

Strategy Here and Nowby ROD TRAVERS

EDITORIAL

theInterpreter x www.iasa.org Winter 2015 5

Every company should have a clear strategy that

is revised as business conditions and market factors evolve. And every company

leader should be able to articulate that strategy.”

Learn more about the IASA by visiting our website at www.iasa.org or by calling (919) 489-0991.

BECOME A MEMBERTODAY

To find out more about IASA,or to apply for membership,visit www.iasa.org, email Tricia Stillman, Director— Member & Volunteer Services at [email protected], or call the IASA International Office at (919) 489-0991 x202.

IASA company membership is established on an annual, calendar year basis at a rate of $600 per company per year. Licensed insurance companies are classified as regular IASA members, and all other organizations (including solution providers, associations and regulatory bodies) are classified as associate IASA members. Membership for licensed insurance companies may be purchased at the holding company level for the main/parent organization and all affiliated entities at a rate of $1,575 per year. Organizations with affiliated entities or regional offices that do not opt for a holding company membership can purchase an individual membership on a company and/or location basis. Once a membership is established there is no limit to the number of individuals that may be involved with IASA from each member company, and we encourage all professionals that might benefit from our products and services to participate.

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As I get older the years seem to pass by ever faster. As 2014 came to an end, half of my term as President of

the IASA was gone. The past six months have certainly flown by. We saw a lot of progress for the IASA in the past 180 days that will provide for a very positive 2015 year and conference in Las Vegas. Key items include:

Our chapters are firing on all cylinders. We have seen record attendance at chapter events with high quality programs. I was able to attend five chapter meetings this fall and was extremely impressed with how our chapters are operating and the enthusiasm exhibited by our chapter officers.

Volunteer development has been hard at work developing new leadership programs to provide more opportunities for our members to learn and grow with the IASA. This is a contagious bunch that is passionate about their involvement.

The e-learning committee has selected a new provider for our webinars. As a result, they have many exciting on-line educational programs scheduled for the new year. In addition, various committees are adapting webinars for internal learning initiatives for chapters, exhibitors and others.

Industry relations has made new partnerships as we reach out to a younger demographic and our scholarship program has grown significantly as a result.

The Industry Pulse has exploded with excitement with a new “chapter” challenge. Participation in the polls is at an all-time high and the information being gathered and presented is first class.

Social Media continues to grow with “twits” and other “posts” that are reaching more and more of our members in a fun way. I am always amazed at the creativity of this talented group.

The Interpreter committee has taken on a new level of “volunteerism” with managing the content of our electronic and paper

publications. This effort has re-affirmed my belief that our volunteers are a great group that can, and will, do anything they set their minds to when working together. What wonderful accomplishments this committee has achieved.

The 2015 conference floor in Las Vegas will be one of the best ever thanks to our Business Show committee. This group has lined up an exhibit hall that will be packed with all of our solution provider friends, quality vendor con-nect tours and a town hall with a few surprises.

The Seminars committee presented a fantastic EDGE conference in the fall in Chicago highlighted by our keynote speaker, former Comptroller of the Currency, David Walker. The committee is already working on the event scheduled for September in St. Louis. In addition, the group has planned four roundtables for the annual conference with top quality speakers and interactive networking opportunities.

And, how about the tremendous job our Education committee has done preparing over 90 educational sessions and super sessions for your learning pleasure in Las Vegas?

Rounding out the efforts of our team these past six months, I am excited about our selection of keynotes for our 2015 annual conference. After last year’s terrific conference highlighted by former President Bill Clinton, we were challenged to keep the bar raised. I think we did it!

Monday morning will feature Peyton Manning, the NFL’s only five-time MVP

and a 14-time Pro Bowl selection. In my view, Peyton has demonstrated a quality throughout his career that is an example of how an individual can “GO ALL IN” with their career. As I grew up in south Louisiana, the Manning family has been synonymous with more than football; they have been a leading example of quality both on and off the field. I couldn’t be more excited to have Peyton “kick off ” our conference.

On Tuesday, Condoleezza Rice, the 66th Secretary of State of the United States, will get us started with her inspirational story. If you have followed Ms. Rice to any degree, you understand that she has been very successful in her ability to “GO ALL IN” in various endeavors throughout her life. Some of her accomplishments may surprise you. It is a great pleasure to have Ms. Rice with us to share her experiences.

On Wednesday morning, we will focus on the “career skills” side of our “ledger.”

Ms. Juliet Funt will try to calm us down in our “age of overload.” And speaking of age, if you are as old as I am, you will remember Ms. Funt’s father, Allen Funt, the man behind Candid Camera! Ms. Funt will share how we can “GO ALL IN” while lightheartedly deconstructing the ingredients driving the pace and pressure of modern life to its excruciating level.

Wow! What an exciting six months we have had! And, what a set up for the new year! Your IASA staff and management team really know how to “GO ALL IN!” As we begin 2015, we will be building on all of these initiatives and rounding out the program to deliver a top-notch annual conference in June.

The registration brochure has been mailed, providing you with all the details. We are excited about this year’s conference and look forward to sharing a fantastic time with you.

See you in Las Vegas June 7 – 10, 2015 at The Mandalay Bay!

6 Winter 2015 theInterpreter x www.iasa.org

2015 – We are “ALL IN”by FORREST E. MILLS, JR

PRESIDENT’S MESSAGE

Forrest E. Mills, Jr. is the Chief Financial Officer of Guaranty Income Life Insurance Company and this year’s IASA President. He can be reached for further information or comment via email at [email protected].

Our volunteers are a great group that can, and will, do

anything they set their minds to when working together.”

Joe Pomilia is the Executive Director of IASA. He can be reached for further comment or information via email at [email protected].

This coming June the IASA Annual Conference will be in Las Vegas, a city best known for two things; gambling

and business conventions. So as we focus this particular issue of the Interpreter on Business Forecasting I thought it might be fun to contrast Business Forecasting with the approach that Vegas Oddsmakers take to mitigate their gaming risks.

Obviously the business of insurance and the casino business are vastly different and finding a common thread might be a bit of a stretch. That said; the business of insurance is all about predicting what will (might) happen in the future. It’s about assuming risk in the face of uncertainty and setting a fair price for that risk assumption because we never really know when the wind will blow or the earth will shake.

In a similar way casinos face a related paradigm. They never know when the craps dice are going to turn hot, a lot of horse bettors are going to hit the trifecta, or a

“whale” (high roller) is going to have a hot run at the blackjack or baccarat table.

In order to control risk both industries use talented and experienced professionals and powerful tools.

For insurance carriers quantifying risk, estimating cash flows, predicting investment returns and hitting a whole series of bottom-line metrics is a daunting task. The business of insurance uses any number of models, analytics, research, expert guidance and other tools to weave through a maze of difficult decisions. And even with all of these resources successful outcomes are never assured, which means individual companies and even the industry as a whole must be aware and even comfortable with the reality that there remains a measure of chance,

perhaps even a bit of luck, that will always be part of the equation, at least over the short run.

Casino operators have definitely used every angle and resource possible to fine tune how they manage their gaming risks. Having spent my fair share of time in casinos trying to beat the house, I have a bit of first-hand experience about how the house keeps the odds in their favor. Here are three ways I have seen how they do that.1. Limit the Risk Ceiling2. Carve out a “Guaranteed” long run ROI3. Only Play the Games they KNOW very well

Casino operators limit the risk ceiling, and create a natural guaranteed ROI for almost all games of chance by creating maximum bets and other betting terms that keep their risk within a manageable range. This is a huge benefit to the house, because that hot run of luck for any gambler can yield a limited maximum win. The casino knows that all the games are set within a prescribed outcome range with a house Vigorish or Vig as it is commonly called factored into the model. The Vig is the house advantage, like the payout on a roulette wheel. If you pick the right number the house pays each dollar bet at 36 to 1. But, since there are actually 38 possible selections, the house Vig with every bet made is 2 in 38 or a bit over 5%. By limiting the amount that can be bet at any one table on any one spin of the wheel the house has can control the risk ceiling and remain certain that multiple bets made over the long term, all within a controlled dollar threshold, will yield a near guaranteed 5% return. A beautiful situation if you can arrange it, especially when you couple that with the additional advantage of only playing the game(s) they know very well. It’s interesting to see how some casinos feature certain gaming options and not others.

Clearly someone is making a conscientious business decision to stay within the games they know very well and have the right people to run them.

One gaming option remains universal within all casinos, however, and that is slot machines because the winning (or really more accurately the losing) percentage can be finely calibrated. Program the machines to pay out at a set rate and not a penny more. I had an experience years ago that illustrated that situation perfectly. I was at a slot machine and the big winning pot was set to pay with three 7’s and after two 7’s came up and a third dropped into place I was about to celebrate. Not so fast, however, because I’ll never forget what happened next. That third 7 stayed in place for only a split second and then popped out of place (backwards). The machine knew it was not set to pay the big pot. Now that’s controlling your gaming risk! Their gain, my loss.

So maybe our industry can learn a little from Oddsmakers about controlling future business risk. Sure we can’t control the assumption of insurance risk like casinos do, within their controlled environment, but we can limit the Risk Ceiling with contract terms and reinsurance. We can carve out a “guaranteed” return over the long run with underwriting discipline and pricing controls. Finally we can avoid unexpected outcomes by “only playing the games we know”, writing the lines of business in the locations that each company understands well enough to do it truly effectively.

I look forward to seeing you in Vegas, where hopefully we can celebrate successful business outcomes and even beat the odds for a gaming win in the casinos!

Managing Business Uncertainty Like a Vegas Oddsmakerby JOE POMILIA

FROM THE EXECUTIVE DIRECTOR



INTERPRETER: Thanks for meeting with us, Peter. (Peter Ricchiuti is the business school professor you wish you had back in college and will be a featured keynote speaker at our Chief Investment Officer Roundtable in Las Vegas!) This is an exciting time to be discussing the markets as 2015 gets started with a “little volatility!” To begin, why don’t you give us a couple of minutes about your background and your current position at Tulane University? Your program is unique and a great opportunity for kids wanting to learn about the markets.

RICCHIUTI: Sure. I started my career with the investment firm of Kidder Peabody and later managed over three billion dollars as the assistant treasurer for the state of Louisiana. In 1993, I founded Tulane University’s Freeman School of Business highly acclaimed “Burkenroad Reports” student stock research program. I also host a popular weekly business show on National

Public Radio in New Orleans called Out To Lunch and recently published my first book, Stocks Under Rocks.

Recently, our Program (Tulane University’s Burkenroad Reports) won top honors for best teaching delivery in the prestigious Wharton-QS Stars Award, an international competition recognizing innovative approaches in higher education that enhance learning and student employability. This is an amazing recognition of the work we have been doing for the past 21 years. It is particularly meaningful because it celebrates both the creativity of the Program and its results in developing strong, well-prepared students. During this time, our Burkenroad Reports Program has sent over 600 students off to careers in the investment field.

INTERPRETER: This is a new year. What is the story for 2015?

RICCHIUTI: Main Street is just starting to catch up with Wall Street. The markets have been white hot since the spring of 2009. The

stock market has tripled, corporate profits are through the roof and we are just now starting to see the consumer come back in the picture. Consumer confidence is higher than it’s been in seven years. You’re actually seeing people come out and starting to buy big ticket items, everything from washing machines to cars and such. You’re finally getting some confidence back on Main Street. I think that’s going to be the big story. It’s not really surprising because historically the stock market has led the economy, and it did it again this time. When the stock market was rallying so much, you heard all sorts of people saying that’s just the “casino” on the side. Of course, they were wrong again. The message was that the economy was really turning. Now we’re in a situation where we have almost full employment; we’re adding another 200,000 jobs every month. The unemployment level is getting low enough, where we haven’t seen this in a long time, where the employees are

COVER STORY

A Funny Economist? I’ve Never Heard of Such a Thingby FORREST E. MILLS, JR

continued on page 10

COVER STORY

starting to get a little leverage. So, I think you’re going to see wages start to creep up, which has become a very interesting question. Traditionally, we’ve said that if wages creep up, it will bring inflation and hurt the economy, but there is another whole camp out there that says if wages went up, then that would actually help the economy. Maybe, because finally these people could go out and buy something, which is like a virtuous circle. I guess we’re going to get to test this out. It’s really a big deal.

This is kind of an aside, but at the college level, every year since 2009 I’ve seen the recruitment get better and better, and this year the recruiters are coming earlier; it is happening. I think we’re going to be in good shape in 2015.

INTERPRETER: When you talk about unemployment being lower, are we at full employment with the people that have come off the rolls and the labor market being filled with low paying jobs? What is your view on that? Is that hurting us?

RICCHIUTI: That’s true. It is a lot of low paying jobs, and even the new ones coming in are disproportionately on the service sector. The real surprise is going to be the growth in the manufacturing sector, which are good paying jobs and are jobs we haven’t had in 30 years. It’s because, not so much oil because they are all being manipulated, but the low natural gas prices, which are what you need to fuel a factory or chemical plant, are so low now that these companies are really starting to ramp up. I know of at least a dozen companies that had plans to build their expansion facilities abroad, mainly in Asia, but now that these natural gas prices are so low, they’ve just moved the blueprints over to the United States and just plan to build it here. Oil is the same price all over the world, basically, but natural gas gets used and priced where it’s found. Natural gas is $3 here and it’s $9 in Europe and about $15 in Asia. It’s really hard to move it.

INTERPRETER: Where do you see the U.S. economy in 2015?

RICCHIUTI: I think you’re going to get GDP in between 3% and 4%, and that’s going to make people feel good. The other thing that people aren’t factoring in is that we’ve been down at that 2% level for so long. When I tell people that we’re going to plus 3% (GDP), they say. “Well, how is that going to happen? Where is that momentum?” The truth of the matter is that the Fed has been flooding the

market with free money for five years. I tell people it’s like being in a room filled with gasoline, and what’s one little match going to do. The accelerants are unbelievable out there. The other thing that we’re pretty encouraged about is that we had very little bank lending. Even when the recovery was getting going in 2010 and 2011, and only recently, have they started to pick it up; guess that’s another sign.

INTERPRETER: Are there any variables that would slow the recovery down?

RICCHIUTI: One of the wildcards out there is this big, big precipitous decline in oil prices for states like Louisiana, Texas, Oklahoma and Alaska. It’s an interesting thing. You’re going to have layoffs in the oil business. Earnings (oil related) will come in under where people are thinking, but it flows right out the other side because these lower oil prices are really creating a huge boost for consumers. Recently, I heard someone say, “If you’re not putting as much cash in the gas tank, you’re putting more junk in the trunk.” It really works that way.

People have to be ready for a couple of other things. First of all, the Fed has been so accommodating since 2009, but I think they are done creating more money for the economy. We are very close to seeing, sometime in 2015, interest rates increase. I wouldn’t be surprised to see the ten year end the year at like 3–31/ 2 percent, and people have to be ready for that. It’s been so long since interest rates

have risen that nobody remembers that when interest rates rise, bond prices drop. People will be waking up and saying, “What are these parentheses in my account?”

Where the Fed has interest rates right now is the way you would have interest rates if the economy were in crisis. And we were in crisis, but we’re not anymore. So, they are under a lot of pressure. The bottom line is this–you’ve got inflation at about 2% and you’re getting 0.05% on a Treasury. You’re supposed to make a little money. Maybe they’ll be gentle. Yellen (Janet Yellen, Chair of the Board of Governors of the Federal Reserve) is out there and she’s saying all the right things about


The real surprise is going to be the growth in the manufacturing sector, which are good paying jobs and

are jobs we haven’t had in 30 years.“”

Peter Ricchiuti and Warren Buffet


COVER STORY

slowly raising rates. That would be good. It’s going to be an interesting story.

And, people are asking about the recent election and what is the impact of the new Congress. I have no idea where that goes. It looks to me like absolutely nothing will get done. Historically, interestingly enough, the stock market has done its best, and really consistently, by having a different party in the White House and a different party running the Congress and the Senate. If you were a cynic, you would say that if nothing gets done, that would be fine. It’s a sad commentary but that’s how the markets have worked over the years. I think that’s going to be the big story of the year—a lot of politics, rising interest rates and an increase in consumer confidence with the wildcard being these oil prices.

INTERPRETER: If oil prices are the wildcard, do you see that as a plus or a minus?

RICCHIUTI: It’s kind of a wash overall, it really is, if you’re the government and you’re calculating GDP. But it’s not going to be a wash according to what line of work you’re in and what part of the country you live in. I’m very sensitive to the mid-80’s in Louisiana and Texas; things were just unbelievably bad. There was so much extra capacity; it was brutal. Every 10th building was boarded up and skyscrapers were empty. I have just never really gotten over that. So, the idea that we could face a mid-80’s kind of situation again really kind of spooks me, but it will really help the rest of the U.S. economy. I remember people always asking me how bad it got here. My wife is from around the Lafayette (Louisiana) area, which is the oil center for the state. She was telling me, she was a teenage girl at the time, in the mid-80’s it was so bad and there were so many people unemployed, trying to get out that they were paying college kids $100.00 to drive U-hauls into Lafayette to get the people out. The Chamber of Commerce was trying to build people’s morale so they created billboards that said, “We believe in Lafayette.” Within a couple of days, the DJs on the radio started referring to those billboards as “We be ‘leave’ in Lafayette.” So, we’ve seen the extremes. It’s so interesting how precipitous it has been. We were at $95 a barrel on October 1st and now we’re at $48 a barrel. I remember a guy telling me, “You know, I’m not going to be affected because I make donuts. I have two donut

shops.” He went out of business six months later. It was like, “Oh yeah, that’s who ate the donuts.” It’s kind of weird, but I think it’s a real boost to the consumer.

Going forward it will be interesting. Between here and your Annual Conference in June, OPEC is going to meet again. Will they have created enough pain in those

“cheating producers” in OPEC, like Venezuela and Iran, to get them to say “uncle” and stop over producing? And, of course, the real reason the Saudis have done it is to kill the U.S. fracking industry because we’ve become energy independent. We’re even talking about starting to export. So, they (OPEC) are scared to death. This go-around we’re actually in a remarkable scenario as a country because now prices are low, we’re getting the benefit of all these low prices and the United States has had to kind of shut down its oil industry. We’re using up somebody else’s reservoirs and reserves, and the difference between this and the late 70’s, early 80’s, when OPEC controlled things, is that if they raised prices now at about $70-$75, the U.S. market can just turn the spigot back on. We don’t have to worry about OPEC ever killing us again. In fact, all we’re doing right now is taking advantage of low oil (prices) coming out of their reserves. We’ve kind of gotten to a really intriguing spot.

One thing that I’m a little worried about is stocks that may be impacted, such as banks that are heavily involved in energy. They are not

saying anything right now but if low oil prices were to last a while, you’d see a lot of defaults and maybe some bankruptcies in these east Texas, Louisiana and Oklahoma banks. That’s what we saw before; the banks became “JP Morgan Chase.” When I go to Texas, and I love going to Texas, there are so few Texas banks left because after the 80’s, the big guys bought them all up. My favorite story about that involved First Republic Bank. They had a loan out to investors that owned 20% of the Cowboys, and those investors went bankrupt. The bank had to take the 20% stake in the Cowboys as part of the assets they held as collateral. Then, First Republic Bank went under and now the government owns 20% of the Dallas Cowboys;

“Boy, how did we get here?”INTERPRETER: What do you think about

exporting oil and liquefied natural gas?RICCHIUTI: It seems like there is a lot

of potential for the balance of trade. They are building some amazing facilities to do that. We haven’t been allowed to export oil since the Carter administration. Of course, that came in because we were dead then. It’s interesting because all of those discussions are now off the table. The last thing anybody wants to do is export oil and create more supply, driving prices down even further. I think that’s something we’re not going to deal with until we get prices back up here. Now, natural gas, which is the greatest bonanza in the history of the country because we’ve found all this clean burning

Peter Ricchiutti Interview continued from page 9

Peter Ricchiuti offshore in the Gulf of Mexico


COVER STORY

fuel which can last us the next 150 years, but it’s just not economic for us. I was just in Shreveport about six months ago. That’s the biggest natural gas find in the country, the Haynesville Shale, and that’s an absolute ghost town because it costs $5 to bring it up and you’re getting $3 for it. The old joke has always been, “That’s okay; I’ll make it up in volume.” But it doesn’t. You look at the oil industry in the United States. I just did an interview about this yesterday. None of the basins are profitable at this level. I gave a speech in Bismarck, North Dakota, in September and their breakeven is $60-$65, so they are shutting down. The shallow water doesn’t make any sense; the onshore stuff doesn’t make any sense. The only basin that makes money at this level is the deep, deep water of the Gulf of Mexico, like where the Deep Water Horizon exploded, and that’s because the find is so gigantic. So, you think the whole country, if they were going to just use pure economics, everybody would just quit drilling except for one basin. That’s pretty wild. Two-thirds of the U.S. economy is consumer driven, so I think people are making a mistake to discount the dollars in the pockets of the consumers. It’s an accelerator; the multiplier on that is huge. It’s the biggest thing out there.

Talk about all of these things that are moot points now. It’s like the Keystone Pipeline is sort of a moot point. Everybody has fought with each other in Congress and the White House. Now you talk to the people that are going to build it and they are like,

“Maybe you can get back to us.”INTERPRETER: What is your perspective

on when oil bottoms out and what’s the length of this downturn? A headline the other day quoted President Obama lecturing a group

“not to go out and buy SUVs because oil will not stay low for long.”

RICCHIUTI: That’s the absolute wildcard here. So many people have an axe to grind,

like politicians, but the only group that doesn’t is the futures market. It’s showing that oil will end the year higher than the start of the year. It started at $50, but will end up north of $50. If you go out to 2020, it (futures) has oil pegged at about $75 a barrel. Those people that really are making the bets and really know things say that we’re close to the bottom, and we’re going to see increases, but we just don’t know how quickly it’ll be.

But just forming a bottom will create a little bit of confidence. But, I agree with what his sentiment was—don’t change your lifestyle based on this; just take it like a short-term blessing and just go out and buy “something.”

INTERPRETER: Are you recommending buying energy stocks now?

RICCHIUTI: We’ve actually started to do that. We’re looking at some of these companies because I think one of the big things that will happen is a massive amount of consolidation. There are just way too many smaller exploration-production companies and way too many oil service companies. They are going to get bought out. I think the

pace of that is going to be very, very quick. And the oddest thing about that whole thing is that just before the bottom fell out, and to tell you what a secret this was that nobody knew this was coming, is Halliburton made a bid for Bakers Hughes, the #2 and #3 oil service companies in the world. That would never have happened if they had an inkling what the Saudis were about to do—it was a good secret. It’s funny, the Saudis, at $45 a barrel, it’s hurting them too. They can withstand it for a while but they can’t do this forever. Their finding costs are lower than everybody else’s but they are not zero. If you listen to the media, you would think that in Saudi Arabia it was like the Beverly Hillbillies,

“shootin’ for some food and up through the ground came a bubblin’ crude.” It’s not that. They do have to drill and there is a cost.

INTERPRETER: What’s the story in Europe?RICCHIUTI: They are not in very good

shape economically. We seem to be coming out of it. I’m not saying they are going the other way, but nothing very good is happening. Asia has slowed down but not to any real problem. In fact, it probably has to slow down a couple of notches before it explodes. Europe is real problematic but I don’t think it’s going to bust though. I think you’ll have another run at a couple of countries leaving the Euro. That’s what’s got all these economists so confused. You’ve got the effect of possible deflation in Europe

Two-thirds of the U.S. economy is consumer driven, so I think people are making a mistake to discount the

dollars in the pockets of the consumers. It’s an accelerator... It’s the biggest thing out there.

“”


Peter Ricchiuti at the Red Sox Fantasy Camp

A day doesn’t go by without a new article on “big data” or an industry event on Insurance Analytics or Insurance

Telematics. The topic of big data is front and center in our industry, but it represents a transformational shift—not just a distinct IT project or IT initiative. Data is used in every aspect of the insurance business, including new product development, underwriting, actuarial analysis, pricing, claim investigation and settlement. Data is the insurance industry and the insurance industry is data.

So what is changing? This is one of the first times we have seen the industry at the forefront (and in the driver’s seat) on the adoption of new information technology, creating advanced pre-dictive analytics capabilities that will drive innova-tion, new products and processes. Many indus-tries are just beginning to understand predictive analytics. Now retailers, manufacturers, healthcare providers and many other sectors have the oppor-tunity to learn from the insurance industry!

A recent report by the McKinsey Global Institute (Game changers: Five opportunities for US growth and renewal, July 2013) specifically discusses energy, trade, big data, infrastructure and talent as the five key opportunities for economic growth. The research further discusses which industries have the most opportunity to create business value with big data analytics, and the financial and insurance industries have both the easiest capture of big data and the greatest untapped potential from big data analytics. (See reference Exhibit 15 from the McKinsey report, Figure 1).

The challenge for the insurance industry will be to avoid viewing big data as a “project”, but rather see it as a shift in our mindset on how we do business as an industry. We will need to quickly evolve and incorporate new types of information in business decision-making processes for underwriting, claims, product innovation, customer need analysis and service.

One of the keys to success will be to ensure that companies take time to define the right questions to find answers in their new data. Even then, the data may provide you with answers to questions you didn’t think to ask, providing new and unexpected insights. This is the blending of the art and science that the industry has talked about specifically in the areas of underwriting and product innovation.

Richard Manship, SVP and Chief Actuary for the ICW Group stated it well when he said, “Big Data is part of a company’s strategy and business needs to articulate its vision and collaborate with IT more than ever to ensure the vision is under-stood. It shouldn’t be treated like a ‘skunk works project’…take time up front to outline the vision and communicate a cohesive plan. Big Data should be included in the data governance pro-cess as well; however, it is still immature in many organizations, but now is the time to learn from our past data missteps.” Jesse Mauser, Manager of EIS for ICW Group further commented, “Un-derstanding the questions to be answered by the data and ensuring the right processes are in place for operational reporting vs. analytical analysis are key as they may vary. Whether resources reside in business or IT, many organizations still struggle with data governance as it is seen as a cost vs. a business value driver.”

Big data is more than social media data—it also includes the explosion of other new types of data such as video, sensor, unstructured text,

geo-location, and clickstream data. This data is already within your company, exchanged mul-tiple times daily across the insurance ecosys-tem, or ingested from other external sources. As an industry, insurance has the opportunity to effectively leverage that information for pre-dictive analytics to enhance loss control servic-es, reveal new product insights and help clients develop better risk mitigation plans, then reward them for doing so. The key will be to expand and enhance existing data capabilities as part of their modern data architectures.

Denise Garth, Partner for Strategy Meets Action (SMA) stated that many carriers embrace the value of Big Data by using the new sources of data for innovation around personalized cover-age for personal lines. This is based upon indi-vidual customer profiles enriched with new types of data. Additionally, the growth of telematics and sensors in the automotive industry drives advanced predictive models for insurance pric-ing and claim investigation. Denise indicated that SMA’s Big Data in InsuranceEmerging

Where is Big Data Now? By CINDY MAIKE


LOOKING AHEAD

Many organizations still struggle with data governance as it is seen as a cost vs. a business value driver.

JESSE MAUSER, MANAGER OF EIS FOR ICW GROUP“

FIGURE 1”

LOOKING AHEAD

Trends: Organizational and Technology research report saw a growing focus in the evaluation and usage of open source data platforms like Hadoop as a key enabler for bringing together and us-ing the new information to enrich traditional analytic data platforms. Ms. Garth stated, “com-panies are looking for capabilities that can blend traditional and new data sources effectively.”

In speaking with Tripp Smith, Chief Technology Officer at Clarity Solution Group, Tripp stated “Telematics puts a new lens on consumer insurance, not only quantifying risk, but reinforcing and rewarding safe behavior; the companies adopting big data analytics as a strategic capability are taking a tremendous advantage over late-comers.”

Additionally, we are seeing advanced ana-lytics in new and innovative types of claims analysis. John Standish, Chief Analytics Officer for Infinilytics shared this interesting insight, “Big data is everywhere! If you think about it, insurance companies have a wealth of informa-tion that can be explored, leveraged, and mod-eled to effectively manage risk and settle valid claims. Fraud is a significant problem for the in-surance industry. A lot of money is schemed by organized criminal enterprises. Insurance com-panies that do not have an effective anti-fraud program, or lack the advanced analytics to iden-tify questionable or suspect claims, will fall vic-tim to the schemes, and will lose their competi-tive edge in the marketplace. We need to start synchronizing the underwriting, claims, and SIU teams in one collaborative business process, and leverage all three with advanced analytics.” Mr. Standish understands this topic particularly well, because he used to lead the fraud division of the California Department of Insurance.

Companies looking to incorporate big data will first need to define a modern data architecture (See Figure 2) that combines the capabilities of their current data architectures with the ability to store and process the new data sources. The enhanced architecture can offer companies a single view of their customers and predictive analytics around product, customer needs, underwriting, claims and loss control services. This is not about throwing out existing operations and data warehousing, but about properly extending those and integrating new technologies into their current landscapes.

By consulting SMA Big Data in Insurance Emerging Trends research on the usage of open source capabilities such as Apache Hadoop, insurance companies can learn how those add processing power, scale and efficiency to deal

with large volumes of information, enhancing business insight and value.

Insurance companies can also learn how other industries are embracing big data to meet similar objectives for predictive analytics and a single view of their customers:

• Airlines analyze sensor data on planes to predict equipment failures and repair parts before malfunctions impact schedules or endanger passengers and crew.

• Food service companies analyze refrigeration units to repair and avoid failure that could cause costly food spoilage.

• Utilities monitor shifting electricity usage patterns to optimize use of their generation and distribution assets.

• Building management companies analyze building data—people movement, elevators, lights, and systems to optimize energy use

and prioritize maintenance activities.• Banks identify credit card fraud as it occurs.

In the near future, we may no longer dif-ferentiate between “big” and “small” data, but rather think of a “data lake” as a perpetual source of life-giving information resources to the insur-

ance industry. The key is to create a simple plan for how data, analytics, visualization tools, and people come together to create value supporting your business strategy. As Richard Manship in-dicated, the power of a plan provides a common language that allows senior executives, technol-ogy professionals, data scientists, and managers to discover where the greatest returns will come from and, more importantly, how to implement the processes to capture those.

As each of us begins our first insurance big data initiative, we must see it as more than a one-time project; it is the beginning of a journey.


ERP CRM SCM Clickstream Web & Social

Sensor & Machine

Server Logs

Unstructured

Batch Real- Partner ISV

Business

ANAL

YTICS

SOURC

ES

& Dashboards

HDFS

MPP EDW

(Hadoop Distributed File System)

FIGURE 2

Cindy Maike is the General Manager of Insurance Industry Solutions at Hortonworks and responsible for the Center of Excellence activities for the insurance industry.

Insurance companies have a wealth of information that can be explored, leveraged, and modeled...

JOHN STANDISH, CHIEF ANALYTICS OFFICER FOR INFINILYTICS“ ”

Figure 2, Source: Hortonworks, Inc.

In the 1986 movie classic, Top Gun, Tom Cruise’s famous line, “I feel the need, the need for speed” still resonates

today, but it is the fast-paced introduction, experimentation, and adoption of emerging technologies that are now gathering speed, and they are leaving disruption, transformation, newly invented businesses, new industries, and the economy in their wake. These rapidly proliferating emerging technologies are now considered some of the greatest change agents since the introduction of the Internet. They are creating game-changing breakthroughs that are just beginning to challenge long-held business assumptions, including redefining the boundaries between business and industries, introducing new competitors into the market, and upping customer expectation levels.

Emerging Technologies: Feeling the Need for Speed of Adoption

SMA is actively tracking nine emerging technologies: 3D printing, the Internet of Things (IoT), drones/aerial imagery, driverless vehicles, wearable devices, gamification, artificial intelligence, semantic technologies, and biotechnology. They are being tracked both from within the industry and outside the industry to gain a balanced and well informed view. As observed in our recent research report, Emerging Technologies: Reshaping the Next-Gen Insurer, all nine emerging technologies are seeing an impressive and rapid adoption. These key points stress the need for speed:• Five of the nine are projected to arrive at or go

well beyond the tipping point within three years. • Internet of Things, wearables, gamification,

drones/aerial imagery, and artificial intelligence will be leading the level of experimentation and adoption within 3 years.

• Within ten years driverless vehicles, the Internet of Things, wearables, artificial intelligence, and drones/aerial imagery will be the top five.

• Even more impressive is that all nine are pro-jected to surpass the tipping point in five years.

Some companies may think they have time, given the tipping point of adoption is still 3 to 5 years out. While waiting may have worked in

the past, in today’s fast-paced environment the failure to develop strategies, experiment, and invest in these technologies today will place many insurers at significant risk. Why? Because the lag time between market leaders and slower movers can be two to five years or more, and the lag time will only expand due to the increasing pace of introduction, experimentation, and adoption of new and emerging technologies.

The astounding pace and influence of new and emerging technologies — over a relatively short period of time — is challenging business models and assumptions and delineating a new generation of market leaders. To put this into perspective, just consider the following:• The Apple iPhone was introduced just

over 7 years ago, providing the foundation for mobile apps, a groundwork for new businesses, and a growth platform for existing businesses. Companies across all industries are intensifying their focus on using mobile for revenue generation and customer service.

• Uber and Airbnb started only 5 and 6 years ago, leveraging mobile, data and analytics, GPS, electronic pay, and other technologies to build new business models. Today, they are now billion dollar businesses, disrupting existing industries while helping to create the new sharing economy.

• Google announced their self-driving car project in 2010. In early 2014, they introduced the first prototype, garnering great attention. Since the first announcement, many automotive manufacturers have begun preparing plans to introduce their own autonomous/driverless vehicles beginning in 2020. More importantly, these manufacturers are beginning

the transition to autonomous vehicles by introducing cooperative solutions that will include “traffic jam assist” systems that take over braking, steering, and acceleration for vehicles moving along in low-speed traffic. But the real game-changer will start in the next couple of years, with the introduction of technology solutions that can be installed in existing vehicles, creating autonomous capabilities immediately and at a relatively low cost. Further adding to the momentum, a number of states are rapidly preparing for their use, wanting to be leaders in adoption of autonomous vehicles.

• Speculation about the Internet of Things began around 2000, but it became a reality with the rapid development of sophisticated sensors, the cloud, communication infrastructures, and data and analytics. As a result, the IoT has gained momentum in adoption across industries including automotive, manufacturing, retail, and others, and IoT adoption is rapidly growing. All the major automotive companies are creating the connected car. Google bought Nest and home improvement retail offering solutions to create the connected home. Apple is creating wearables for the connected life. And these are just a few examples.

Next-Gen Insurer: Responding to the Need for Speed

With the explosive pace of change and disruption, the absence of experimentation, adoption, and innovation creates considerable business risk and the potential for loss of relevance. So how should insurers respond to this rapid pace of change and disruption?

Feel the Need... The Need for Speed: Emerging Technologies and Innovation

By DENISE GARTH, SMA Partner


LOOKING AHEAD


LOOKING AHEAD


Considering recent events, I think 2015 will be a big year for cyber security. But, to move forward, it is important

to understand what has been holding us back. I am continually surprised by the insurance market’s lack of urgency when it comes to cyber security. And, for that to be happening in an industry that is so risk averse, is simply amazing to me. So, why is this the case? Limited resources and limited budgets certainly play into it, but there are several myths I hear repeatedly which likely also play a role, and I’d like to take a couple moments to debunk them.

Cyber security is completed. Many companies have cyber security on the radar, but view it as an item or project which can be checked off of a “To Do” list. There is no such thing as “once and done” in cyber security. It’s similar to buying a new iPhone. Before you can even figure out all the new bells and whistles, the phone is obsolete or requiring a software update. Insurers must recognize that threats are constantly changing and adapt their security posture to meet them. I like to advocate a strategy that follows the Predict, Prevent, Persist model. Predict both where current vulnerabilities lie by performing a thorough security assessment, and where future risks lie by examining business and IT strategies. Prevent exploitation through a program of education, training and implementation of security best practices. Enhance best practices with mitigation strategies targeted specifically to the company’s DNA. And finally, persist through continuous monitoring that includes both periodic reassessments and spot drills.

My company is not a likely target. No matter how many times it happens, I’m always surprised when someone tells me that a hacker wouldn’t be interested in their company. In fact, most companies consider themselves not big enough or without sensitive enough data. I find this position dangerously naïve. Sure, a large credit card or banking institution would be a great one time score, but hackers are smart. If I were a burglar, I wouldn’t go to the biggest, fanciest house in town because I know they’ll have

a state of the art security system. I would go to the middle class neighborhoods that still have decent loot but may or may not have a security system – and if they do, it won’t be that robust. Mid-size insurers still have valuable information – social security numbers and financial information – that despite a lower volume can be just as damaging to the company. And chances are, they aren’t adequately guarding this information. It is truly a question of when, not if these companies will be targeted.

Cyber security is an IT problem. I think I have a decent poker face, but when a CEO tells me that he or she is not worried about cyber security and they’ll just let the IT guys figure it out, my poker face vanishes. Cyber security is not an IT problem. Cyber security is a business problem. It is a PR problem. It is a customer liability problem. It is a consumer confidence problem. Consider the recent Sony breach and the damage that has been done to the reputation of that company and its executives. While IT may be the stewards who carry out the technical

tasks related to it, cyber security must be part of a company’s overall risk management portfolio. A company must understand what its risks are, determine its appetite for risk and then put a program in place involving both technical solutions and mitigation through cyber liability insurance. It is simply impractical to think that IT can 100 percent guarantee protection against cyber threats, and most companies would not have the budget to support that level of technical intervention anyway. There must also be a backstop in the form of a cyber incident response plan that includes not only technical solutions, but customer management and consumer market damage control.

My hope is that our industry is able to put these myths to bed and to recognize that cyber threats are real, persistent, and costly. Insurers must take a proactive stance and remain vigilant against the evolving landscape of cybercrime. And, we must take a holistic view of cyber risk and its management. If we can do that, then we can all achieve one big step closer to a prosperous and secure New Year.

Janeen Blanton is Vice President, Insurance Productivity Services & Commercial Operations, for Salient Commercial Solutions. She can be reached for further comment or information via email at [email protected].

Debunking Cyber Security Myths to Move ForwardBY JANEEN BLANTON, PMP, SA, CSM, CSPO, AIS, AIT

As the calendar turns to 2015, we leave behind the accomplishments and challenges of a past year and look

ahead to what a new one will bring. The capital markets likewise turn the page on a sometimes bumpy but generally rewarding 2014, and investors are looking forward to generating investment returns by year-end 2015. There is no shortage of forecasts on a wide variety of economic and capital markets barometers for the coming months. Such forecasts are often inaccurate because they fail to account for disruptive economic events that are not easily predicted.

One notable characteristic about the pleth-ora of economic predictions is how closely aligned they are both to each other and to historical averages. The Federal Reserve Bank of Philadelphia is one of many sources for eco-nomic predictions about several key metrics. Some results from their 2014 Survey of Profes-sional Forecasters are listed below. The results are in line with what many other economists are predicting about the economy for 2015 and beyond. The typical expectation is for a con-tinued modest decrease in the unemployment rate, and real GDP growth at or slightly below 3%. There is a general consensus about these numbers, as few prognostications made by well-known or widely followed sources deviate significantly from the numbers shown below.

When we compare the historical forecasts for GDP growth to actual realized growth in the economy, we find that the projections

have differed substantially from what was experienced. The chart below shows how GDP growth has systematically been below that which was forecasted by economists several quarters ahead of time.

The chart above shows predicted U.S. real GDP growth compared to actual results, for the years 2004 - 2014. The predictions were made 5 quarters in advance. For 2004, economists predicted GDP growth to be 3.7% for the year, while actual growth turned out to be just over 3%. Growth expectations were similarly overstated through 2007. Prior to the financial crisis year of 2008, economists predicted close to 3% GDP growth; this time the result was dramatically different, as the average change in GDP over the 4 quarters of 2008 was approximately -3%.

Since the recovery of 2010, predictions have continued to generally overstate GDP growth. In the years 2011 – 2014, economists predicted higher growth than was realized in 3 out of the 4 years. In fact, in the 11 years of predictions shown on the chart, only once (in 2013) has growth come in higher than the initial prediction, made only 5 quarters earlier. In 9 of the years, growth was significantly

below projection, and in 1 year (2010), the initial forecast was quite close to the eventual result. That’s not a great track record!

One of the key reasons for this consistently poor performance in forecasting is that annual forecasts regularly fail to capture the unpredictable disruptive events that affect economies and capital markets. Consider the events of the year 2014. Perhaps the largest domestic surprise last year (as measured by the magnitude of the price movement) was the nearly 50% collapse in oil prices, the majority of which occurred in only 1 calendar quarter. West Texas Intermediate crude oil began the year at nearly $100 per barrel, and closed out 2014 at $53.46 (as reported at eia.gov.) This unexpected result has had disruptive effects throughout the investment markets, as countries and regions (such as Iran, Venezuela, and Russia) heavily dependent on the sale of oil and gas face enormous budget pressures, credit downgrades, and possible bankruptcies. High yield debt, which has a large concentration in heavily leveraged energy producers, has sold off due to the difficulty some producers will have in a world with much lower energy

2015 Outlook: Predictions and SurprisesBy FRANK CONDE, CFA, FCAS, MAAA, Chief Investment Strategist. and JASON GINGERICH, CFA, FSA, MAAA, Senior Investment Strategist.


LOOKING AHEAD

2014 Survey of Professional ForecastersReal GDP (%) Unemployment

Rate (%)Payrolls

(000s/month)

Quarterly Data

2015: Q1 2.8 5.8 211.2

2015: Q2 3.1 5.7 195.4

2015: Q3 2.8 5.6 208.0

2015: Q4 3.0 5.5 201.3

Annual Data (annual average levels)

2015 3.0 5.6 212.3

2016 2.9 5.4 N.A.

2017 2.7 5.2 N.A.

Source: The Federal Reserve Bank of Philadelphia, their 2014 Survey of Professional Forecasters

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

GDP GROWTH, PREDICTED VS ACTUAL Predicted Actual

Source: The Federal Reserve Bank of Philadelphia, their 2014 Survey of Professional Forecasters

LOOKING AHEAD


prices than a year ago. The general outlook for inflation has decreased along with the decline in energy prices.

Another surprise which went counter to virtually all predictions was the decline in interest rates, as the 10-year Treasury yield fell from 3.00% to 2.17%; nearly all forecasters were calling for higher interest rates in 2014. The recent history of interest rate predictions has not been any more successful than the GDP growth predictions. The chart below shows yield forecasts for the U.S. Treasury 10-year bond, again compared to actual interest rates; the actual rates are averages over a time period, rather than the yield on one specific date. We can see that forecasts since 2001 overstated the expected level of interest rates in every year but 2013. In that year, forecasters predicted a modest increase in interest rates, and they instead increased sharply.

The Philly Fed survey quoted above for measures of GDP growth and unemployment also asked respondents for their projections of the yield on the 10-year U.S. Treasury bond for 2015. The average response was for the yield to rise to 3.2% by the fourth quarter of 2015. That move is certainly possible, but it would be greater in magnitude that the change in interest rates that occurred in 2013, a sharp move that surprised many observers and spooked bond investors with fears that rates may continue to move much higher.

Any look forward into the possibilities for investment markets in 2015 should consider not only the consensus predictions of strong GDP growth, lower unemployment, and somewhat higher yields; the potential for disruptive events that surprise most observers should also be considered. A number of Wall Street gurus and investors have put together

lists of potential developments which would be unexpected to many market participants. Here are a few of those predictions which we find interesting:• A conflict in the Middle East will be

instigated by a country such as Iran or Russia to raise oil prices for their floundering economy (Kevin Burke, Trinity Capital)

• The Fed leaves rates unchanged until at least 2016 (Craig Everett, Pepperdine University)

• Hackers invade the accounts of a major money center bank, and the Federal Reserve orders the institution to suspend transactions for five business days. (Byron Wien, Blackstone)

• Faith in central bankers is tested — stocks sink and gold soars. (Doug Kass, Seabreeze Partners)

• Competitive currency devaluation ensues across Asia, led by China (Richard Madigan, JPM)

• A military coup in North Korea leads to civil war (Richard Madigan)

• The recession in Japan which began in the third quarter of 2014 continues throughout 2015 in spite of further fiscal and monetary stimulus (Byron Wien)

• The Eurozone faces a potential breakup as its weaker members such as Greece continue to struggle with slow growth and high debt burdens (Prime Advisors)

A review of your asset allocation and portfolio positioning should consider the possibility that some of the above predictions occur within the next year. There is increasing risk of large market dislocations occurring from surprise events. This is due to reduced liquidity in the current environment of heavy regulation of the broker/dealer community, which has reduced market depth. Liquidity concerns are magnified by the herd mentality of capital flows. Identifying potential risk exposures of market liquidity should be a key investor concern.

For More Information or questions contact Prime Advisors Frank Conde, CFA, FCAS, MAAA is our Chief Investment Strategist. His contact number is: (860)331-3010 Email: [email protected] Gingerich, CFA, FSA, MAAA is a Senior Investment Strategist. His contact number is: (860)331-3061 Email:[email protected]

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

US TREASURY 10-YEAR BOND YIELD, PREDICTED VS ACTUAL Predicted Actual

Source: The Federal Reserve Bank of Philadelphia, their 2014 Survey of Professional Forecasters continued on page 24


LOOKING AHEAD

In a slowly recovering economy, both risk and opportunity may be increasing, if not on a macro level, at least for individual

companies. How does one recognize an inflection point? In the context of this economy and investment environment, the greatest risk for a company may lie in not taking calculated risk. Nonetheless, placing bets on the direction of interest rates or the economy is likely a losing tactic—it will be better to understand and manage for risk and reward across a broad spectrum. For example, if interest rates rise or the economy grows more quickly, what needs to be in place to take advantage? What if this does not happen? Will the consequences be worse than the potential upside?

The U.S. insurance industry across all sectors will likely continue to improve in capital strength and prospects in 2015

following a similar year in 2014—these trends have both good and bad implications. Economic trends are improving, but with increased capital it is likely that competitive pressures will increase. With continuing investments in analytics, technology, and infrastructure, opportunities for companies to take strategic competitive actions are also likely to increase. Some companies are more prepared for this than others.

Economic environment continues slow improvement

In the latest survey of economic forecasters by the Philadelphia Fed, the 2014 annual growth in U.S. gross domestic product (GDP) is expected at 2.2% (heavily influenced by a negative first quarter) and 2015 is expected to be 3.0%. A year ago, the consensus for 2014 was 2.6%. The latest FOMC consensus, issued in December, presented central tendency GDP projections

in a range of 2.6% to 3.0% for 2015. However, the range for 2016 has widened, indicating reduced consensus regarding the medium-term outlook. The recent estimate of growth in the third quarter of 2014 was raised to 5%, indicating more robust momentum into 2015.

State differences, amplified by energy prices

Conning maintains a review of economic and financial differences developing at the state level for purposes of credit analysis and also for a more granular understanding of insurance trends at a state or regional level. In 2014, state fiscal pictures broadly improved, as borrowing and pension costs improved and spending growth was constrained. This bodes well for continued, though uneven, improvements in 2015.

Energy presents a major macro factor going into 2015—with oil below $60 from a high of over $115 earlier in 2014—presenting challenges and opportunities across the states as well as globally. Lower energy costs and lower borrowing costs leading into 2015 are good news for consumers and the economy at state and federal levels—a conclusion recently reinforced by Fed Chair Janet Yellen. However, certain sectors (energy, energy-related manufacturing) will suffer, along with related employment. The strongest states that have been benefiting from the energy boom may find progress slowed by the collapse in oil prices, leading to reduced employment in energy strongholds. In contrast, low energy costs may have a beneficial impact on the northeast and upper Midwest.

Asia continues to growAsia’s GDP growth directly affects

demand for life and nonlife insurance

products and also increases the region’s attractiveness to foreign insurers seeking growth opportunities. According to the International Monetary Fund (IMF) overall Asian GDP growth is forecast to be 5.5% in 2015, remaining well above forecast growth in the U.S. and European Union (EU). However, the Asia Pacific region is more exposed than other regions to growth shocks originating from China. As a result, a slowing of Chinese growth may affect its trading partners, especially Korea and Vietnam, and act as a brake on stronger GDP growth across the region. In 2015, some Asia Pacific countries may increase interest rates in an effort to control domestic inflation.

Europe continues to struggleThe European Commission forecasts

that Eurozone GDP growth will be 1.1% in 2015. This low growth applies more pressure on the European Central Bank (ECB) to increase extraordinary measures aimed at restoring growth and fending off deflation. The ECB is likely to launch a full-blown asset purchase or “quantitative easing” program early in 2015. The Commission acknowledged the EU economy was underperforming compared to other post-crisis recoveries—and the slowdown risked feeding on itself. The sanctions which the EU and Russia have imposed on each other are making life difficult for businesses. In Germany, the Eurozone’s keystone economy, it has been estimated that the cumulative effect of the sanctions may knock up to 1% off the country’s GDP in 2015. Meanwhile, the

2015 OUTLOOK

Should companies plan for an inflection point?By STEVEN W. WEBERSEN

Lower energy costs and lower borrowing costs leading into 2015 are good news for consumers and the

economy at state and federal levels.”

Projected Change in GDP by Region2014E 2015F

U.S. 2.2% 3.1%

Advanced Asia 2.1% 2.2%

Emerging & Developing Asia 6.5% 6.6%

U.K. 3.2% 2.7%

Eurozone 0.8% 1.3%

Source: International Monetary Fund, October 2014

FORECASTING

Eurozone’s second-largest economy, France, is still dogged by weak growth. However, across the channel, the U.K. is forecast to experience stronger GDP growth, and the Organization for Economic Co-operation and Development (OECD)stated that interest rates could rise in 2015 in response to inflationary pressure.

Potential for emerging game-changers in 2015

Impact of accelerating developments in technology, communication, and analytics. The recent growth in applications of analytics, telematics, cloud technology, and data sciences as applied to distribution, competitive processes, insurance operations, and infrastructure technology will mean that companies will have different capabilities to respond to a changing economic and competitive climate. Developing tools and capabilities will also support advancements in the recognition of risk and responsibility for risk management in 2015. Some of this can be ascribed to the need for Own Risk and Solvency Assessment (ORSA) readiness for U.S. companies in reporting and documentation, catalyzing a common language and understanding of risk (appetite, tolerance, approach) among insurance company management, boards, regulators, and rating agencies. The formal introduction of Solvency II in 2016 will require insurers operating in Europe to finalize their capital modeling to be compliant and competitive in the new regulatory regime.

Cyber security will be an increasing concern for insurers (and perhaps an increasing opportunity for property-casualty insurers and reinsurers) after the high-profile attack on Sony and large

retailers and banks. The National Institute of Standards and Technology (NIST), part of the Commerce Department, recently issued an update to its “Framework for Improving Critical Infrastructure Cybersecurity (the Framework),” which could become a standard for the private sector in the future. It requires companies exposed to a breach to explain to regulators or potential plaintiffs why the company had not implemented and documented compliance with the Framework.

The competitive environment is likely to become more intense, including competition from outside the traditional industry led by responses to disruptive technologies in crowd-sourcing services (Uber, AirB2B, etc.), disruptive distribution approaches (“robo-advisors,” big box retailers, and search engine technology), and disruptive capital solutions challenging traditional insurance models.

Disruptive capital solutions. In an environment where all sectors of the insurance industry are enjoying record levels of capital strength (or excess capital, depending on one’s perspective), new capital, and new capital solutions continue to invade the industry. In property-casualty, the issuance of catastrophe bonds reached new highs in 2014, directly leading to a collapse in property reinsurance pricing. Other insurance-linked securities solutions, new reinsurance company formations, new captive and risk retention group formations, and runoff solutions continue to divide traditional insurance markets. Similarly, in life and retirement, alternative capital solutions are exploiting opportunities in alternative investment structures, annuity solutions including private placement and insurance designated fund (IDF) solutions,

and captives. While regulatory bodies are pushing back on some of these innovations, there is no sign of them slowing down. Some of these entities represent permanent or long-term capital that may expand beyond initial sectors and challenge traditional players to find new approaches to a marketplace value proposition (including expanded service solutions) to compete on more than capital and traditional product distribution.

Politics and regulation—post 2014 mid-terms and into 2016. Increasing regulatory activity at multiple levels of domestic and global jurisdiction is continuing into 2015, though some domestic activity may be more muted after 2014 mid-term elections. The predominant theme coming out of these elections is divided government, such as between the Administration and Congress, and divided power between governorships and legislatures at the state level. While there was some loss of Democratic control of some state governments, Republicans, in–fact, did not pick up net control in any of the states. The impact of the 2016 elections will begin early in 2015 and dominate the conversation across social, economic, and fiscal topics; this may also slow active change in the near term.

The continued effect of the Dodd-Frank rollout, including developing regulation of large significant financial institutions by the Fed and the International Association of Insurance Supervisors IAIS, and potential involvement of Financial Stability Oversight Council and the Federal Insurance Office in insurance regulation on multiple levels will be a continuing concern for companies of all sizes. However, some smaller companies may find opportunities in operating at local levels and in target markets.


continued on next page


LOOKING AHEAD

Mergers and acquisitions are picking up. The resurgence of property-casualty insurance mergers and acquisitions (M&A) late in 2014 is likely to signal more robust activity into 2015 as well. During the first three quarters of 2014, most large insurance M&A transactions were in the life and services sectors, yet there was a flurry of property-casualty and reinsurance transactions at the end of the year, including RenaissanceRe/Platinum, ACE/high net worth business of Fireman’s Fund, and discussions between XL and Catlin. Insurers seem to be returning to the view that scale can be a competitive advantage. This represents a change from recent years’ M&A activity, which was driven more by acquisitions of smaller specialty insurers. In addition, confidence in the economy’s outlook may justify the use of perceived excess capital for inorganic growth.

Asian M&A activity may increase in 2015. A chief reason for the potential increase is China’s new rule permitting investors to have stakes in more than one insurance company providing

the same products. This change is likely to stimulate investment in the China market from foreign insurers. Private equity investors are expected to buy European insurance assets in 2015 as more companies sell nonessential businesses, according to a Towers Watson report. The ability of EU insurers to generate cash and a spate of initial public offerings is a key attraction to private equity firms.

Equity performance and outlook—Conning stock monitor

Median price-to-book value performance within each of the industry sectors has traded within a tight range since the middle of 2013, correlating with what we have seen in investment yields and outlooks.

However, in an analysis of both trends and the standard deviation of price-to-book values over the past two years, we have seen broadly an upward trend in the median value, generally upward trends within each company tracked, and an upward trend in the standard

deviation of price-to-book values within each sector of property-casualty (diversified, personal lines, regional, specialty), life insurance, and health insurance. Only in reinsurance did the standard deviation decrease, though median values did increase. This trend upward in price-to-book values corresponds in part to the general strength of equity market performance and may also reflect some capital management (share repurchase) activities, but the broadening of the standard deviation among companies suggests that the performance is not equally shared among companies; some are performing (and being valued for future performance) better than others. Is this reflective of an increasing opportunity to outperform supported by enhanced analytics, data, and technology?

This may result in greater opportunities for those companies who take advantage of these strengths in 2015, though we do not expect a uniform level of improvement.

PROPERTY-CASUALTY TRENDS IN 2015Our overall outlook for the property-

casualty industry is for moderate premium growth and slightly deteriorating combined ratios in 2015. Premium growth tails off slightly and, with expected catastrophe experience, combined ratios should deteriorate to just under 100% in 2015.

Exposure growth remains broadly muted with the slow economic recovery (though with industry sector variability), and the level of pricing improvement is expected to taper from 2014 levels and is at some risk of turning negative. In 2015, exposure growth from an improving economy is expected to pick up, but slowing rates may offset that exposure growth.

Investment income is expected to fall slightly in 2015. The estimated book yield declined in 2014, as maturing securities were reinvested at lower rates, and our forecast now projects that it will continue to fall in 2015 and 2016. Will companies see this in their forecasts and respond, either in investment allocation strategies or pricing, or will the decline be sufficiently moderate that companies will decide to hang on and wait for better times? Rising short-term rates may give some immediate boost to property-casualty companies, though this may not help until 2016.

We projected industry return on equity (ROE) to fall to 5.6% for 2015, with normalized

catastrophes after an expected 6%-7% level in 2014. This decline in ROE is driven by both reduced income and increased surplus (equity).

Property-casualty price softening drives renewed focus on customer

Moving into 2015, insurance underwriters and distributors will renew their focus on effective customer interactions and retention. Many personal and commercial property-casualty insurance accounts will experience renewal pricing at expiring levels, which is a material change from the past three years that have witnessed price increases from 3% to 10%. As the year progresses, Conning estimates that pricing could begin to turn negative, given excess industry capital, continued reinsurance rate softening, an absence of catastrophes, and increased competition from traditional and nontraditional sources.

Declining prices often drive underwriters to concentrate their efforts on retaining their most profitable clients to maintain attractive operating margins. In addition, new customer acquisition in a declining price environment will likely become more difficult. With price deterioration, fewer dollars will be available for new account solicitation—it is materially less costly to retain existing customers with known loss experience than to attract new

clients with unknown claims history.Pricing declines will also affect how

insurers solicit and interact with new prospects and existing customers. Direct writers’ attempts at regular contact with customers have been limited to media advertising, direct mail, or electronic solicitations. The economics of this type of solicitation will begin to worsen as advertising budgets come under pressure and rate-stimulated shopping levels decline. In addition, insurers that rely on independent agents and brokers interact with their insured customers mainly during policy renewal or following a claim. This episodic customer contact in the context of price softening will require change. Allstate’s scenic drive mobile app for motorcycle enthusiasts, Liberty Mutual’s home inventory app, and Progressive’s art collection app for art aficionados all attempt regular customer interaction to increase brand awareness, build brand loyalty, and improve customer retention at policy renewal time.

Insurers will feel increased pressure to make effective contact in 2015 as clients are presented with attractively priced policy offerings from competitors. Recent studies suggest that online shoppers are more price-sensitive than traditional channel customers. Attempts by

competitors to woo customers that use more traditional broker channels will intensify in 2015 as customers with more complex insurance needs have been shown to focus as much on expert advice and service as on price.

The 2015 property-casualty industry will also experience a battle for control of the customer between insurers and distributors as incentives diverge. Agents have been demanding (and recently receiving) extra commissions for delivering large, profitable customers to an insurer. Likewise, insurers are offering more ways in which they can interact directly with the insureds both online and offline, effectively bypassing the agent. Insurers and agents are turning more to predictive modeling and advanced data analytics to identify, attract, and retain profitable personal lines and commercial lines customers. Those underwriters or brokers that can use technology to understand customer coverage needs, price elasticity, and service requirements will ultimately own the customer relationship.

The reinsurance market in 2015Our outlook for reinsurance in 2015

includes the continuation of the stream of new capital entering the property-casualty reinsurance market and the formation of alternatives to traditional reinsurers. New capital and new players will pressure the reinsurance industry in three major ways. First, reinsurance rate softening will stimulate reinsurers defensively to heighten their relevance and attractiveness to customers as they compete with new players. Second, the consolidation seen in 2014 is likely to continue in 2015. Third, re/insurers will continue to explore new business models for reinsurance cover, such as insurers creating “captive” reinsurers.

The principal sources of new capital entering the reinsurance industry include pension funds and hedge funds. The collective investment in the property catastrophe sector at year-end 2014 accounted for an estimated 20% of aggregate property catastrophe reinsurance capacity, mainly accessing the growing market for catastrophe bonds and collateralized coverage.

Though there are questions surrounding whether hedge funds will stay in the reinsurance market for the long term or withdraw in the wake of exceptionally large catastrophe losses, pension funds are likely to be longer-term players in this asset class. This added competition for reinsurers, particularly

for peak risk, contributed to rate reductions at the January renewals and may result in soft market conditions continuing for an extended period. Only a small minority of pension funds have “discovered” reinsurance as an asset class. As more pension funds develop familiarity and comfort with reinsurance, further softening is likely. Expected responses from reinsurers in 2015 to softening conditions include expansion of terms and conditions to offer multiyear treaties and additional covers, such as terrorism, and the provision of more analytical services in the effort to differentiate themselves from capital market alternatives that may be viewed principally as financial counterparties rather than business partners.

The acquisition of Platinum Underwriters by RenaissanceRe, announced in November 2014, is possibly an indication of further efforts in 2015 by reinsurers to achieve diversification, whether by expanding into new lines, into primary insurance, or into new geographic areas. Though there are obstacles to successful execution of mergers, as was seen in the aborted takeover of Aspen by Endurance Re earlier in 2014, market pressures appear to be sufficiently strong in 2015 to catalyze more combinations of reinsurers.

The formation of captive reinsurers managed by primary cedant insurers may add to the alternatives to traditional reinsurance, which currently include cat bonds, hedge fund-backed reinsurers, industry-linked warranties, sidecars, and fully collateralized special purpose vehicles. The precedent set by Arch in forming Watford Re, sponsored

by Highbridge Capital, is likely to produce additional internal reinsurance vehicles launched by primary insurers in 2015.

Emerging risksInsurance risks from increasingly

common cyber intrusions and from the budding “sharing economy” exposures are expected to test the insurance industry in 2015 with coverage disputes and efforts to develop policy language to provide cover for losses associated with such new, disruptive technologies.

Industry sources have estimated that there are already close to 30 insurers providing cover for various forms of cyber risk. Widespread awareness of intrusions has catalyzed demand for the product into firms of all sizes and by the coverage disputes that have emerged when victims of cyber intrusions have sought post-loss coverage in their general liability policy.

The explosive growth in ride-sharing exemplified by the success of firms such Uber and Lyft has given rise to coverage questions for drivers in ride-sharing arrangements. Ride-sharing drivers are independent contractors, but the personal automobile policy excludes coverage for losses arising from business use.

The sharp growth in cyber intrusions and the exponential growth of the sharing economy are just two of the changes disrupting the economy and society, with clear implications for insurance. Although they are often termed “emerging risks,” they are also emerging opportunities for insurers to step up and provide relevant products to protect against losses associated with the changes.


LOOKING AHEAD

Property-Casualty Industry Forecast Summary($ in millions)2013 2014E 2015F

Net Premiums Written $480,916 $501,193 $519,197

Net Premium Change 4.4% 4.2% 3.6%

Net Investment Income $49,520 $49,692 $48,620

Net Income $60,864 $51,461 $41,909

Loss Ratio 67.9% 69.0% 70.8%

Expense Ratio 28.3% 28.0% 28.0%

Combined Ratio 96.8% 97.5% 99.3%

Operating Ratio 86.3% 87.5% 89.7%

Statutory Surplus $674,076 $707,737 $726,102

Return on Equity 9.2% 7.2% 5.6%

Source: Conning Property-Casualty Forecast & Analysis by Line of Insurance


LIFE & ANNUITY TRENDS IN 2015In 2015, life annuity insurers face another

year of difficult investment decisions as interest rates remain low. At the same time, capital continues to build up, and insurers once again will be seeking the best ways to deploy it. Part of this build-up comes from operating profits; however, the use of captives and reinsurance also contributes. Higher capital and lower leverage may stimulate expansion into global markets as insurers seek higher premium growth opportunities. With slow progress on the adoption of principles-based reserving, life/annuity insurers will be managing through the implementation of other regulations. We expect insurers and distributors will continue investing in technology in 2015, paying particular attention to how best to leverage cloud-based services and solutions. With the growing rollout of robo-advisors, insurers will be working to identify how to integrate their products and solutions into this new platform.

The life/annuity industry represents four distinct products. In 2015, individual annuities and group annuities are forecast to account for approximately 70% of total net premiums and total assets. Total net premium for 2015 is projected to increase 2.3% over 2014, which is one of the lowest increases after excluding unusual one-time transactions. The industry’s investment portfolio rate continued its decline, reaching 4.56% in 2014. While it is projected to remain steady for 2015, the projection is dependent on long-term interest rates increasing during 2015. Given global

growth outlooks, this may be a challenging assumption. If the interest rate increases are not realized, then the industry’s portfolio rate will continue its decline.

Capital leverage is estimated to have held steady in 2014 and is projected to remain at the same level in 2015 as companies retain their accumulated surplus as a cushion for possible future volatility and anticipated changes in regulations. General Account assets are projected to increase 3.3% in 2015. We project Separate Account assets to increase 4.9% on continued market performance and positive flows.

Difficult investing climateWe are not likely to see much relief to

the challenge of low-interest rates in 2015. While rates on longer-term bonds have risen from their lows in 2012, the yield of maturing bonds is still higher than new money rates, resulting in continued downward pressure on the portfolio yield rate. With no change in investment strategy, we project that the portfolio rate will at best hold steady in 2015 and may continue to trend downward.

It also promises to be another difficult investment year, globally. Larger U.S. insurers have been adjusting to the interest rate environment by reducing guarantees on liabilities and slowly shifting their asset allocations to reach for yield by taking on more liquidity and credit risk. U.K. and EU insurers continue to move into alternative asset classes, with explicit regional regulatory encouragement leading to increased local infrastructure investment. Asian insurers have seen some regulatory requirements loosening on the asset side of the balance sheet and have been looking abroad to diversify their portfolios and increase yield. In these cases, the largest insurers have reached into these new investment opportunities first. In 2015, as the low-interest rates continue to bite, small and midsized insurers will see the need to adjust and also reach for yield.

Insurers have enjoyed an advantage in crediting rates on annuities and life insurance, compared to noninsurance products such as certificates of deposit. Lapse rates have been


LOOKING AHEAD

Regulatory mood darkeningA series of moves on the part of the

federal government may indicate an adverse shift in the public mood regarding insurance. There are indications of a change in the public’s perception of the role of insurance in society, and 2015 may bring the opportunity to test the role of public versus private insurance markets and regulatory tolerance for risk-based pricing.

At the end of 2014, the House voted to approve a six-year reauthorization of the Terrorism Risk Insurance Act (TRIA), which would provide some added stability to insurance markets, were the Act to become law. The Senate adjourned without acting but is likely to readdress the issue in the new session. While it appears that TRIA will

be reauthorized, the debate leading up to this point featured a lot of pushback on the industry from negative perceptions that TRIA is another government bailout of a financial institution—this time a bailout for large insurers. With an indication of private market interest in terrorism risk, there are arguments on both sides of the aisle for shifting more of the risk assumption back to the insurance industry. This is, however, also affected by whether risk-based pricing of terrorism risk will be part of the outcome.

Risk-based pricing is also falling out of favor. For example, public sentiment (or least regulatory sentiment) looked to be moving in the industry’s favor with the passage of the National Flood Act of 2012. The 2012 Act marked a decision to require federal flood insurance

premiums to reflect the risk—on second homes in hazard-prone areas as well as those homes that are subject to repetitive flooding. The Federal Flood Act of 2014, however, weakened the reforms with a rollback of price increases that were integral to the 2012 legislation.

The Dodd-Frank Act provides an additional vehicle for federal involvement in the property-casualty market. The Dodd-Frank Act authorizes the Federal Insurance Office (FIO) to monitor the extent to which traditionally underserved communities and consumers, minorities, and low-to-moderate income persons have access to affordable insurance products. The FIO decided first to focus on the market for personal auto insurance. Insurers, therefore, will face a series of challenges and opportunities in the coming year.

Life-Annuity Industry Forecast Summary2013 2014E 2015F

Net Premiums % Change (9.6%) 4.9% 2.3%

Net Operating Gain (AFIT) $56,940 $47,604 $50,684

Operating Margin (AFIT) 9.7% 7.7% 8.0%

Surplus % Change 2.7% 2.9% 3.3%

Return on Average Surplus 11.6% 9.4% 12.3%

Source: Conning Life Forecast & Analysis by Line of Business

LOOKING AHEAD


decreasing for many products for several years as in-force policies offered higher rates than new policies. However, in 2015, this could quickly reverse if new money rates on competing or new products increase, especially as many older products are no longer in a surrender charge period.

Capital markets, M&A, captives, and reinsurance opportunities continue

With capital continuing to build up and leverage decreasing, insurers will need to identify the best uses for their capital. Some will continue to issue share buybacks; others will deploy capital to acquire new growth opportunities. The use of reinsurance, either via captives or unaffiliated reinsurers, will continue as companies continue to hone their capital management.

Merger and acquisition activity involving life insurance and annuity companies has been low for a few years. With the U.S. market growing only slowly, insurers are looking to become global players so they can capture opportunities in higher-growth markets. One area of potential consolidation remains the pension market, where insurers are seeking to achieve scale and integrate product and service offerings. For example, in December 2014, John Hancock Financial (owned by Manulife) and New York Life announced that Hancock will buy New York Life’s Retirement Plan Services business, which provides investment and plan support to corporate and state retirement plans. New York Life

will acquire 60% of certain John Hancock life insurance policies via assumption reinsurance. With the accumulation of surplus mentioned earlier, possible uses include consolidation of market positions like the Hancock/New York Life transaction just announced or overseas acquisitions. The Asian market is strong, and companies may seek to expand into those markets or increase their current holdings.

Implementing ORSA and managing increased compliance and transparency

Implementing new regulations often consumes management time and resources as both insurers and regulators work through the inevitable “bugs” in the system. We would expect a similar outcome as insurers and regulators deal with the implementation of ORSA in 2015.

As insurers work the ORSA implementation, other regulatory efforts will compete for attention in 2015. These efforts are likely to remain focused on increasing transparency into fees, sales compliance, and—perhaps most important—resolving the debate over fiduciary standards. At the same time, regulatory changes may widen the opportunity for insurers to deepen their penetration into the 401(K) market.

Regulators continue scrutiny surrounding the use of captives in the life industry, with attention from multiple regulatory bodies, such as the NAIC, the New York State Department of Financial Services (NYSDFS), and the FIO. The increased scrutiny has been driven partly by regulatory concerns about the lack of information about these risk transfer vehicles. It is uncertain whether these regulators will move forward in 2015 on any action to restrict the use of captives. As a result, insurers, that do use captives, are likely to spend resources monitoring and adapting to any proposals that could emerge.

Game-changing innovations and growth opportunities

All told, 2015 is poised to be another broadly positive year for life/annuity distribution. Increased sales will produce higher commissions. As always, product and premium mix will play a key role in overall advisor productivity. For example, large group annuity buyouts,

increased group life sales, or more single-premium individual life sales can produce higher premiums; however, the lower commissions paid on those sales can boost productivity.

In 2015, the pension buy-out and buy-in market offers a growth opportunity for life insurers to gather new assets. Next year, new IRS mortality tables may increase pension liabilities 5% to 15%. As a result, sponsors may find annuities to be less expensive than the cost of keeping the liability. This opportunity builds on the momentum created by Prudential Financial’s recent closure of two transactions with Motorola and Bristol Myers. From a broader perspective, this opportunity is just one aspect of the trend of insurers seeking growth as asset managers rather than as pure protection providers. We will be exploring the implications and challenges of this trend in 2015.

During 2015, insurers and distributors continue to invest in technology. The introduction of “robo-advisor” platforms continues to generate attention. A key event was the announcement by Schwab that it plans on introducing its robo-advisor in the first quarter of 2015. Schwab will also introduce a “white label” version to registered investment advisors firms in 2015. With a robo-advisor, the lower costs and lower levels of advice enable robo-distributors to target underserved mass affluent and middle-market investors, in the same way that those investors can use online stock trading services. A major impact of robo-advisors will be the decreasing of advisor fees.

Insurers are increasing the use of analytic-driven algorithms to speed the issuance of life policies. We expect insurers will make further investments in these areas over the course of the year, continuing a trend began to accelerate back in 2013. Initially driven by larger insurers, in 2015 look for midsized and smaller insurers to follow the lead and invest in technology. The increased use of algorithms and cloud computing is providing a competitive and cost advantage. As a result, we expect insurers will make further investments in these areas over the course of the year.

Sample of Largest M&A Transactions, 2014

(currency in millions)Acquirer Target Price

Aviva Friend Life £5,600

Dai-Ichi Life Protective Life $5,700

Manufacturers Life Standard Life $3,700

RenaissanceRe Platinum Re $1,900

Desjardins Financial State Farm Canadian ops $1,500

Source: Public announcements and press releases, Conning analysis

Steven W. Webersen, is a Managing Director and Head of Insurance Research. Mr. Webersen joined Conning in May 2012 and initially was responsible for Conning’s property-casualty research group. Prior to joining Conning, Mr. Webersen was a Managing Partner for SFRi LLC., an investment banking boutique serving the insurance industry. Mr. Webersen has over 25 years of experience in the insurance industry, including as a managing director at Swiss Re in its capital partners group, the property casualty rating division at A.M. Best Company, and equity research and corporate finance at Smith Barney. Mr. Webersen holds a B.A. in Economics from the University of New Hampshire.


LOOKING AHEAD

Create a Next-Gen vision and strategy. Zero-in on your vision and strategy as a Next-Gen Insurer. Consider what your insurance products cover today and rethink those products based on these technologies, how they will redefine risk and pricing models, how they will change services, and other matters.

Modernize and optimize the core. Core systems are the cornerstones of insurance operations, and if they do not perform well or adapt quickly to changes, they can hinder an organization and its ability to leverage emerg-ing technologies.

Commit to innovation and experimentation. Insurers must quickly begin to develop strate-gies, experiment, and invest in these technolo-gies today, because the catch up time between leaders and laggards is increasing rapidly. Look at outside-the-industry initiatives to gain an un-derstanding of the potential of these technologies. Recognize that the pace of adoption of these tech-

nologies by insurance companies coupled with the extra time needed to get up to speed carries more potential for damage than it did in the past.

Master the data and analytics. Broaden and deepen your expertise and knowledge about new sources of data coming from these emerging technologies. New insights and information will drive business strategies and customer engagement models.

Align capital investment. Based on the Next-Gen Insurer vision and strategy, align capital resources to more quickly fuel the strategies. Look at how the capital can be used for joint ventures, partnerships, acquisitions, and technology investments to gain expertise and insights on emerging technologies to help close the lag time gap.

A new era for insurance is unfolding, influenced by a key lever of change and disruption—emerging technologies. Those that embrace the potential and capitalize on

the opportunities stand to make the biggest gains, bypassing the competition to become part of a new breed of market leaders. Those that hesitate or wait to be quick followers will struggle to catch up, falling behind as they increasingly lose importance.

The coming years hold an unparalleled promise of opportunities for transformation and innovation, and matchless potential for becoming market leaders that leverage emerging technologies to increase customer value, engagement, and loyalty. Insurers, don’ just feel the need for speed – get started today. Embrace the disruption and change. Experiment and adopt emerging technologies. Re-envision the business. Become a Next-Gen Insurer.

Contact me at [email protected] if you’d like to learn how SMA can help you on the innovation journey and discover new opportunities for the insurance industry. Click here to learn more about SMA’s research.

Denise Garth, Partner, is well known as an innovation leader in insurance. With a unique combination of strategic and operational experience in the industry, Denise is committed to helping insurers create and accelerate new ideas by capitalizing on established and emerging technologies. Exclusively serving the insurance industry, Strategy Meets Action, (SMA) blends unbiased research findings with expertise and experience to deliver business and technology insights, research, and actionable advice to insurers and IT solution providers. Denise can be reached at 1.402.963.018 or [email protected]. Follow Denise and SMA on LinkedIn at sma-strategy-meets-action and Twitter at SMAInsurance.

Source: Och-Ziff. August 15, 2014

What Prime Advisors, Inc. has done in recent months is to reduce some overweights/underweights to benchmark levels, capitalizing on investments that performed well throughout the past couple of years. In evaluating interest rate risk we continue to refrain from making bets on the direction of long term bond yields. As shown in the previous charts, predicting the direction of interest rates is difficult. Investors that have recently bet on higher yields gave up both income and total return. Duration is best managed by viewing it as part of a company’s enterprise risk management considering interest rate forecasting, income needs, liquidity requirements, and surplus stability. In evaluating credit risk we moved to higher credit quality

securities in portfolios. This allows us to be prepared and have the resources to take advantage of the next dislocation. As an example of this, Prime has been underweight the energy sector; as prices became much more attractive recently, we were able to trade into holdings that we believe are strongly positioned to weather the drop in oil prices.

Our overall investment themes for 2015 are to expect the unexpected and to manage liquidity to prepare for the next dislocation. If you have any questions on how your organization might be impacted by these issues, please feel free to contact us.Frank Conde, CFA, FCAS, Chief Investment StrategistJason Gingerich, CFA, FSA, Senior Investment Strategist

DISCLAIMERPrime Advisors, Inc.® (“Prime”) is a federally registered investment adviser that

customizes portfolios for its clients. Accordingly, while the views expressed in this presentation are a general guide to Prime’s economic and marketplace opinions, these are macro or strategy-level views and do not replace portfolio-level advice. Moreover, they do not constitute legal, tax or investment advice; and they are not intended as an offer to sell or a solicitation to buy investment products or individual securities.

This presentation is current as of January 8th, 2015. Some of the views expressed are expectations, and constitute “forward-looking statements.” They also reflect the author’s best judgment. Actual results may differ. Neither the author nor Prime is under any obligation to update this presentation to reflect changed conditions. Additionally, these views are not intended to predict or guarantee the future performance of any individual security, asset class, market, or the future performance of any Prime account.

Emerging Technologies and Innovation continued from page 14

2015 Outlook: Predictions and Surprises continued from page 17

COVER STORY


Peter Ricchiutti Interview continued from page 11

and now that we’re starting to gain some traction, you’ve got the problem of inflation in the United States, and who is going to win. What’s going to be the overall rate? Most economists I speak to say that we should be more worried about inflation rather than deflation. That’s why most people see interest rates going up. Now Europe has a lot of structural problems just the way those governments are operated. I don’t think we’re going to get sucked down their hole though.

INTERPRETER: Based on the run we’ve had, do you expect the stock market to continue to rise in 2015?

RICCHIUTI: I think a lot of the gains are already in there. I don’t think it is going to go down. I think it will go up a little bit, but I don’t think you’re going to see these double digit gains we’ve gotten so used to. I think it’s the time that Main Street gets to catch up and start to look a lot more like what Wall Street was forecasting. I think that Wall Street is going to have to deal with a little higher interest rates. I don’t think that will end the bull market, but you will have a lot of things like that that are going to make it a much more normal year. You know historically with dividends the market returns about 8% and I think this year will be much more in line with that kind of thinking. But, there are some big drivers that are going to be very much intact like the number of mergers and acquisitions. I don’t see that stopping. Money is still pretty cheap and companies are looking for growth. So, that’s kind of an easy way to do it. I have a slide that shows in 2000 there were 6,600 publicly traded companies in America and now there are around 3,300. We’ve lost half of them. That in-cludes the new IPOs that have come out. I think the market will probably do okay but not these kinds of numbers; these have been an anomaly. If you look back at history, you can’t keep gluing these together. I saw a guy at a party the other day that had a button that said, “Dow 25,000.” So, if they’re printing buttons, guess that’s a good sign—or a bad sign. A button saying 25,000 is a good sign that it isn’t going to happen.

INTERPRETER: You mentioned growth in manufacturing? Are there certain areas/sectors

of the economy in the United States that you think will do better than others in 2015?

RICCHIUTI: I think we’ve got a huge come-back in machinery for a couple of reasons. I think there is going to be more manufacturing in the United States. It’s going to be big. These companies never thought it would come back, and they really haven’t spent enough money on upgrading equipment. The people that make that kind of equipment are going to do very well. And the chemical industry; they are making it just hand over fist. Not only is natural gas one of the big feed stocks, but that business is just exploding. There is an area south of I-10 in Loui-siana; it goes from New Orleans to Lake Charles. Every two months someone announces a new chemical plant over there. We have a facility they are building in Lake Charles; a South African company is building it, and it’s the largest private investment in the history of the country—$26 billion. They are turning natural gas into die-sel. Lake Charles is one of three or four ports that move natural gas in or out and that is why they’re building the plant there. I talked to an economist the other day about the Lake Charles area and that plant. He was talking about what a financial impact it would be. This sounds like a make believe story, but he said we need so many welders that if every resident of the Lake Charles metro area that is between the ages of 5 and 65 went to welding school, we wouldn’t have enough welders. I just like the visual school room of 5 and 65 year olds together playing with fire. There is a lot of good stuff going on.

INTERPRETER: The top margin for the U.S. corporate tax structure is already 35%, and we are way out of line with other countries. It’s hurting us because corporations

“rathole” money overseas.RICCHIUTI: You’re absolutely right. It’s

a little convoluted because that 35% level is not even comparable. I mean nobody would do business in the United States. There are a ton of loopholes. It just needs to be scrapped and started again. If we could get the money back here, then what we’ve been talking about would just accelerate. I think it’s absolutely true. If they would invest in the United States, rather than building a plant in the middle of a farm field in Germany that says “Kraft” on it. I saw that traveling and thought, “Damn, what’s it doing over here?”

INTERPRETER: Do you think there will be a tax reform in the near future?

RICCHIUTI: I think there may be some changes because the Republicans now control both the Senate and the House. I think they can come up with plans and just barter with the President and maybe get two or three things through. I’d be surprised if we didn’t get something on immigration and corporate tax reform. But, for real corporate tax reform, they are just going to have to start all over again. Every lobbyist has attached things to it for over 40 years. They would have to start with a blank slate. The other day I was talking to somebody who was looking at stock of H&R Block and the guy said to me, “You know what the risk is there?” The risk is that in owning that stock they simplify the tax code. I thought that that’s a risk I will live with.

INTERPRETER: Do you consider yourself to be a bull or a bear?

RICCHIUTI: I’m a bull; a long-term bull. I think Wall Street just got ahead of Main Street and just needs to catch up a bit; that happens from time to time. I know a bunch of things can happen between here and June, but I’d be very surprised if the stock market isn’t about where it is and Main Street doesn’t take a couple of jumps/steps by the time we get together in Las Vegas.

Ricchiuti and family at Loyola Concert 2010

Forrest E. Mills, Jr. is the Chief Financial Officer of Guaranty Income Life Insurance Company and this year’s IASA President. He can be reached for further information or comment via email at [email protected].

Brent Jones is Chief Financial Officer with Texas P&C Insurance Guaranty Association. For the 2014-2015 fiscal year he is currently serving on the Executive Education Program sub-committee. He can be reached via email at [email protected].


LOOKING AHEAD

Current technology megatrends offer great opportunities for insurers. Improved accessibility to internal data, the

“internet of things”, and the explosion of data available from social media, telematics devices, sensors, satellites, wearables, mobile devices and traditional third party data providers can be harnessed to drive improvements across the insurance value chain. Powerful data storage technology and analytics tools can enable valuable insights that can deliver big benefits in product development, customer service, underwriting, pricing, and claims management. Mobile empowers our customers, agents and employees to conduct their business where, when and how they want. Social media has opened new ways for insurers to communicate to the customer, to understand the customer’s needs, and to re-enforce brand. And cloud and SaaS offers insurers the opportunity to enable speed to market, and business and technology agility as other industries have experienced. Lots of opportunities, but the reality is that insurance technology budgets and investment plans change slowly year to year.

In 2015, insurers will leverage all of the above to some degree, to enable growth, agility and optimal customer experience but many insurers are investing in the same projects as in 2014. Novarica’s 7th annual insurer IT budgets and projects report presents and analyzes the results of a survey conducted in late 2014 among 88 insurer CIO members of the Novarica Insurance Technology Research Council. Despite the rapid changes in technology across the economy, the main theme of 2015 insurer IT budgets and project priorities is one of continuity.

While budgets are increasing slightly, spending ratios are staying within historical ranges, indicating that they are tracking projected premium growth. Overall average spending ratios are up slightly to 3.8% from 3.5% or 3.6% in previous years, but Novarica regards this slight statistical increase as consistent with historical norms of 2-5% rather than evidence of a significant shift in resource allocation within the industry.

For more than half of insurers, their top priority projects for 2015 are the same as in

2014. Supporting growth continues to be the dominant strategic goal of insurance IT spending. Whether growth will be achieved through new products, jurisdictions, appetite, acquisitions or new distribution strategies,

insurers are investing in the technology to support this key goal. Operational effectiveness, a critical competency to support a growth and scale, as well as customer satisfaction, was a close second. Insurers are more likely to cite

Insurance IT Spending in 2015By MARTINA CONLON, Senior Vice President, Novarica

Average insurer IT spending ratios (% of premium)2011-2015

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%2011 2012 2013 2014 2015

3.6%

Source: Novarica Research Council CIO Surveys, 2010–2014

3.6%3.5% 3.5%

3.8%

All (n=88) L/A/H (n=19) Large P/C (n=20) Mid/Sm P/C (n=49)

Average importance of Business Drivers IT Strategy for 2015(1=not important, 7=critically important)

Growth Strategies

Operational effectiveness issues

Competitive parity issues

Organization-wide expense reduction issues

Compliance pressures

Economic environment

Pressure to reduce IT expenses specifically

Recent operating losses

Investment market losses

1.0 2.0 3.0 4.0 5.0 6.0 7.0

Source: Novarica Research Council CIO Survey 2014Q3


growth and operational effectiveness as the key drivers of their IT strategies than they are to cite expense reduction or even competitive parity.

Fewer than half of insurers are enthusiastic about their current capabilities. Insurers remain critical of their own technology-enabled capabilities, with the exception of financials and IT security. CRM and customer portal capabilities are widely acknowledged to be weak, and more than one-third of insurers believe their analytics capabilities are badly in need of improvement.

Top projects for 2015 are related to policy admin and business intelligence. Core policy admin remains the most active area for replacement and the top priority project. Nearly 40% of insurers are currently engaged in or are planning a policy administration system replacement in 2015. Business intelligence is the most active area for enhancement. While few insurers are shopping for new BI environments, more than half are planning major enhancements in reporting, data repositories, and analytics capabilities. Expanding agent portals capabilities is high priority for many insurers and predictive analytics (most commonly underwriting risk scores), while not the top priority for many insurers, is an area of investment for many insurers.

And emerging areas, continue to emerge…slowly. While policy administration systems and business intelligence remain areas of continued investment and focus, most insurers are investing more limited amounts to dabble in social, mobile, big data and cloud.

These emerging areas in technology offer great opportunities for insurers, but they also increase the challenge of prioritization. While many insurers would love to leverage big data, mobile and social in a grander and more substantial way, most are still dealing with foundation issues like brittle, antiquated core systems or inaccessible, poor quality internal “little” data. Insurance IT spending for 2015 reflects this challenge.

The increase in budgets in 2015, however modest, is cause for hope as insurers continue to devote resources to expanding and improving their capabilities. More and more insurers view technology as a strategic asset and key business enabler rather than the risky, expensive hindrance it was considered 10 years ago. There is a noticeable disparity between insurers who are investing heavily in their core systems to meet future demand for business

capabilities and embracing the possibilities offered by emerging technology areas, and those that continue to treat IT as a problem to

be solved. We believe the former group will continue to have a competitive advantage over the latter in this industry in 2015 and beyond.

Martina Conlon is a Senior Vice President at Novarica

High Priority Project for Insurers in 2015 (percentage of respondents citing each area among their top three priority projects))

Policy Administration(Suite or Components)

Business Intelligence(Reporting and/or Repository)

Agent Portal

Predictive Analytics

Underwriter Workflow

0% 10% 20% 30% 40% 50% 60% 70%


Extensive deploymentLimited deployment, no plans to expand

Limited deployment, planning to expandPilot project planned or underway

Deployment Rate of Mobile/Social/Cloud/Big Data (n=88)

Mobile for policyholdersMobile for agents/brokers

Mobile for adjustersMobile for staff (beyond email/calendar)

Tablets for external usersTablets for internal users

Social Media for marketingSocial Media for agents/brokers

Social Media for internal usersHosted applications (single tenant)

Software-as-a-ServicePaaS or IaaS

Big Data appliancesBig Data, databases/file systems

Big Datat parsing tools

0% 10% 20% 30% 40% 50% 60% 70%


LOOKING AHEAD


LOOKING AHEAD

CHAPTER OUTLOOK 2015 Educating, Networking Socializing and Growingby CHUCK GUNKEL

For the past 8 years, while working with Chapters, I have learned one thing…the “down time” is very limited. Usually right after they hold a conference…within weeks they are talking with each other, planning

the next one. They can’t help themselves, they’re the type of people who volunteer. Whether it’s for IASA, their kids school, church or even a neighborhood event. Volunteers are special people, they keep giving back.

So a few weeks ago I sent an email to all the Chapters asking if any of them wanted to promote their Chapter. I asked for 4 or 5 Chapters to participate in this article. I got 14 Chapters interested in promoting what they plan on doing in 2015! So look out, I see some big things happening this year! Once you go to your local Chapter event, chances are you go again, and usually bring a colleague. If you’ve never gone, you’re missing out.

Central Illinois Chapter Met at IASA’s Roots but Remains Focused on the Future.

Central Illinois had a busy 2014! We started out the year with our annual spring conference. It’s a one day event held in Bloomington, Illinois that highlighted the usual accounting and tax updates, IT topics, sprinkled with some investment and other areas for extra flavor! We had a good turnout, and a great sponsor to boot.

Fast forward to September 2014—Central Illinois hosted the Regional Central States Conference in Peoria, IL in conjunction with Indianapolis, Chicagoland and St. Louis chapters. The day and a half conference was held in the historic Marriott Pere Marquette hotel in downtown Peoria. Interesting to note, that back in March of 1928, the first ever IASA meeting was held in the exact same location. Our conference had lower attendance than we had hoped, but wonderful participation from our sponsors/exhibitors.

During 2014, we began an initiative to increase our board size. We have always voted on a new slate of officers at our annual conference in the spring. The outgoing President finds a replacement in their company and this person joined the board. This led to the same (wonderful) companies sitting on our board year after year. We decided this year to add some new positions and invite all member companies to be a part of our board. We sent out a mass email to our members and were successful in adding three new companies and board positions.

In 2015, we look forward to working with our new board members and will begin planning our April conference soon. We will also again support the Central States Regional Conference this fall, which will be in St. Louis.

Come out and join the Central Illinois Chapter.

For more information contact any of our officers and board members. Immediate Past President Meg Dixon, RLI Insurance Company President Karen Leeman, Pekin Insurance Company Vice President/SecretaryKathleen Schwitzner, COUNTRY FinancialTreasurerDennis Loveridge, State Farm Insurance Cos.Chair Position, Marketing Tiffany McNeely, CCMSIChair Position, Membership Mike Smith, CGB Insurance CompanyChair PositionRandy Erickson, Commerce BankBoard Member At LargeNancy Fangmeier, Pekin Insurance CompanyBoard Member At LargeBetty Apke, RLI Insurance Company

A Home Run for The Desert States Chapter- Rebuilding and Growing Come Join Us!

The Desert States chapter of IASA had an active year for 2014. We labeled this our “rebuilding year” and it was. In April we offered a half day conference where approximately 25 people participated in a very good conference. It was held at the Marriott which was a great venue, a good lunch buffet, the speakers were outstanding and the topics were of interest to the attendees. In September the chapter teamed up with the IMA for a night out with the Diamondbacks. This opportunity to network with other accounting professionals made for a lot of fun and is something we hope to continue annually with other local accounting organizations. Our

fall conference in October was the chapter’s first full day conference in many years. There were approximately 30 participants, again held at the Marriott and very good speakers. We have a number of repeat attendees which is an indication that they like the conferences and are finding value. We learned from this conference that a full day conference takes a lot of resources and at our current membership level we should stick to the half day conferences.

For 2015 we plan to offer two half day conferences in April and November, and once again have the night out with the Diamondbacks networking event. We will have one of the half day conferences in the

morning with a keynote lunch time speaker. The fall conference will be in the afternoon with a social following the conference. We also are incorporating an “open” session to discuss current topics and get audience participation. The format includes a panel from accounting firms, the insurance industry, and internal auditors. Our Board is made up of the following members:Greg Voorhies, Mutual Insurance Company of ArizonaGlenn Schulke, Consulting Systems EngineerNikki Pethtel, Eagle TechnologySteele Campbell, Campbell, Hightower & AdamsMarlys Rulon, Eide Bailly, LLP


LOOKING AHEAD

Happy New Year! Happy new possibilities! Get RENEWED with Indiana Chapter

After several years of dormancy, the Indiana Chapter made strong efforts in 2014 to renew itself. Our rebirth consists of new Officers, each of whom possesses a unique focus and approach:Chapter President: Mike HolmesVice President: John BakerVice President: Rita GoldenbergVice President: Doreen Koning Secretary/Treasurer: Pam GordonBoard Member: Kit Kovacs

We’ve re-established the Month of May as the time for our Indiana Chapter Meeting. In 2014, Indy’s IASA excitement was quite high early on, accelerating towards the fantastic National Conference held in early June, in our Capital City of Indianapolis! Our Chapter Meeting covered the needs of those unable to attend the National and provided a great framework for those of us new to the Committee. We look forward to a busy 2015!

Our 2015 Indiana Chapter Meeting is scheduled for Monday, May 18th, at the upscale and popular Marriott Indianapolis North.

If you have an interest in IASA, our Chapter would love to hear from you. We hope that you will identify with us as we grow. Your ideas and your participation (at any level) are enthusiastically encouraged! For information, please contact Mike Holmes at [email protected]

SW Ohio Chapter

Andrea, Nationwide Carolyn, Nationwide & Maya, Grange Mutual....getting ready to throw a conference for 400 people!

Time to Network! Atlanta Chapter. Cecil, Forrest & Karyn...in Biloxi at the Mid South Chapter.

The President of the Atlanta Chapter – Cheryl Sorenson, Assurant Specialtiy Property and Chuck Gunkel, IASA Vice President – Chapters

Yeah, he’s about this tall...Land O Lakes Chapter

Angela, Allan, Laura & Scott...sessions are finally over! Mid South Chapter



LOOKING AHEAD

Networking, Social hour Plus Games & Prizes—Keep Northern CA Chapter Strong

The Northern California Chapter has had consistent attendance at our meetings of 60-80 people over the last seven years. During that time we have changed around the time of the meeting anywhere between the first week of November to mid-December. This year, we had big changes and did not know what to expect. Our meeting was December 16th , which was fairly late in the year, and we moved to a new location. Based on feedback from the year before, the lunch break was used for networking with peers and we had a social hour after the sessions. Overall, the meeting went very well! For next year, we are considering changing the meeting to a Regional meeting co-hosted with the Southern California chapter in Los Angeles. This will be a great opportunity to combine our chapters for a single day

conference with networking and vendor participation and it is just a short flight for those located in Northern California. We recently sent out a survey using Survey Monkey to ask our chapter for their feedback both on our current meeting structure and proposed changes. And we look forward to the feedback we get. Attached are some photos from our recent meeting and of the game we played to giveaway our prizes – PLINKO!!

For more information Please contact the chapter officers Northern CaliforniaCindy Boyle / Chapter PresidentCheri Schmidt / Chapter Vice PresidentJulie Schilling / Chapter Vice President

Get Excited for the Metro New York/New Jersey Chapter!

The Metro New York/New Jersey Chapter is one of the twenty-six local IASA chapters in the United States catering to insurance professionals in the New York City metropolitan area and offers opportunities for training, professional development and networking.

Annually, the chapter holds a full one day event with an educational session for approximately 4 hours in the morning followed by a golf outing in the afternoon. CPE credits can be obtained during the morning educational session. The afternoon is all play and no work where 18 holes of golf with a team of up to four are played followed by an awards ceremony and reception. Various interesting topics are covered during the educational session, sponsors are recognized throughout the day’s activities and all attendees are given plenty of time to network throughout the day. In 2014, this event was held on Tuesday May 20th. In the coming year this event will be held on Monday May 18th, 2015. Registration and sponsorship opportunities fill up quickly so please register as soon as possible

once registration opens in March 2015. Please contact any of the chapter officers listed below with questions.

Along with the Mid-Atlantic Chapter, on September 11th-12th, 2014, the Metro New York/New Jersey Chapter held a day and a half event at Harrah’s Resort in Atlantic City, NJ. The educational session topics, sponsorship opportunities and networking

events were so successful both chapters will host this event again on September 10th-11th, 2015. 2014 was the second year this event was held and its popularity continues to grow.

The Metro New York/New Jersey Chapter always looks forward to seeing attendees they have in the past and continues to welcome new attendees with open arms.

Please contact any of the Chapter Officers listed below with questions:Jason Freund, President, KPMG, LLP [email protected] Ravi, VP Membership, EisnerAmper LLP [email protected] Rasimowicz, VP Conferences, Prudential Financial [email protected] Horn, Treasurer, Everest Reinsurance Company [email protected] Graf (formerly Dobies), Secretary, Johnson Lambert LLP [email protected] Schaeffer, Past President, Deloitte & Touche LLP [email protected]

Clockwise from Left: May 2014 Golf Outing; September 2014 Atlantic City Event; Chapter Officers (listed above left to right)

Chuck Gunkel is the Rainmaker for Swift Print Communications and VP-Chapter Advisory for IASA. He can be reached for further information via email at [email protected]

Perspective is everything: If you are in a room with all southern

exposure and a bear walks by, what color is it?Your first response is to think about the

bear’s color — how can this be determined? Everyone knows that there are three colors of bears — black, brown and white - but how can you determine the color of this bear with the information that you have been given?

Then you think about the information that you have been given; you are in a room with all southern exposure so where would you be? There is only one place that you can be — THE NORTH POLE! So if you are at the North Pole and a bear walks by, there is only one type of bear that lives in this environment — a Polar bear and you know that Polar bears are white. So based on the perspective that you have, that if you are in a room with all southern exposure and a bear walks by, of course that bear would be WHITE!

The IASA Industry Pulse is designed to give perspective on some of the challenging questions in the Insurance Industry.

This September the IASA Pulse Committee put together a three-part mini-series poll that spanned September, October and November. The topic was Corporate Travel Expenses and it achieved record results. In fact, participation was very high and consistent throughout the entire

mini-series. This approach has shown that there is interest, and that with the right topics and poll-ing structure we can generate even more partici-pation. The graphs below show some of the high-lights from the mini-series; it is our hope that they will encourage more participation in the future.

The mini-series focused on the following areas: Travel Expense Policy and Reimburse-ment, Submission / Tracking / Reporting, and lastly Approach / Software and Allowances. Together, these results give us an in-depth look into Corporate Travel Expense in our industry.

Responders to the September Pulse indicate that a formal Travel Expense Policy is the standard, with 89% stating that they have a formal policy in place.

While this is to be expected, 11% still do not have a formal policy. Almost all of the No responses were from companies with less than $250 million in Net Written Premiums (NWP), highlighting that larger companies require that more documented procedures are in place.

Even with a formal policy in place, 80% of responders still book their own travel. Those responders that do not book their own travel increase as the NWP of a company grows, dramatically increasing in companies with NWP over $1 Billion.

Interestingly, only 66.5% of reporting is done electronically via e-mail or reporting

software, while 32.3% is submitted manually. There is a lot of room to improve efficiency in this process, especially for smaller companies.

Reasons for automated systems include both cost reduction of staff time and processes, enhanced audit control, fraud reduction and better expense tracking. Cost of automated systems attached to a company credit card can be done for little upfront cost and no ongoing expense, and some programs even offer cash back on total company spend.

With Reimbursement being handled as incurred as shown in the graphic below, the efficiencies could decrease the turn-around time and increase employee satisfaction.

While the findings of Pulse Polls are not sta-tistically significant, they are a window into the activity, processes, and procedures of our indus-try. Support of the Pulse Polls has been grow-ing, and it is our hope that this article will in-spire more people in our community to respond to them. By participating, you can increase the validity of the results and the value they provide to the industry. As always, you can participate in the pulse via the e-interpreter!

IASA continues to support the Insurance Industry and we are hopeful that we can inspire you to participate in all of the activities that IASA offers, increasing the value that we can bring to the industry.


LOOKING AHEAD

IASA Industry Pulse: Gaining PerspectiveBy DON MACFARLAND

Don MacFarland has spent his entire 32 year career in the Insurance Industry. He has worked with Insurance Carriers, Retail Agents, Brokers and Managing General Agents through out the span of his career. He has held positions in Agency Management, Agency Interface Management, Product Management, Data Management, System Management and Sales / Marketing for both “Direct to Consumer” and “Business to Business” Insurance Carriers. Don is in charge of Sales and Marketing for CastleBay Consulting and is a member of its management team. He can be reached for further information or comment via [email protected]

EXPENSE REIMBURSEMENT

4%

96%

Per diemallowance

Reimbursedas occured

FORMAL TRAVEL EXPENSE POLICY

NO 11%

YES

89%

All responders

WHAT BEST DESCRIBES YOUR TRAVEL EXPENSE PROCESS

Reports submitted electronically via reporting tool/softwareReports submitted manually via inter office

Reports submitted manually via emailReports submitted manually via faxDon’t know

32.1%

12.8%

0.9%

0.5%

53.7%

Navigating income tax rules, regulations and requirements can be a perplexing and overwhelming task. With this edition, the Interpreter is introducing a new tax column titled Tax Solutions

Corner. This new feature will provide helpful guidance and insight to commonly asked questions from three seasoned tax professionals who

are well versed with insurance taxation and the common pitfalls and challenges impacting insurance companies: Joanne Kearbey, Manager at Brown Smith Wallace LLC, Sarah Stubbs, Principal at Johnson Lambert LLP and Margarete Chalker, Partner at Plante Moran. In this edition the Tax Solutions Corner tackles the topic of tax accounting methods.

What is an accounting method? What is the difference between a method and an error?JOANNE KEARBEY, Tax Manager — Insurance Advisory Services, Brown Smith Wallace LLC

An accounting method is a set of rules that are used to determine how and when income and expenses are taken into account for federal income tax purposes. The term can refer to an overall method of accounting (cash versus accrual, for example) or to the way a specific item is accounted for, such as the discounting of loss reserves.

Certain Internal Revenue Code sections provide for variations between financial and tax reporting, but in any case the method of accounting must clearly reflect the taxpayer’s income. Generally, financial accounting attempts to match expenses against the corresponding income. Financial accounting tends to be more conservative when considering items of income but more liberal in treating an item as an expense or loss. Tax law takes the opposite perspective as it is more likely to recognize an item as income but hesitant to recognize deductions or losses.

No one method can be imposed on all taxpayers, however as long as the method of accounting reflects a consistent application of accounting principles or practices in a particular trade or business, it generally will be considered to clearly reflect income if treated consistently from year to year.

The key concepts in determining what constitutes a method of accounting are timing and consistency. If an issue involves when an item is deductible or included in income, rather than whether it is included, the issue being addressed generally involves a method of accounting.

The Internal Revenue Code does not define exactly what a change in method of accounting is but the regulations provide that a change in method would include such items as a change in the methodology of

valuing inventory, a change from cash to accrual method, or vice versa; or certain changes in computing depreciation or amortization.

A taxpayer adopts a method of accounting simply by using a correct method treating a material item on the first return it files or alternatively, by using an incorrect method for two or more consecutively filed tax returns. For example, if a taxpayer files a return using a correct (or permissible) method of accounting in year one but then files the next return (year 2) using an incorrect or impermissible method, they can remedy this by filing an amended return prior to filing the next year’s (year 3) return. However, if the incorrect (or impermissible) method is used for two or more consecutive years, then they have established a method and are required to obtain IRS consent in order to make a change.

An error, on the other hand, includes an incorrect tax liability computation (such as the computation of the foreign tax credit or net operating loss), a math or posting error, or the use of a method that results in a permanent difference rather than a timing difference. The correction of an error does not require IRS approval.

Joanne Kearbey is a Tax Manager with Brown Smith Wallace’s Insurance Advisory Services Practice. She spends her time consulting with a variety of property/casualty and health and life insurance companies. She can be reached at 314.983.1367 or via email at [email protected]

So how do I change an incorrect method? Won’t this create a red flag with the IRS? Will there be penalties? More importantly, will I get audited?SARAH STUBBS, Tax Principal, Johnson Lambert LLP

In order to change a method, taxpayers file Form 3115 — Application for Change in Accounting Method. There are two types of changes that one may request: automatic and advance consent. A list of automatic changes is maintained by the IRS and these changes must be submitted in duplicate – once as an attachment to the timely filed federal income tax return (including extensions) for the year of change, and again directly with IRS National Office anytime between the first day of the year of change and the date of filing of the tax return for the same year. Automatic changes do not require submission of a user fee.

For all other method changes, Form 3115 must be filed during the year for which the change will be effective. A user fee is required and can be substantial, ranging from $1,500 to $18,000 depending on the issue. However, it is important to consider this fee impact in light of the potential interest and penalties that might be assessed by the IRS if they were to discover the error upon examination of prior tax returns that an incorrect accounting method is being used.

As you might imagine, changes in accounting methods may result in favorable or unfavorable consequences as you gain compliance with


FEATURE

Tax Solutions Corner

the tax rules. Favorable changes are usually taken into account wholly in the year of change. However, unfavorable changes are permitted to be recognized as taxable income over a 4-year period without accumulating interest or penalties on the remainder balance.

Does this mean that you will be waving a red flag by filing Form 3115? Absolutely not! Contrary to popular belief, there is no committee of IRS agents who convene to identify specific taxpayers for examination. Except in rare circumstances, taxpayers generally become subject to examination by computer-initiated random selection. Filing any form with the IRS does not increase your chances of random selection merely because of the form’s content.

Furthermore, the filing of returns in the United States is based on a system of voluntary taxation. Although there are rules that stipulate how to determine your tax liability, the fact that taxpayers themselves report to the IRS on a regular basis is entirely voluntary and removes the burden of calculation, assessment, and collection from the government. So when a taxpayer voluntarily discloses an error and initiates a method

change, doing so provides for audit protection relative to the method being corrected and prevents penalty assessment, too.

Individual aspects of filing Form 3115 may cause some shock to taxpayers, but in the larger picture of all that is offered, taxpayers must weigh the costs and benefits of voluntary compliance (user fee + deferred income recognition) against those of an IRS examination (interest + penalties + all-in-one tax assessment + extended statutes + amended state or other returns). It is suggested that taxpayers remain forthright and in the good graces of the IRS rather than to rest in the shadows and hope they are passed over in random selection.

Sarah Stubbs is a Tax Principal with Johnson Lambert LLP responsible for providing engagement management, tax compliance and consulting services to insurance companies, not for profit organizations and affiliated entities. She can be reached at 919.719.6426 or via email at [email protected].

What common methods might I not be properly following and how do I gain compliance?MARGARETE CHALKER, Tax Partner, Plante Moran, PLLC

We believe that taxpayers should pay particular attention to methods used to report income from advance payments and when deducting compensation, especially bonus, accruals.

For taxpayers using the accrual method of accounting, income from advance payments is usually taxable in the year in which the payments are received. There were certain exceptions to this rule, and Revenue Procedure 2004-34 expanded the types of advance payments that would qualify for the deferral method. Under this method, taxpayers can defer recognizing income from certain advance payments until the year following the year of receipt. These additional types of payments include, among others: services; sales of goods; the sale, license, or lease of computer software; and the use (including license or lease) of intellectual property. Often taxpayers believe they can defer the recognition of income for both tax and book purposes in the same way. If a taxpayer has been improperly deferring income the taxpayer can file Form 3115 to gain compliance with the IRS.

Another method that taxpayers may not be properly following relates to deducting accrued compensation. Generally speaking, an accrual basis taxpayer can deduct accrued compensation in the year following the tax year the services were provided, as long as the liability was fixed and determinable at year end, and the liability is paid on or before the 15th day of the third month following year end. If an employer’s bonus plan requires that the employee remain employed until the payment date, then the liability is usually not considered fixed and determinable at year end, and the accrual generally would not be deductible until paid. As

with the previous example, Form 3115 would generally need to be filed to change to the proper method of accounting. Keep in mind that bonus plans can be reviewed, and there may be planning techniques available to preserve the timing of these deductions.

As noted above, when a taxpayer is required to increased taxable income as a result of making a method change, the adjustment, known as the 481(a) adjustment, can generally be taken into income over a four-year period beginning with the year of the change. Another benefit from filing Form 3115 is that a taxpayer generally receives audit protection from the IRS for the issue that led to the method change.

The IRS provides regular updates to the rules regarding method changes, and taxpayers should consult their tax advisor for specifics on the appropriate methods as well as the proper way to make method changes in order to gain compliance.

Margarete Chalker is a Tax Partner with Plante Moran’s Insurance Services Group. She spends most of her time advising property/casualty and health insurance companies and can be reached at 517.336.7548 or via email at [email protected].

We welcome your feedback on this new column as well as suggestions for future topics to be covered in the Tax Solutions Corner.

FEATURE


A 2014 CareerBuilder studyi showed that forty-three percent of recruiters are now researching candidates on social

media—up from thirty-nine percent in 2013—and fifty-one percent of those have found reasons on social media to choose to not hire a candidate. That same study showed that forty-five percent use search engines like Google to research candidates prior to hiring them.

It may sound vain, but Googling your name from time to time is actually a valuable exercise in protecting your brand. Give it a try; you may be surprised at what comes up. Photos posted by friends who don’t lock down their accounts; links to news articles from the distant past; maybe even stories about someone with a similar name that aren’t about you--but would your current or future employer know that?

As I’ve been speaking about social media at recent IASA Chapter events, I’ve been asked several times, “Why should I use social media? Where’s the value?” And the best answer I can give is this:

Engaging on social media gives you the ability to take control of what people see about you when they search for you online. Whether you’re seeking a new job or just want to protect your personal brand for the future; one thing is clear: social media has dramatically changed how companies view current and potential employees.

In the same study referenced above, one third of employers who research social media said they found information online that made them more likely to hire a candidate.

Imagine what a difference it could make if a recruiter—or, for that matter, a potential client, a business partner, or someone you’re recruiting for your company—searches you on Google and sees links to professional accounts on sites like Twitter, LinkedIn, and SlideShare, demonstrating professional expertise, industry knowledge, and superior communication skills.

That’s the power of social media.Over the next several issues of The

Interpreter, I’ll provide step-by-step guidance on each of the key social sites, including information on how to get started using them, pitfalls to avoid, and—where applicable—how to lock down your privacy to ensure that the things you want to share, for example, on Facebook actually stay on Facebook.

Before we jump into individual site recommendations, create accounts, or start posting on Twitter, there’s a first step we need to consider: your company’s social media policy.

Chances are, your company has a social media policy in place. They vary widely; some are long and exhaustive, and others are short and open to some interpretation, but there’s likely some guidance on what you may do on social media as an employee of your current company.

Read it. Get clarification where needed. Know your company’s limits.

In many cases, your social media policy probably has some limitations similar to the following:• Your social media postings are limited to

personal posts• You are forbidden from posting anything

proprietary about your company

• You are forbidden from posting anything on behalf of your company

• Anything you do post should disclaim that your opinions are your own, or some other variant thereof

• You remain responsible for what you post; even if you disclaim that your opinions are your own, anything you post can reflect on your employer

One of the best social media policies I have ever heard suggested was simply “Don’t be stupid.” If you think about it, all of the above policy bullets align with that idea.

In our next issue, we’ll discuss how to get started on Twitter. While it’s the easiest of the channels to jump onto, it’s also the easiest on which to make mistakes or start poorly. I’ll be guiding you through establishing an account, creating a profile, and learning the ropes specifically within the insurance marketplace, including accounts to follow, use of hashtags, and how to begin demonstrating your expertise in your field.

In the meantime start thinking of how you want to represent yourself (that is, an appropriate Twitter handle), and if you’re already on Twitter look for me @dmreffitt.

Darin M. Reffitt, is a Director, Demand Generation & Campaign Management at EIS Group. He can be reached for further information via email [email protected] or @dmreffitt on Twitter

FEATURE


Get Started With Social: Why Build Your Professional Brand?By DARIN M. REFFITT

i “Number of Employers Passing on Applicants Due to Social Media Posts Continues to Rise, According to New CareerBuilder Survey” http://www.careerbuilder.com/share/aboutus/pressreleasesdetail.aspx?sd=6%2F26%2F2014&id=pr829&ed=12%2F31%2F2014


FEATURE

To Go All In in Vegas, a gambler is taking a calculated risk and betting they beat the odds. Peyton Manning and Condoleezza

Rice redefined what it means to “Go All In.” They are not a calculated risk. They are the real deal. Their careers are defined by raising the expectations, hard work, dedication, and trailblazing to set new standards. Now these two trailblazers in their areas of expertise make going all in at IASA a sure bet! Therefore, It is with great pleasure that IASA announce the 2015 Keynote Speakers for our Annual Conference in Las Vegas, June 7-10 are Peyton Manning and Condoleezza Rice.

The IASA Annual Conference and Business Show is the premiere education and networking event for insurance professionals in the areas of finance, technology, accounting, systems, investment and operations. Individuals with insurance carriers across every line of business consistently return to this conference because they find educational content specifically targeted to their needs, and a business show with one of the most diverse representation of solution providers.

“I am thrilled to announce this impressive line-up of Peyton Manning and Condoleezza Rice as the keynote speakers for our 2015 event. We are extremely proud of the reputation our annual conference has for being a high-quality and high-value event for insurance professionals and solution providers, and our keynote speakers are a key component of our program and the outstanding content we are able to deliver,” said Joe Pomilia, IASA Executive Director. “Securing this caliber of speakers is in large part due to our generous keynote sponsors, The Nolan Company and Majesco. We sincerely thank them for their continued support.”

Denver Broncos quarterback Peyton Manning, the league’s only five-time MVP and a 13-time Pro Bowl selection, is the Keynote Speaker on Monday June 8, 2015. Manning, who was the 1st overall draft pick by the Indianapolis Colts in 1998, led the Colts to win Super Bowl XLI over the Chicago Bears in 2006. He has earned his place among the NFL’s greatest quarterbacks. Most recently Manning set the NFL record for the most career passing touchdowns. Football enthusiasts, who do not always agree, all agree on one thing, Peyton Manning is headed to the Hall of Fame. Having continually set the bar high in his own career we are certain he will provide an inspirational keynote address.

As the former United States Secretary of State Condoleezza Rice will be IASA’s Keynote speakers on Tuesday June 9, 2015.

In addition to serving as the 66th Secretary of State from January 2005-2009 — the second woman and first African American woman to hold the post — Condoleezza Rice also served as President George W. Bush’s Assistant to the President for National Security Affairs (National Security Advisor) from January 2001-2005, the first woman to hold the position. Having set new standards throughout her career, Ms. Rice is sure to provide both an educational and motivational keynote address.

Peyton Manning and Condoleezza Rice are an outstanding selection for the conference theme of “Go All In”. Make a sure bet and Registration for IASA’s Annual Educational Conference and Business Show will be available in January 2015. Please visit our website for more conference information www.iasa.org/conference

Stephanie C. Leicht is the Vice President of Marketing for IDP, and a new volunteer for IASA. She can be reached for further information or comment via email at [email protected].

Rice and Manning a Guaranteed Win at the IASA 2015 Annual Educational Conference and Business Show

The IASA Industry Pulse is a monthly polling service designed to “take the pulse” of the association, and thereby the insurance

industry as well, by asking members a few quick questions every month on current hot topics.

These polls began 5 years ago when a subcommittee of the Marketing & Communication Committee was looking for additional ways to enhance the benefits of being an IASA member. The goal of the polls is to be a conduit for information and the sharing of best practices on hot and relevant topics that the membership is dealing with on a daily basis. The members of the Industry Pulse Poll Committee develop the poll topics and questions plus analyze and share the results of the polls via the Executive Summaries. The poll topics are taken from the membership and focus on the issues and challenges IASA members and peers in the industry are experiencing.

Scott McEntee has chaired The Surveys/Polls Committee for 4 years. “The intent of the polls is to get the heartbeat of membership on what is coming at them at any particular time and then kick that back to membership,” explains McEntee, the assistant treasurer at Farmers Mutual Hail Insurance Co. of Iowa. “It’s really information-sharing on how members are wrestling with [an issue] to give you some insight on how you might want to deal with it.” The insights and data from these polls provide a unique and exclusive benefit for members of the association. The Industry Pulse Poll is available via social media channels (LinkedIn, Twitter and Facebook), email blasts, as well as through the IASA’s website. Each month the responses are analyzed, graphed and a written explanation about the results are sent to members. In an effort to generate poll participation, the group instituted a monthly prize raffle, “What a nice surprise! Thanks for the prize and the informative surveys.” Jason Yoshimi, President & CFO Hawaii Employers’ Mutual Insurance Co. (HEMIC).

The monthly management of the polls is an arduous process that could not be accomplished without a strong committee. McEntee’s strength lies in his ability to get all of the volunteer members of the committee involved in creating, developing and analyzing the polls on a monthly basis. The committee operates like a well-tuned

vehicle, each individual contributing via their strengths. Yet, even with dedication from the committee the participation in polls began to drop in 2013 and early 2014. The biggest concern for this team after 4 years of building and developing, was that a large segment of the membership was unaware the poll exists. McEntee allowed his team to brainstorm but not get dragged down by the sluggish response to the polls. The committee determined that taking the poll is a quick and easy process that typically takes approximately two minutes. The sharing of expertise and experience is a huge benefit to the industry and finally the more general the poll’s topic, the better was the response. The committee focused its efforts on a re-launch of the Industry Pulse Polls.

The re-launch concentrated on two areas 1) increasing the number of generalized polls while increasing the depth of the polls, and 2) generating increased interest and participation in the polls. Thus was the advent of the “Polls 3 Month Mini Series.” This was launched this fall in conjunction with a new contest, focusing on building excitement and awareness around the Industry Pulse Poll. The committee rolled out “Polling for Dollars.” There are 3 incredible features to the “Polling for Dollars” contest. • 1st – IASA is giving away 1 national

conference registration to a lucky participant of the Poll. Each month as you take the poll, IASA will enter you into the drawing for the free conference membership.

• 2nd – If your chapter has the highest participation rate for the monthly poll over all the other chapters within IASA, your chapter will receive $100 from the National office to help defer the cost of your chapter meetings.

• 3rd – The chapter with the highest participation rate throughout the year, until the contest ends in February, will be awarded the coveted “Polling for Dollars Trophy” which will be awarded to the chapter officers and chapter during the Chapter luncheon at the annual conference in Vegas. The goal was to create envy of the other chapters not to mention the bragging rights that come with such a prestigious award. By winning the Polling for Dollars Trophy you earn the right to proudly display the trophy at all of your chapter meetings during the year until the next annual conference!

The more poll responses IASA generates, the more information its members will have available to consider. “Wow, that was a nice surprise this morning. I have been in the insurance industry for a long time and value the organization, articles and seminars to help me stay current with industry issues and trends.” Chung Leong, Investment Accounting Analyst, RGA Reinsurance Company.

Great News! The Polling for Dollars Contest and Mini Polls Series has been a big success. In fact, it is generated benefits far beyond increasing the Industry Pulse Poll’s visibility and tripling the number of monthly poll participants. Marketing efforts in the eInterpreter and Interpreter, social media posts and grass roots efforts for chapters with marketing in every chapter broadcast and handouts at chapter meetings have encouraged (or instigated) competition between the chapters. These efforts have resulted in chapter camaraderie, additional communication from chapters to members outside of meeting notices and helped with recruitment. Everyone is very pleased with these results. Chapter winners are being touted monthly. The contest does not end until after the April poll so there is still time remaining for even greater participation while allowing enough time to conduct analysis, determine monthly and overall winners and handle trophy details.

For more information about the Industry Pulse, to see what’s trending in the industry via our Mini Series or “Polling for Dollars,” and to let your voice be heard contact Scott McEntee, chair of IASA’s Surveys Sub-Committee (515.724.5007/[email protected]), get in touch with your local IASA chapter president, go to www.IASA.org or reach out to any of the amazing committee members:

Cindy Boyle, NORCAL Mutual Insurance Company • Denise Garth, Strategy Meets Action • Susan Cotter, EDM Americas • Kent White Occidental Fire and Casualty Co of NC • Stephanie Leicht, IDP • Celeska Fredianelli, QBE Holdings, Inc. • Holly Moltane, Jackson National Life Insurance Company • Alaine Heselmeyer, Cenpatico • Howard Chin, Compiricus • Julie Ledbetter, KeyMark, Inc • Don MacFarland, Castlebay Consulting • Mike Smith, CGB Insurance Company • Hsin-Hsin Lee, Mercury Insurance Group

ASSOCIATION NEWS


COMMITTEE SPOTLIGHT

Industry Pulse Polls Committeeby STEPHANIE LEICHT, IDP

1. How did you get started in the Insurance Industry?

I started my career with KPMG (then Peat, Marwick, Mitchell) and was assigned to audit a large life insurer along with a variety of other clients in my first year. It turned out that the audit senior left the firm the next year, and I more or less became the in-charge auditor in my second year and thereafter was considered an insurance auditor. I eventually went to work for that company nine years later to head their internal audit department. I later worked for a large national surplus lines broker and managing general agent before landing at Republic almost 15 years ago.

2. Was there a person or event that impacted the direction of your career if so can you share a little bit?

It would be hard to single out one person or event. Since I’ve been blessed my entire career to have had wonderful superiors that have mentored me and provided encouragement and support in every job that I have had. I would give a lot of credit to my parents who stressed the importance of education and who provided wonderful examples of integrity and character.

3. How / when did you first get involved with IASA?

My first IASA event was most likely a Texas Chapter conference, in 1983 or so while with KPMG. However, I was not a regular IASA participant until I started my current job in 2000 and was “volunteered” by my boss in 2001 to serve on the Texas Chapter governing board. I became president of the Texas Chapter in 2006 and moved on to the national volunteer ranks in 2009. I’ve served as Co-Chair of the Host Committee, on the Board of Directors and as Vice President of Chapters and Seminars and will be IASA President in 2015/2016.

4. How do you typically get your work day off to a good start?

At least three mornings each week, I get up at 5:30 and run 4-5 miles with a small group of good friends. I like to read the paper and watch the morning news with

breakfast before jumping into Dallas traffic. That said, a better start to any morning would be to be up before dawn to head to a deer stand or duck blind or to go fishing.

5. Is there a certain song on your iPod that gets you motivated?

I don’t have an iPod nor do I have any music loaded on my iPhone. However, I always enjoy George Strait, Merle Haggard or the Beatles.

6. What would you consider to be the biggest benefit your company gets from your volunteer participation in IASA?

Through IASA, I have access to a large number of other insurance professionals and solution providers – so if my company has a resource need, I know any number of places to go for answers or solutions. Also, as a regional insurance carrier, I think my participation provides broader exposure for my company in insurance circles beyond our traditional operating footprint.

7. What is the biggest benefit you get from being involved as a volunteer with IASA?

I have a tremendous sense of fulfillment in being a part of something larger than myself. During my early years, my parents instilled in me a sense of being engaged in service wherever possible, and volunteering with IASA is part of that sense of responsibility in my professional life. I believe that I am a well-rounded professional as a result of my IASA involvement. I have a network of friends, peers, and other relationships across the country through IASA, which adds an enormously fulfilling dimension to my professional life.

8. Do you have any hobbies that could affect your personal insurance premiums?

I enjoy golf, travel, wilderness canoeing and backpacking, hunting, fishing and camping and time with my family (especially my two grandkids) – but probably nothing that would impact my insurance premiums.

ASSOCIATION NEWS


NATIONAL VOLUNTEER PROFILE

Tim Morgan Edited by RAY HAZEL


9. What is your favorite way to relax after a particularly stressful day in the world of insurance?

I’m not real good at relaxing – there’s always something to be done or planned. After a particularly stressful day, I would try to get home early. Spending FaceTime with my four-year-old grandson and one-year-old granddaughter — a brief interface with them always helps restore some equilibrium to life. Another way, to help offset stress, is always have an adventure on the horizon that I can be planning and anticipating.

10. IASA is a great place to experience the cooperation of business, financial and IT professionals working toward a common goal firsthand. Do you struggle with issues relating to business/IT alignment at your company?

What is the best way you have found of successfully handling these types of situations? I think my company does an excellent job of fostering cooperation and communication between the various disciplines of technology, operations, underwriting, and finance. We have a set of guiding principles that define what is important and how we go about our work and the company’s strategic initiatives, and corporate objectives shared with all employees. We all have a vested interest in working collectively and cooperatively toward our goals.

11. What do you believe is the biggest challenge currently facing your company?

We are just starting a major system transformation project that will position us to be competitive for years to come. I believe that technology provides the biggest challenge to insurers, but also the biggest opportunity.

12. How do the educational and networking benefits you get by volunteering for IASA help you do your job better?

As I noted above, I believe I am a better-rounded professional due to my IASA involvement; therefore, I bring more knowledge and awareness of our industry and its resources to my job. The networking element is incredible in that I know a lot of insurance company people along with solution providers that I can call on in the event I have an issue where I need to seek outside assistance.

13. Is your company getting involved in social media?

Do you think social media can have benefits for insurance companies, or is it just a trend? I think social media is more than a trend, although certain mediums may come and go. In my opinion, social media can impact any business or industry for good or bad. My company has not gotten very involved in social media. We’re aware that this is a way of life for much of the younger demographic and social media and the

“internet of things” will accelerate in their impact on the way, we do business.

14. Can you name one thing most people would never guess about you when they first meet you?

My life is pretty much an open book and probably pretty boring in the eyes of many. Some high points have been running a marathon and some solo backpacking in the New Mexico wilderness. I’ve led Boy Scouts on wilderness backpacking and canoe trips across the country. I had the name of Chief Large Growly Bear when I was in the YMCA Indian Guide/Princess program when my kids were little.

15. Do you volunteer for any other organization other than IASA? If so, which organization and why?

I’m active in my church and have had many different leadership and service roles over the years. I’ve also been active in volunteer leadership with Boy Scouts, the YMCA and High Adventure Treks for Dads and Daughters along with periodically coaching my kids in basketball or baseball. Much of this involvement was due to my kids’ participation, although being involved often led to board membership and other aspects of leadership. If I had my choice, I would prefer to work at the various organizations with the kids themselves. In my opinion, volunteer involvement in some capacity is part of who we should be. Everyone should be engaged in some element of service to others – simply for the purpose of giving something of yourself. All of this can vary depending on where you are on your family or career timeline and can occur in a wide variety of forms in our personal or professional lives. I think IASA volunteers get this, and this is another reason IASA involvement is meaningful for me.

ASSOCIATION NEWS


IASA IS POLLING FOR DOLLARS! Win a free registration to the 2015 IASA Annual Educational Conference

and Business Show AND help your chapter compete for monthly cash

prizes for having the highest percentage of chapter participation!

Monthly winners and the chapter with the most participation will be posted

at IASA.org in the Surveys and Polls section.

Spread the word and help your chapter win!


ASSOCIATION NEWS

IASA’s volunteers and committees are dedicated to meeting the mission of the Association. The goal of IASA is to be an educator and a facilitator for the exchange of ideas and information. The

Industry Relations Committee has two sub-committees focused on assuring our future leaders are strong and involved in IASA. These sub committees are IASA Scholarship Program, which developed in 2009, under the leadership of Karen Furtado, established in 2010; and Attracting Younger Demographics (AYD) created in 2013, spearheaded by Brad Dupont,

In 2014, with a great deal of commitment from the local chapters who are dedicated to making a difference in the lives of future industry leaders, the IASA Scholarship fund gave away $16,000 to 18 students from 13 colleges and universities. The goal of the Scholarship Committee is to continue funding scholarships while creating opportunities to expand donations via companies and insurance industry leaders/individuals. A good example is the Walt Mason Scholarship for $2500. Walter Mason was extremely active in IASA and the Insurance industry. His family looked at this scholarship as an opportunity to memorialize their father. This year’s winner was Kelsey Harris from Butler University, majoring in Risk Management & Insurance, Finance. “It’s great to be recognized by such a well-respected and recognized insurance association; the scholarship not only helps me financially, but also gives me an advantage when applying for positions in the insurance industry” stated Harris. After four years of winners, the committee is working closely with current and past winners to develop strategies to follow-up on scholarship award winners and indoctrinate them as IASA advocates.

All of the scholarship recipients were dedicated not only to academic excellence, but to the betterment of themselves, their campuses, and their communities through service and leadership

“Investing in the insurance professionals of tomorrow is an important part of our core mission and strategic objectives,” said Joe Pomilia, executive director of IASA. “By helping students financially, we enable them to better achieve their goals, and strengthen the insurance industry in the process. It’s a win-win situation.” In 2015, IASA continues to expand the scholarship program thanks to generous funding from IASA local chapters, companies and individuals who feel it is important to make a quantifiable difference in the lives of future industry leaders.

Reviewing the demographics of the Insurance industry and the positive reception of the scholarship program, an area of obvious growth was to develop a strategy that would continue to serve the needs of younger demographics. The goal of AYD Subcommittee,

after identifying some of the top colleges or universities with strong technical insurance programs or majors, was to leverage IASA as a resource. “The Local IASA chapters have been very receptive to this objective” stated DuPont and “have assisted us in university visits.” As a result, a new relationship has been forged with Gamma Iota Sigma (GIS) the collegiate fraternity for Risk Management and Actuarial Science. GIS is a national organization incorporated in 1965, which today has 60 chapters at colleges and universities. The goal of GIS is to develop, promote, and encourage student interest in the industry while encouraging the high moral and scholastic attainments of its members. This relationship has already begun to increase IASA’s networking with future leaders in the insurance industry while introducing these students to the value IASA provides its members.

As part of a pilot program, four IASA Chapters aligned with local Universities with a GIS chapter and invited students to attend their fall chapter meeting. The idea was to introduce the students to IASA, immerse them in the learning, culture, and networking with the hopes the students will continue a relationship, providing their thoughts and creative ideas, with IASA once they graduate.

The Mid-Atlantic Chapter, under the guidance of President Josh Keene was the first chapter to host students. Two students from Temple University attended the two day meeting in Atlantic City, NJ in September.

“I really enjoyed having the opportunity to attend the IASA conference this fall. Everyone Francesca (Waddington) and I met at the conference was extremely inviting and engaging, and the caliber of speakers we were able to sit in on made the experience extremely worthwhile. It was great to trail blaze the relationship between IASA and the student population, and I hope it is a relationship that continues to grow and develop.”

IASA Scholarship Program Combined with GIS Partnership Equal Success for Our Future LeadersBy STEPHANIE LEICHT


Wisconsin Chapter hosted three students from the University of Wisconsin and the Texas Chapter hosted students Victoria Nelms and Stephanie Noguez from the University of North Texas’s GIS Chapter

“Thank you for inviting Stephanie and I to the conference. It was a pleasure meeting all the industry professionals you introduced us to and to hear all the interesting topics that were discussed at conference. I loved every minute of it and cannot wait to attend more Texas IASA events in the future. The conference was amazing and extremely informative and beneficial. Again, thank you so much for the invite and for taking time out of your busy schedules that day to introduce us to several potential employers.”VICTORIA NELMS.

The Northeast Chapter hosted one student from the University of Hartford. Anna Pan attended the two day session as Peter Gamer’s guest.

“I would like to express my deep thanks for the invitation to the attend the Northeast Chapter Conference this past week. It was an incredible experience where I not only learned so many new things about the insurance accounting, but also had the opportunity to meet professionals from many companies. I especially enjoyed the variety of the sessions, which ranged from very technical training to the keynote speaker’s wonderful (and hilarious!) talk about coping with stress. I was sitting at a table with many past Northeast Chapter presidents for dinner on Thursday night, which was such a neat experience. I feel extremely privileged to have had the opportunity to attend the conference, and I hope that more GIS students from the University of Hartford will be able to get connected with the IASA!”ANNA PAN

In this next year, chapters from the Mid-South, Mid-West, Mid-Atlantic, Northeast, Wisconsin, and Texas have all agreed to host students at their meetings. The AYD Group is working with other chapters who have insurance track schools close to where they hold meetings in order to get more students involved with IASA. We are talking with chapter presidents as to how students can participate and volunteer to gain more experience interacting with senior insurance professionals.

We are excited to have so much support and enthusiasm from our Chapters. This is such a wonderful experience for the college students. IASA is committed to the education of this younger demographic and continues to look for ways to expand the program. The possibilities include an education curriculum at our national conference, speaking at local colleges, and even e-learning webinars.

“These are our future leaders of tomorrow and these early relationships provide us the opportunity to showcase how exciting our industry really is.”LAURIE MACKLOSKY

IASA Scholarship Program and partnership with GIS demonstrates the association’s commitment to aiding undergraduate college students currently enrolled in a university with an insurance program, or in pursuit of a career in insurance, and whose course of study includes working toward a degree in Information Technology (IT), Actuarial Science, Accounting, or Risk Management. For more information about getting involved with IASA Scholarship Program, and GIS Partnerships with your local Colleges and Universities or to donate to the 2015 IASA Scholarship Program, please contact Laurie Macklosky at 860.277.2128 or Karen Furtado at 978.239.2741, or, visit the IASA website at www.iasa.org

ASSOCIATION NEWS


Stephanie C. Leicht is the Vice President of Marketing for IDP, and a new volunteer for IASA. She can be reached for further information or comment via email at [email protected].

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Executive Education Roundtable SeriesMonday, June 8th & Tuesday, June 9th, 2015

IASA’s Executive Roundtables are presented exclusively for insurance company senior executives. Timely content, a highly interactive program, and unparalleled peer networking are some of the many benefits of IASA’s Executive Roundtables.

u Enjoy individual events held for Chief Information/Technology Officers, Chief Financial Officers, Chief Operating Officers and Chief Investment Officers with content tailored to the specific needs and interests of each group.

u Participate in moderated discussion sessions led by respected analysts, industry consultants and your peers from insurance companies around the country.

u Interact with a select group of solution provider knowledge experts that will also be in attendance.

u Take actionable information back to your office that will help your company succeed in the coming year.

u Earn CPE credits by attending timely sessions during the IASA Executive Roundtables.

These important events are held in conjunction with the IASA Annual Educational Conference & Business Show — register to attend the conference and your registration for the roundtable(s) is complimentary! The Roundtable Events will be held at the Mandalay Bay. #IASAEEP

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SPECIAL REPORT: REPORT OF THE NOMINATING COMMITTEEAt the Annual Business Meeting during the 2015 IASA Annual Conference & Business Show, the Nominating Committee will propose the following candidates for Officers of the Board of Directors for the Insurance Accounting and Systems Association, Inc. for the 2015-2016 Fiscal Year.

Board of Directors • President TIM MORGAN The Republic Group • Immediate Past President FORREST MILLS Guaranty Income Life Insurance Company • President Elect ROD TRAVERS The Nolan Company • Chief Financial Officer TOM EWBANK The Ewbank Group • Chief Information Officer CARLOS CORREA Liberty International Underwriters • Board Members At Large ANIL CHACKO Smart Devine MIGUEL EDWARDS Allstate Insurance Company CHUCK GUNKEL Swift Print Communications LAURIE MACKLOSKY The Travelers Companies, Inc. DARBY O’NEILL Princeton Insurance LINDA PAOLUCCI TIAA-CREF

With the dual objective of providing our volunteers with varied and rewarding experiences as well as bringing diverse expertise to the Board of Directors, every effort was made to recognize all segments and locales of the Association and to maintain a balance of experienced and new officers. These outstanding candidates have proven their ability and interest through previous service to the IASA, fully understand their responsibilities and, if elected, are available and willing to serve.

Immediate Past President Forrest Mills, Guaranty Income Life Insurance Company, will automatically become a member of the Board of Directors under the Association’s By-Laws, Article IV, Section 2. The Nominating Committee is confident that these individuals will provide excellent leadership for the Association.

As noted in Article IV, Section 4 of the Association’s By-Laws, official representatives of any 100 or more Regular Members, providing such representatives represent at least 25 percent of the Chapters, may also nominate a list of candidates to be voted on at the ensuing Annual Conference. The list of candidates must be filed with the Secretary at least 45 days prior to such meeting, together with a certificate signed by the official representative of each such Regular Member and a written acceptance of such nomination by each person so nominated.

Respectfully submitted,Elizabeth Mercier, The Travelers Companies, Inc.Chair, Nominating and Human Resource Development Committee

• John J. Bauer, Prudential Financial • James Keal, Argent, A Division of West Bend Mutual • Ruth Estrich, MedRisk, Inc • Steve Meziere, The Ewbank Group, P.C.• Michael Holmes, State Automobile Mutual Insurance Company • H. Louise Ziemann, State Farm Insurance Companies, Retired

MANAGEMENT TEAM APPOINTMENTS, FISCAL YEAR BEGINNING JULY 1, 2015As the Association looks to provide the volunteers diverse experiences as well as driving great results for the Association as a whole, the following Management Team has been appointed for the 2015-2016 fiscal year.

Management Team • Vice President – Business Show MARGARET HORN Everest Re • Vice President – Chapters BRIAN OLLECH The Warranty Group • Vice President – eLearning CELESKA FREDIANELLI QBE North America • Vice President – Education BEECH TURNER Assurant • Vice President – Industry Relation JEANNE SOKOLAK RR Donnelley • Vice President – Marketing MARY ELLEN FREYERMUTH Catholic Mutual Group • Vice President – Membership SCOTT MCENTEE Farmers Mutual Hail Ins. Co. of Iowa • Vice President – Seminars BILLIE MIDGET-GORDON Reinsurance Group of America (RGA) • Vice President – Volunteer Development KARYN SPAUDE

Congratulations to all of the Management Team appointees!

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