Insurance Advisor Newsletter - Winter 2016

January 2016


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5 Technology Trends Impacting the Insurance Industry

By John Green       
Technological innovations are transforming nearly every industry sector today, including insurance. Cybersecurity, data analytics, mobile/social/web interface, telematics and automation, and evolving IT systems are undeniable forces pushing the industry to change the way it does business. While fundamentals will remain the same, insurance companies must evaluate how these trends will impact business going forward, and harness their potential to gain a competitive advantage.


Hardly a week goes by without news of another security breach or website disruption. Just before Thanksgiving, Hilton Hotels announced a breach of access to its payments system. Meanwhile, Target—the poster child for corporate hacking—just signed a preliminary settlement resolving claims for its 2013 data breach. No industry is immune from cybersecurity issues, but it’s especially precarious for insurance companies. Not only do insurers have their own highly sensitive customer data at stake, they are increasingly embroiled in cyber-related insurance claims.

Several years ago, I attended a cybersecurity presentation at an industry conference. The presenter described two types of companies—those that have been hacked and know it, and everybody else. Insurance regulators are now taking more action on cybersecurity. As noted in the Fall Insurance Advisor newsletter, the NAIC issued a bill of rights highlighting general principles of effective cybersecurity best practices, and the New York Department of Financial Services recently announced that specific cybersecurity regulations will be issued in the near future. Insurance companies of all sizes must allocate appropriate resources to both prevent and mitigate ever-present cybersecurity threats.

Of course, increased risk also means increased business opportunities. More companies are purchasing cyber risk insurance than ever before, according to several studies cited by Risk & Insurance this year. Last year, U.S. businesses spent over $2 billion on cyber insurance. That number is expected to reach $10 billion by 2020, according to ABI research. To qualify, companies must demonstrate that a comprehensive cybersecurity plan is in place.

Data Analytics

The insurance industry compiles a huge amount of statistics, but most companies aren’t leveraging the information to its full potential. Billy Beane, general manager of the Oakland Athletics baseball club and subject of the movie Moneyball, disrupted the baseball establishment by implementing data analytics. The same opportunity lies with insurance companies that can implement better data gathering and data analytics techniques; ultimately, they will realize improved benefits in recognizing trends, pricing products, administering policies and settling claims.

Actuaries often rely upon gut instincts and overall industry results to develop and price products. However, to gain an advantage, insurers might consider taking a page from Beane’s playbook. He created the front office position of data scientist, staffed by an individual who held degrees in mathematics, astrophysics and astronomy. Insurers need more individuals with enhanced statistical and analytical skill sets to better manage and analyze data.

Mobile/Social/Web Interface

A July 2015 case study by social data intelligence company Talkwalker indicates that at least 10 top insurance brands are already leveraging social media. In addition, Capgemini’s World Insurance Report 2015 indicates that 56 percent of millennial customers of non-life insurance companies in North America consider Internet-mobile channels as important. Another 47 percent from this cohort cite social media as an important channel.

The changing interface of communication will have an enormous impact in the future. I was reminded of just how different communication will be during a recent airplane ride. I was sitting across from a mother and her 2-year-old son, who was promptly given an iPad and headphones to practice Spanish lessons. After the flight, I got to thinking about what this child’s expectations will be as he goes through life. If he is already using a mobile device at 2 years old, he will naturally have expectations about that mobile device in terms of communicating with friends and family, reading books, viewing videos, and purchasing goods and services, including insurance.

Mobile applications will only continue to grow in importance and popularity, as will expectations about the digital customer experience. All companies must adapt quickly or risk competing in an ever-shrinking non-connected marketplace. Speaking to this trend, in a recent conversation with A.M. Best,’s founder compared the travel market’s shift to largely online purchasing to the insurance marketplace, commenting that the industry will soon see innovative new ways to both create and sell insurance products—and simplicity will be key. Data will be a critical component of the connected world.

Telematics and Automation

Telematics, the use of wireless devices and “black box” technologies to transmit data in real time back to an organization, is already in use by several leading insurance companies such as Progressive (we’ve all seen the Flo commercials). While data obtained through telematics currently allows insurance companies to flag risky behavior of drivers (high rates of speed, number of hard brakes, etc.), automation poses far greater challenges to the industry. Driverless cars and robotics will likely have a fundamental impact on insurance premiums and coverage.

In theory, once all vehicles are driverless and communicating with the environment and with each other, there would be very little, if any, risk associated with private passenger or commercial auto insurance. In 2014, private passenger and commercial automobile premiums amounted to approximately $215 billion, almost 40 percent of all property and casualty premiums. What are the implications for the industry if insurance premiums are reduced to a fraction of current writings? Driverless cars could conceivably deprive auto insurers of significant revenues.

Increased use of robotics will impact other lines of business including workers’ compensation, liability, accident and health, and life. On Nov. 23, 2015, The Wall Street Journal reported that the use of industrial robots will increase by 163 percent in China and 44 percent in North America through 2018. Many are anticipating a massive exodus from the labor pool as robots take over jobs previously held by humans. Research firm Gartner predicts that by 2030, smart machines will replace 90 percent of jobs as we know them today.

We will certainly see quality of life improvements as the result of automation and robotics, but the implications to the insurance industry as the workforce shrinks and high-risk jobs are left to the robots are far reaching.

IT Systems

The insurance industry already invests heavily in IT systems, but increased investment will be required. IT systems are the backbone of all innovation in the industry. Without sufficient computing power and storage space, innovation will be limited.

Probably the most critical aspect of IT systems is the need to modernize legacy systems that will support future innovation.

For many years, a portion of the industry has been resistant to change and the associated costs, operating under the theory of “if it isn’t broken, don’t fix it.” This has left many companies with multiple outdated applications that are difficult to integrate and upgrade.

To succeed in the future, insurance companies must have an IT strategy that embraces escalating data needs and integration to the connected world. The upfront cost of upgrading IT systems may be prohibitive for some small and mid-market insurance companies, and could ultimately lead to increased mergers and acquisitions.

Continuous Change

These five issues are in no way meant to be all inclusive and the insurance industry will need to adapt as technology continues to impact our lives in new ways on a daily basis.

John Green is a partner in the Insurance industry group at BDO.

For additional counsel on adapting to the rapid pace of technology changes, BDO Consulting’s Technology Advisory practice provides information technology (IT), operations and risk management services to global organizations including in the areas of cybersecurity, IT due diligence, IT financial management, application development, IT infrastructure services, business continuity, regulatory compliance and sourcing strategy.


Spotlight on the R&D Tax Credit

By Chris Bard and Chai Hoang

2015 was a great year for insurance companies. For many years, insurance companies of all sizes have benefited from research and development (R&D) tax credits for their attempts to develop new or improved technology and software applications. In 2012, insurance and finance corporations reported more than $225 million in R&D credits. In 2015, these benefits were significantly enhanced. With the December enactment of the Protecting Americans from Tax Hikes Act of 2015 (PATH), the R&D credit is now not only permanent but also available to companies that couldn’t benefit from it previously. Under the PATH Act, businesses with gross receipts less than $50 million can now claim the credit against their Alternative Minimum Tax (AMT), and startups with annual gross receipts of less than $5 million can take up to $250,000 in credit against their payroll taxes for up to five years.

These developments greatly enhance the credit’s value to U.S. companies generally. Another development in 2015 has also made the credit more valuable, especially for insurance companies.

On Jan. 16, 2015, the IRS proposed taxpayer-friendly regulations concerning the treatment of expenditures related to the development of both internal-use software (IUS) and non-IUS for purposes of calculating the R&D credit. These regulations state that the IRS will not challenge return positions consistent with the proposed regulations for taxable years ending after Jan. 20, 2015.

IUS vs. Non-IUS

IUS-based development activities have historically been subject to stricter guidelines than non-IUS in order to qualify for the credit. Under previous guidance, insurance software was generally presumed to be IUS because it was not developed to be commercially sold, leased, licensed or otherwise marketed for explicitly stated consideration to unrelated third parties. Therefore, the related research activities for developing software would likely not qualify for the credit because they were subject to the Section 41(d)(4)(E) ”high threshold of innovation test” that outlined three additional requirements for credit eligibility.

However, the proposed regulations broaden the range of development expenditures eligible for the credit. The new regulations define IUS as software that is developed by or for the benefit of the taxpayer for general and administrative back-office functions of the taxpayer, namely financial management functions, human resource management functions and support services functions. As such, software will not be treated as IUS if it:
  • Is developed to be commercially sold, leased, licensed or otherwise marketed to third parties;
  • Enables the taxpayer to interact with third parties; or
  • Allows third parties to initiate functions to review data on the taxpayer’s system.

Thus, if the software is consumer-facing and benefits third parties, it may not be treated as IUS as it would have been previously. Examples include software that allows third parties to manage insurance policies and claims, facilitate communication between customers and vendors, and access services over the Internet. Now, insurance applications that serve any of the functions listed below (and more) could be considered non-IUS, and are thus more likely to result in tax credits.

Credit Eligible Insurance Solutions

Attempts to develop or improve the functionality, performance, reliability, or quality of software that facilitates the following services may be considered non-IUS under the new regulations, and may qualify for a major reduction of tax liability. Eligible solutions may include the following:

Life, Health, Annuities and Pensions
  • Online Insurance Quotations
  • Business Analytics and Process Management Tools
  • Claims Management
  • Customer Relationship and Service Tools
  • Incentives Compensation Management
  • New Business Acquisition
  • Policy Administration
  • Product Configuration
  • Rules and Calculations
  • Enrollment through Online Tools and Forms
  • COBRA Compliance Services
Property & Casualty
  • Agent Services
  • Billing Administration
  • Business Analytics and Process Management
  • Claims Administration and Tools
  • Customer Relationship Management
  • Policy Administration
  • Interest Rate Monitoring
  • Risk and Regulatory Management Tools

Qualified IUS Development

It is important to know that expenses for certain IUS development activities may still qualify for the credit if the software meets the following three standards:
  1. The software must result in a reduction in cost or improvement in speed that is substantial and economically significant;
  2. The taxpayer must bear economic risk by committing substantial resources to the software’s development despite the prevalence of technical uncertainty of a successful outcome; and
  3. The software must not be commercially available for use by the taxpayer without substantial modifications being made to it that would satisfy the first two standards.

Claim Your Credits

The R&D credit, now permanent, is one of the most beneficial tax-planning opportunities to save and even generate cash and reduce effective tax rates. The IUS regulations and other 2015 developments outlined above make the opportunity to claim this dollar-for-dollar offset against your company’s tax liability even more promising.

Chris Bard is Practice Leader for BDO’s Specialized Tax Services Research and Development practice and Chairman of BDO International’s Global R&D Center of Excellence. He can be reached at [email protected].

Chai Hoang is a senior associate with BDO’s R&D Tax Services practice for the Northeast U.S. region. She can be reached at [email protected].

With assistance from Samantha Zurcher, associate with BDO’s R&D Tax Services practice.


PErspective in Insurance

PErspective in Insurance is a feature examining the role of private equity in the insurance industry.

Deal activity in the insurance sector is at its highest level in more than a decade. According to a report from ratings agency Moody’s, insurance M&A value reached over $200 billion through the end of the third quarter of 2015. Fierce competition has forced insurance companies to reduce rates, while bond market investment returns have been weak, driving firms to cut costs, seek synergies and improve profitability through consolidation. Meanwhile, low interest rates and funding costs, as well as the desire to seek scale in growing markets, are attracting bidders, The Wall Street Journal reports.

Read about PErspective in Insurance

Did you know...

In the first half of 2015, 400 data breach events were publicly disclosed, exposing a total of 117.6 million records, according to the Insurance Information Institute.

Twenty-eight percent of board members surveyed in the 2015 BDO Board Survey said their company has purchased cyber insurance, almost triple the percentage that reported purchasing this type of coverage in 2014.

A new study by global reinsurer Swiss Re predicts that demand for non-life insurance will grow over the next two years, led by an 8 percent to 9 percent annual gain in emerging markets during 2016 and 2017.

Weather-related disasters such as floods and heat waves have occurred almost daily in the past decade, almost twice as often as two decades ago, according to a November U.N. report.

For more information on BDO USA’s service offerings to this industry, please contact one of the following regional practice leaders:
Chris Bard
Los Angeles
  Brent Horak

Richard Bertuglia
New York
  Timothy Kovel
New York

Doug Bekker
Grand Rapids
  Albert Lopez

Phil Forret 
  Imran Makda
New York

Carla Freeman
Los Angeles
  Barb Woltjer
Grand Rapids

John Green
New York