AI Wisdom Ep. 11: The Impact of COVID-19 on Insurance with Robert Hartwig

Insurance Industry News & Views - April 14 2020

On this episode of the “AI Wisdom – Talking Innovation in Insurance” podcast, host Ron Glozman speaks with Dr. Robert Hartwig, Director, Centre for Risk and Uncertainty Management, at the Darla Moore School of Business at the University of South Carolina. Dr. Hartwig shares his expert insights relating to the impact of COVID-19 on the insurance industry across Life, Health, Property & Casualty, Workers’ Compensation and SMB insurance including business interruption insurance. Click the link to listen or read the full transcript below to hear what the future holds for insurance.


Full Transcript

Ron Glozman: Hello, and welcome to “AI Wisdom – Talking Innovation in Insurance.” On this podcast, we talk to business and insurtech leaders about how artificial intelligence is transforming the way we buy and sell insurance. I'm your host Ron Glozman, Founder and CEO of Chisel AI, and a strong believer in the power of AI to help people work smart and enrich their lives. So, let's get into it.

As the world conforms to social distancing, shelter in place, and isolation to combat COVID-19, what will be the impact on the global insurance industry? Will some segments of the industry be impacted more severely than others? What is the economic outlook for the insurance industry? I'm very pleased to have Dr. Robert Hartwig, Director, Center for Risk and Uncertainty Management at the Darla Moore School of Business at the University of South Carolina, join me today as we discuss how the COVID-19 virus will affect the global commercial insurance industry. Welcome. Before we jump in, can you please introduce yourself?

Dr. Hartwig: Yes, thank you very much, Ron. Yes, I'm Bob Hartwig, and I'm a Professor of Finance Risk Management and Insurance at the University of South Carolina in the Moore School of Business. And I'm also the University's Director for the Center for Risk and Uncertainty Management. And at that center, we sponsor research into risk management related issues. And, of course, we also provide support to students who are studying this particular field.

Ron: That last one speaks to me. Many of the listeners will know the founding story of this, which was I was a university student when I started working on the initial hypothesis for the application. And so, anytime you help students, I'm a big appreciator of that. So, I'd love to understand because I think it's an understatement to say that the coronavirus outbreak is having a tremendous effect on all facets of life. Many parts of the economy, for sure, the food and services industry have seemed to have come to a halt, except for takeout. And many small businesses are starting to come under financial troubles. And so, it's hard to ignore everything that's happening. And so, I'd love to hear, what do you see as the impact on the insurance industry, both in the short-term and then in the longer term?

Dr. Hartwig: You know, insurance is one of those businesses that is always in the background and very frequently not in the forefront. But typically, it is when disaster strikes, and this time is no different. And generally speaking, when we think about disaster striking insurance, we think of property insurance and we think of buildings being destroyed, and we think of flooding, and tornadoes, and earthquakes, and hurricanes, and so forth. But here we have an event that is impacting all segments of the insurance industry. Obviously, particularly here in the United States, we have a health insurance sector that is going to be deeply impacted by an enormous number of COVID-19 patients who will be very, very costly to treat. And in the United States, we still have a problem with many people who have no health insurance. And so, there's been a special provision, such that anybody presenting with COVID symptoms will, in fact, receive treatment for no cost and the hospitals will be reimbursed for what should have normally been paid by insurance companies. So that's idiosyncratic to the United States. Not everybody is covered by health insurance. And that's an unfortunate thing. But we, at least, have a band aid or a stop gap measure to handle that. When we think about life insurance, we're expecting in the United States now perhaps as many as... the numbers have been coming down very fortunately, but the most recent numbers are 60,000 to 80,000 deaths beyond what we would normally expect to see. And that is something that will be easily managed by the life insurance sector, which normally expects to see a fair amount of fluctuation on an annual basis, often times due to seasonal influenza.

So, there'll be a bit of an impact but easily manageable for that segment. And then there's a property-casualty insurance segment. And here is where we're hearing a lot these days about what is and what is not covered. And that really falls into a couple of buckets. It is not typically the case that insurers cover losses associated with communicable diseases, at least not property-casualty insurers. It's not the norm. One exception to that would be workers' compensation coverage, which provides for the lost wages in medical care of individuals who become ill in and out of the course of their employment. And again, normally we think about a worker becoming injured, breaking a leg, getting some sort of a wound. But in this particular case for workers' compensation, we're talking about exposure to the coronavirus and developing COVID-19 in and out of the course of their employment.

And so, increasingly, many states are requiring insurers to provide coverage for healthcare workers and for first responders, and, in fact, requiring a presumption that coverage exists. In other words, if a healthcare worker or if a first responder comes down with COVID-19, the legal presumption is going to be is that that was, in fact, acquired in a work-related context, and therefore workers' compensation will respond. We're seeing that spread across the country. But getting more of the headlines have been issues related to business interruption coverage. This is coverage that provides businesses with reimbursement for their lost net income and extra expenses they incur, again, typically associated with some sort of physical loss or damage, say, a fire happens in their restaurant and it takes a month to rebuild. Obviously, they don't have any business during that period of time, so the insurance not only repays to rebuild the restaurant, the business interruption coverage pays for their lost income during that period of time.

Where this has become controversial is, generally speaking, in the United States, business interruption coverage requires two things. It requires that there must be some actual physical loss or damage from a covered peril. In the opinion of insurers, that does not exist in the case of a communicable disease, that the existence or the closure of businesses because of fear of the existence or the fear of spread associated with COVID-19 does not even come close to satisfying the requirement of direct physical loss or damage to covered property from a covered peril.

And then beyond that, the majority of policies in the United States that provide for business interruption coverage, actually, have virus exclusions and bacteria exclusions associated with them. So, there's no ambiguity in this particular case. That will not stop plaintiffs’ attorneys from attempting to find a way to circumvent these long-standing exclusions. It is also the case then, at least six state legislators have proposed, though none has actually approved, but six have proposed legislation that would effectively override all of the insurer exclusions related to viruses mandate that insurers provide business interruption coverage retroactively back to some period early in March, and that they should do this all for having received no premium whatsoever.

The industry has estimated that this would produce business interruption payouts of actually approaching $400 billion or so per month, just for businesses with 100 or fewer employees. This would literally bankrupt the industry by the 4th of July. And this is because, again, insurers have never anticipated paying anything like this because it's excluded. And they've never collected a penny in premium for this particular type of risk. So that's sort of the quick highlights to the three major segments of the insurance world.

Ron: That was an amazing answer. I think you touched on many points and many questions that I've actually heard come up in different conversations I've had over the past few weeks. Like, for example, I had several people who I discussed with who run small business practices of the sorts, like, a legal lawyers office or, like, an accountant who've had to shut their doors. And they tried to file for business interruption. And as you said, you know, it didn't even go to a claim because it's just not covered. There was no direct damages to the building, and the fear or closing of the office, even though now it's mandated at least where we're located in Ontario, it's been mandated that all non-essential businesses must be closed. That's not covered. And so many people are frustrated. But as you point out, you know, no dollars were ever collected. No premium was ever collected. And, you know, I didn't know the magnitude. I think it's very interesting and I'm glad we should dive deeper into this, that you have so much information, on that topic, that $400 billion, and it could equal, you know, a collapse of the industry by July 4th. That's just mind-blowing.

Dr. Hartwig: Exactly. And again, the industry has somewhere in the neighborhood of $800 billion in what many people would refer to as net worth or owner's equity. In the insurance world, it's known as surplus. Essentially, it's the difference between assets and liabilities, but that is the cushion that insurers rely upon to pay large scale claims. And it also gives them a capital base to underwrite new business as the industry grows and new economies expand. And these numbers are so large, that literally, again, that $800 billion would be exhausted within 2 to 3 months. So again, at the utmost, by around the 4th of July or so. So, it's really not tenable. It's not reasonable for any party, whether it be plaintiffs’ attorneys, whether it be state legislators or, quite frankly, even buyers of insurance, to presume that business interruption coverage will be forthcoming, associated with the actual exposure associated with COVID-19 or government-related closures again.

It's so far beyond what the industry could have ever conceivably imagined it would be held responsible for because the insurance industry assumes that the legal contracts that they enter into with their policyholders, the language in which is approved by regulators, will be upheld by the courts. And behind the courts sits the United States Constitution. In Article 1 of that Constitution is a very famous clause, known as the Contracts Clause, which basically says states will not interfere with legal contracts. So, the assertion that insurers should be paying on this is not only incorrect from reading of the contract itself, it is, quite frankly, a violation of the Constitution here in the United States.

Ron: Is there a specific sector, and I would say more in terms of, you know, let's assume for now that the Constitution is upheld and there's no retroactive payouts between commercial insurance workers’ comp, which we talked a little bit about in life and health, you know, the 60,000 to 80,000 deaths, where, if any, do you think that, like, will be the biggest cost across those?

Dr. Hartwig: Now, again, assuming the contracts will be upheld, I think the largest impact is probably on the health sector. You've already in the first...the so-called Care Act passed by Congress in the United States that's signed by President Trump a week or so ago, this provides more than $100 billion for hospitals. And there, again, is a requirement now that all individuals who have no insurance can be covered. More and more states are requiring or strongly suggesting that there be no co-payments or deductibles for individuals seeking tests or treatment for COVID-19 related illness. So, there's no question that there is pressure on the health insurance sector today. However, it is going to be manageable for two reasons. Ultimately, they are receiving some federal aid, at least not the insurers directly, but the healthcare providers and particularly the hospitals. Also, in terms of the insurers, the insurers will have the opportunity to basically incorporate the COVID-19 experience into their rates. And as they look ahead to pricing insurance products for 2021 and beyond, they are definitely going to include a significant component associated with pandemic risk, much larger than they had anticipated in the past. So certainly, they already embed expectations for cost from seasonal flu, influenza, those sorts of things. But they'll be adding this, and it may take them some time to have the risks fully reflected in the rate, but ultimately, they will.

But I think we're gonna take a look at our health insurance sector once again, as we approach the November election here in the United States, where each and every year, even in the absence of COVID, the issue of the Affordable Care Act, so-called Obamacare, is routinely criticized by Republicans. And Mr. Trump, in his first election, of course, we might all remember repeal and replace was a nonstop mantra that we heard. And so, when finally given the opportunity to repeal and replace, they couldn't agree on what to replace it with. So, therefore, they did not repeal it. But there has been efforts to, in a piecemeal manner, dismantle the act through a variety of court rulings and other mechanism. I think we're going to take a look at that. And we are gonna once again have... and it's going to be a huge political debate. Once we emerge from this, let's say, in the fall, we have the Democratic nominee, presumably Joe Biden, obviously, Vice President during the time when the Affordable Care Act was developed and signed into law. And it'll be very interesting to see whether or not attitudes towards something approaching universal health care, universal health insurance in the United States changes. So, I think that's what... no one's talking about that yet, but this is something that clearly people are gonna recognize there's been a vulnerability and we need to do better at managing that. I am obviously on the workers' compensation side.

That's the property-casualty area. I'm looking at the most in the sense that it's where we might see the largest surge or I should call it an expansion, kind of expanding the bounds of what might be covered both through an automatic presumption that COVID was contracted. Again, we mentioned for healthcare workers and first responders, this concern that could expand to what is a very long list of so-called essential workers, which varies by state by state in the United States. So, that becomes very problematic in that particular instance. For instance, construction workers here in South Carolina, and most of the country, are considered essential workers. They are outside. They are usually doing something like building a house. And they tend to be not necessarily close to each other and most of the day is not spent... obviously, they're not treating individuals who are ill and so forth. Should individuals like that automatically be presumed to have contracted the virus in and out of the course of their employment? I think that would be considered unreasonable. So, we have to be very careful with where that ultimately goes.

Ron: I think when we look back on this, there will be many precedents set at the legal level. You know, we've covered even just a few of them, like whether or not they're gonna uphold the... we don't have the same constitutional laws within the U.S. Within the U.S., the first constitution, the right to not amend, legally binding contracts between corporations and private citizens or whatever the exact wording is, this...and so, when you think about where we are, and I recognize that, you might be a doctor, I'm definitely not a doctor, you're a doctor by Ph.D. presumably. And so, when you think about what normalcy looks like, I won't necessarily ask you to predict when. But what do you think that return to it looks like?

Dr. Hartwig: If we think about normalcy in the economy, it's going to be quite some ways out. We are looking at, in the United States, what is likely to be a decline in second quarter GDP of about 22%. That is the largest drop we've literally seen since the Great Depression. It's very sudden. We would expect to see some snapback, maybe in the third quarter of around 7%, maybe about 5% in the fourth quarter, but then returning to a more typical level of growth in 2021. And so, what that means is it's going to take quite some time to just simply get back to where we were at the end of 2019. The expectation is economic output in this country will not be equal to what it was at the end of 2019 until the end of 2021. So effectively two lost years of growth. During that period of time, we're going to see unemployment shoot up from the lowest levels in half a century. As recently as February, the unemployment rate was 3.5%. We had seen that through most of the past year. And prior to that, we have not seen unemployment rates that low since the late 1960s.

Ron: And I would love to get your thoughts on this. So, I took a little bit of economics, and one of the things you always learn about is the natural unemployment rate. So, some would argue 3% would be lower than the natural unemployment rate. Do you have any views on that?

Dr. Hartwig: Yeah, typically speaking, until we reached an unemployment rate of below 4% and, actually, we were at approximately 3.5%, 3.6% for a year without any signs of inflation, the general view really moved to the fact that the natural rate of unemployment wasn't something like 4.5% or 5%, as had often been viewed, that it was lower than it once was. And that somewhere around 3.5% was more along the lines of the natural rate of unemployment. That's good news. So, more people are employed without provoking inflation. But the natural rate of unemployment is certainly not what is expected to be by the end of the second quarter of this year. It is expected to spike to somewhere between 15% and 16% unemployment rate. That compares to 10% at the peak of the financial crisis back in 2010. Now, the good news is that it'll begin to move down rapidly, and we should be at about 8% in the fourth quarter of this year. However, making progress to getting back to where we were, 3.5%, it's nowhere in the cards right now. Right now, we're looking at, in 2021, descending down from the high sevens down to maybe around 6.5% or a little above 6% by the end of 2021.

So, of course, there's a lot of uncertainty here at this point. How fast we recover depends on how deep we go into recession, how long it takes before we restart the economy, not just here in the United States, but how well our trading partners are doing, such as Canada, such as Mexico, such as Europe, and, of course, China, how fast they restart their economies. Can we reengage? And then, you know, there are psychological issues here with respect to this. Even if everything is suddenly opened tomorrow, how comfortable will people feel sitting next to total strangers at a restaurant, or in a movie theater, or shopping in a mall next to people all of whom might be wearing masks? Are we going to adhere to social distancing? You know, for insurers, this is not theoretical. The ability of the insurance industries to grow is very, very much tied to the pace of economic growth. It's very, very highly correlated. And so, there's no question that this dramatic hit to economic activity is going to drastically reduce premium income for insurers, particularly for property-casualty insurers, less so for health and life insurers, although potentially for health as many people actually lose their jobs.

During the financial crisis, growth actually turned negative in the property-casualty insurance industry for three years in a row. I don't expect to see that because the current COVID-19 related economic downturn is expected to be very deep but sharp. And so, some of the effects will likely be transient.

But the loss of certain types of exposure, such as payroll, which is assessed against workers' compensation rates, to develop premium, it's certainly going to take a hit. Other areas, we're already seeing insurers provide refunds to drivers of motor vehicles, $50 a car, $30 a car, those sorts of things. That's going to be billions of dollars of revenue that auto insurers thought they were gonna earn this year, but no longer will. And we'll see this played out across many, many types of insurance that are economically sensitive. So, related to trucking and transportation, aviation, construction, manufacturing, all of these areas are going to likely shrink. And what that means is that insurance premiums are likely to shrink along with them.

Ron: And when you think about the return of the economy to balance a lot of the conversations that we are having right now is a lot of people are starting to realize that automation is really important and a lot of the processes that they used to have broke when people went to work from home. Like, if something used to involve filing a piece of paper in a filing cabinet or walking it across the office to have it reviewed by a peer that no longer can happen. And so, there's efficiencies that are being introduced, I think, that maybe in the short-term, we're not starting to experience them now. But as we get further out, like, in the next month, more people are gonna implement them in two months a little bit more. Is there an opportunity where we could get to the same level of efficiency? So, the GDP returns to where it was, with a higher unemployment rate, just because we've introduced automation into the ecosystem?

Dr. Hartwig: I mean, yeah, you raise a good question there. In other words, are the efficiency enhancements sufficient to potentially get us back to the status quo ante, in other words, where we were at the end of 2019 faster, despite the fact that we have this drag on the economy associated with lower unemployment? I think that's a longer run possibility. I'm not so sure that in the next 12 to 24 months, we'll be able to fully recapture GDP without putting the vast majority of people who lost their jobs back to work. We're talking about, you know, a lot of jobs that require physical labor. So, you know, to give you an example, some of the hardest-hit people in this downturn are people who work in segments that really require close conduct or cooperation with other people. If you look at anything from trying to get your teeth cleaned by a dental hygienist, okay? Not possible today. Try to get some surgery done that is not related to anything in COVID-19, can't happen. Try to go to a bar, try to go to a restaurant. And you can go on down the list. And so, there's an enormous segment of the economy that is service-based and requires interpersonal interaction.

It was already the case that many of the people who are working at home today and continuing to draw most of their pre-COVID wages already had some capability to work remotely. And they've been developing that capability, really, gradually over the last 20 years or so with the first dialup laptops. And, you know, I was an early adherent to the Blackberry and these sorts of things back in the day. And most people can work at home with laptops, internet access, and these sorts of things so long as they are in knowledge-based, information-based related industries. So, I think where we'll see some efficiencies, for instance, is perhaps areas like education, where I find myself. Is it possible that in the future, a greater proportion of classes may, in fact, be offered online? Well, I can tell you, putting your courses online, I can tell you from personal experience with absolutely no planning to do so, is a very time-consuming and inefficient process. However, with planning, it certainly could be an efficient way to deliver some forms of education and not just at the university level, in high schools and elementary schools, as well.

So, we're seeing some other areas, like telemedicine, likely to benefit from this particular... it was already growing, insurers, healthcare providers. Employers had already identified it as a hands-down way to enhance efficiency and to bring some efficiency to a very inefficient healthcare system. So, I think, yeah, there will be certain areas. I think we need to make a lot of investments in our infrastructure in order to be able to...our digital infrastructure as a country to make this happen. If you listen to the CEOs of Verizon, for instance, and companies like that, AT&T, you know, their networks, they perform very well, but they are operating absolutely at top capacity right now. So, over time, and everybody has run into problems with, you know, maybe, you know, 100 people on a Zoom call, and it's just not working like you'd like it to. So, we'll need to make these investments and it will take a number of years. But absolutely, you know, this will probably accelerate what was already happening in a sense that it'll become more second nature, I think, for many people to work at a distance, to work remotely. And that's probably a good thing over the long run for many reasons. It's efficiency-enhancing. It's probably good for the environment. It's good in terms of work-life balance and many other reasons.

Ron: I love that! So, we're going take a quick 20-second break, and when we come back, we'll talk a little bit more about how companies can prepare to deal with this and keep their morale high.

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We're back with our featured guest, Dr. Hartwig. Let's jump right into the next question. You mentioned as we were talking that companies need to prepare for this and invest in the people, and especially insurance companies. We talked a little bit about the minimization of auto premiums, for example, because people are gonna be driving less. And I read recently that some companies, in fact, they're giving back the premiums they collected, I believe, for the month of March. So, how should these big companies be thinking about their business, the impact of their business, the impact of the premiums, and at the end of the day, keeping staff morale high during this time?

Dr. Hartwig: You know, large insurers are used to operating during periods of adversity, whether it's COVID, or whether it is a major natural disaster, or events like 9/11, or whether it's an economic downturn, many insurers have been operating for 100 or more years, some for more than 200 years. So quite frankly, they've seen it all. And in fact, they've even operated many times during past pandemics, perhaps not as severe as this one, but they certainly have, and they're prepared for it. So, the insurers, first and foremost, have to be... well, they need to ensure that they are financially capable of weathering the storm. And fortunately, that is something they practice day in and day out. Insurers, by their very nature, are extremely conservative in terms of how they operate. And that's reflected in terms of, for instance, relatively low-risk investment portfolios, very conservative in terms of such things as establishing reserves against claims that have occurred so that they are absolutely sure that there's enough money to pay that claim overtime, no matter how large it is. You know, managing their aggregate exposure to any particular type of event. And it's also a very tightly regulated industry. So not only do insurers engage in all sorts of modeling related to particularly type of events that can give rise to large numbers of claims simultaneously, but also how that ability to pay might be influenced by changes in the economic or regulatory environment.

There's no question that insurers entered this COVID crisis from a very rock-solid position financially, and they will exit it rock-solid financially as well. So, policyholders can take solace in that fact. Now, again, I am assuming that contract law is upheld there. If governments decide they're going to tear up contracts, then there's no guarantees on anything anymore. But we'll assume that that holds. So, again, you know, well-prepared.

In terms of mission number two is making sure their customers are well-treated and appropriately treated. So that makes... what that means is insurers doing what they do day in and day out, that their customers receive every dollar that they are due, that they receive it expeditiously, and that the settlement is a fair one. But that also means, in terms of being fair, it means that payouts, that claims will not be paid that are not covered under the scope of the policy, and that would include COVID-19 related business interruption claims. It's a difficult message that insurers and brokers and agents have been giving their customers, but it is the truth. And it is the only answer that insurers can give. There has not been such coverage, and the coverage clearly does not exist, and that the policy is quite unambiguous with respect to that. But it's also, the same customers could take solace in the fact that, again, when they have a claim, maybe it'll be this hurricane season, which is expected to be 40% above normal. So, more storms, more intense storms.

Ron: That's just in case we haven't had a bad enough year.

Dr. Hartwig: Yeah, just in case we haven't had a bad enough year. I mean, it could easily be August, or September, or October, and we have a $25 billion hurricane, impacting some of the areas, let's say like in New Orleans that have been very, very hard hit by COVID-19. But in that instance, the insurers will be there at the ready with their resources ready to pay claims on the spot for, you know, wind damage, water damage, business interruption that ensues. And that will be exactly what policyholders expect of their insurers, and they will be getting exactly the type of customer treatment that they paid for, which is, again, a very rapid response. And they will be paid as necessary up to and including the limits of their policy if that's the magnitude of their loss. And then, you know, you mentioned employees. Generally speaking, employment does not vary as rapidly as it does in, say, sectors such as retailing or manufacturing, where you see very rapid fluctuations in employment based on changes in economic conditions. Part of the reason for that is, even if there's an economic downturn, for instance, people are not giving up their cars. So, cars still need to be insured. There may be somewhat fewer accidents and you may have somewhat less need for adjusters, but insurers have been taking advantage of technology to operate with fewer adjusters, to begin with, for instance.

And that rollout of that technology could continue a pace, and without any great displacement of current employees, we'll see those efficiency-enhancing technology investments begin to pay off for exactly situations like this. So, to give you an example, when we think about there being fewer accidents, you might say, "Well, then you need fewer claims adjusters." But as many insurers have, they've adopted technologies where the policyholder themselves, for minor claims, can simply send in a picture, a couple of pictures, fill out a claim form online and electronically. That technology is expensive to develop and to bring online, initially, but it is very scalable. So, if the economy expands and people are buying cars, and they're in more accidents, that technology could handle 100,000 claims a day. But if the economy slows down and people are driving 30% less like they are today, well, maybe they'll only be 65,000 claims per day. Technology is very scalable in there and you don't have to worry about those expensive variable costs, in other words, the cost, potentially, of an adjuster. The industry can be expected to continue to hire bright people, motivated people, in claims, and underwriting, in the technology space, in the financial space. That's going to continue. But technology adoption is going to continue to make them more efficient over time. But I expect insurers, you know, bottom line, they'll be treating their employees right. Quite frankly, they are.

Insurers are an essential industry. There's no question about that during times when the nation is in its greatest need.

Ron: That's right. So, are you worried and is the industry worried at all about false claims and fraudulent claims, especially at a time like this? And I'm not saying that this is an example of one, but there was, for example, recently a fire somewhere in South Florida, where 3,500 rental cars went up. And obviously, some people on the internet are saying, "Well, you know, those cars were not being rented due to COVID. And it's not covered, as you said under the property policy because there was no physical damage. So maybe they decided to light a small fire." And so, what are your thoughts, and I don't know if the industry has even estimated what the fraudulent claims could look like for this?

Dr. Hartwig: Yeah. And insurers are always vigilant for fraud. And it was certainly the case back at the onset of the Great Recession, there was a lot of discussion about individuals, for instance, after all that crisis was precipitated by the collapse of the housing sector. Millions of people were underwater on their mortgages and the concern that people would essentially commit arson to escape their mortgages and get the insurance payout. As a practical matter, there was not a great deal of that activity, committing an act of arson, felony offenses and getting caught. The downside risks are pretty high, and insurers will investigate, and refer to law enforcement any activity that they believe is fraudulent. In many states, insurance fraud is, in fact, a felony crime. And, you know, these forms of soft fraud that are out there, individuals faking an injury, claiming it was related to work to avoid a layoff, so they're out on workers’ compensation and receiving basically most of their salary that way.

We do sometimes see a bit of that activity at the early stages of an economic downturn. We may or may not see that this time, given, A, the expectation that is expected to be a shorter downturn, and also the fact that we have seen other programs come into place that might reduce that incentive. So, for instance, the extension of unemployment benefits for an additional 4 months and the sweetening of those benefits by, I think, at least another $600 a month or so, it's a pretty considerable increase. And so that may reduce the incentive to file a fraudulent workers’ compensation claim, but insurers will remain vigilant in this particular area. But by and large, there's always a lot of discussion of this. But in reality, I don't think we see as much of that activity as some people might presume.

Ron: That's good to hear. I think that's always good to hear. So, you know, when we think about the fact that so many insurance companies are having to grapple with work from home policies for the first time, likely. And as you said, standing up some of these claims management systems, underwriting systems, can take a long time and be quite costly. Do you have any recommendations for those coming companies who are seeking to digitally transform while they're going through that process and still be able to provide value?

Dr. Hartwig: Yeah, I think that, you know, many a company, if not most, has wasted tremendous sums on IT projects that wound up just simply not providing the benefit that they had anticipated that they would, untold billions of dollars, no doubt industry-wide over a span of years. You know, there's a couple of ways to approach this. I mean, some insurers are looking to be market leaders in terms of the technology that they bring into the marketplace. You know, these are the big well-capitalized companies that typically have a lot of market share. They can afford to have a hiccup or two along the way. And, you know, my suggestion is that, as they roll out these processes, they roll out these initiatives, you know, test them in limited markets, limited number of states first. You know, have a sense of, what is success going to look like when we roll this out? You know, what do we expect to see in terms of premium growth or what do we expect to see in terms of expense reduction? What do we expect to see in terms of other efficiency gains, such as a reduction in the amount of time it takes to settle a claim or, you know, other systems that are out there? Are we more accurately establishing reserves due to this AI algorithm we're now implementing? These sorts of things. So, many companies, they make enormous investments but don't have a good vision of what success is actually going to look like on the other side of that investment.

Or this investment may take so long they tend to lose track of what that might be. The other is, you know, kind of a sunk cost fallacy. Some companies will believe that, "Hey, we've already spent an enormous sum on this. If we only spend a couple more million dollars, then we'll be able to get it off the launching pad." The reality of it is, as you stand here today, no matter how much money you've spent on it in the past, if it does not have a positive net present value going forward, then the project is probably not worth pursuing. But, you know, I wanted to separate companies into, again, a couple of groups. So, the large market-leading companies that are looking to invest in technology on all fronts, you know, internally, customer-facing, in a variety of ways. I think for smaller insurers that simply don't have those resources they need to take a good survey of what's working in the market. And many of these companies, you know, for instance, medium size, smaller size mutual companies don't have enormous growth aspirations. Their aspirations are quite modest. And what they might do is simply adopt technologies that have been proven by others and bring that online, and then they'll have relatively little execution risk associated well with that.

I will say that, within this group, the medium and smaller size insurance companies that do successfully implement and roll out technologies will, I think, have an opportunity in the future to become consolidators.

One of the largest expense drivers for insurers these days, of course, is technology, and many of the smallest insurers who may have a good operating model may nevertheless not be able to make the necessary investment in technology to get them where they need to be over the next 5 to 10 years. So, those companies that are smaller and more of a modest size can have some success implementing these very scalable sorts of technologies do have the opportunity to act as consolidators in the business.

And so, I think the execution of technology is going to be something that we see... I should say the successful execution of technology is going to be something that allows a company to leverage itself and to attract business partners in the same way in the past and, even today, but typically when we think about, you know, being able to leverage, for instance, a large capital base, being able to leverage a great management team, what have you. Now I think this technology is going to be a lever to basically drive some consolidation and part of the business over the next 5 to 10 years.

Ron: So you know, as we think about this from a macro perspective, I would love, you know, as we wrap up, one of the questions that we always love to ask, if you could share one prediction or one piece of advice for...and especially given the whole topic, given COVID-19, I'm really looking forward to your answer. What one piece of advice would you share? And it doesn't have to be business-related, it doesn't have to be insurance-related, that you just wanna share with our listeners, as they think about the next two to three years.

Dr. Hartwig: At the risk of sounding cliche, this too shall pass. There's no question that this has been an extraordinary event in American history. But it is not, by a long shot, anywhere close to the most traumatic or difficult periods we've experienced in the United States. We can think of World War II, World War I, we can think of the Spanish Flu in 1918, Civil War. There are many, many other sorts of events, economic events, like the Great Depression. As an economy, we will persevere. I think where we run the greatest risks is it's not so much that we don't have the technology that will allow us to overcome the challenges like COVID-19, or that Americans will be so downtrodden by this that they'll go into their COVID-19 bunker, never to be seen to emerge again, or even that small businesses will never want to invest again. It's not that. I think we are in an era, however, where there's a potential for a higher than average probability of what I would call policy risk. And what that means, essentially, is that we are at a point where clearly the role of government is very, very important, but we are a very, very contentious society when it comes to our politics.

Before COVID, we heard a lot about politicization and polarization. And beneath the surface of unity that we may see here today as we try to overcome COVID-19 crisis, there's still that polarization. Now, crises have a tendency to unite countries. They have a way of bringing together people of disparate political persuasions. And I'm hopeful that there will be some element of that evident as we get on the other side of this COVID-19 crisis. For instance, we will clearly need, irrespective of the fact that there's an election in about seven months from now, we're going to need a plan very quickly in the event that we have a resurgence or a return of COVID-19 in the fall or early next year, irrespective of who wins the election. And I think the American electorate is going to demand that, American business interests are going to demand that. And quite frankly, policyholders of insurers, who want to make sure that their interests are going to be well taken care of, are going to demand that. They're not gonna want to see the kind of bickering that typically we see in Washington, when they know that their lives and their livelihoods are at stake.

Ron: Exactly. And I love what you said. I just want to double down on that message, which is, "This too shall pass." And I was just reading about some great companies started during recessions, and so General Electric, 1890, IBM, 1896, General Motors, 1908, Disney, 1923. Anyways, I'll skip a couple. Burger King, 1953, Microsoft, 1975. And so, to your point, I'm very optimistic that, out of the dark times that we're in now, there will be a lot of opportunity. There are a lot of companies right now that are looking for technology vendors to help them. And so, I'm excited because if you have a technology right now that can help these big companies, it really is an opportunity for you to show them that you can make a difference at a time that matters. And I promise or at least I believe that, will be the basis of a very long and fruitful relationship going forward. Because if you help them during their darkest times, you'll definitely be there to see their brightest.

Dr. Hartwig: Exactly.

Ron: Just keep going. I love that! So, Bob, thank you so much for your time. I think this is gonna be an amazing episode. If people wanna find out more about you, stay in touch, where can they do so?

Dr. Hartwig: You know, people can get in touch with me directly via email. Or they can visit my Risk Center's website at

Ron: Awesome. And as always, guys, you can find us on Twitter, LinkedIn, Facebook, and of course our website for some more of the most up to date information on what's happening with COVID and insurance. Bob, thanks again, and stay safe, everyone.

Dr. Hartwig: My pleasure.

Ron:  That’s a wrap for this episode of “AI Wisdom” hosted by Chisel AI and me, Ron Glozman. Thanks for listening.

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Join us next time for more expert insights and straight talk on how AI and insurtech innovations are transforming the insurance value chain. See you on the next episode!


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