Category: Insurance Industry

Transformation Imperatives for Wholesalers and MGAs in Insurance: Exploring Opportunities to Unlock the Next Growth Phase | Blog

Managing General Agents (MGAs) and wholesalers are becoming increasingly relevant in the insurance ecosystem due to the unique advantages they have over brokers/agents. With five key transformation levers described in this blog, MGAs can overcome challenges and unlock a wave of unprecedented sustainable growth. Technology and business process services (BPS) providers can help MGSs reduce costs and increase their digitization and automation intensity. Read on to learn more.

As insurance intermediaries that represent carriers, MGAs provide insurance products to retail agencies and insureds. They are frequently positioned between other intermediaries, such as retail or wholesale brokers and insurance firms. MGAs also are qualified to underwrite and bind coverage as well as perform customer support services, including policy issuance and claims management. Overall, more than 1,000 MGAs are in the US, and 250-plus operate in the UK, covering nearly 5-10% of the overall insurance market.

Role of MGAs in the insurance ecosystem

The business model of MGAs stands apart from full-stack insurers and agents/brokers by the greater span of control and the profitability they generate. On the product side, MGAs have the flexibility to build products in collaboration with the insurer but may have a lower appetite for innovation and slower speed to market, depending on the insurer’s capability and commitment. On the customer relationship side, these specialized agents have full control over all customer activities.

According to a McKinsey report, 43% of top 100 Property and Casualty (P&C) insurers have at least one MGA relationship to source new premiums. Various types of MGAs operating in the ecosystem are illustrated below.

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MGA profile

MGAs keep their financial profile stronger like other intermediaries in the ecosystem by achieving 20-30% EBITDA. MGAs are moderately capital efficient due to low setup cost, no legacy platform burden, quick monetization opportunity, and lean team setup.

However, they need to share the profit pool with insurers. The major revenue streams for MGAs are commission paid by insurers, risk performance-based commission, and offering additional services like claim administration and inspection.

Various value chain elements performed by MGAs include marketing, sales, distribution, underwriting, policy issuance, claims handling, policy review, customer services, risk management, policyholder communication, and renewal management.

Challenges MGAs face

Despite the significance of their role, MGAs face the following challenges in running operations effectively:

  • Complying with regulations: MGAs must keep up with the most recent rules and compliance standards because insurance regulation is always changing and is state-based. Penalties, fines, and legal repercussions may arise from breaking rules
  • Attracting and retaining talent: MGAs face hurdles in attracting and retaining skilled and experienced employees who can provide quality services to clients
  • Managing risks: On behalf of insurance companies, MGAs are in charge of risk management. This requires agents to have a thorough understanding of the insurance products being supplied, the underlying risks, and the potential effects of these risks on the organization
  • Balancing client demands with profitability: Client demands for new products, services, and coverage may not be aligned with the profitability goals of the MGA
  • Staying competitive in a rapidly changing industry: MGAs must stay abreast of advances in technology, goods, and services in the insurance sector to remain competitive
  • Competing with increasing industry consolidation: With large companies getting bigger, it is more difficult for other players to compete effectively

Five transformation pillars

To remain competitive, MGAs must find new ways to transform their businesses by leveraging new technologies and business models, as shown below.

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Let’s explore each of the elements in the innovation framework in more detail:

  1. Embrace digital transformation: MGAs can streamline operations, enhance customer experience, and cut costs by utilizing digital technologies, including automation, artificial intelligence, and cloud computing. To improve their decision-making and expand their business, MGAs can benefit from unique insights into consumer behavior and market trends provided by digital transformation
  2. Partner with other ecosystem providers: Partnering with InsurTechs and technology and BPS providers is an effective way for MGAs to embrace digital transformation and wide-scale automation levers like Robotic Processing Automation (RPA), Artificial Intelligence/Machine Learning (AI/ML), Natural Language Processing (NLP), Optical Character Recognition (OCR), etc. By leveraging the expertise and technology of these providers, MGAs can access new tools and capabilities, helping them remain competitive and grow their business.
  3. Embrace a customer-centric approach: Young customers prefer a digital-native approach and demand slick web and mobile interfaces to engage; direct-to-consumer (D2C) distribution platforms to buy; and two-way SMS messaging, chatbots, and interactive documents, forms, and videos to communicate. By offering these services, MGA insurance companies can not only improve customer satisfaction but also build deeper relationships with their customers, which can lead to increased loyalty and longer-term engagement
  4. Enable data-driven decision-making: Data and analytics play an increasingly important role in the insurance industry, and MGAs must leverage these tools to remain competitive. By collecting and analyzing data from multiple sources, such as customer interactions, market trends, and operational performance, MGAs can gain new insights into their business, enabling them to make more informed decisions and drive growth
  5. Foster a culture of innovation: Innovation is key to remaining competitive in the insurance industry, and MGAs must foster a culture of innovation to stay ahead of the curve. This requires a commitment to investing in new ideas and technologies, as well as encouraging employees to think creatively and embrace change.

 

These five transformation levers can help mitigate challenges like compliance adherence, talent management, low profitability, risk management, and strong competitive intensity by ensuring a culture of innovation, enforcing client-centricity, utilizing data analytics, outsourcing non-core functions, and embracing digitization.

Sourcing implications

MGAs operate in an area requiring specialized knowledge and experience in specific insurance markets and products. Companies typically prefer to keep core functions in-house and outsource non-core traditional and technology-led activities.

Multiple tech and BPS service providers work across the ecosystem with insurers, agents, brokers, insurtechs, and MGAs that have built superior capabilities to provide services across multiple business lines and geographies.

Service providers also offer the latest tools and technology, superior customer experience capabilities, operational efficiency, Service Level Agreement (SLA) management, flexibility to ramp operations up and down, superior talent, a low-cost advantage, best-in-class lean operations, improved risk management, and much more. MGAs can outsource either a part of the value chain or engage in end-to-end transformative deals, depending on their appetite for outsourcing, process maturity, and management buy-in.

Some of the areas within MGA’s and wholesaler’s process value chain that can be outsourced are as follows:

Screenshot 2023 03 17 092024

MGAs need to evaluate the service provider’s capabilities after carefully considering their expertise, experience, cost arbitrage, flexibility, security, business continuity, delivery footprint, talent maturity, technology, infrastructure, governance approach, and client-centricity.

Analyst firms like Everest Group can help evaluate these capabilities through its proprietary PEAK Matrix® assessment and impartially rank the service providers as leaders, major contenders, and aspirants, as well as provide expert commentary to help enterprises make better-informed decisions.

To discuss MGAs in insurance and outsourcing trends, please reach out to [email protected] and [email protected], and stay updated by accessing our latest research on insurance business processes.

 

The Recessionary Conundrum: What Lies Ahead for Healthcare Payers?

A looming global recession may finally take its toll on payers who have escaped prior economic challenges. Let’s take a look at the healthcare trends influencing decision-making by payers, the markets most likely to be affected, and the actions payers can take with the uncertain outlook.

Wall Street predicts that the probability of a global recession in 2023 is 61%, well above the stable benchmarks. Although inflation has eased up marginally since the last quarter, tighter financial conditions and weaker global growth still indicate a potential downturn.

The healthcare industry historically has weathered economic collapses better than core industries that are generally more severely impacted. A Forbes assessment shows that while the US economy (as measured by GDP growth) plunged into recession eight times over a 60-year period from 1960-2020, healthcare expenditure growth never shrunk, often outgrowing gross domestic product (GDP) as illustrated in Exhibit 1.

This stability is primarily because impacted employees either opt for subsidized government programs or forego medical care, as applicable, pushing the healthcare cost to the future. As a result, health plans tend to be relatively less affected due to recessionary headwinds. In fact, reports suggest that earnings for healthcare payers declined only by 27% compared to a 77% decrease for the overall S&P 500.

Exhibit 1: Real GDP growth and national health expenditure growth 1960-2020
Exhibit 1: Real GDP growth and national health expenditure growth 1960-2020

Although many healthcare payers posted strong growth rates at the end of fiscal year 2022 as shown below (Exhibit 2), the results may not be as positive in 2023, particularly for employer-sponsored or provider-owned health plans.

Exhibit 2: Year-over-year growth rate by revenue for healthcare payers
Exhibit 2: Year-over-year growth rate by revenue for healthcare payers

The overall impact on the payers in the fiscal year 2023, however, will be determined by several upcoming trends. Let’s look at some of these influencing factors in detail below.

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Exhibit 3: Major healthcare trends defining the decision-making process of payers in 2023
  • Medicaid redetermination: As states kickstart Medicaid redetermination in April 2023, over 15 million Medicaid members are expected to lose their enrollment after the renewal process. Several payers, such as Centene, expect to lose about 2.2 million members over the next 18 months. On the other hand, payers like Humana and Molina Healthcare project their Medicaid membership to be largely stable due to new Medicaid contracts offsetting redetermination losses
  • Prior authorization rule: The CMS Interoperability and Prior Authorization rule requires regulated payers (Medicaid, Medicare, CHIP, and QHP) to utilize Application Programming Interfaces (APIs) that give healthcare providers more streamlined access to data. Payers will be required to maintain these APIs using the Fast Healthcare Interoperability Resources (FHIR) standard. This regulation is expected to bring effective workforce utilization, improved data exchange, reduced appeals, and, in turn, more timely claims disbursal
  • Inflation reduction act: Starting this year, Medicare will be allowed to negotiate prices for prescription drugs with pharmaceutical companies. Apprehensions are high that this will lead to cost-shifting to privately funded and employer-sponsored health plans. Or, the reverse also could be true, and privately-funded plans may demand similar negotiations along the lines of Medicare to avoid overpaying for healthcare. Moreover, the Part D plans will have to bear higher responsibility in the catastrophic phase as the law puts a spending and inflationary cap on out-of-pocket expenditure beginning in 2025
  • Focus on alternative care market: Payers are striving to strengthen preventative care and ensure end-to-end offerings, as many big players (e.g., United HealthCare, CVS Health) have invested in home, virtual, and alternative care. The race to outcomes-based care is shifting from retrospective to proactive and comprehensive health management through multiple integrations
  • Member experience and STAR Ratings: With the Consumer Assessment of Healthcare Providers & Systems (CAHPS) member experience weights increasing to four times in 2023, ensuring top-of-the-class member experience will remain a priority for health plans

Impact of the potential downturn on the healthcare payer market

So, how specifically will payers be impacted? It’s hard to say, given the global inflation outlook improvement. But lessons from the past indicate that a sustained period of economic uncertainty will impact both the government and the private markets in the following key markets:

  • Privately-funded market: Markets such as employer-sponsored health plans could lose members due to layoffs and loss of employee-sponsored coverage. Payers such as Cigna, that have significantly high commercial membership (Exhibit 4), could feel the heat of the competition from the health insurance exchange (HIX) and Medicaid plans. However, these losses can be offset if payers can retain these members in other product lines. Alternatively, having a diversified business portfolio such as a pharmacy or data services also may provide a cushion against medical membership loss
  • Government market: While the Medicaid market would traditionally gain membership in a recession, instead it will see the combined effect of redetermination and a potential economic downturn. As some of the members who lose employer coverage join Medicaid, the drop in membership might be less than expected after the redetermination process. The impact on Medicare, however, is expected to be relatively insignificant. Overall, the payer mix might experience a shift toward government business

Lastly, the uninsured population may experience an uptick due to information asymmetry and administrative complexities. According to an assessment done from 2007-09, only some of the insurance loss from a lack of employer coverage was offset by added public coverage, leading to a 5.6 million rise in uninsured adults. While the Affordable Care Act (ACA) has lowered the uninsured population, an economic downturn potentially can add to the current uninsured coverage.

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Exhibit.4: Percentage of membership in the commercial business

What should payers do in this uncertain market outlook?

With the market unpredictability, healthcare payers will have to take calculated measures to prevent business impact. Here are four actions they can take:

  1. Focus on operational efficiencies: Healthcare providers are more likely to be impacted by a downturn, pushing them to negotiate for higher contract prices. Payers will have to explore ways to offset any price hikes. This can lead to increased outsourcing and offshoring of traditional processes, such as provider and claims management to ensure lower administrative spending and higher operational efficiencies
  2. Invest in preventative care: Price-conscious members may move to higher deductible plans and avoid care, particularly preventive services, leading to lower utilization. This can have lingering long-term effects, particularly for members with multiple chronic diseases. To combat this, payers should identify susceptible members, invest in areas such as social determinants of health (SDoH), and devise strategies that prevent care gaps and discontinuity
  3. Increase digital member engagement efforts: Millions of members lost their coverage in the last recession despite being eligible for other plan options, partly due to a failure in getting the right information and comprehensive engagement with their insurers. To avoid this from happening again, payers will have to ramp up investments in member engagement to avoid losing members. Regional health plans and the Blues will have to bring in digital-enabled solutions that help to understand member needs and provide forward-planning insights. Support from third-party services providers who offer customized, plug-and-play customer experience (CX) solutions can help meet this need
  4. Upgrade systems: Several payers with strong capital support can undertake digital transformation efforts to replace legacy systems and move to interoperable, connected ecosystems that will help improve administrative as well as care outcomes. However, this might only be applicable for payers who experience limited utilization and payouts due to the downturn.

Outlook for service providers

These measures will require service providers to proactively engage with healthcare payers and focus on three levers – the right clients, the right capabilities, and the right value addition. This will enable service providers to aim for the right opportunities such as member engagement and preventive care and ensure sustainable growth in an uncertain economic environment. Finally, in a highly competitive market like payer services, service providers will have to offer targeted digital and traditional Business Process Outsourcing (BPO) services to serve the right client need and differentiate themselves with unique value propositions refined as per the prevailing market demand.

To learn more about healthcare payer and provider trends, contact Lloyd Fernandes or Vivek Kumar.

To learn about the changes in the pharmacy benefits management (PBM) industry, such as increased regulatory scrutiny surrounding pricing transparency and rebate-sharing rules, watch our video, Pharmacy Benefits Management: The Next Big Healthcare Opportunity.

You can also learn more about How to Deliver Hyper-personalized Customer Experiences in Life Sciences in this LinkedIn Live session. 

Uncovering a Massive Insurance Industry Cloud Opportunity | Blog

Cloud computing presents a huge opportunity for insurers to drive growth, improve efficiency, and deliver innovation, among other benefits. Read on to learn about the coming phase of industry cloud and the key role system integrators (SIs) can play in advancing cloud adoption in insurance.

As insurance enterprises navigate the volatile and risky macroeconomic environment combined with recessionary market sentiment, increasing operational resiliency and agility and delivering superior speed becomes essential.

Insurers have to work effectively, efficiently, and, most importantly, smartly. The urgent demand to innovate and move beyond risk remediation to risk mitigation is making insurers realize the importance of leveraging cloud as a key enabler of growth and efficiency mandates. Let’s explore this opportunity further.

Cloud rises to the top of the business agenda for insurers

Most insurers currently rely on cloud for non-core operations while they explore stepping up to full production. While cloud’s massive potential is well known, insurance enterprises hold back from completely leveraging it for various reasons, including security concerns, integration issues, and the existing legacy stack. The inability to realize full value from cloud investments also becomes a massive roadblock.

Fortunately, the mindset regarding cloud adoption in insurance is taking a huge turn. A cloud-first approach is becoming important to insurance enterprise business leaders who find its benefits too irresistible to pass up.

In addition to helping meet cost and efficiency mandates, deriving full potential and optimizing cloud investments, and driving business-focused growth and experience are arousing interest in cloud adoption in insurance.

A recent Everest Group study on cloud initiatives with more than 75 insurance enterprises found that 70% of insurance leaders believe that cloud insurance initiatives make up more than 20% of their IT spend, as illustrated in the exhibit below.

Driving business agility and lowering the total cost of ownership has become the most important aspect of cloud transformation for insurers. Achieving data-centricity by seamlessly integrating external data with internal datasets, facilitating real-time analysis of large data volumes, and enabling data-driven decision-making across the value chain are other desires gaining prominence among insurers.

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The near future is industry cloud

Slowly and gradually, innovation is taking a front seat in managing the IT estate for the insurance industry. As insurers embark on their next growth phase, they increasingly need to run industry-specific workloads on cloud, such as premium payment processing, policy administration, loss notification, multi-channel sales and distribution management, and claims management and fraud detection.

With insurers moving away from a one-size-fits-all approach, industry cloud is expected to drive the cloud spend going forward to future-proof the technology estate, monetize data to generate alternate revenue streams, and re-think value delivery to end customers. Insurance leaders have started realizing that industry cloud can be a catalyst for transforming and automating industry-specific business processes.

Industry cloud allows industry leaders to get all the assets organized in one place which are specific to the use cases of the industries they operate in. This platform is becoming the next big thing in cloud computing and insurance as it easily allows enterprises to customize processes based on usage, differentiate faster, and innovate in a better way.

Picture2 2

SIs need to support hyperscalers and carriers to shape industry cloud

As the need to develop the industry cloud story gains prominence, the concept of co-creating also is booming. Generally, hyperscalers provide the building blocks for cloud, and SI partners assist insurers in creating and customizing specific applications and business processes on top of that foundation.

Insurers increasingly expect cloud providers to create customized and insurance-specific core solutions that address their unique needs and enable modular business processes. However, industry cloud is the missing piece in full-stack capability for hyperscalers.

As a result, they need support from SIs to realize their vision of catering to the entire enterprise IT stack. SIs need to support hyperscalers in identifying high-potential insurance industry cloud use cases aligned with specific business segments, as shown below.

Picture3 2

Cloud computing has moved beyond being ‘just a digital infrastructure’ to replace on-premise servers. The latest cloud services are more aligned towards integrating advanced technologies such as Artificial Intelligence/Machine Learning (AI/ML), the Internet of Things (IoT), and data analytics to transform the insurance value chain.

For example, cloud computing can take claims management to the next level by managing and automating claims handling and offering a superior claims experience. By combining cloud capabilities with data and AI, insurers can fundamentally change how they manage claims. Infusing AI/ML in claims processes can help insurers tap the plethora of data they possess and unlock immense value to come out on top.

Cloud enables insurers to reduce manual handling, lower error rates, and perform more straight-through processing, eventually leading to faster claims processing and a superior claims experience.

Everest Group research shows about 35% of P&C insurers’ priorities across claims management focused on enhancing customer experience (based on an analysis of 60-plus case studies involving claims modernization/transformation).

Cloud computing also allows insurers to drive superior efficiency by enabling data and analytics-driven claims processing and focusing on effective service delivery to reduce claims expenses and improve claims handling accuracy – all while ensuring greater customer satisfaction.

The time for insurers to go big on cloud has come

Cloud computing is no longer a choice but a mandate for insurance leaders. The insurance industry is finally catching up to the momentum of integrating SaaS into IT systems. As insurers replace outdated mainframe and on-premise infrastructure that has become harder to update and inefficient to scale and maintain, they must leverage the skills and experience SIs offer. Close partnerships between insurers and SIs also can help drive innovation and is where the future is leading.

Everest Group is launching an inaugural Cloud Services in Insurance PEAK Matrix® Assessment 2023. Please reach out to [email protected] and [email protected] for more information on cloud adoption in the insurance industry and to participate in the Cloud Services in Insurance PEAK Matrix® Assessment 2023.

You can also watch our webinar to learn about software and cloud pricing and contract negotiations and to keep spend in check.

3Cs of Emerging Risks – How Insurers Can Capitalize on the Opportunity | Blog

Insurance carriers need to transform their risk function, become more agile, and proactively create new offerings that protect against the threats of 3Cs: climate risk, cyber risk, and crypto risk. Read on to learn how this environment can create opportunities for insurers.

In today’s evolving risk landscape, insurers need to seek new technologies to improve efficiency, streamline workflow, and fill coverage gaps. Insurers must carefully navigate the detrimental effects of these volatile threats and evolve from being risk insurers to risk guardians. But are insurers putting enough emphasis on exploring the lurking threat areas that can pose imminent risks? Let’s take a look at how this will reshape the insurance industry moving forward.

Hardly anyone could predict a global crisis such as COVID-19 leading to insured losses amounting to nearly US$44 billion, making it the third most costly catastrophe to the industry. After any such black swan event, insurers need better preparedness and foresight to manage their response. The impact of unforeseen risks is becoming increasingly evident. Insurers need to foresee, pre-empt, and prepare for future risks to reduce uncertainty, and underwrite risks in a better way.

Due to spiking losses caused by emerging risks in insurance, traditional rating models are losing relevance to advanced solutions developed by InsurTechs and niche solution providers that enable data-driven decision-making powered by next-generation technologies such as Artificial Intelligence (AI)/Machine Learning (ML) and internet of things (IoT).

With insurance products being largely commoditized, carriers need to differentiate their offerings by rapidly creating newer products for emerging risk segments. We have explored three key emerging risk segments that are complex to evaluate and increasingly gaining prominence, as illustrated below:

Picture1 3
Exhibit 1

Market landscape and challenges faced by Insurers

  • The pandemic forced insurers to adopt newer technologies, scale up digital-first operations, and expand data estate leading to added risk and exposure. The average data breach costs jumped about 13% from 2020 to 2022, according to the IBM Cost of a Data Breach Report 2022
  • The increasing frequency and costs of extreme weather events is putting a greater burden on insurers. Traditional insurer risk models are not sufficient to face the challenge of accurately capturing and testing climate-related risks
  • Cryptocurrency presents a diverse risk landscape. Risky investments in digital assets and unexpected losses tied to cryptocurrency curtails their viability, triggering surety claims. Product development and coverage pricing become challenging because of the dynamic nature of these assets

In response to the challenges illustrated in Exhibit 2 below, insurers need to assess the risks and create personalized products and zero-touch claims processes.

Picture2
Exhibit 2

Next steps in the right direction

With rising losses, insurers can no longer shut their eyes to the devastating impact of these emerging risks on pricing, underwriting, and investment decisions. Insurers need to strategically rethink their risk function.

Carriers must prioritize investment bets across the insurance value chain and evaluate InsurTechs and specialists that bring in niche talent, industry expertise, speed, and experience to help them meet their key business priorities.

According to Everest Group research, specialist providers (illustrated in exhibit 3) can act as catalysts for value realization by quantifying the financial impact of climate change, providing comprehensive cyber risk visibility, and offering innovative digital asset protection solutions.

Contextualized solutions from InsurTechs are gaining prominence to fill capability gaps, enhance value propositions, and streamline workflows across the insurance value chain.

Picture3
Exhibit 3

Let’s explore some of the solutions providers offer for addressing the 3Cs of emerging risks in insurance.

Climate risk:

  • The quantitative consequences of risks must be appropriately assessed and addressed to minimize the impact. Real-time analytics providers use resiliency insights, risk engineering, probabilistic hazard maps, and historical catalogs to recognize the likely risk from natural disasters across the globe
  • Insights on possible hazards can be conveyed via geospatial web-based applications, reports, or application programming interfaces (APIs). Using asset and portfolio-level climate risk analytics, insurers can tap into these insights that affect crucial aspects of the value chain, starting from product development and portfolio planning to underwriting and pricing

Cyber risk:

  • Cyber risk analytics platform providers use telemetry and threat intelligence from across customer workloads, endpoints, identities, IT assets and configurations, DevOps, AI, and blockchain. Using this intelligence, they identify and map shifts in adversary tactics and create actionable data to automatically prevent real-time threats
  • As insurers navigate through uncertainty, they need to tap into the plethora of data they possess along with third-party data to unlock immense value. They must infuse data analytics at every step, starting with identifying, protecting, and detecting cyber-attack risk to proactively computing the cyber control performance. This will enable early identification of weaknesses and detect advanced attacks

Crypto risk:

  • Storing crypto assets is creating new risks. To quantify loss exposure, actuarial teams can draw on forecasting analysis of cryptocurrency crimes to build actuarial models around cold wallets (coverage against damages or theft of the physical storage device) and hot wallets (coverage against abuse of the private key that enables access to digital assets)
  • Insurers need to develop the tools to implement dynamic policy limits/pricing that increase or decrease based on the price changes of these assets, enabling insurers to respond and act upon real-time market changes and ensuring the policyholder is always protected even with innumerable value fluctuations during the policy period

Insurers have a critical role in leading society to navigate these looming threats. Carriers need to change their approach, become more agile, and proactively build products while safeguarding these risks.

It has never been more important to assess and address the 3Cs of insurance risks. To learn more about them in detail, check out our Insurance Solutions Specialist Trailblazers – 2023.

To discuss emerging risks in insurance, please reach out to [email protected], [email protected], [email protected], and [email protected].

Request a briefing with our experts to discuss the 2022 key issues presented in our 12 days of insights.

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