April 20, 2020
COVID-19: Stark Choices Amid Structural Change
by Paul Carroll
With COVID-19 forcing permanent, structural change, insurers have to get outside their own heads and see how customers' businesses and lives will evolve.
My dad often said he’d rather be lucky than good. Now that it’s becoming clear that the coronavirus shutdown will cause a longer and deeper economic slump than many initially thought and will likely lead to permanent, structural change in the economy, it seems to me that those are the two options for insurance companies: You can be lucky, or you can be good. (Or, like my dear old dad was, you can be both.)
To me, lucky looks like Michael Dell at the dawn of the internet age. I know that the official origin story is that he was simply too good: He supposedly saw, in the 1980s, the opportunity for a hyperefficient personal computer business that was based on direct sales and manufacturing only after receiving payment from buyers. This, even though every major manufacturer was producing millions of machines on spec and selling through stores. But the real story is rather different.
I know because I interviewed him in 1986, when as a 21-year-old he had already built an impressive mail order business around his PC’s Limited computers and desperately wanted to break into mass-market retail outlets alongside the three major brands (IBM, Compaq and HP). If he had succeeded, you might never have heard of him. He would have been entangled in the same inefficiencies that crushed the IBM brand and bedeviled the other two. Instead, when the internet came along in the mid-1990s, he had the best brand not tied to the retail channel, and he quickly turned his mail-order model into a business that dominated online.
So, kudos to Dell. He built a strong company from the get-go and capitalized on his opportunity in a huge way. But the positioning for the internet occurred because of no particular strategic insight. He was lucky.
Lucky is lovely. No need to apologize for luck. You just need to exploit the luck the way Dell did.
In the insurance world, the lucky ones include those companies that were already well on their way to digitizing when the coronavirus shut the world down. Because the economy may open only in fits and starts until a vaccine arrives in 2021 (let’s hope), highly digital companies have some time to exploit their advantages in selling, in providing customer service, in processing claims, etc. Those that have updated core systems should be more agile than those that haven’t. (It pains me to see states having to advertise for programmers who can use Cobol or even Fortran and can update systems, such as for unemployment insurance, that have been largely untouched since the 1960s and 1970s; some states need people who can program in machine language, to update systems written in the 1950s.)
Companies that sell usage-based insurance (UBI) also have a leg up because premiums are ratcheting down precisely and automatically; while many other insurers are (I’m happy to see) rebating premiums to customers, they have to make those determinations at a macro level and can’t serve customers as well as the UBI companies are.
Health insurers will be lucky at least in the short run. While costs for treating coronavirus will obviously soar, governments will cover many of those expenses. In the meantime, people who would otherwise seek treatment, schedule elective surgeries, etc. are staying away from hospitals, sharply reducing claims for insurers.
And so on. If you’re lucky, you surely know that by now and can be trying to figure out ways to entrench your advantage, as Dell did.
But what if you have to be good?
I’ve already written about some ways you can be rethinking your business to prepare for the world that comes after COVID-19: reimagining risk management services; exploring “reverse innovation“; and using the economic shutdown as a “natural experiment.” An earlier piece on how to rethink an industry once it becomes digital also seems relevant, given how the virus is accelerating the transition for insurance.
But “good” insurers will go well beyond internal issues and start exploring scenarios for clients, whose worlds are being turned upside-down, too, and whose insurance needs will change as a result.
Health insurance, for instance, could change drastically. About half of Americans get their health insurance through jobs, and 22 million have lost those jobs just in the past few weeks. Might there be new pressure to separate health insurance from employment — a connection that prevails only in the U.S.? Some suggest that healthcare providers will want to switch away from a fee-for-service model, given that the coronavirus has scared so many people away from seeking any service that would get them near those who are possibly infected and that they don’t absolutely need.
I’m not convinced that health insurers will change much — the immediate problems will be that they will generate such huge profits, in the absence of claims, that they’ll have to dampen public outcry and will have to return premiums because of Obamacare’s limits on their profit margins. But the health insurers need to be at least considering how the medical system may change, and lots of other types of insurers will surely find their customers in new environments.
If many of us continue to work from home, what does that do to commercial office space? Will people be healthier if they stay home, or will we all add what a friend calls “the COVID-19 19” pounds? If workdays are staggered to limit the times employees interact with each other, how does that change the risks in workers’ comp? If supply chains are realigned to reduce reliance on other countries, and certain types of manufacturing resume in the U.S., what does that do? But what if most of the “workers” are robots? What happens to the living situation for retirees, as long as retirement/nursing homes have turned out to be Petri dishes for infections?
Those questions are just the start, of course. You can ask similar questions about transportation, our food supply, education and a host of other areas. The point is that lots of what we’ve taken for granted is now up for grabs.
While it may be many months, or even years, before we start to settle into a new normal, it’s not too soon to start exploring with clients how their worlds are changing, so you can serve their new needs as well as you’ve served their old ones to date. Even if you haven’t been lucky, there’s still time to be good.
P.S. How was my dad both lucky and good? Glad you asked. Among many other things, he got a job taking sports scores over the phone for the Des Moines Register as a 16-year-old in 1943 because all the older boys were already in the military. That credential with a metropolitan daily, slim as it was, tipped the balance in his favor when he later ran for election as editor of the paper at the University of Iowa. That, in turn, helped him launch a career in journalism, where talent kicked in and he worked his way up to a reporting job at the New York Herald Tribune and then had a 30-year career as the chief spokesman for Westinghouse.
Oh, and he met my mom on a blind date, arranged by a friend of my dad’s who happened to meet her on a plane.