Tag Archives: csaa

Moving Beyond ‘Greed Is Good’

Last month marked the 50th anniversary of Milton Friedman’s defining essay on the role of the corporation, which concluded that “there is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.”

That conclusion has been taken to such extremes — think, “Greed is good,” the signature line from the movie “Wall Street” — that a backlash has been developing. I think the insurance industry can support what might be thought of as a “beyond greed” movement, and even ride it. Doing so would help our public image, while benefiting the customer and — dare I say it? — perhaps even increasing industry profits.

Now, there’s lots of power to Friedman’s argument. Otherwise, it wouldn’t have guided business for so long. Businesses need to generate profits to keep investing and improving in ways that benefit us, the customers — think of all the things that Amazon has been able to deliver cheaply and quickly to you since the start of the pandemic because of Jeff Bezos’ ferocious investments in his business. (Who knew I even needed eight sets of chopsticks, an air fryer and 63 plants?) Profits also provide feedback that help businesses get better at serving us. If a company is generating lots of earnings, the market is telling the company that it’s doing well. If not, the company needs to try something different.

My old friend Andy Kessler notes in a column in the Wall Street Journal this week that Friedman specified that a company focusing solely on profits must “stay within the rules of the game, which is to say, engage in open and free competition without deception fraud.” Andy says that, within the right structure, Friedman’s focus on profits produces huge benefits for society.

But cracks have been appearing in that structure. For instance, tobacco companies lied for decades about the dangers of smoking, and oil and gas companies likewise hid what they knew about greenhouse gases and climate change. Profits thrived. But did the companies show social responsibility? Not so much.

More recently, social tensions have heightened about income inequality, which can be traced in part to the laser focus on profits. That focus has certainly pushed the upper end of corporate pay far higher by creating a vicious circle (a virtuous circle if you’re one of the senior executives benefiting). The circle looks something like this:

To encourage the CEO to drive profits and nothing but profits, his or her pay is tied to the stock price — boost earnings, giving the stock price a kick, and you win big. CEOs are then evaluated against a peer group and are slotted into a quartile. They are paid like others in that grouping. Sounds fair enough, right? But who wants to tell the CEO that he or she is below average? In fact, in the chumminess of the board room, CEOs are almost all stars. That means they are paid above average — which raises the average, again and again and again, for each annual review cycle. Add in the potential for big gains on stock options, and the system looks increasingly unfair to anyone not fortunate enough to be at the high (and always getting higher) end of the scale.

Meanwhile, wages have been stagnant in the lower ranks of businesses. In the past, gains from productivity tended to be shared with workers, in the form of higher wages. In recent decades, almost all the gains have been captured by companies feeling pressure to produce maximum profits.

With the sense building that the pursuit of profits and nothing but profits has taken us too far to the greed end of the scale, the Business Roundtable released a statement in August 2019 signed by 181 CEOs “who commit to lead their companies for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.”

Such an approach, known as “stakeholder capitalism,” turns out to be easier to articulate than to execute. For instance, Marc Benioff, CEO of Salesforce, who was one of the champions of the Business Roundtable statement, declared a “victory for stakeholder capitalism” in late August when he reported quarterly sales exceeding $5 billion — then announced the next day that he was cutting 1,000 jobs. He argued that the cuts weren’t inconsistent with a pledge to benefit all stakeholders, but the 1,000 people losing their jobs surely felt differently.

A study looking at all the companies whose CEOs signed the “stakeholder capitalism” statement found, a year later, that they hadn’t followed through. I’m not especially surprised. You may value your employees greatly, but, if you’re Walmart, you’re not going to suddenly start paying clerks $15 or $20 an hour unless you know that your competitors will, too. Otherwise, you’d cede an advantage to them. So, I don’t think much will change until there is some kind of public pledge by all companies to do a series of very specific things for employees, communities, etc. or until government mandates something such as an increase in the minimum wage.

But the sentiment is there. There is a movement afoot to get businesses to look beyond profits and focus on broader issues, and it sounds to me a lot like what insurance is all about: We’re here to help clients reduce their risks and to recover quickly when the inevitable losses occur. We don’t sell widgets; we help people in their time of need. Who better to lead a “beyond greed” approach to business?

Back in the early days of the personal computer, when I was covering technology for the Wall Street Journal, the CEO of a successful software company told me his strategy consisted of trying to spot a parade. He didn’t have to organize the parade. He just had to put on a drum major costume, jump in front of it and lead it somewhere.

The more-than-profits movement seems like a parade that could — or even should — be led by insurers.

My suggestion would be less “stakeholder capitalism” as the starting point and more Peter Drucker. Drucker, the management guru whom I had the privilege of interviewing twice, began with the customer. Rather than the diffuse focus of “stakeholder capitalism” or the harsh emphasis on profits that Friedman advocated, Drucker argued that “the purpose of business is to create and keep a customer.”

That focus on the customer not only fits the historic ethos of the industry but seems to be where we’re heading. I’ve never seen an industry talk so much about the customer experience or the customer journey. And I’ve started to see the industry’s focus shift to what customers really want: to avoid losses, rather than to be reimbursed after they occur. Just in the past couple of weeks, Travelers announced that it was using artificial intelligence to help clients survey their workplaces and spot ergonomic issues that could cause injuries, and CSAA announced a pilot program to provide fire retardant that Californians can spray on brush surrounding their homes as a wildfire approaches. The list could go on.

Focusing on the customer could lead as far as insurers wanted to go into the “stakeholder capitalism” movement, with its emphasis on communities, employees and suppliers, as well as customers and shareholders. After all, clients live in communities that would welcome fewer car accidents, a reduction in home invasions and theft and other benefits that insurers could facilitate. Insurers will invest in employees and relations with suppliers as part of caring for customers. And if Drucker was right — he almost always was — focusing on creating and keeping a customer will make the profits flow, keeping those shareholders happy.

In fact, I’d argue that the industry is at a point where attaching to the hip of the customer could lead in all sorts of interesting directions and new revenue streams. Why just focus on serving a client after a car accident? Why not begin the relationship way upstream, installing a camera that watches both the road and the driver and uses AI to make sure the driver is paying attention as he heads into a known danger spot like a blind intersection? Why not continue the relationship way downstream, helping a client run errands via Uber or Lyft while waiting for a car to be repaired?

When I hear complaints about capitalism, I think of the line concerning democracy that is generally attributed to Winston Churchill, that “democracy is the worst system of government — except for all the others.” I’d agree that capitalism is the worst economic system — except for all the others. Capitalism, while messy, drives an extraordinary amount of innovation and has been the engine driving the progress of civilization for centuries now.

But maybe it can be a little better. And maybe the insurance industry can help lead the way.

Stay safe.

Paul

P.S. Here are the six articles I’d like to highlight from the past week:

A New Boom for Life Insurance?

Life insurance can move past the 250-year-old, risk-focused transaction and become a core component within a life, wealth and health ecosystem.

Keys to Limiting Litigation Liability

Risks associated with GL and AU claims can be managed, even with “social inflation,” “nuclear verdicts” and tough jurisdictions.

How Analytics Can Tame ‘Social Inflation’

Claims data within insurance companies is being increasingly seen as a key asset, not a byproduct of the claims process.

P&C Insurers Shift Course in Pandemic

In 2021, there looks to be a major increase in overall tech spending and a rapid acceleration of digital transformation plans.

Insurtechs’ Role in Transformation

Insurtechs are important for the development of the industry — but as tools. Incumbents must still get the real transformation done.

State of Diversity, Inclusion in Insurance

Organizations that adhere to a rigid hierarchy throw up roadblocks to diversity & inclusion due to preconceived notions.

Six Key Insurance Business Impacts From Analytics

Recently, I had the privilege of serving as chairman of the inaugural Insurance for Analytics USA conference in Chicago, which was very well organized by Data Driven Business, part of FC Business Intelligence. I am convinced that analytics is not only one of the most valuable and promising technology disciplines to ever find its way into the insurance industry ecosystem, but that its very adoption clearly identifies those carriers – and their information technology partners – that will be the most innovative.

Analytics has exceptionally broad enterprise potential, with the ability to permanently change the way carriers think and conduct their business. The future of analytics is even more promising than most can imagine.

The conference — where the excitement was palpable — showed the sheer diversity of carrier types and sizes as well as the many different operational areas in which analytics is being used to drive insight, business outcomes and innovation and create real competitive differentiation. From large carriers such as Chubb, Sun Life, Nationwide, American Family, CNA and CSAA, to smaller insurers including Fireman's Fund, Pacific Specialty, Great American, Westfield, National General and Houston Casualty, presentations demonstrated how broadly analytics should be applied through every function and every level of the organization. Presentations from information technology provider types including Dun & Bradstreet, L&T InfoTech, Fractal Analytics, Megaputer, EagleEye Analytics, Clarity Solutions Group, Dataguise, Quadrant, Actionable Analytics, Earley & Associates and DataDNA laid out the future potential.

Recent research shows that one major application of analytics — predictive modeling — is getting attention in pricing and rating, where more than 80% of carriers use it regularly. However, only about 50% use it today in underwriting, and fewer than 30% do so in reserving, claims and marketing.

Based on information shared during the conference, there are six major thrusts to the analytics trend:

• Analytics liberates and democratizes data, which in turn ignites innovation and change within carriers.

• Analytics is uniting insurance organizations, breaking down information silos and creating collaboration between operating units, even as enterprise data governance policies and practices emerge.

• Investment and M&A activity in information technology companies in data and analytics is surging and will create even greater disruption and innovation as more entrepreneurial thinkers continue blending art with science.

• New “as-a-service” pay-per-use models for delivery and pricing are emerging for software (SaaS) and data (DaaS), which will be appealing and cost-effective, especially for mid-tier and smaller carriers.

• Analytics is driving innovation in products, business processes, markets, competition and business models.

• Carriers will have to innovate or surrender market share and should watch for competition from new players, such as Google and Amazon, which understand data, the cloud, innovation and consumer engagement.

This article first appeared on Insurance & Technology

Modern Burglar Alarms Remain One Of The Best Defenses Against Losses

In the past few weeks, we have published two articles by Keith Jentoft, the Partnership Liaison of the nonprofit Partnership for Priority Video Alarm Response, regarding the use of video verified alarms. Recently, David Margulies of the Margulies Communications Group approached us and asked if we would be willing to publish an article which provides a different perspective. David's article appears below.

There is no question today that alarm intrusion systems are often one of the first lines of defense against insured losses from crime. According to the Electronic Security Association, which represents the majority of companies in the alarm industry, the breakdown for intrusion alarms shows them protecting virtually every type of insured business enterprise:

  • residential: 40%
  • commercial (office buildings, retail, banks, etc.): 30%
  • institutional (schools, hospitals, churches, etc.): 11%
  • industrial (factories, warehouses, utilities, etc.): 12%
  • government (local, state, federal Facilities): 7%

In a national survey of police chiefs, 90 percent acknowledged that alarms both deter burglary attempts and increase the probability of a burglar being apprehended. Of the nation's approximately 18,000 public safety agencies, only a handful require confirmation from a business owner, witnesses or security guard before police are dispatched to an alarm site.

One of the most in-depth and comprehensive studies of the effectiveness of alarm systems in preventing losses was conducted by the Rutgers University School of Criminal Justice (SCJ). The study found that in Newark, New Jersey, residential burglar alarm systems decreased crime. While other studies have concluded that most burglars avoid alarm systems, this is the first study to focus on alarm systems while scientifically ruling out other factors that could have impacted the crime rate.

Researchers concentrated on analyzing crime data provided by the Newark Police Department. “Data showed that a steady decrease in burglaries in Newark between 2001 and 2005 coincided with an increase in the number of registered home burglar alarms,” said study author Dr. Seungmug (a.k.a. Zech) Lee. “The study credits the alarms with the decrease in burglaries and the city's overall crime rate.”

In short, the study found that an installed burglar alarm makes a dwelling less attractive to the would-be and active intruders, and protects the home without displacing burglaries to nearby homes.

The study also concluded that the deterrent effect of alarms is felt in the community at large. “Neighborhoods in which burglar alarms were densely installed have fewer incidents of residential burglaries than in neighborhoods with fewer burglar alarms,” the study noted.

The alarm industry has aggressively addressed the issue of false alarms because of concerns that they were putting a strain on police resources. In 2003, industry leaders created the Security Industry Alarm Coalition (SIAC) which is comprised of four major North American security associations — Canadian Security Association (CANASA), Security Industry Association (SIA), Central Station Alarm Association (CSAA) and the Electronic Security Association (ESA) — representing one voice for the alarm industry on alarm management issues. The Security Industry Alarm Coalition's primary charter is to significantly reduce calls for service while strengthening the lines of communication with law enforcement professionals and end users.

“Eighty-five percent of the nation's alarm systems generate no calls to the police in any given year,” said Stan Martin, Executive Director of the Security Industry Alarm Coalition. “People who say that 98 percent of reported burglar alarms are false are trying to justify ending police response to alarms without human verification of a crime (verified response). These people have failed to perform their due diligence on public safety and industry best practices.”

Working in a partnership with law enforcement, the Security Industry Alarm Coalition has helped communities significantly reduce the number of alarm calls made to police by promoting industry and law enforcements best practices including:

  • The model ordinance requires registration of all alarm systems.
  • Two phone calls by alarm companies to alarm owners prior to calling police.
  • Technology designed into systems to avoid accidental triggering.
  • Fines for alarm owners who create unnecessary dispatches.
  • Suspending response to the chronic abusers.

According to a study just released by the Urban Institute, these steps allow communities to maintain police response while conserving law enforcement resources. The study notes that Montgomery County, Maryland was able to save $6 million in costs and reduce alarm calls by 60 percent. The reduction in alarm calls from 44,000 to 16,000 came despite a significant increase in the number of alarm systems.

According to Glen Mowrey, the National Enforcement Liaison of the Security Industry Alarm Coalition:

  • Marietta, Georgia reduced alarm calls 65 percent in two years with annual revenues of $223,050 in 2008 and $94,800 in 2009;
  • Johnson City, Tennessee reduced alarm calls 50.1 percent over a four-year period;
  • Union City, Tennessee showed a reduction of 55.4 percent over a four-year period; and,
  • during a 14-year period, the police department in Charlotte-Mecklenburg, North Carolina brought down its percentage of alarm calls, out of total calls for service, from 20.1 percent to 2.4 percent annually, netting 13.5 police officers and an annual revenue in 2009 of $334,470, which includes a reimbursement for 2.5 full-time employees from an outsource company contracted to administer the billing and tracking component.

As new technology emerges, the Security Industry Alarm Coalition is at the forefront of helping develop standards and policies with its partners in the law enforcement community. “Alarm systems and technology are constantly changing and improving,” said Stan Martin, SIAC Executive Director. “Our major and long established trade and professional associations that support SIAC are constantly working to make sure there are standards in place to properly apply this technology.”

“The working relationship between public safety agencies and the alarm industry has never been stronger,” said Mowrey, not only the National Enforcement Liaison of SIAC, but also the former Deputy Chief of Police in Charlotte/Mecklenburg, North Carolina. “Eleven states have created state-wide committees to work with the industry on alarm issues and they all have adopted some form of SIAC's model alarm ordinance.”

The Security Industry Alarm Coalition also serves as the industry's voice working with national law enforcement organizations such as the International Association of Chiefs of Police and the National Sheriffs Association.

Through the Security Industry Alarm Coalition, the alarm industry is always available as a resource to the insurance industry for questions, concerns, or more information on how the alarm industry can continue to protect the insured from unnecessary losses.