Credit the coronavirus with one thing. In an era when individuals and organizations strive to establish themselves as “thought leaders,” COVID-19 has vividly–or, should we say, morbidly–demonstrated the importance of people becoming sensible “thought followers.”
Whatever one’s assessment of the public sector’s response to the pandemic, many believe there has been too much comment from too many quarters on the crisis, exposing people to an incessant barrage of information and misinformation. If there was ever a time to refrain from talking unless you have something truly new and valuable to say, this is it.
So, it is certainly gracious for an organization devoted to thought leadership to give room to someone promoting the idea of “thought followership.” It’s also presumptuous for me to think that what I have to say is “truly new and valuable” at a time when “stay home and shut up” is a civic calling. But, here goes.
The premise of thought leadership is that there is value in being able to come up with new ideas, either to solve problems or shape how others see them. Being perceived as a thought leader is considered to have value in itself, beyond any immediate impact that one’s ideas might have.
With regard to insurance, an abiding message of commentary over the past 10 to 15 years has been that insurers face transformational changes that threaten to “disrupt” the industry. “Insurtech” upstarts threatened to replace incumbents in a manner similar to how Amazon displaced traditional retailers. In the view of many “thought leaders,” the insurance industry had to shed its hidebound legacy methods and get into the 21st century, or, or—what?
What, indeed, would happen if the insurance business as a whole remained operationally behind the times in the eyes of people not on the front lines of accepting and compensating risk?
It may seem sacrilegious to say so, but it is more important for insurers to follow than to lead. Innovation and disruption are givens in the modern economy; insurance is used to limit their potentially damaging effects. Insurance is there to preserve things as they were, to the extent possible.
Whose job is it?
To that end, it is not the job of the insurance business as a whole to figure out how to manage new and different ways of risk transfer. On the contrary, it’s up to those creating the risks to convince insurers that the risks can be adequately identified, managed, allocated and priced.
There’s no right to be insured for property and liability losses. We lose sight of this basic fact because we’ve come to expect a competitive market for coverage to emerge almost automatically whenever a new form of enterprise emerges, almost as if it were a matter of right.
The typical progression is for E&S markets to experiment with coverage of emerging risks until enough experience is acquired to write them in admitted markets. If professional insurers cannot come up with a way to sustainably insure certain risks, whoever has those risks will either retain them or create their own insurance entity to share the exposure (a mutual company, captive or risk retention group).
Of course, given the robust competition in U.S. insurance, no sensible person would deny that individual insurers must innovate in some way to remain competitive in the long run.
Still, prospective vendors and market entrants are often surprised to see how many insurance organizations remain viable despite having what the newcomers regard as outdated products, services and operations. “Incumbents” with “legacy” processes are likened to prehistoric fauna headed for extinction, yet they still manage to lumber along.
First, be dependable
How is it possible that an entire industry could appear to lag behind others and continue growing? There are a lot of reasons, and, yes, regulation is one of them, but it’s not the only one, nor even the most important.
If insurance seems to be mired in inertia, it’s because stakeholders in commerce—consumers, organizations, lenders and public authorities—want insurance to be dependable more than they want it to be innovative.
When it comes to core insurance products, these stakeholders value what’s old, established and expected. Sure, products have to address current exposures, but there’s been little desire and some resistance to having policies that are new and different for their own sake.
To explain, I’ll provide an anecdote from when I worked for an advisory organization that developed policy forms and manuals for standardized lines of P&C insurance.
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As new employees went through orientation, I used to explain how we competed with the market leader to produce forms that had content almost entirely equivalent to that of the market leader. In other words, we competed to standardize, if you can grasp that. We had to be different enough to add value while adhering to long-established parameters and practices of coverage.
To describe the implications of this, I would ask new employees to consider what would happen if they showed up at a mortgage closing with a “new model,” “cutting edge,” “outside-the-box” homeowners policy. Even in the unlikely event the policy was approved by regulators, the transaction would come to a halt. The parties could not stop to read and interpret a new policy. To proceed, they would need coverage in place in a format they immediately recognize.
Now, my premise above is being challenged by Berkshire-Hathaway, whose three-page small business policy, called “THREE,” provides broad commercial property and liability coverage in a short policy designed to be read and comprehended by the policyholder. If THREE takes off and starts a trend, that would truly upend decades of insurance marketing practices—and probably lead to a new standard approach.
At this point, some readers will object that my analysis has overlooked insurance distribution and claims management, two transactional elements of insurance where buyers’ expectations are established by the experiences they have with banks, retailers, service providers and other organizations outside of insurance.
In that case, it is indeed wise to be a thought follower, or practice follower, in the wake of industries that specialize in transactions. There’s no need to be a leader here, because insurance is not a transaction-rich business, compared with others.
Think about it. How many transactions a month do you have with your financial institution, supermarket, gas station, utility companies and other providers? Compare that with how many transactions a year—or even in your life—you’ve had with your P&C insurer(s). There’s no comparison.
One of the biggest misconceptions about insurance is that the business has “fallen behind” other financial services in embracing and using technology. The fact is, insurers were among the first major adopters of computer technology as record keeping and manual calculations were moved onto electronic media, and insurers eagerly embraced online data and analytics as they emerged at the turn of the 21st century.
If insurers “fell behind,” in the eyes of some, it was principally in the 1980s and 1990s, when other industries implemented technology for massive volumes of user-generated transactions that insurers did not have or need.
Insurance transactions are better compared to one’s relationship with a lawyer than with other financial services. People buy insurance the way they buy legal services, with the hope they will never have to make contact, but with the expectation they will be fully and competently supported if they do.
Like legal advice, insurance is really a consultative service. Online portals will sell standardized coverage commodities, like low-cost auto coverage. “Insurance,” properly understood, will consult with households and business to help them select the right types and amounts of protection against a growing range of risks. That will certainly entail a good deal of innovation and thought leadership, but it will also entail a return to the founding principles and practices of modern insurance.
Fail fast? Not here
On their own, constraints on policy form development shouldn’t suppress innovation in insurance, but they do place boundaries on it, boundaries that extend to the corresponding loss information used to help price coverage.
More than that, however, enduring expectations and practices regarding coverage shape the culture of insurance companies and the industry in general. Given the inherent limitations on insurance product innovation when compared with other industries, insurance is going to attract and retain individuals who value dependability over disruptive change.
Those who prefer the breakneck pace of disruptive change would be frustrated to learn that the current mantra of “fail fast” has little application in insurance.
“Fail fast” refers to an organization’s toleration for experimental change whose results, good or bad, can be quickly demonstrated, acknowledged and, if necessary, abandoned. Fail-fast is a path to innovative breakthroughs in many industries and can be safely applied to internal agency and carrier operations with limited exposure to product performance or market conduct.
There is almost no room for failing fast in core insurance operations, however.
An underpriced exposure in a portfolio of property accounts can devastate the combined ratio of that book. An overlooked or unintended exposure in liability accounts can do the same. Errors like these can linger in a book of business for months or years before being detected, at which time it may be too late to compensate for the damage.
Again, beyond the immediate impact of the operating results, this limitation on insurance innovation shapes the culture of companies and the industry by self-selecting for people most comfortable operating under such constraints.
A.M. Best weighs in
This discussion might be academic if not for the fact that A.M. Best has just begun formally incorporating an insurance company’s ability to innovate into Best’s assessment of the overall strength of an insurer.
Innovation and thought leadership are not the same thing, as the former can be carried out quietly, and often is in the world of insurance, where even small and subtle adjustments can create competitive advantages that carriers are reluctant to share publicly.
Nonetheless, innovation and thought leadership share the same basic premise: The ability to generate and implement new ideas is seen to have value in itself, apart from their actual impact. The implicit presumption is that an innovative company culture will generate enough good ideas to more than compensate for any bad ideas that are tried and rejected.
Early on, some observers questioned the need for Best to assess innovation separately. If the ability to innovate makes a company stronger, won’t the existing measures of company strength reflect that?
For its part, Best argues that, to the extent insurers can innovate, they can “better respond to external challenges such as evolving consumer preferences, growing business complexity, shifting market dynamics and ever-expanding technological advancements.”
Best adds that “insurers that successfully incorporate innovation will likely strengthen their organizations, increase their customer base and improve their efficiency, supporting their financial strength.”
It’s hard to argue with that, but the issue becomes a little murky when one considers the actual criteria for rating innovation. In one key section, the new methodology scores a company’s “level of transformation” due to innovation according to four statements, labeled 1-4, with one being the lowest and four the highest (best) score.
- The company’s innovation output is primarily the result of replication of well-used or mature processes or technology.
Why is this a weakness? If you can do something with existing tools and methods, why change?
- The company’s innovation output is not industry-leading. The company has adopted some emerging technologies.
Shouldn’t insurers be selective in their technology investments?
- The company’s output indicates that it is an industry leader in innovation. Peers often replicate the output results. The company is viewed as a leader in the industry.
“Peers often replicate the output results.” Where do you want to be in the chain of innovation investment?
- The company effectively uses cutting-edge processes and technology throughout the enterprise. The company’s innovation is at levels comparable to leaders even outside the insurance industry.
If your company really needs and can use “cutting-edge processes and technologies,” go for it. If you want to be “comparable to leaders outside the insurance industry,” knock yourself out. But if you want to insure risks on a sustainably profitable basis, why not do so with the minimum investment on your end, and with the greatest possible commitment and contribution by those whose risks you are assuming?
Now, no one should let off-the-cuff comments of an industry observer diminish the importance of what A.M. Best is trying to accomplish. Following extensive review by and input from the industry, the new criteria are thorough and carefully explained, and compose only a fraction of a company assessment.
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But insurance professionals should not be distracted by this important initiative from recognizing and embracing the historic role of this business in preserving value so that innovators can create value. One might say that insurance is the protective yin to the dynamic yang of a modern economy, an essential complement that responds to different imperatives.
What, then, is “thought followership?” I would describe it as a series of commitments and understandings to guide decisions within an insurance organization and in its dealings with customers:
- A commitment to minimize disruption until it can add real value;
- A commitment to use established business practices and methods of communication until others are shown to better add or preserve value; and
- An understanding that, all else being equal, an established idea or practice is actually better than a new one, simply because of its track record and common understanding.
For the most part, insurance professionals already demonstrate these commitments and understandings, even as they improve the way coverage is delivered. That approach simply hasn’t been fashionable of late, and the industry and the people who work in it are continually told they have to change the way they think. Well, they don’t, fundamentally. What they have to do is follow where other sectors are leading, and provide old-fashioned assurances to leading-edge enterprises.