Tag Archives: management

Are You Fit Enough for Growth?

When it comes to scrutinizing costs, most insurance companies can say, “Been there, done that. Got the T-shirt.” Managers are familiar with the refrain from above to trim here and cut there. The typical result is flirtation with the latest management trends like lean, outsourcing and offshoring. However, the results tend to be the same. Budgets reflect last year’s spending plus or minus a couple of percent.

Meanwhile, managers attempt to develop strategies to capitalize on the trends reshaping the industry – customer-centricity, analytics, digital platforms and disruptive delivery and distribution models. Yet, after all of the energy companies exert to reduce expenses, there is often little left over to spend on these strategic initiatives.

Why do you need to look at your expense structure?

A variety of pressures have led carriers to improve their cost structures. In all parts of the market, low interest rates and investment returns are forcing carriers to scrutinize costs to improve return on capital, or even to maintain profitability to stay in business.

After all of the energy that companies exert to reduce expenses, there is often little energy left over to spend on strategic initiatives.

P&C carriers with lower-cost distribution models have been able to channel investments into advertising and take share, forcing competitors to reduce costs to defend their positions. Consolidation in the health, group and reinsurance sectors have forced smaller insurers to either a) explore more scalable cost structures or b) put themselves up for sale. For life and retirement companies, lower interest rates have taken a toll on the competitiveness of investment-based products.

This spells trouble for companies that have not adequately sorted out their expense structure. And a shrinking insurance company sooner or later will run afoul of regulators, ratings agencies, distributors and customers. Even if expenses are shrinking, if revenue is declining more quickly then the downward spiral will accelerate. It is virtually impossible to maintain profitability without growth. Expenses increase with inflation, tick upward with each additional regulatory requirement and can spike dramatically when attempting to meet customer and distributor demands for improved experiences and value-added services.

The reality is that companies have to grow, and that’s difficult in a mature market, especially in times when “the market” isn’t helping. What’s the key to success, then? In short, growth comes from better capabilities, service, customer-focus and products – all of which require continuing investment in capabilities.

See Also: 2016 Outlook for Property-Casualty

The math doesn’t work unless you’re finding ways to spend less in unimportant areas and allocate those savings to more important ones. If your answer to any of the following questions is “no,” then it’s important that you look at your allocation of resources for capital, assets and spending:

  • Are you making your desired return on capital?
  • Are your growth levels acceptable?
  • Do you have an expense structure that lets you compete at scale?

The transformation of insurers from clerk-intensive, army-sized bureaucracies to highly automated financial and service operations has been a decades-long process. The industry has invested heavily enough in standardization and automation that one would expect it to be a well-oiled machine. However, when we look under the covers, we see an industry with a considerable amount of customization and one-offs. In other words, the industry behaves more like cottage industry than an industrial, scalable enterprise.

We know that expenses are difficult to measure, let alone control. But why are they so intractable?

The industry’s poorly kept secret is that insurers, even larger ones, have sold many permutations of products with many different features. All of these have risk, service, compensation, accounting and reporting expenses, as well as coverage tails so long the company can’t help but operate below scale.

Why are expenses so intractable? The issue is scale.

What defines operating at scale for you? A straightforward way to answer this question is to consider whether you’re operating at a level of efficiency on par with or better than the best in the marketplace. Where do you draw the line? The top 10% to 15%? The top 20% to 25%? Next, ask yourself if you, in fact, are operating at scale. Remove large policies and reinsurance that disguise operating results, then sort out how many differentiated service models you are supporting. Are you in the bottom half of performers? Are you in the top 50% but not the top quartile? Are you in the top quartile but not the top decile?

Every insurer needs a more versatile and flexible expense structure to fully operate at scale and be more competitive.

Competition is changing

Customers now have access to a wealth of information and are increasingly using it to make more informed choices. New market entrants are establishing a foothold in direct and lightly assisted distribution models that make wealth management services more affordable for more market segments. Name brands are establishing customer mind-share with extensive advertising. FinTech is shifting the way we think about adding capabilities and creating capabilities in near real time. Outsourcers are increasingly proficient and are investing in new technologies and capabilities that only the largest companies can afford to do at scale.

See Also: Don’t Do It Yourself on Property Claims

The competitive landscape will continue to change. More products will be commoditized – after all, consumers prefer an easy-to-understand product at a readily comparable price. As they do now, stronger companies will go after competitors with less name recognition and scale and lower ratings. Customer research and behavioral analytics will more accurately discern life-long customer behavior and buying patterns for most lifestyles and socio-demographic groups. The role of advisers will change, but customers of all ages will still like at least occasional advice, especially when their needs – and the products they purchase to meet them – are complex.

Table stakes are greater each year and now include internal and external digital platforms, data-derived service (and self-service) models, omni-channel distribution models and extensive use of advanced analytics. The need to improve time-to-market has never been more important. Scale matters. Because they can increase scale, partners also matter even more than in the past. If they have truly complementary capabilities, new partners can help you improve your cost curve because you can leverage their scale to improve yours (and vice-versa).

In conclusion, all companies – regardless of scale – need to ensure that their capital and operating spending aligns with their strategy and capabilities and the ways they choose to differentiate themselves in the market. In this transformative time, the ones that can’t or won’t do this will fall increasingly behind the market leaders.

Implications: Leave no stone unturned

  • Managing expenses is a job that is never finished. Even if you’ve already looked at expenses, it doesn’t mean that you get a pass from scrutinizing them afresh. You will always have to keep rolling that particular boulder up the hill. Acknowledging that you could always manage expenses better is the first step to doing it well.
  • Identify and commit to the cost curves that get you to scale. This may require new thinking about sourcing partners and which evolving capabilities hold the most promise for the future of the company. How transformative do your digital platforms need to be? Can the cloud help you operate more efficiently and economically? How constraining is your culture, management and governance?
  • Every company needs to invest. Every company needs to be “fit for growth.” You will need to increase expenses where it helps you compete and decrease it where it doesn’t. Admittedly, this is hard to do, but the companies that don’t do it successfully will be left by the wayside.

Leveraging the Power of Data Insights

The vast majority of insurance companies lack the infrastructure to mobilize around a true prescriptive analytics capability, and small- and medium-sized insurers are especially at risk, in terms of leveraging data insights into a competitive advantage. Small- and medium-sized insurers are constrained by the following key resource categories:

    • Access and ability to manage experienced data scientists
    • Ability to acquire or develop data visualization, machine learning and artificial intelligence capability
    • Experience and staff to manage extensive and complex data partnerships
    • Access to modern core insurance systems and data and analytics technology to leverage product innovation insights and new customer interactions

Changing customer behaviors, non-traditional competition and internal operational constraints are putting many traditional insurance companies—especially the smaller ones—at risk from a retention and growth perspective. The marketplace drivers create several pain points or constraints for small and medium size insurers, such as can be seen in the following graphic:

Screen Shot 2016-02-15 at 2.53.12 PM
This is excerpted from a research report from Majesco. To read the full report, click here.

risks

Why Do Some Take Risks, Others Not?

Every time you breathe, you take a risk. But, usually, the potential for harm is greater if you don’t breathe. (There are exceptions, such as when your head is under water without a breathing mask.) Every time you make a decision, you take a risk; we take risk all the time, in pretty much every facet of our personal and professional lives.

But, when faced with the same situation, people will act differently from one another. A person may assess the risk differently from someone else. He may make a different decision regarding whether the risk is acceptable and which fork in the road he should take to address it.

In risk management, it’s fine to have defined risk criteria or appetite statements, but these rarely cover every decision a manager has to make. So, the manager has to make a decision based on what she thinks is best.

A number of experts will point to risk culture as the answer to this variance in decision-making. The experts seem to believe that some organizations are more risk-averse than others. But organizations are composed of people—different people in leadership roles with different backgrounds, experiences and biases. Organizations are not homogeneous. In fact, sections of an organization are not staffed with people who are identical in their attitude toward risk.

For example, on whether to select vendor A, B, C or a combination of the three, different people are likely to make different decisions. Manager X may have had a bad experience at another company with vendor A, while Manager Y used to work for that vendor. Manager Z may have lived through a disastrous experience where a sole-source vendor failed, so she will opt for a combination of two or more vendors. Manager Y may have just suffered a loss on the stock market that affects his desire to take risk, while Manager X has just heard he is a grandparent again. Even something such as a state of mind can influence a risk decision.

It’s not only that different people make different decisions in the same situation but that each person may make different decisions at different times. This is important because, as risk professionals, we want decision-makers to only take the level of risk that top management and the board desires.

To have consistent decisions on risk, we need to know the temperature and overall health of the organization and its decision-makers. We need to answer these questions:

  • Who are we relying on to take the risks that matter most to the organization’s success?
  • How can we obtain assurance that they understand the desired level of risk?
  • How can we obtain assurance that they will act as we desire?
  • How will we know when their risk attitude changes?

A survey will, perhaps, give you a moment-in-time view. However, people change. Managers and executives leave, new ones join and people’s perspective and desire to take risk changes, especially if they see their compensation or termination is likely to be affected by their decision.

This is a complex issue that risk professionals need to understand and assess within, and across, their organization.

Richard Anderson and I will be discussing this in our Risk Conversations coming up in April in London and Chicago. Details are at www.riskreimagined.com.

In the meantime, how do you address this variability? How do you know that your decision-makers will take the desired level of risk?

ERM Blurs Lines for Nonprofits

I will never forget a frustrated Peter Drucker lamenting years ago, in his heavy German accent, the use of the term “nonprofit” when “the fact remains that profitability is vital to our sustainability?” To this point, I’ve been so impressed with the tools of technology (and equally with recent management appointments in nonprofits) that I’ve been encouraging nonprofits to raise their game relative to risk retention. This can be achieved with a more sophisticated form of reinsuring their liabilities and operations — captive, risk retention group — so that nonprofits’ efforts are rewarded through an ROI on their capital (i.e., a surplus), generating a “profit center” for mission protection.

I believe the time has come for a more holistic view of how we manage, whether it’s our company, our organization or our household. (Interestingly, the word “economics” comes from two Greek words — oikos and nomia — whose earliest origins relate to taking stock of the affairs of the home.) I believe this blurring is manifest in much of what I am witnessing:

  • For-profit executives leaving a life of “success,” corporately, for a life of “significance” in a mission-based organization (Bob Buford’s theory) at a mid-point in their lives;
  • For-profit executives sitting on non-profit boards advocating for more enterprise risk management (ERM), a more sophisticated form of risk management; and
  • A tidal wave of interest among emerging generations in the nonprofit sector — for careers, volunteerism and engagement.

Another concept of this blurring relates to the need for nonprofits to see resources, talent, contribution and solutions in their nonprofit, community-based neighbors. In fact, it appears that risk management is no longer an “organization issue,” per se; you can have the best-laid plans, but if you aren’t aligned with your community, you risk vulnerability.

Additionally, so many recent security breaches point to the need for community-based solutions that are global, not just U.S.-centric.

Below is a diagram I raised with a faith-based nonprofit to demonstrate how its approach to risk might, more effectively, be to find greater impact through alignments within the local community.

Screen Shot 2016-01-25 at 1.41.00 PM

Engaging your community

Perhaps now is the time for “nonprofits” to change the semantics of their sector to a broader, community-based organization (CBO) concept. In fact, one idea that has emerged is an alternative label for a nonprofit: CBO.

Perhaps — as CBOs — we will more effectively live out our missions, starting with a positive, inclusive approach rather than a negative (“non”) dynamic. And, no doubt, we’ll better manage risk through these alignments.

Ultimately, we’re better off with collaboration!

company

How to Build a Fail-Fast Culture

There’s a lot of talk these days about how failure is not just fine but fantastic.

Tech companies famously tout “fail fast”-style mantras. One of Facebook’s guiding principles is “Done is better than perfect.” Many start-up founders are known for having built companies that failed before finding long-term success.

The philosophy of encouraging mistakes and quickly learning from them complements the design-thinking movement. In this way of thinking, you’re encouraged to launch quickly, shipping imperfect product and iterating based on customer feedback.

But what role can this approach play in a slow-moving, large company? After all, many of the small start-ups that encourage fast failure will grow quickly, and maintaining that kind of culture as it scales is tricky. How do you treat not-quite-perfect, disappointing or outright failed ideas and projects as acceptable among hundreds or thousands of employees?

Here are a few guiding principles for instilling an innovative, fail-fast philosophy in a larger organization.

Set up mini innovation groups: I worked with an organization that set up small teams across the company with the mandate to drive innovations in the everyday routines of work. The teams discuss new processes, test their ideas and then present a summary of improvement initiatives. They share ways to extend their concept, and the teams look at other potential business implications. A review board makes the final approvals based on the portfolio and suggests ways to make wider impact. It’s an organized, civilized and, yet, wholly innovative way of working in a bigger company. And if the teams’  ideas fail? Well, at least they were given permission to try.

Focus on feedback year-round: If you were working on a new project and it failed to launch or didn’t perform well in a test, would you want to hear about what you could’ve done better from your manager a year later? Real-time development happens throughout the work days and weeks– not during an annual performance review – and allows you to constantly and more quickly improve. But this is a change you should make as part of a bigger talent innovation strategy in performance management – it can’t be executed effectively alone.

Recruit, promote and succession-plan differently: To encourage a fail-fast mentality, we must reimagine what we consider successful. Along with rethinking annual performance reviews, consider what guidance and framework you use to define a productive employee. Can you reward the team that boldly pushed new ideas, even if the ideas didn’t come to fruition? Is a top performer one who differentiated your brand in the marketplace with a new angle, even if it didn’t have the same broad reach as last year’s campaign? Adhere to what principles your organization’s strategy prioritizes, but ensure you’re not inadvertently punishing people who take smart risks.

Follow basic culture evolution lessons: Strategy+business magazine’s article “Culture and the Chief Executive” shared how culture can evolve by following four tenets, and they’ll of course apply here, too.  The basic steps to remember:

  • Demonstrate positive urgency by focusing on your company’s aspirations — its unfulfilled potential — rather than on any impending crisis.
  • Pick a critical few behaviors that exemplify the best of your company and culture that you want everyone to adopt. Set an example by visibly adopting these behaviors yourself.
  • Balance your appeals to the company to include both rational and emotional cues.
  • Make the change sustainable by maintaining vigilance on the few critical elements that you have established as important.

Know your limitations: Certain companies, organizations within an enterprise and missions can more easily afford to push the envelope and experiment than others. While inspiration can come from the tech world, there are limits to how far your organization can go. The key is to understand, challenge and ultimately work within these limits to foster a culture of innovation. Even in risk-averse circumstances, some businesses exercise the fail-fast philosophy on non-mission-critical projects that won’t harm the business, brand or customers if they don’t pan out. This approach can reinforce your culture and can empower and engage the team. It can even lead to new value if the idea can spark other future, more achievable initiatives.

It’s difficult to create a work world balance where innovation and creativity can quickly become executable projects or products in the market while also staying within the complex boundaries of a large organization — especially one that’s regulated.

But a learning culture that embraces fresh ideas, even those that could fail, is increasingly essential. More than ever, our clients ask PwC to help them stay competitive and innovative while smaller organizations threaten their growth. And, more than ever, big businesses risk losing talent to these companies, too.

To keep up, you’ve got to re-up. There’s little progress to be made by doing things the way you’ve done them in the past few years. If you consider how your company’s culture could better embrace risk and failed ideas, you’ll be better positioned to deal with more unpredictability and to grow in the future.