Tag Archives: pandemic

Beware the Grey Swan

As the U.S. steadily emerges from the pandemic — and we all hold out hope for India — the temptation is to dismiss it as a one-off, a once-in-a-century health disaster, a black swan. But the pandemic is actually what’s coming to be known as a grey swan — something that, while rare, relates to a known problem and that can be planned for, if we come to grips with the cognitive biases that blur our ability to see them.

As we’ve learned the hard way over the past 20 years, there are a lot of grew swans out there, so we as an industry need to learn to prepare better for them, both for our own sakes and for those of our many clients.

This report from Aon on dealing with grey swans’ effect on corporate reputations includes a daunting list of those that have been broadly ignored over the past two decades, starting with the 9/11 terrorist attacks — which somehow caught the world by surprise even though Islamic terrorists were known to want to strike in the U.S., even though plots had been uncovered to hijack and crash planes into high-profile targets or blow them up and even though terrorists had attacked the World Trade Center itself and tried to make it collapse eight years earlier (right across the street from my office at the time).

The dangers that a hurricane posed to the levees in New Orleans were well-known long before Hurricane Katrina devastated them. So were the perils of subprime mortgages — a member of the Fed’s board of governors saw the crisis coming so far ahead of time that he published an alarmist book in 2007 yet was largely ignored until after the Great Recession of 2008-9 began. The tsunami that caused the disaster at the Fukushima nuclear plant in 2011 was eminently foreseeable. And, of course, many had been predicting a pandemic for years before COVID-19 pretty much shut the world down starting last spring and killed millions — Bill Gates even got most of the particulars of COVID right in a dire TED talk in 2015.

Why do we keep missing these grey swans?

Drawing on the seminal work of behavioral economist Daniel Kahneman, the Aon report lists six cognitive biases that cloud our judgment on risks more complicated than “white swans” — which are common enough that we have clear data on them and routinely incorporate them in our risk management.

The biases are: the ambiguity effect (our minds don’t like options with unknown probabilities); normalcy bias (we underestimate the likelihood and severity of disasters); optimism bias (we underestimate the probability of being affected directly); the ostrich effect (we ignore negative information to avoid the anxiety that comes with decision-making); herd instinct (we align with the behavior of a group to avoid conflict); and status quo bias (we prefer to keep doing what we’re doing).

As the report explains, the ambiguity effect, normalcy bias and optimism bias “relate to our limitations as natural statisticians. We gravitate toward information that we can process and organize [while avoiding]… uncertain, ambiguous data…. To help us navigate through the storms of life, we tend to be optimistic about our chances. Despite knowing the health risks associated with smoking or obesity, for example, we believe that ‘it won’t happen to me,’ yet we buy lottery tickets equally believing that, ‘it might be me!'”

The ostrich effect, herd instinct and status quo bias “relate to managing our emotional state. Evidence that conflicts with our rosy view of the world is uncomfortable and unpleasant…. It is easier to go along with the majority than stand one’s ground and cause waves.”

So, how can we do better?

The report’s conclusion: “Effective risk management strategies will acknowledge these flaws openly and institute measures to combat their most harmful effects.”

It suggests considering, in particular, the possibility of “a large-scale cyber attack with physical consequences. Cyber physical risk is not new, but its threat is growing rapidly, as adoption of the Internet of Things (IoT) accelerates and increases the ‘attack surface’: the number of connected systems and devices through which an attacker can enter or extract data.”

That kind of attack certainly seems plausible — as the SolarWinds attack by Russia showed, nation-states have the ability to sabotage each others’ infrastructure, such as electric grids, pretty much whenever they want.

The report adds: “We could turn our minds also to the ‘green swan,’ the term coined by the Bank for International Settlements to describe black swan events related to climate change.” It’s always hard to trace a disaster to climate change — some will say the recent Texas freeze may stem from climate change’s tendency to cause more extreme weather; some won’t — but the likelihood of green swans is certainly increasing.

One caution: I think the evaluation of disasters after the fact is often Monday morning quarterbacking: “It’s obvious that we should have punted/shouldn’t have punted,” “should have passed/should have run,” “should have seen that that player would be a star/a bust,” etc. You can’t just prepare for one grey swan and hope that’s the one you should have headed off. You have to prepare for all the grey swans you can imagine — you don’t just fix the levees in New Orleans; you prepare for what hurricanes might do up and down the Gulf Coast.

That can be expensive. So, there has to be some real calculation involved based on the odds of an event, the likely cost of a disaster and the expense associated with avoiding all such problems — and the nature of grey swans is that none of these figures are easily quantified.

All we really know for sure is that grey swans are occurring faster than we’ve expected and have been far costlier — COVID-19 has cost trillions of dollars in the U.S. alone, and the devastation in terms of lives lost has been even greater. So, we’d do well to confront our biases and keep trying to make ever-more-realistic evaluations of the risks we’re facing.

Stay safe.

Paul

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

How Social Inflation Affects Liability Costs

The industry is probably looking at several more years of accident year combined ratios above 100%.

The Future Isn’t What It Used to Be

Customers, risks, operations and the workforce all have been transformed over the last year. This makes strategic planning a challenge.

How Geospatial Data Lowers Traffic Risk

The cadence and granularity of data about travel behavior need to be enhanced. Geospatial analytics can be the engine.

A New Environment for Insurers

Environmental, social and governance (ESG) is a chance for the insurance industry to do well by doing good.

The B2B Digital Payment Opportunity

As trends point to rapid adoption of alternative payment methods, insurers must determine how to meet B2B needs.

Long-Haul COVID-19 Claims and WC

Employers and workers’ comp carriers must tread lightly; accepting a COVID claim can have a big impact, beyond the initial care and recovery.

The Future Isn’t What It Used to Be

The pandemic has changed everything. Well, not everything… but it has changed many aspects of the lives of individuals and families and has had far-reaching effects on businesses in every industry. The patterns that represent the ebb and flow of daily life have been altered significantly. Where we work, travel, eat and buy are quite different than what they were in early 2020. This upheaval of society has important, long-term implications for the P&C insurance industry. Customers, risks, operations and the workforce all have undergone rapid transformations over the last year. This makes strategic planning a challenge for insurers.  

As the new decade dawned in 2020, many insurers began thinking about what the world would be like in 2030 and, by extension, what it would mean for their business. Enter scenario planning.

Scenario planning is a time-tested tool in the strategic planning toolkit. SMA has been quite busy facilitating scenario planning sessions for insurers over the past couple of years. The beauty of scenario planning is that, even though the timeframe is often 10 years out, the result of the process is the identification of strategic actions that should be taken in the near term to position for the possible developments in the future. Before the pandemic, many were able to envision the state of their customers and their business model 10 years out. Even though there were many uncertainties, there was still a relatively clear line of sight to the future.  

Although mid- to longer-term planning should never be based on straight line projections, they still form the basis from which various alternate future scenarios can be developed. Now, it is fashionable to say that 2025 is the new 2030. The predominant theme is that the pandemic, economic lockdowns and work-from-home mandates have accelerated digital transformation. There is no doubt this is true, but the reality is more nuanced than just an acceleration of trends in a straight-line manner. It is not just that the future we envisioned will arrive more quickly than we originally thought – it’s that the future will be different than we all thought it would be. In other words, the future isn’t what it used to be. 

See also: The Future of AI in Insurance

None of us can predict the future. But that makes scenario planning even more valuable. Evaluating different alternative futures in the context of the insurance enterprise stretches our thinking, opens up possibilities and identifies foundational capabilities that are required for success in any of the possible futures. Every dimension can be explored in a holistic way, looking at factors external to the insurer such as the industries and customers they serve, the potential changes to the landscape of risk, the nature of the workforce and the role of automation and advanced technologies. The whole value chain is in play – from how products are conceived and designed to how they are sold, priced and serviced – along with every part of the business that supports those activities.  

What will the world of 2025 or 2030 mean for your business? For that matter, how do you need to adjust your strategies and plans now and for 2022?

Sea Changes After a Year of Pandemic

We are past the first anniversary of the start of the COVID-19 pandemic. While it’s an event many of us never expected to see, it is a reality that is informing an array of operational, financial and structural decisions inside the insurance industry. These changes will likely be with us long after the dust settles and the post-pandemic normal becomes the de facto operating model.

The pandemic has wrought a catastrophic human toll. However, there have been some silver linings in terms of things like the rapid acceleration of digital and virtual capabilities that allow customers, employers and employees to rethink the once seemingly unchangeable operating rules. Our collective eyes have been opened to an array of new possibilities that will likely inform hybrid models for as far into the future as we can see.

Another set of changes rippling through the insurance industry relates to the financial pressures that carriers are facing. Some of this has been created by persistently low interest rates. Long-term demographic shifts and changes in customer preferences are also having a profound impact on what carriers need to bring to market to remain both relevant and competitive.

Industry Evolution

This confluence suggests some notable “sea change” events in the future for life insurers in particular. For one thing, long-standing expense challenges have become clearer and more urgent. Investment income has masked this for perhaps as much as 25 years. No more. New products generally have less fixed cost covering capability than old, in-force blocks, so the natural changes in generations of policies create their own form of expense pressure. 

Demographic shifts are also in play. During this decade, the youngest Baby Boomer will reach retirement eligibility. We are but months away from the oldest millennial reaching 40 years old. The shifts in product demands are palpable, and a strategy that suggests millennials will turn into Boomers, aside from the graying hair, appears flawed. Perhaps fatally so. 

All this is now playing out in carrier decisions about future business models. One interesting example is that publicly traded companies are under pressure to consider fundamental changes in their strategies, moving away from retail businesses with long-liability-tail products and toward more fee-based and institutional models. MetLife recently completed an exit that included individual life, annuity and P/C operations. Prudential announced that it is considering an array of options, including a possible sale of its core L/A business. Principal has a study of the future of the L/A business underway, driven in part by activist minority investors. 

See also: Pressure to Innovate Shifts Priorities

Tackling Challenges

At the same time, mutual carriers (e.g., MassMutual, Northwestern Mutual) seem to be doubling down on the long-liability-tail retail businesses, perhaps a recognition that this is most possible when the prospect of quarterly earnings calls is not an imminent challenge. 

The spate of M&A witnessed over the past few years shows no signs of abating. This is likely a reflection of the need to generate scale in core businesses, a recognition that organic growth can be difficult in economic downturns, as well as the realization of the need to see if smaller units are really businesses, distinct from “corporate hobbies.” 

The challenges, and opportunities, for carrier IT organizations are real. Clarity on the business direction for a company, agility to respond quickly to new priorities, flexibility to ramp resources up (or down) depending on circumstances, and the ability to tie IT investments more closely to the internal business cycles of an organization will be key. Business as usual is likely to take on a different meaning in the future, a reality compounded by the ever-shortening useful life of technology. 

We would have arrived here with or without the pandemic, but COVID-19 has accelerated the moment of reckoning. Developing an overarching IT strategy to address both the technology and human capital needs to support this could be key to how successful CIOs and their teams are at delivering successes, building on their effective responses to the pandemic’s arrival. It turns out that was the start, rather than an end, of a story.

Crisis Invigorates Insurance Innovation

It’s like a scene from an action-packed Marvel thriller! The threatened hero is being chased down the street but sees a route for escape. It’s an alley. (We all know not to go down the alley, but the hero doesn’t listen to us.) At the end of the alley, there is a brick wall. (We all knew there would be a wall or a fence or an iron gate.) There’s no way around the wall. Our hero is going to have to get innovative in a hurry, find and use their superhero capabilities! They save the day. Save people. Save the world.

That’s what COVID has done to nearly every industry. It chased companies into corners. It threatened their markets. It even built brick walls in perfectly good alleyways, separating unprepared companies from the customers they need.

Sometimes, however, it is the crisis that makes the necessity become real. Think about it. The pandemic has obliterated any lingering doubts about the necessity of insurance digital transformation. With rare exceptions, operating digitally is the only way to do and to stay in business. It’s “go digital” or stare at that wall until the unthinkable happens. 

And this is where superhero capabilities come into play for insurers!

Some insurers are leveraging their superhero capabilities. They are the Leaders. When COVID rewarded the insurance industry with the ultimate teachable moment, they took the lesson to heart. When something built a brick wall between them and their customers, they made the wall irrelevant. They are focused on today’s business while also creating tomorrow’s business – operating at speed with a multi-focus, unlike others.

Some insurers are trying to keep pace or catch up. These are the Followers. Determined not to let the Leaders get too far ahead, Followers are listening to the lessons of COVID and are launching initiatives and making changes to ensure their success. They are solidly focused on modernizing and optimizing today’s business; however, they are less focused on creating the future business. But they are continuing to gradually fall behind.

Some insurers are in a tight spot. They face dilemmas. These are the Laggards. Laggards generally understand the market dynamics but are clearly stuck in the past and have failed to rapidly move to planning and execution across the array of strategic areas – even for their business today. They are not moving to new cloud platform solutions or incorporating platform and emerging technologies. They are keeping their business focused on the past, rather than the future. If not already in one, they are approaching a downward spiral of relevance that will be nearly impossible to reverse.

Majesco’s 2021 Strategic Priorities first report, based on post-COVID insurer survey results, shows a dramatically widening gap between Leaders and Laggards – 64%, a year-over-year increase of 20% – when looking at their focus on key strategic initiatives in the past year. Followers were “treading water” to keep even with the previous year – with a 12% gap to Leaders.

To explore in more detail the widening gaps, the 2021 Strategic Priorities second report, just published, assesses how insurers are dealing with necessary transformation in the midst of increasing challenges. In today’s blog, we look at the details of this gap. What is it that Leaders and Followers and Laggards are doing differently? What can insurers do to make sure they are positioned to become or remain Leaders?

See also: Does Remote Work Halt Innovation?

Despite COVID Challenges, Leaders Are Widening the Gaps

The COVID crisis seemed to come out of nowhere, blindsiding the world with the force of a tsunami. Suddenly, the “usual” way of doing things no longer worked. Adaptability is the new innovator. For example, COVID-19 reduced or eliminated “in person” time for agents, adding a layer of difficulty to distribution. Those who were prepared to digitally shift for everything from communications to support lead generation through alternate channels and launch products in spite of quarantines were in a better position to turn plans into actions.

What Did Leaders Do Differently?

A key to reducing the drastic impact is the ability to rapidly adapt planning – both the plans themselves and the process for creating and altering them. Throughout history, we often see that the difference between success and failure is related directly to the ability to evaluate, reinvent and adapt to the current environment. While COVID forced all companies to adapt, Leaders took advantage of the situation. Leaders exercised their adaptability to a much greater degree than Followers (25% gap) or Laggards (34% gap), as seen in Figure 1. 

Figure 1: Impact of COVID-19 on annual planning

Leaders are also more in touch with COVID’s potential internal and external impacts on their companies. Externally, their awareness of the impact to their customers was 26% higher than Followers and 33% higher than Laggards (Figure 2), a crucial insight and strategic difference between Leaders and those trailing them.

Leaders know they can’t assume the customers they serve today will need or want the same products and services tomorrow… or that the same customers will even be there tomorrow. Leaders constantly monitor the changing demographics and dynamics and make short- and long-term adjustments to adapt and thrive in an ever-evolving market. If their current target markets are diminished by COVID, they know they need to adjust their product and service offerings, develop new channels, seek new markets and more.

The State of Insurers Last Year

COVID was a gut punch for all three segments in 2020. Leaders, Followers and Laggards all had setbacks in their companies’ growth and strategic activities compared with 2019. On an aggregate basis, Leaders (-12%) and Followers (-10%) saw similar declines, but Laggards’ (-24%) was twice the decline of Leaders, highlighting their lack of preparedness for the crisis (Figure 2). In contrast, Leaders’ response was to counterpunch and adapt with new approaches to planning underpinned by a greater awareness of the business implications.   

Awareness and adaptability matter when responding to change.

Figure 2: COVID-19’s impact on growth and strategic activities last year

Despite the setbacks of the last year, Leaders continue to dominate with a 12% lead over Followers and a striking 64% lead over Laggards, as seen in Figure 3. 

Leaders and Followers were nearly identical in their views of company growth during the previous year, but Leaders averaged a 15% gap over Followers on all the other factors. The largest gap (21%) was in Maintaining/Replacing core systems, and the smallest (12%) was in a new factor added this year: Allocating resources to business as usual/change how we do business. 

Figure 3: Gaps between Leaders, Followers and Laggards in assessments of company growth and strategic activities last year

Digital Disparity

However, the huge gap between Leaders and Laggards was due to four key factors reflected in Figure 3 — all of which are linked to digital transformation and creating the business for the future:

  • Channel expansion: 103%
  • New business models: 97%
  • New products/services: 74%
  • Reallocating resources: 70%

These gaps reflect a vastly different strategic mindset between Leaders and Laggards, one that is squarely focused on the future and adapting to market challenges while the other is stuck in the past, trying to survive but falling further behind. 

The gap between Leaders and Laggards this year is the largest we have ever seen, more than doubling in size since we started tracking these segments in 2018-19. In contrast, the gaps between Leaders and Followers have been steady or slowly shrinking when looking at these in terms of the last year. But that gap is deceiving because it portends challenges when looking out three years. The gap between Laggards and both Leaders and Followers reflects a stark reality that Laggards’ lack of awareness, planning and execution are putting their survival and relevance at increasingly greater risk – something they understand the implications of well. 

This scenario aligns with a December 2018 Boston Consulting Group (BCG) article on how some companies successfully navigated disruption and created value, earning the title, “thrivers.” The article states that successful reinvention requires making a large bet—one that can overcome the drag of the old way of doing things. Making that big bet requires leadership, confidence and expertise to eliminate the “knowing – doing” gap. Those who wait – the Laggards – will need to make bigger and potentially riskier bets to gain parity with the “early responders” (the Leaders). As Leaders gain growth momentum, the “knowing – doing” gap grows, leaving Laggards with dwindling options and relevancy in fast-changing market. 

See also: COVID-19 Is NOT an Occupational Disease

The 2018 article seems prophetic in our current pandemic-dominated environment, as illustrated by this quote:

“In a time of technological revolution, shifting regulatory priorities, and fast-changing consumer expectations, most companies will face some form of disruption in their industries or core markets. Some management teams anticipate the coming changes and respond promptly. Others, slow to react, must eventually address a more mature threat. The speed of response matters. Early movers can experiment with new businesses and models. Those that wait have dwindling options and, as our new research shows, must make far larger, more concentrated bets to navigate the disruption.”

Speed matters, particularly during disruptive change.  

Has the COVID crisis invigorated your organization or has it backed your planning into a corner and trapped your transformation list under a pile of priority revisions? Are you using your superhero capabilities or continuing down the same path? 

Heading Off Surprises

Who had “giant cargo ship” on their bingo card for possible disasters at the start of 2021? What about “derecho in Iowa” in 2020? “Global pandemic” at the outset of 2020?

Few of us foresaw any of those specific disasters. I certainly didn’t. I didn’t even know what a derecho was until the massive wind storm whacked Iowa, causing $7.5 billion of damages and some $5 billion of claims against insurers — more damage than in most hurricanes.

But some at least entertained such possibilities. And it’s time that we all broadened our thinking by returning to the too-often-neglected discipline of scenario planning.

Bill Gates warned us of the possibilities of a pandemic during a TED Talk in 2015, based on thinking akin to scenario planning — which involves developing stories about possible futures that, while not necessarily probable, are at least plausible and would require drastic action. Gates even got the contours of COVID-19 right, warning of a virus that could be spread through the air and that would have people infecting others before they knew they had contracted the disease. Gates said the world was woefully unprepared and recommended what he called “germ games,” the medical equivalent of war games, in which governments would simulate responses to a hypothetical virus and spot their vulnerabilities (in this case, their very many vulnerabilities).

Others have worried about potential disruptions to supply chains as trade has become more global, which makes something like the Suez Canal a choke point. Still others have raised concerns about the effects of climate change, such as may have contributed to the derecho.

But we keep getting caught flat-footed, with serious implications for both clients and insurers.

Now, I’m not suggesting that anyone should have predicted that a ship as long as the Empire State Building is tall would wedge itself athwart the Suez Canal for six days, holding up $10 billion of cargo a day and causing many ships to be rerouted around the Cape of Good Hope, adding weeks to their journeys.

Still, scenario planning has shown itself to be an effective tool for gaming out problems, stemming back to the pioneering work that Royal Dutch/Shell did beginning in the 1970s. According to a 2003 article in Strategy + Business, “Scenario planning alerted Shell’s managing directors (its committee of CEO equivalents) in advance about some of the most confounding events of their times: the 1973 energy crisis, the more severe price shock of 1979, the collapse of the oil market in 1986, the fall of the Soviet Union, the rise of [Islamic extremism] and the increasing pressure on companies to address environmental and social problems.”

That’s a pretty good set of warnings.

The article adds: “The method has since become widely popular outside Shell, not just in corporations but in some governments. In South Africa, for example, scenario planning played a major role in the peaceful transition from a system of apartheid to a stable multiracial government.”

I’m no expert on scenario planning, but I’ll try to seed the discussion with some classic articles on the topic.

Here is a Harvard Business Review article from 2013, which explains the history of the work at Royal Dutch/Shell and argues that, even when scenarios don’t play out as imagined, “a sustained scenario practice can make leaders comfortable with the ambiguity of an open future. It can counter hubris, expose assumptions that would otherwise remain implicit, contribute to shared and systemic sense-making, and foster quick adaptation in times of crisis.” 

Here is a 1995 article from the MIT Sloan Management Review that lays out the methodology in detail. The article says that scenario planning doesn’t just lay out lots of data about how the future might play out but “goes one step further. It simplifies the avalanche of data into a limited number of possible states. Each scenario tells a story of how various elements might interact under certain conditions…. A detailed and realistic narrative can direct your attention to aspects you would otherwise overlook. Thus [in a scenario developed for mountain climbers] a vivid snowdrift scenario (with low visibility) may highlight the need for skin protection, goggles, food supplies, radio, shelter, and so on.”

It seems that we should at least be laying out scenarios related to the possible effects of climate change — hurricanes, wildfires, derechos and other wind storms, surprising freezes like the one that shut down the electric grid in Texas, etc. (I encourage you to read this recent article from Francis Bouchard on other ways that we as an industry should respond.) The potential for civil unrest seems to be rising worldwide. Solar storms that could fry the grid? Weapons of mass destruction? A crisis with a natural resource — perhaps water?

There’s a lot to do. I’m hoping that we as an industry can both prepare better ourselves and can help clients at least be ready to adapt when the next bit of craziness happens.

In the meantime, we can celebrate that a whole lot of hard work, plus a “supermoon” full moon and high tide on Monday, freed the 220,000-ton ship blocking the Suez Canal.

Stay safe.

Paul

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

Pioneering Use Cases for IoT in Insurance

Several early adopters of the IoT have already concretely demonstrated the potential of using this technology in the insurance sector.

Insurance Ecosystems: Opportunity Knocks

nsurers must apply unfamiliar skills – customer intelligence, speed and coordination – but can achieve benefits of scale without asset intensity.

COVID-19 Is NOT an Occupational Disease

If workers’ comp becomes responsible for common conditions that affect millions every year, it is no longer meeting its designed purpose.

Unlocking the Power of ‘No-Code’

We’ve all seen how complex and costly enterprise software can be. “No-code” tools let non-experts quickly build the systems they need.

Key to Better CX: Think Like NTSB

Airlines are rarely held up as exemplars of customer experience, but in one important respect the industry deserves such recognition.

Tip the Sales Scale in Your Favor

Yes, relationships matter, but they’re only a tiebreaker. The key lies elsewhere. And, no, it shouldn’t take two to three years to develop a client.