A Self-Destructive Cycle in Insurance

The insurance industry can’t get enough brilliant people to work in the business because the culture is anathema to most of them.

We are stuck in a self-destructive cycle because an industry-wide culture that rejects true innovation leads to a huge talent deficit that prevents innovation.

With few exceptions, there is little in the way of innovation, effective marketing, risk-taking, creativity and substantive investment in systems and technology in the insurance industry. That absence will be the death of many insurers and health plans.

We can’t get enough brilliant people to work in our business because our culture is anathema to most of them.

The most important part of any organization is its people. Yet our industry’s talent deficit is as wide and deep as the Marianas Trench.

Sure, there are some very smart folks doing great work – in health plans, state funds, private insurers, third party administrators (TPAs) and service companies.

They are the exception, not the rule.

Don’t agree?

How many of your brilliant college classmates chose a career in insurance? In your career, you were blown away by someone’s acumen, insight, brilliance, thinking how many times? How many execs in this business came out of top business or other schools?

Why is this?

I’d suggest it is the very nature of our industry; it isn’t dynamic, doesn’t reward innovation, hates self-reflection, abhors risk-taking and doesn’t invest near enough in people or technology.

Proof statements, courtesy of The Economist:

  • No insurer ranks among the world’s top 1,000 public companies for R&D investment – yet dozens of insurers are in that top 1,000.
  • On average, insurers allocate 3.6% of revenue to IT —about half as much as banks.
  • In a study of 500 innovation topics across 250 firms, many insurers are working on the same narrow set of ideas.
  • Many property insurers, whose fortunes rely on forecasting climate-induced losses, are still learning how to use weather information.

Tough to recruit talent to an industry that – for Pete’s sake – invests half what banks do in IT.... Or where a property insurer hasn't figured out weather.... Or where all your competitors define “innovation” as doing the same stuff you do... That probably spends more on janitorial services than R&D? (Ok, that may be a bit of an exaggeration.)

Many of the big primary insurers in today’s market will be overtaken by the Apples, Amazons, Googles, Beazleys, Trupos and Slices tomorrow. The names you know are brilliant innovators and have billions upon billions of cash to invest. The names you don’t know have figured out and are diving into markets that the traditional, stodgy, glacially fast insurers can’t even conceive of – reputational risk, very short-term insurance for specific items, disability coverage for gig workers and a host of other opportunities.

Oh, and the innovators avoid all the paperwork, hassle and nonsense that keeps insurance admin expenses at 20% of premiums while frustrating the bejezus out of potential customers. (Having just spent hours on the phone fixing a problem with flood insurance, I count myself as one of the frustrated.)

See also: Realistic Expectations for Insurance in 2020  

And, no, with rare exceptions health insurers aren’t any better. With structural inflation that guarantees annual growth of 5% to 8% and an employer customer that has to provide workers with health insurance, plus governmental contracts that pay on a percentage of paid medical, and record profits across the entire industry, there’s every reason to NOT control costs.

The record profits may well continue till a Cat 5 storm hits the Jersey shore or a deep recession hits or investment portfolios are crunched by macro factors.

In the meantime, Jeff Bezos will be looking for places to plow some of his hundreds of billions.

What does this mean for you?

Critical self-reflection is really hard, and really necessary. This industry is ripe for disruption, and it will happen. The question is, what will you – and your company – do?

Joseph Paduda

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Joseph Paduda

Joseph Paduda, the principal of Health Strategy Associates, is a nationally recognized expert in medical management in group health and workers' compensation, with deep experience in pharmacy services. Paduda also leads CompPharma, a consortium of pharmacy benefit managers active in workers' compensation.


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