December 3, 2019
The False Dichotomy That Holds Us Back
by Paul Carroll
Our chief innovation officer, Guy Fraker, told me the other day of being in an innovation strategy meeting where the CFO of a workers comp carrier talked of needing to “protect our losses.”
The pushback was fast and strong: Insurers increasingly can help clients predict and prevent losses and must do so, even though lower premiums will eventually result. But we can empathize with the CFO, right? His job is to squeeze the last drop of profit out of the business, and that gets harder if premiums shrink because clients’ losses are declining.
His comment points to a false dichotomy that is accepted throughout the insurance industry even in these modernizing times and that we need to move past. Left unaddressed, a belief in the dichotomy could both lead us away from our mission of protecting clients and cause strategic blindness that could endanger our businesses in the long term.
The issue is that we want to help clients, including by preventing losses, but we also need to generate as much profit as possible. Trying to maximize both goals simultaneously can seem to be somewhere between hard and impossible, depending on your role in the industry.
If we just bounce between the two goals (what might be called a thesis and an antithesis, if you’ll allow me to dip back into my vague memories from college of the Hegelian dialectic), you miss the chance for a novel solution (what Hegel called synthesis). And one is available—but only if we take a new view of what clients want and of what our sources of profits should be.
New ways of thinking have always been hard, no matter the industry. Businesses begin with some sort of novel approach, but, as they grow, become much more about developing that approach to the fullest and optimizing the business built around it rather than about developing new insights. Even worse, over time, executives often come to think that customers are as wedded to the industry structure as the executives are.
Kodak’s fundamental failure was that it thought customers loved physical prints as much as Kodak loved selling the film, paper and chemicals used to produce prints. Executives, since about 1980, saw clearly how digital technology would develop but simply couldn’t imagine a world where images were shared solely digitally and was slow to react to that new world.
In insurance, we have the inertia problem in spades. We think of ourselves as selling policies. Even our language locks us into thinking of ourselves as being in the product business—I’ve heard some talk of setting up “factories” and “manufacturing” policies. But customers don’t long for policies, and they are becoming increasingly stern about letting us know their preferences.
Customers want peace of mind, and they want help managing and reducing their losses. They’ll tolerate insurance policies if that’s the only way to achieve their goals—and detailed legal contracts are certainly required in many, even most, instances—but customers aren’t wedded to traditional policies like we are.
We fit the description of the classic Harvard Business School article that said companies often think they’re in the business of selling quarter-inch drills, when what customers want are quarter-inch holes.
If we can free ourselves from the historic emphasis on pushing product, we can see our way to providing an array of services that provide customers with the insurance equivalent of quarter-inch holes. That workers comp CFO, for instance, could sell services that would help clients identify potential problems and head off workplace injuries, based on the growing capabilities of sensors, better data analytics and other developments that the insurtech movement is providing.
The shift to services does require, of course, a willingness to look beyond today’s profit streams and will require creativity. Even Kodak, belatedly, looked to digital cameras and printers (remember executives’ belief about the absolute need for prints) as new revenue streams, but there just wasn’t enough there to replace the billions of dollars of revenue that film, paper and chemicals had generated. The new revenue streams turned out to be rather far afield, in facilitating digital sharing of images and helping customers build stories around images, so all the value from digital photography went to Facebook, Instagram and other such platforms.
It’s always tempting to think that customers don’t have a choice, and inertia certainly provides some protection here for insurers. But commercial buyers’ willingness to self-insure and broker dominance in captive management services sends a strong message that clients are going to get what they want, with or without insurers. And just because an insurer doesn’t want to switch from a product to a service focus, lest profits be endangered, doesn’t mean someone won’t offer that quarter-inch-hole service. (We know a thing or two about this approach because our IE Advisory team has helped companies innovate into services.)
So, let’s get beyond the false dichotomy of either helping clients OR maximizing products. Let’s turn thesis-antithesis into synthesis. Let’s get beyond policies and premium, addressing customers’ actual needs and finding ways to make them happy about paying us for our assistance. Hegel would be proud, and the industry will thrive.