Expert Commentary

Change ... Are You Ready for More?

Take a look at factors driving change in the insurance industry and consider how this will affect your relationships with your various business partners.


June 2000

So, you have the ideal team of insurance partners? Well, it has never been easy finding insurance partners who provide a consistent and stable approach to underwriting/service. Insurance providers who come close to meeting the desired criteria are often thought to be too expensive. Notable change is just around the corner, based upon the following.

  • 5 to 8 years of soft pricing
  • A large void in material improvements to insurers' business models
  • Fundamental regulatory change
  • Lack of definition about clients' risk/service needs

In 1 to 2 years we are all in for less clarity, and in 3 to 5 years there will be even fewer choices.

The next wave of change will result from merger and acquisition (M&A) activity. This M&A activity will occur within the traditional insurance industry and will include players from other sectors of the financial services industry as well, namely banks and investment firms. There will be a definite impact upon how the insurance business is conducted in the future. The only sure winners are the investment banking, accounting, and legal firms.

What Is Driving Current Change within the Insurance Industry?

A number of factors are leading to changes in the industry.

Financial Performance. Soft pricing is only part of the performance challenge. The underwriting (operating) results of most insurance companies and “pure” distribution firms over the past 5-plus years have ranged from a breakeven to a loss. The other challenge is providing customer value along with cost effective delivery. Most insurers have been working hard to increase market share and reduce overhead costs to improve their financial performance.

With regard to another issue, some insurance companies appear to have multiple efforts under way to introduce technology to improve financial performance. The efforts do not appear to be well defined and are thought of more as IT issues. Most insurers are applying technology to existing products and processes, which were designed for a high degree of human interaction. Redesign of product and related processes needs to be driven by customers' needs and to include a great deal of simplification. For example, Schwab, USAA, and Progressive drove change from a customer perspective and not from an IT platform or short-term cost point of view. Each of these firms has invested billions of dollars in developing a solution. While there is no perfect solution, these firms are very good role models that focus on improving customer service, which drives notable improvements in financial performance.

A lack of profit margin is not resolved by increases in sales volume. For example, if two companies whose profit margins over the past 5 years have been a breakeven to a loss merge, the combined volume of the consolidated firm does not change the profit margin. Additionally, can any superficial cost cutting be sustained in view of the need to improve customer service and to deal with economic inflation?

Insurers' New Business Model. Current products and processes are largely dependent upon paper flows and duplicate handling, which make it difficult to sustain cost reductions of 10-15 percent or more. To succeed, insurers will have to redefine products in much simpler terms, provide the customer with a choice of distribution channels, and migrate to digital means of conducting business. This does not totally replace high-touch service for selected clients, nor does this mean the agent is extinct. Successful businesses in other industries have provided a choice of distribution channels based upon customers' preferences. Without choice, customers will go to competitors who have the desired access channel.

Insurance industry consolidation is a force larger than any single company will be able to ignore. M&A is usually about size and being a global player. There may also be some rationale about strategic fit, geographical space, or acquiring new customers. (Remember that volume or any well-articulated rationale does not improve profit margins.)

Any M&A deal should focus on how and when the consolidated enterprise's valuation will become greater than the pre-merger value of the individual firms involved.

A new business model is important because most companies will, voluntarily or involuntarily, be involved in an M&A deal. Prior to any involvement in an M&A deal, all insurance companies' management teams have choices. The choices are (1) to maintain the status quo and standard valuation or (2) to move as fast and as far as possible in improving customer service capabilities and cost-effective delivery. For any company, after a merger is complete and/or it runs out of investment capital, valuation growth is difficult to achieve without helping its customers improve their businesses.

Regulatory Issues. The Glass-Steagall Act (Gramm-Leach-Bliley Act 1999) has been repealed, placing the competitive landscape back to pre-1933 and allowing banks, investment firms, and insurance companies to be part of one economic family, driven by customers' demands, today's vastly improved capabilities to track credit quality trends, and the public's best interest. HR-10 is a bank-sponsored bill, where one provision is to align insurance regulation under one set of rules, as exists for banks, covering the entire United States. The NAIC has nine committees working on model guidelines to produce one common set of insurance regulations for all states. There may be regulatory process issues that the states will try to maintain to survive; however, most customers are likely to share the view that state oversight is not worth its cost.

Customers' Needs and Focus. From a client perspective, have the expected deliverables from its insurance partners been clearly defined and communicated? The real challenge for insurers is bridging the gap between their product offerings and client needs. Needs should be thought of in terms of how the clients' enterprise objectives are being satisfied.

Forward-looking risk managers are focused upon the real risks to their respective enterprises. The real risks are directly related to two key issues: customer continuity and reputation. Insurance products provide partial financing for these risks. However, it should be emphasized that insurance is a financial vehicle and does not reinstate a business or maintain customers throughout a recovery period. The “heavy lifting” of risk management begins through active involvement in developing a practical plan that supports business reinstatement and maintains existing customers following a disaster.

From a client's perspective, an insurance partner potentially has two roles: to supply risk transfer capacity and to offer services to support managing risk. Managing risk is not the same as supporting an insurance transfer position. Services that support underwriting positions are claims adjustment, safety, fire protection engineering, etc. While these services are highly advisable, often the linkage to enterprise objectives is not always clear. There is a wide variation in the quality of service providers whose abilities are limited in providing help with business recovery.

Think about risk transfer and services to manage risk relative to clients' needs. To maintain a clear focus, keep it simple. The focus should include the following.

  • Risk transfer capacity needs to function as efficiently as other hedges used by corporate clients. Other hedges such as foreign exchange risk, interest rate risk, gold, D-ram chip sets, wheat futures, pork bellies, etc., provide efficient commodity transactions for matching buyers and sellers. The other key concern is counter-party risk or credit quality.
  • Services to manage risks require a greater degree of customization. To assist a corporate client with business recovery and maintaining market share following a disaster requires understanding of the business fundamentals in order to help map a practical recovery plan with the client's operating management. While insurance representatives are not necessarily operating experts, their points of view can provide value in a recovery situation. For example, where and how does a business obtain temporary power, communication, transportation, and computing links? Are vital records storage secure, safe, and readily accessible?

Dealing with Change

In dealing effectively with change it is important to adopt some basic principles. As change occurs, these principles should help to maintain focus on the most important issues and provide clear definition of objectives, deliverables, and the measurement of success. Examples of these key issues include the following.

  • Have client objectives and expected deliverables been clearly defined in writing for insurance partners? (In the absence of sound answers, both parties may apply their own standards and judgments.)
  • Do clients have a direct communications link with the top management of their insurance partners? (What is going well, where can improvements be made, and do you have the right people assigned to client's team?)
  • Are you asking for support for a new business model or forgiveness for doing next to nothing? (If you are not asking yourself the tough questions someone else will.)
  • What contribution are you directly making to support customer continuity and the enterprise's reputation? (Why do we the need risk management function and its supporting infrastructure?)
  • How is your time allocated between risk finance/managing risk? 70-30? … 50-50? ... 30-70? (How will management judge your value, your allocation of time, and your contribution?)
  • Are all commitments delivered, as represented, on time, every time? (This is the foundation of building and maintaining credibility and positive reputation.)

In today's world it is next to impossible to avoid change, most of which is beyond your immediate control. Therefore, it is important to understand how to be positioned to achieve the desired objectives. The key is to have a vision of where you want to go and why; without this, it is like a random walk in a heavy fog. Waiting to merely react to change will likely end up in a series of starts and stops without achieving any measurable results.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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