Panic pricing might bring insurers unexpected results

In a season of unprecedented change and hyperbolic rhetoric, we want to sound a word of caution and suggest the U.S. property/casualty insurance industry think critically about the possible adverse consequences of a headlong rush to impose steep rate increases to cover anticipated loss exposures.

While raising rates might be how the industry has responded to uncertainty in the past, there are a number of reasons why doing so now might be ill-advised: First, the industry risks alienating its customers and inviting more regulatory scrutiny if it pursues onerous rate increases before the full scope of 2020 exposures are known. Second, the past several years have seen a rise in technologies to capture and analyze more precise data, improve efficiencies, and develop new products, all offering insurers an opportunity to innovate how they manage risk—if they successfully integrate those in their operations. Third, many insurers routinely posting combined ratios in excess of 100% need to first put their house in order and look at their expense structure and underwriting performance before seeking blanket relief by raising rates that do not address underlying problems.

The drivers behind today’s sharply harder rates are a combination of capital markets uncertainty, assumptions about prospective insurance exposures to COVID-19 losses, assumptions about insurance regulatory positions, natural catastrophe forecasts and, last but not least, reliance on historical experience. Based upon discussions with regulators, reinsurers, primary insurers, and new entrants to the industry, the sharp rate filings now in the pipeline began with reinsurers, followed by primary carriers. The greatest hardening of rates is occurring in commercial lines, especially for small business, as well as in homeowners, general liability and workers compensation.

Filing rate increases based on market and/or capital uncertainty has historically been an accepted industry practice, managed on a state-by-state basis. However, given the beneficial impacts of COVID-19 stay-at-home orders and business closures on routine insurance expenses, including claims volume, should these filings for extreme rate hikes be approved, as if business as usual?  We think not.

Back in 2019, the signs of a firming property/casualty insurance market were apparent, due to rising primary, reinsurance and retrocessional rates after years of losses from catastrophic weather and wildfires plus continued low investment yields. Throw in a little 2020 volatility from COVID-19 and social unrest and the market has grown even harder across both personal (except auto) and commercial lines.

We acknowledge there are valid reasons incremental rate increases may be needed, but not at the across-the-board and exponential levels we are seeing. We frequently hear of premium increases in the mid- to high-double digits and in many cases the increases are measured in multiples. We have spoken with insureds being quoted premium increases as high as 400%, with most increases falling in the 50% to 200% range.

Among the problems with a business-as-usual approach is uncertainty about the future. In particular, there is uncertainty about the relevancy of historic data sets to actual loss exposures in a rapidly changing risk environment, such as we are experiencing now.

One consequence of these extreme rate hikes could be a policyholder backlash. At what point do higher prices cause economic harm to policyholders, driving them to limit or abandon the insurance they purchase because it is not affordable? Or drive commercial policyholders to captives and other alternative risk financing options? Or driving them to seek relief from insurance regulators—perhaps even federal regulators—against what seems like excessive premium increases? Furthermore, what would those consumer and regulatory reactions mean for the future health of the insurance industry?

If we accept that the world shifted on a societal scale within a six-month period of time, should we not expect that insurers also change how they operate?

While many insurers in recent years have experimented with innovation, unfortunately they appear slow to fully incorporate real-time data and analytics technologies into their operations. These tools, the focus of much innovation activity in recent years, could help to better understand evolving risks and improve loss forecasting capabilities, as well as their ability to mitigate loss frequency and severity.

One of the promises of insurtech is that it would enable insurers to apply the right data sets to the right circumstance to more accurately underwrite a risk—and perhaps identify new opportunities to prevent certain losses altogether. As it turns out, the impact of insurtech on incumbent insurers has not yet resulted in a simplification of the supply chain, a reduction in costs, an acceleration of growth or a more accurate predictive view of the future. Rather, the sophistication of actuarial calculations and the application of technologies used to perform historic functions with greater precision have increased the complexity and deepened specialization within the existing supply chain. Silos within organizations are deeper and more restrictive, all of which create challenges to working innovative solutions through an organization, achieving new insights and efficiencies.

Any argument for extreme rate hikes should also ask questions about the validity and relevancy of the insurance industry’s historic benchmark of profitability: the combined ratio. A ratio below 100% indicates a company is making an underwriting profit, while a ratio above 100% means that it is paying out more money in claims that it is receiving from premiums.

Fundamentally, why would a regulator approve a rate increase for an insurer with a combined ratio well above 100%? Wouldn’t this be a misplaced reward for bad management? That may sound harsh, and some may accuse us as being uninformed or naïve, but think about it: what other industry routinely allows businesses to operate at a loss? And now, when investment returns are assuredly lower and no longer offer cover for losses, insurers making up any shortfall on rate hikes alone seems to ignore a need to first address fundamental problems.

The COVID-19 pandemic and resulting restrictions has caused enough of a shift in how everyone lives and works, it’s fair to raise essential and fundamental questions about the role of the insurance industry in reacting to and recovering from this shift and in defining how emerging risks are appropriately managed. Simply raising rates cannot be the industry’s only response. Let’s examine some questions that the situation raises.

First, from an economic perspective:

  • Could a significant increase in premiums for nearly all non-auto insurance products negatively impact a national economic recovery or, worse, compound the current on-going financialchallenges consumers face? 
  • Will rate increases combined with the traditional U.S. insurance industry practice of operating with a combined ratio above 100% contribute to small business closures and job losses?
  • What happens if a number of people don’t/can’t procure the coverage they need due to prohibitive costs and a hurricane or flood or other disaster comes along?  What happens if businesses cannot afford the new premiums, drops coverage and a loss occurs for which they don’t have coverage? Or what if a business needs to cut jobs or other operating costs to stay in business and pay their premiums?

From an operational perspective within an insurer:

  • Do remote working environments provide a greater opportunity to break down silos and create cross-functional working groups to capture key learnings from our recent/current operating experiences?  For example, one regulatory leader described multiple working groups within his organization that also highlight an issue that may be occurring within insurance companies. Two of these small teams were focused on solvency, others were tasked with other operational questions. However, none of these working teams was tasked to look at operational practices as they affect the combined ratio. He did agree with our hypothesis that given the complexities of insurance and chaos of a COVID-19 “new normal,” the combined ratio is a solid “ground zero” number to use as the foundation for rate filing analysis.
  • What have carriers learned from operating through the past six months regarding FTE count, efficiency gains, elimination of red tape, gains from new processes and procedures? Consider the savings alone from elimination of routine business travel, from conferences to Ritz-Carlton client lunches, being shut down for months, if not longer.
  • Have loss ratios worsened to such an extent that double-digit (or triple-digit) rate increases are necessary? Do these rate filings reflect a sort of day of reckoning for ratings agencies who also believe the present and future must be extensions of the past?  Are current economic realities forcing insurers to reckon a loss of investment returns they have relied on to cover underpriced coverage?
  • The most recent sigma research report from Swiss Reseems to recognize the danger of unrestrained premium increases in the short term, without taking a longer view. The Swiss Re report noted that there will be challenges to industry profitability in 2020, but the industry’s capital position should be strong enough to handle COVID-19 shocks. Between non-life rates that were already showing signs of firming, and an anticipated increase in demand for risk protection amid heightened risk awareness, industry premiums should rebound in 2021. In other words, don’t overreact. (Swiss Re subsequently announced a $1.1 billion loss for the first-half of 2020, after claims and reserves related to COVID-19 of $2.5 billion.)

From a regulatory perspective:

  • Are insurance regulators the most appropriate body to challenge the basis for combined ratios that exceed 100% before approving carrier rate filings?
  • In the event of a public outcry for federal legislators to “fix” a broken insurance system, questions will focus on the oversight applied by the State regulatory system. Were premium increases necessary and warranted for the protection of the customer and resiliency of the insurer?
  • Has the role of the insurance regulator changed with respect to prioritizing the viability of insurers, protecting consumers, contributing to state budgets? 
  • Will the election cycle increase the natural tendency to expand a federal solution within the construct of the Federal Insurance Office (FIO) created under Dodd Frank with expanded powers to respond to the market?  The long-term effect of this would be to essentially turn insurance into a federally regulated public utility – with all of the bad and very little good that would come from that scenario.

Innovation thrives on uncertainty, and has always been the engine that drives the most growth. The same will be true now. Whether it produces efficiencies that reduce combined ratios or generates new sources of revenue, innovation is the better and more sustainable course. Many insurers seem content to rely on rate increases as their strategy for resiliency through these uncertain times. Be assured, based on several advisory engagements from the past six months, others in insurance related sectors have acted upon and are developing new models, accelerating pace and devoting resources towards their goal. Circumstances that are perceived as chaotic and threatening by any majority of incumbents are also perceived as “once-in-a-lifetime” opportunities to change business-as-usual by those who will lead in the future.

Our purpose is to urge the insurance industry to ask hard questions and examine the potential consequences of the various strategy responses to these uncertain times. To us there are essentially two paths. There is that path of sharp rate increases and business as usual, with potentially dire results.  The other path encourages innovation, a nimble look into the future and a commitment to leadership.

How do you think it will all work out? Let us know.

Wayne Allen

Guy Fraker

Podcast: Bryan Falchuk on the Future of Insurance

Bryan Falchuk offers his views on the opportunities that the insurance industry has to reinvent itself, sharing his experiences and insights and a series of case studies in his new book, titled “The Future of Insurance: From Disruption to Evolution.”

Bryan, who is the founder and managing partner of Insurance Evolution Partners, has viewed the changes taking place in the industry from the perspective of an advisor, an incumbent and insurtech and believes successful innovation is within reach of all companies. Learn more and obtain a copy of the book at

Listen to podcast interview with IE Advisory’s Paul Winston below or access it here.

We invite your questions, comments or requests for future podcast topics at

Browse all Innovators Edge podcasts here.

Managing risk in a time of coronavirus

As companies emerge from government mandated COVID-19 shutdowns and begin the process of re-opening, they will have to balance a desire to resume operations with the risk of a liability exposure from customers or employees who get sick and claim the business was to blame. In tomorrow’s fragile economic recovery, such litigation could mean the end of a business.

Small businesses and retail in particular will need to take reasonable steps to open safely, following recommended measures to minimize the risk of transmission and infection among people before re-opening their doors to a willing public.

Even if a business adopts all prudent measures, there is so much we don’t yet know about the transmission of the COVID-19 virus or its prevalence that there remains a chance of people being exposed and getting ill. And where there’s a chance of exposure, there’s also a chance of businesses facing liability lawsuits alleging their preventive efforts were negligent and to blame for someone’s illness or death.

If businesses choose to open, and not avoid the risk by remaining closed until safety is more assured, they will have few options to transfer this liability risk. One option eventually will be new pandemic liability policies and endorsements, which are sure to be developed by the insurance industry soon. These likely will be quite costly and perhaps unaffordable to small business until the risk is better quantified. Small business associations might eventually develop group captives or risk sharing mechanisms as an alternative, but those also will take time to set up and price the risk.

A more fundamental option for non-essential businesses to transfer the risk from opening their doors might be to implement some sort of hold harmless agreement. Such an instrument would require people to waive liability for their voluntary patronage of a non-essential business, such as a retail store, restaurant, hairdresser, sporting event and so on. This seems especially applicable when we know so little about the transmission of the COVID-19 virus, and going out into this unknown environment seems risky.

Hold harmless agreements are widely used and often overlooked by most people. Have you ever read the fine print on a parking ticket, or read the waiver you sign when you participate in an athletic event or activity like a zip line ride? With modern technology, there likely are more efficient digital ways to present a waiver of liability before one enters a business, requiring a person to give their consent and record that agreement.

But when a business does all the right things, it shouldn’t bear all the liability arising from a pandemic virus. While a customer may have a reasonable expectation of safety entering premises open for business, with coronavirus unknowns they are assuming some risk. Asserting one’s freedom to engage in non-essential activities like shopping for garden supplies, getting a haircut, going to a concert or eating at a restaurant four-top also requires the customer to assume some responsibility for the risk of infection.

When someone engages in a high-risk activity like skydiving, they typically are asked to sign a liability waiver, acknowledging there are risks and they willingly assume them. This doesn’t eliminate the risk—it shifts it to the consumer. Obviously, if one doesn’t wish to bear the risk of horrible injury, one shouldn’t jump out of a plane and find the parachute doesn’t work as well as the laws of physics.

We know the insurance industry is looking to develop insurance solutions for the business liability risk, but if individuals are assuming a greater personal risk, might there be an opportunity for an insurance solution?

Maybe this unprecedented situation calls for some form of personal accident insurance, or an endorsement to another policy like health insurance, that would cover medical expenses, loss of income or even death benefits if someone is exposed to a pandemic virus after shutdown orders are lifted. It would not only provide financial relief for a loss, but also peace of mind amid the unknown exposure risks of a pandemic.

Airlines, event organizers and so on could even embed such voluntary coverage in the price of a ticket, perhaps for a limited period of time at risk, such as a two-week period of incubation after an event.

Maybe there’s also a market for a transmission liability risk, protecting an individual from being sued by another party for causing an infection. This could be structured as an endorsement to liability protection in homeowners or umbrella coverages.

Who knows—for the first time the industry could come up with a product that people want to buy, not one they have to buy.

All of the above presumes that businesses and customers act responsibly and take preventive measures to minimize exposing themselves and others, and do not negligently embrace the contagion. What about situations—which sadly are emerging more frequently as shutdowns ease and people balk at stay-at-home restrictions—in which neither party shows a regard for public safety and exposes themselves and others to a risk of infection?

People may have a right to put themselves in harm’s way, but do they have a right to expose others to harm? Throughout all of our communities are those who choose individual freedom and ignore potential adverse consequences to themselves and their community. This raises a significant challenge to both risk managers and legislators, and raises a basic question: Who is responsible for managing the risk of coronavirus transmission?

While there’s a lot of uncertainty and misinformation about COVID-19, there’s almost universal agreement that once infected, people can spread the virus to others. Borrowing from science fiction vernacular, COVID-19 acts like a microscopic alien life form, with humans as non-voluntary and unwitting hosts. This alien life form enters the body, adapts to the host’s DNA, thus converting every host into a potential killer. Even when a host is unaffected by symptoms, and may forever be unaware of their role as a host, COVID-19 makes all infected people the contemporary version of a Trojan horse.

For policymakers, carriers, regulators and consumers thinking about ways to provide an incentive people to better manage this risk, consider the following “what if” scenario about introducing potential consequences of not following current mandated guidelines meant to manage the spread of COVID-19.

Let’s assume that in a rebound of the virus later this year, the capacity of medical resources to care for the infected and ill ranges from scarce to completely overwhelmed. What if our individual access to the full measure of available medical services were to become largely decided by our own choices and risk management attitude? 

Person A goes into a hospital to be tested. As part of testing, the attending physician captures their contact history over the prior week. On the list is a sports bar and grill, which brings follow-up questions regarding that establishment following social distancing and personal protective equipment guidelines. The patient replies, “The place was jammed, they had a band, and you couldn’t find a mask anywhere. It was great—just like old times!” The physician thanks the patient and tells him/her they will be notified of the results via phone call and they can go home. Patient A later receives a call at home. “We got your test back, and are sorry to inform you of a positive result. We have already called in a script for a Z-Pak. However, I must also inform you we cannot treat you in the hospital if your condition worsens given that you chose to ignore current safety guidelines. We have limited capacity and every serious case puts our staff at risk. We hope you feel better soon.”

Patient B also tests positive. This patient’s contact history reflects adherence to established guidelines regarding social distancing and protective gear. This patient gets a phone call that goes something like this: “We got your test back, and are sorry to inform you of a positive result. We have gone ahead and called in a script for antivirals. I can assure you that should your condition deteriorate, we will treat you here in the hospital.”

We believe insurance can offer solutions to help responsible businesses and individuals transfer some of the financial risk arising from a pandemic, but we also caution against a mindset that whenever a loss occurs “insurance can pay for it” without also introducing incentives for businesses and individuals to be smarter about risk management.

—Paul Winston
—Guy Fraker

How to be a Winner in the New Normal

Photo by Miguel Á. Padriñán from Pexels

There is little doubt the world has changed, forever, as a result of COVID-19. In the aftermath of any upheaval that affects society so broadly as this, there will be a shift in behavior as people begin to react and behave based on their perceived reality. What compounds the effect of this particular event is a fear of the unknown made more concerning by a general lack of confidence that anyone actually knows what they don’t know.

The problem is we do not know what the future will hold. After COVID-19 runs its course, will we return to what was? Will people’s behavior have undergone a permanent change? They say habits are formed over a period of about 28 days of consistent behavior. If that is true then lots of new habits are being formed over this period of physical distancing, isolation, scarcity (at least of toilet paper and adequate bandwidth for zoom meetings and conference calls), and fear.

This uncertainty over the future has brought entire industries and markets to its knees. Markets hate uncertainty (see the stock market). Business is driven by the ability to make decisions, ideally based on information not just intuition. Yet when data is no longer relevant to the reality of the moment, it’s hard to make reliable business decisions. The result is usually either paralysis or adherence to what you “know” to be true.

However, this moment affords a better course; it is an opportunity to renew your business. When forecasting the future, much is unknown, and while it’s possible we return to what we recognize as normal, the absolute least likely version of the future is “no change.” Those companies that emerge from these uncertain times stronger will be those that use these times to successfully prepare their business to meet a “new normal,” whatever that may be and create as much clarity from uncertainty as possible. We do not know what the future holds, none of us do. But we do have an approach to be better prepared. And there are three steps to begin the process of preparing your business for what’s next.

First, transformation is achieved through a renewed mindset. No one ever does anything they cannot first imagine. Your executive team must adopt a new mentality, a new understanding, a new commitment to thinking differently. More than about how COVID-19 has changed the world and your place in it, a renewed mindset projects a much greater opportunity. Are your executives willing to face the possibility that the business model you operated under six months ago and the business model you may have six months from now do not align? Are they willing to do what it takes not to avoid compounding the current crisis, with another crisis? This requires companies to examine their purpose, their strategy, and their customer in light of these ongoing changes. Guesswork and speculation are easy and entertaining. Converting that to clarity requires shift in mindset. This renewed mindset is an irreplaceable cornerstone of planning for the future. Every company today should approach these times like a STARTUP, or at least a RESTARTUP.

Second, identify every assumption and thesis that underpins your existing business model. From the resources and relationships you require to operate, to the customers you serve and their behavior and how you engage your customers, many of those assumptions may no longer be valid (if in fact they ever were). Is your supply chain still valid and sustainable? Has your target customer changed? Have they changed the way the feel about your products or services? Do people view your value prop differently? This may be an uncomfortable experience, but a necessary self-examination. Identifying assumptions and thesis requires executives actively participate and be open to suspend long-held beliefs. We are not saying these beliefs and assumptions must be surrendered, but they must be examined. The assumptions and thesis that kill businesses are those that are so imbedded they go unrecognized. The ability to facilitate this self-examination process by a protagonist, who is not bound by the unrecognizable constraints inherent in the business and is willing to approach the exercise with no preconceived answers or bias, is a critical. If you fake your way through this, you will fail.

Third, test every assumption. Discernment only comes with examination, testing. Testing assumptions and thesis requires executives be completely open to a future that is highly undesirable, but still plausible. Identify what data points you will need to ascertain whether each assumption or hypothesis is true. Assembling the right data on which to test assumptions and thesis may hinge on accessing new technologies to gather data and new ways of analyzing the data. An effective facilitator in this process guides executives to identify which assumptions are actually relevant, those that have the most uncertainty, those that have the most potential impact. The ability to ask the not so obvious question is important, as is the discipline to examine motivation, why people behave or react the way they do. It will require executive teams able to ask “why do we do that?” “what if?” and “what’s possible?” at every turn. You have to face the unthinkable. No assumption goes unexamined and nothing about the past is sacred.

Those companies that successfully prepare their business to meet a “new normal” will be those that undertake this Renewal Process, and gain a new understanding of their supply chain, the resources they need to execute, and their customers’ problems, attitudes and needs. Every executive will face shifts in the market they could not anticipate—no one could have anticipated them. Our Renewal Process is an approach to emerge stronger. Our Renewal Process will cause executives to examine every aspect of their value chain, including resources, supply, engagement, and the ultimate transaction. The strong will renew their business, then based on the strategies and constraints developed from this Renewal Process, they will undertake an intentional scenario planning process and proactively innovate in the context of what the “new normal” might be.

This call for renewal is applicable to all businesses. But, because of our historic emphasis on insurance and risk, I want to be clear. I’m not talking renewing insurance policies, nor renewing any aspect of what was; rather, it requires a renewal of the mind. It results in a re-imagining of what should be. We all thought insurtech was going to produce a seismic shift in the insurance industry, and to an extent it has. By contrast, the global reaction to this virus will create a tectonic shift. People and businesses will reconsider what they truly need and don’t need and why they feel they need it, from whom they want it and how they want it delivered. This will create a broader world of opportunity.

So, I am officially planting the flag of the future on the hill of RENEWAL. Renewal will lead to transformation fueled by strategically constrained innovation, resulting in accelerated growth. In addition to our best practices in scenario planning and producing accelerated growth through innovation, we have developed a unique Renewal Process to accelerate your restart. You want to be on the right side of the starting line.

—Wayne Allen

Podcast: How to Enable Insurance for Pandemic Risk

Amid the ongoing coronavirus pandemic, there is huge concern about the economic impact from not only the spread of the virus but also how the US and other countries are working to limit its spread. Event cancellations, business interruption and economic losses are widespread and in many cases will not be covered by insurance.

Wayne Allen, a principal of IE Advisory, speaks with Zachary undefinedFinn, Clinical Professor & Director of the Davey Risk Management & Insurance Program at Butler University, about his ideas for creating a federal program for pandemic risks, similar to the Terrorism Risk Insurance Act, that would enable the insurance industry to provide coverage. Hear why the lessons learned from the 9/11 terrorism attacks provide a template for coronavirus losses and would provide businesses with greater certainty and protection for economic losses resulting from COVID-19.

Listen to podcast below or access it here.

We invite your questions, comments or requests for future podcast topics at

Browse all Innovators Edge podcasts here.

Podcast: The Human Side of Innovation

Many organizations that are pursuing innovation can overlook what we call the human side of innovation when adopting new processes and goals to grow their company. In a new Innovator’s Edge podcast the principals of IE Advisory—Guy Fraker, Wayne Allen and Paul Winston—discuss what some of these human issues are for insurance incumbents.

The conversation covers such issues as: Who are the right kinds of people to lead or be part of an innovation team? What characteristics lend themselves to an innovation mindset within an incumbent? How can we understand the customer challenges we want to address? Listen below or access the podcast here.

We invite your questions, comments or requests for future podcast topics at

Browse all Innovators Edge podcasts here.

Podcast: What Makes An Effective Innovation Strategy?


Do you have a defined innovation strategy? A surprising number of insurance companies, even those that regard themselves as innovative, do not. In a new Innovator’s Edge podcast the principals of IE Advisory—Guy Fraker, Wayne Allen and Paul Winston—discuss why it is essential to have a defined innovation strategy for communicating and guiding an effective innovation program. The conversation covers such question as: What are the needed elements and structure of an innovation strategy document? How does it differ from a broader corporate strategy? Why does this help innovation efforts? Listen below or access the podcast here.

We invite your questions, comments or requests for future podcast topics at

Browse all Innovators Edge podcasts here.

10 Tips That Your Innovation Program Is Failing

The saying in journalism is that there are no new stories, just new reporters. It seems the same is true of mistakes in innovation programs: There are no new errors, just new companies making them.

I say that having spent years watching innovation programs at established companies fail for almost the same reasons, time after time. I thought I’d share the 10 most common mistakes, on the theory that it’s a lot better to learn from others’ costly errors than to make these yourself.

Here are the 10 most dangerous things I’ve seen companies believe about innovation:

  1. Investment is innovation. It’s not. If you’re assigning importance to a technology or insurtech based on how much money it has raised, you’re making a huge mistake. You are ceding your future to a crowd of financial analysts and technology treasure hunters. Money always looks backward. You need to look forward. The genius behind RiskGenius didn’t suddenly appear once the company raised a bunch of money. The genius was always there, and RiskGenius, whose natural language tools improve the quality and accuracy of policies, should have a game-changing effect. (We told you about RiskGenius almost three years ago because we know there’s more to anticipating the success of an early-stage company than the capital raised.)
  2. We’re focused on customer engagement. Just stop. Your customers do not want to be engaged by their insurance company any more than I want to engage with the guy who did my colonoscopy. Your customers want to be served. Stop talking about customer-centricity, which is an excuse for spending a ton of time and money trying to figure out how to sell folks more of the products you developed based on what you thought they needed. Try customer empathy instead. Stand in the shoes of your customers (internalizing all their concerns, fears, hopes, dreams, etc.) and look around for solutions. The answer may not be any of your products. It might not be a product at all. But if you genuinely pay attention, your customers will tell you what they will pay for.
  3. Victory will go to the slow and steady. No, victory will go to the deliberate and focused. That may not sound like a huge distinction, but it is. We have found through our work at our IE Advisory unit that the key is to define strategic areas of opportunity, then to adopt an innovation process based on clear boundaries. Don’t think outside the box; think inside the box, once you’ve sharply defined the right box. John Wooden used to tell his basketball teams to be quick, but don’t hurry. There’s a difference.
  4. It’s not us, it’s them. When an insurtech fails to deliver the expected impact, the tendency is to blame the startup for malfunctioning technology, a lack of industry knowledge or entrepreneurial hubris. But the industry has, in many respects, been its own worst enemy. The sloooowness of incumbent “innovation” processes can grind early-stage companies into non-existence—they can’t wait for your next quarterly innovation review; they’re trying to make payroll on Friday. Some incumbents major on pilots or proofs of concept, with no real objective—we call this death by POC. Others just use the try-out process to learn as much they can about an entrepreneur’s ideas, about tech features and functionality and about possible applications, with no real intent to engage with the early-stage company. The problem is very likely you, not them.
  5. We’ll see the ROI—one of these days. If your innovation team has been at work for a year or two and you have not generated measurable revenue, I mean of a magnitude that nears the cost of your innovation effort, you need to make a change. If your innovation consultants have not generated measurable revenue from the innovation process they helped you implement within a year of their engagement, you need a new adviser. I’m not saying there’s a technological magic bullet, but there is an innovation process that can deliver measurable growth, and rather quickly.
  6. We are the best at that already. Not likely. A famous Bain study from about 15 years ago found that 80% of executives thought their company had the best product in the market—and that 8% of customers agreed. Stop kidding yourself. Whatever it is, you are not the best at it—Silicon Valley, not known for its modesty, nonetheless subscribes to a saying from software pioneer Bill Joy: “No matter who you are, most of the smart people work for somebody else.” You should adopt that attitude, too. If you don’t, you create a barrier that prevents you from seeing opportunities. Look at Amali Solutions, which developed technology that draws amazing efficiencies out of the subrogation process. The payback on purchasing the technology is less than a year. Beat that. But carriers can’t see past their existing subrogation processes. They don’t realize that all they have to do is bend over, because there are dollar bills on the ground all around them. There are lots of insurtechs out there that, like Amali, are built to pull hidden value out of an obsolete supply chain, so, if anyone in your organization tells you to ignore a technology or idea because you’re already the best, you might start looking for the person’s replacement.
  7. We are sticking with what we do. You will at your peril. If you are in claims administration or the management or settlement business, we have a news flash for you: Technology is going to cannibalize your core business—not completely of course, but a lot. You had better figure out how to generate additional sources of revenue.
  8. We are the oldest and biggest. You will be the oldest only as long as you are in business. You might be the biggest today, but by what measure and for how long? Oh, and Sears and Kodak say, “Hi.”
  9. We have time. Maybe, maybe not. When A.M. Best announced earlier this year that it would include an innovation assessment in its financial rating methodology but said it would phase in the weighting of the assessment, a lot of carriers adopted a we’ll-cross-that-bridge-when-we-come-to-it attitude. The phase-in sounds to me a lot like those parents who count to three and then wonder why their kids wait ’til “three” to actually move. We have been huge supporters (and in some ways participants) in A.M. Best’s effort because we believe, as they do, that failure of incumbents to innovate is a threat to their long-term financial resiliency. But we don’t see any reason for A.M. Best or for any incumbent to count to three. Let’s get moving.
  10. The supply chain is what it is. Every supply chain is always vulnerable—ask HP how it did when Dell’s hyper-efficient supply chain hit the PC world two decades ago. Don’t ever assume that the way things are done today is they way they will always be done. The job to be done in insurance is to provide insurance policies for businesses and consumers, right? Wrong. The job is to provide financial security, to mitigate risks, to help clients head off losses, etc. If you believe we’re just in the business of manufacturing policies, then you’re dead; you just haven’t made it official.

Innovation is a never-ending journey, with defined ports of call along the way. Let’s not keep running aground on the same shoals. We’ll still make mistakes, but let’s make new ones.

—Wayne Allen

Podcast: A.M. Best Draft Innovation Assessment Preview

As innovation becomes increasingly important to the long-term success and financial strength of insurers, AM Best has released a new Innovation Criteria Procedure detailing how it plans to evaluate a company’s level of innovation, through the assignment of an innovation score. This podcast features a discussion between Matthew Mosher, Executive VP and Chief Operating Officer of A.M. Best and head of ratings operations globally, and IE Advisory Chief Innovation Officer Guy Fraker.

Embracing Risk Management as a Driver of Value

We have been telling everyone who would listen for a long time that the future of the insurance industry will be dictated, not by the insurers, but by the clients. We have also been telling you that this reorientation will manifest itself first on the commercial side of things, if for no other reason than the greater bargaining power of the customer. Sure enough, Willis Towers Watson announced last week an innovative risk advisory service that very much looks at the world through corporate clients’ eyes.

Of course, Willis is not the only organization moving in this strategic direction. We know of at least one large broker that is actually ahead in its thinking. But it’s still worth looking at the implications of the Willis program, which helps risk decision-makers (usually risk managers or CFOs) manage risk more effectively, balancing retained and transferred risks to reduce companies’ total cost of risk. 

I have heard from a lot of risk managers that they would like their role within their organizations to be elevated. They would like to be part of strategic decision-making, forging the organization’s risk profile. Well, as the Willis program shows, here’s your chance. 

The key to the future of risk management is that risk has always been viewed as an expense or a liability but, because of technology, will start to feed into opportunities on the top line of a company’s financial statement. Basically: Yes, there will be a risk if we attempt X, but we can be smart and mitigate risk by doing Y. The numbers for X now look a lot better, so let’s go ahead with it—and watch sales climb.

Risk management can become strategic if managers find ways to enable projects that can drive revenue. We have seen more than a few examples of this. The benefits are not fractional; they are measured in multiples, as in P/E multiples that make the stock market amplify the gains.

From the standpoint of brokers like Willis, the needs are pretty straightforward: They need to become better at identifying technology advances that are important for clients, to stay ahead of their broker competitors, and will need to consult more with clients while selling products less. There will, of course, be some transition required in the business models, because consultants don’t get paid a commission on premium. New pay arrangements will need to be figured out.

From the internal risk manager standpoint, the situation will be more complicated. Even though many risk managers say they want to take a more strategic role in their organization, they may be reluctant to stick their necks out. (No jokes needed about being risk-averse.) Just look at all the RMs that have sprung up over the years—ERM (enterprise risk management), SRM (strategic risk management), IRM (integrated risk management) and maybe more—without causing the sort of major shift in role that many have predicted.

There isn’t always an appetite among senior management for more input by risk managers, either. Our friend Chris Mandel, an SVP at Sedgwick who is one of the world’s ranking authorities on risk management, says input is requested on the most destructive exposures, so requests for strategic advice are scattershot. But the needs are there among senior management, and aggressive risk managers can spot and fill those needs. (Chris offers more thoughts on risk management opportunities in a podcast I did with him earlier this year.)

Clients will, of course, continue to work on reducing their traditional, internal risks, and technology will help there, too. For instance, many companies have learned the hard way that they had more cyber exposures than they realized—the sort of thing that technology can track. Reducing the number and severity of claims will, at least eventually, lead to lower premiums. But the days where the risk management game was based on ratings and recovery are numbered, and the days of prediction and prevention are fast coming. The new game will be won by those in the industry that can help clients switch from a focus on reducing losses to enabling growth.

Those companies that embrace the notion of risk as a value driver will see exponential gains in enterprise value, and those of us in the insurance industry need to enable those gains. It’s all about the clients, not the insurance.

—Wayne Allen