Insurance innovation: an oxymoron stuck in 3rd!

The transition from 1 to 3 was relatively straightforward because greater operational efficiencies and product commoditisation enabled insurers – and brokers whose aspirations matched theirs – to sell more by reducing pricing and increasing commissions.

But a “high growth” strategy is an all-or-nothing commitment that, eventually, has to take its toll upon the products and services provided. When GWP and ROI become the focus they do so, inevitably, at the expense of customer:

peace of mind; service; satisfaction; trust and (with them) reputational damage for the industry

So, as retention rates declined, an industry that, since its earliest days, thrived upon trust, loyalty and stability chose to spend increasing amounts on marketing and sales that promote – even reward – disloyalty and volatility!

Insurance system graphic(1)

Thankfully not all insurers are the same but, isn’t it ironic and worrying that, an industry whose historic profitability has been reliant upon the mitigation of insured risk, is now a major potential source of systemic financial risk.

Insurers and much of the broker channel have become dependent upon the revenue from selling protection when they SHOULD be promoting loss prevention and rewarding profitability. 

The following extract is from my recent article: Feed the beast but ignore the elephant

Never waste a good crisis…it may be the ideal “smokescreen” for change!

It may appear to be something akin to a Turkey looking forward to Christmas but many UK insurers, major brokers and their investors NEED another major catastrophe to help them secure the pay-off from the high leverage (debt-driven), high growth (premium over underwriting profit) strategies that they have pursued in recent years…

GIVE A MAN A FISH – SELLING RISK PROTECTION: According to their, surprisingly naive, view of probability they determined that, with improved efficiency and product commoditisation, came greater spread/diversification of risk and the ability to market based upon reduced pricing. But it is a transactional and short-sighted, approach that has turned insurance from a grudge purchase into a wholly unsatisfactory experience from start to finish.

Overcharge the customer to overpay the salesmen for volume business.

TEACH A MAN HOW TO FISH – PROMOTING RESILIENCE THROUGH RISK PREVENTION: IF insurance is about achieving a profit from underwriting business with the best risk profile, surely a “strategy” would focus upon educating and rewarding those businesses that demonstrated a proactive approach to risk management, an improving risk profile and fewer claims?

The UK insurance industry has been criticised by Regulators, customers, industry and on behalf of institutional investors but, whilst all the rhetoric has been about change and professionalism, there isn’t much evidence of any meaningful improvement…here’s why:

Financial Services Growth Model: Goal – Secure market-share so as to (1) benefit in a rising market (2) “close out” smaller competitors in flat/stable market: Overpay brokers to accelerate delivery and so they focus on sales at the expense of service (leads to customer dissatisfaction and churning); sell on price leads to downward spiral, de-skilling of staff; little scope for underwriting profit without compromising cover, service, training, investment, reputation (increase customer/staff dissatisfaction) – pacify shareholders with short term results); more protracted, disputed,repudiated claims (more dissatisfaction); less time and staff to deal with claims, requires outsourcing or similar means to curtail costs secure referral fees to “massage” spiralling claims costs as a result of failure to engage independent loss adjusters preferring “approved repairer” network approach – determined by lowest hourly rate (failure to manage claim process leads to spiralling claims costs and dissatisfaction) ALL “BAD” EXCEPT THAT IT CREATES AN UPWARD PREMIUM SPIRAL [see (1) above] AND FURTILE ENVIRONMENT TO PERPETUATE WHAT EXEC’S ARE FAMILIAR WITH…BECAUSE IT IS THEIR MASTERY OF WHAT HAS BEEN CREATED THAT GIVES THEM THEIR POSITION AND WEALTH!

2 Responses to Insurance innovation: an oxymoron stuck in 3rd!

  1. As if by magic I have just found this article:

    Giles has revealed a loss of £37,113,000 for the financial year ended 31 August 2010 in documents released to Companies House.
    The figure represents a deterioration from 2009 when the broker lost £22.7m.
    The group annual report for the period also showed an operating loss of £6.5m as opposed to a profit of £8.4m the previous year. Its turnover similarly fell from £72.14m in 2009 to £69.98m in 2010.
    The directors’ report noted that the operating loss included the cost of integrating acquisitions within the group which amounted to £2.9m. During the period Giles bought JHIB Holdings, Westinsure Group, and the UK wholesale insurance business of Cooper Gay & Co.
    Interest and charges were stable at £30.7m (2009: £31.4m) as was Giles’ net debt of £219.3m (2009: £219.6m).

    Read more:
    Insurance Age – Serving the broker community.
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  2. Just in case Insurance Age decide not to publish my comments…partly because they and other insurance publications have been guilty of hailing the emergence of consolidators, I thought I would just publish it myself for this select band of discerning readers!:

    The “High Growth” business model (much loved by banks and VC companies) was embraced with such enthusiasm by the “most ambitious” (greediest and most ego-driven) in insurance is inherently fragile!

    We have already seen the evidence of this in other sectors, quite apart from banking. The warnings have been issued but ignored by an industry caught in a stand-off of its own making:

    Brokers with huge debt “need” unsustainable commissions to service debt AND a soft market to secure pricing that helps maintain business volumes and compensates clients for inferior advice/products/services.

    Ironically, in a turbulent economy fashioned by greed and ego and funded by debt, the industry pay-off comes when external catastrophes lead to a rising market that allows insurers to increase premiums whilst reducing commissions without invoking broker collapse. This may help the broker but if the money-lender isn’t getting the promised returns they will look for the next “opportunity” and move on.

    Perhaps unsurprisingly, the customer who funds the model stands to be the loser! So much for TCF. As long as the boxes are ticked Regulators have done their part until they realise that all they did was create a false positive.

    Effectively, in the absence of TBTF, this is the insurance industry’s means of socialising loses.

    Insurance companies – they are so few that they could be named and counted on one hand – who have resisted the temptation or been kept out of the trough by the fattest and greediest of their breed SHOULD be the lucky one’s.


    I am not a lone voice BUT I have been consistent in my criticism of a strategy that failed the customers to feed the “worst of breed”…not that I blame ALL of the brokers that, literally, sold out their clients and staff. It is soul-destroying watching cannibals at work whilst seeing them being lauded as great innovators.

    Where and why have our industry and trade leaders been hiding? Behind FSA, bank or Parliamentary offices?


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