Insurance Insight: “Product innovation in European insurance firms is widespread”– where is the evidence???
Friday, 6 January, 2012 Leave a comment
Hmm, I’m not so sure I’m buying any of this!
In fact, I don’t, entirely, agree with the headline OR the presumption that insurers are willing and able to offer the “peace of mind” that customers, rightly, expect from the coverage, products and services available to them.
A mixture of technical, organisational and market factors naturally constrain how expansive insurers can or should be in terms of developing new products. Most obviously, missing information can give rise to adverse selection or moral hazards and lead to amplified losses.
Insurers might easily find their capital exhausted if claims turn out to be unusually large. So caution always needs to be exercised when taking on new or changing risk exposures. Additionally, there is sometimes limited demand for highly innovative products, even if insurers are prepared to offer them.
Instead, ‘big’ innovations tend to occur only when an exogenous driving force, such as new legislations or tax changes, stimulates demand.
Please “indulge me” when I suggest that, IF we are asked to believe that “‘big innovations tend to occur only when an exogenous driving force…stimulates demand” then the current ongoing global economic crisis constitutes THE most significant “exogenous driving force” for generations!? Yet, “innovation” in insurance is most certainly, only, spelt with a small “i”.
Survival: exaptation before adaptation
In reality, despite of all that we now know about the flawed structures, risk models, tools, techniques, Governance, Regulation AND culture, of the prevailing model(s), the Financial sector is still too prescriptive, inward-looking, ignorant or arrogant to learn and apply lessons from other industries.
They may have become over-specialised for the environment in which they thrived…like the Dodo!!?
Years of “easy living”, from excessive profits, appear to have dulled the instinct for survival.
A corrupted culture based upon the “false positives” of self-similar strategies, products and individuals, where the warning signs were ignored, dissenting voices and contrarians marginalised. Now that the, relatively benign, environment of the industrial era has evolved into the, highly complex, dynamic and inter-connected world of the digital age, the complexity that served them so well for so long, has rendered them so inflexible that the ability to adapt is “impaired”: victims of their own success!
Failure and collapse may be the only remaining path for some. With survivors and new entrants able to thrive in a post-critical landscape free from some of the constraining “legacy issues”.
Before product innovation – whether of the incremental or any other variety – can take place, issues surrounding “missing information” do, indeed, need to be addressed. But, we should really expect greater transparency about the nature and source(s) of what REALLY constrains product development.
Reference is made to “adverse selection”, “moral hazards” and “amplified losses”. I take it the inference is that this would be from customer to insurer. But surely the opposite is also true and of equal (if not greater) concern!?
What is “missing information”? Is that a reference to undisclosed underwriting information (since institutions believe they have moved beyond the notion of utmost good faith?), a lack of available risk data (we don’t know as much as we thought!), an oversight or an assumption too many? In which case how does an insurer underwrite – apply a rate – to a risk in uncertainty?
If the carriers of risk fail to take the time to adequately consider their exposures, because they don’t know which questions to ask or what to do with the answers should the insured (and society) pay the price of their failure?
What properties should an underwriter look for in a business operating in turbulent economic times?
How did the leading players providing Government Bonds, Bankers indemnities and underwriting CDS’s (or similar complex financial products), assess those risks and apply rates?
Now THAT IS a question that begs an answer!