Surfing the corporate venture wave

14-12-2015

Surfing the corporate venture wave

As the re/insurance industry struggles to turn good ideas into tangible innovation, one solution could be investing in ideas and ventures in the same way as a venture capital fund, James Berkeley, managing director of Ellice Consulting, tells Intelligent Insurer.

Why do demands for diversification in the re/insurance business today reveal so little about the customer and so much about the fears of re/insurers and brokers? This is the question posed by James Berkeley, managing director of Ellice Consulting, a specialist in helping companies improve their performance.

Berkeley has worked with insurers and brokers that include Travelers, Aon and Jiangtai Insurance Brokers. He argues that if a company’s objective is to grow profitably in both the short and the long term, then they should start by using a telescope, not a microscope.

“They should think of the future and work backwards rather than trying to gradually inch the organisation forward in today’s hyper-competitive property cat and other lines of business,” he says.

He advocates a greater focus on innovation, the pragmatic application of new ideas that raise performance to new levels, “while not confusing this with problem-solving and corporate efficiency doctrines that merely return performance to the levels they used to be at”.

Berkeley claims that innovative companies generate in excess of 8 percent more three-year total shareholder return premiums than their industry peers. He notes for example that, for many years, 3M has operated a strategic objective that 25 percent of its new business originates from products that were not in existence five years earlier. “This is what great businesses do,” he says.

The rise of corporate venturing 

One of the hottest new trends in innovation in the past 18 months has been the rise of ‘corporate venturing’—where a company invests its own capital in new ventures or start-ups. Companies such as Ping An, Aegon (Transamerica Ventures), American Family and Hartford have all embraced corporate venturing as a strategic tool to position their brands in a distinct or leading-edge position, Berkeley claims.

He foresees an even greater propensity for mid and large re/insurers and brokers in the next 12 months to deploy capital and build and expand their corporate venturing presence.

“Is this an idea whose time has come for more re/insurers, and is it for everyone? Yes and no,” he says.

While almost every industry participant agrees with the ‘what’ in terms of what corporate venturing can deliver (enhanced focus on innovation to accelerate profitable growth), companies differ in their understanding of the ‘how’.

He says much depends on each firm’s desired timing of when it wants an impact on key business units’ performance and the proximity to the key strategic area of the business (underwriting, sales, etc).

Berkeley says there are five innovation pathways: mergers and acquisitions (M&A), currently in vogue with the property cat players; internal research and development; business incubation; strategic partnerships; and venturing.

He says the industry can learn much from outside the sector. Many global banks, such as Citi, HSBC and BBVA, have doubled the amount of capital deployed to corporate venturing since 2010. Citi has set up a global innovation hub in Silicon Valley, California, relocating executives from New York.

“Imagine if Munich Re, Cigna or Aon were bold enough to do the same or set up base camp in London’s fintech community?” he says.

“Is this increased interest a sign that internal innovation is beached in a ‘zero-risk’ environment? Certainly, corporate venturing is a path of least resistance for many leaders.

“One chief innovation officer at a global financial institution let the cat out of the bag recently, saying: ‘Trying to get our executive board to properly resource and give priority to internal innovation initiatives is painful and fraught with personal risk.’

“If the hidden objective is to be an increasing object of interest to investors and analysts, the mere mention of a stake in the ‘next Uber’ certainly gets the pulse racing faster than mention of a new internal cyber risk product under development within the business. I think the same motive force will play out in the insurance sector.”

Berkeley lists a number of reasons for this, including perception, the fact such an initiative is easier to value, there is less chance for corporate bureaucracy to hinder growth, increased speed and greater proximity to a liquidity event.

He admits the industry has been here before. In the past three decades, financial institutions and insurers have created private equity and venture capital units, only to disband them three to five years later when the firm’s corporate strategy changed.

“Is the popularity of corporate venturing simply a function of plentiful capital and a need for CEOs to be seen to be innovative? No,” he states.

“What is different now? The simple answer is that for financial institutions and insurers the swimming lanes are merging. The traditional value chain in their respective sectors is being re-shaped. The ability of firms to recombine technology with knowledge to create wisdom is allowing them to get closer to the client, at a lower unit cost, and create more impressive results.

“Technological advancement is challenging legacy internal systems and processes (payments, underwriting). The internet is enabling clients and prospects to compare alternative products and services (price comparison and aggregator sites, online forums and so on) in real time.”

An alternative approach 

Berkeley argues that the retail customer largely ‘owns’ the marketing efforts of banks and insurers today and claims that traditional retail bank and insurance sales approaches are increasingly becoming moribund.

“The future is about educating clients and providing tremendous value in doing so. Technology is creating greater insecurity over issues such as cyber terrorism. Public opinion and regulators are placing increasing onus on banks to put clients’ interests ahead of their own, reflecting less tolerance for failure and the potential punitive fines for reputational risk,” he says.

What are the benefits of venturing for intermediaries? “They are getting squeezed on all sides,” he says. “There is faster reinvention, stronger value propositions, new ways to compete, new ways to find new customers and more impressive high tech/high touch customer experiences.

“Many firms are getting left behind. There are some really great ideas to be found in the new wave of entrepreneurs that could with smart application incrementally transform the future of these firms, producing happier clients, increased profit, stronger brands and so on.”

Should the mindset be strategic or opportunistic? “Most of the established corporate venturing firms in the sector desire to be strategic but in reality they are opportunistic in how they operate.

“They think and act like an A&R rep in the music publishing business: they start with a sense of the ‘sound’ radio stations want to play, and customers want to listen to. The process of finding and signing ‘acts’—entrepreneurs—with the right proposition is far more opportunistic. It is both art (instinct) and science (hard numbers),” Berkeley says.

He lists a number of sectors that could benefit from such innovation including cyber security, payments, online marketplaces, digital health, energy and clean tech.

Examples can be found in the market, he says. He lists Indian online insurance comparison portal Policybazaar, which has attracted backing from Intel Capital, Zephyr Health, and Get Insured, as a very interesting business. 

“And with AIA’s track record and powerful brand in China, I expect their new Accelerator programme will undoubtedly unearth some gems,” he says.

It seems while some companies have nothing to lose in their quest for innovation, equally, those that do it correctly, have much to gain. He claims that a return of 5 to 10 percent internal rate of return (IRR) is not uncommon.

“Corporate venturing is not for the foolhardy but it does represent a powerful innovation tool for those with the right skills and volition.” 


A road map to success

Whether you accept that demand for corporate venturing is here to stay in global financial services and insurance or think that it’s merely an ‘in vogue’ innovation tool to be considered alongside M&A, research and development, incubators, accelerators and so on, you would be wise to think about the following questions, Berkeley says.

Consider only the opportunities that fall in section 4 and disregard the rest.

1. What are the biggest market needs facing our clients and prospects?

•           Existing needs. More impressive distribution, greater risk prevention and mitigation (cyber attack), faster market expansion, real time resolution of health issues, smarter pricing of risk, stronger value proposition, stronger alignment of capital and need, increase operating margins, lower acquisition overheads, improved image, more impressive talent, etc;

•           Needs we create. Transfer of risks from public to private sector risks (cat funds, long-term care); and

•           Anticipated needs. Changes in capital, society, demographic, technology, social values, politics, travel, lifestyles, working patterns, etc.

2. Where are the most promising sources of innovation to be found to address those market needs?

Don’t confuse innovation sources with problem-solving sources (those sources which promise to return performance to previous levels, often found in operational improvement programmes, lean initiatives, etc)

•           Internal

•           External

3. Where do we have the passion to apply those creative ideas to address those market needs?

Innovation without passion is the same as aspiration without enthusiasm. A largely fruitless exercise. 

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4. Evaluation criteria:

•           What is the benefit to our key constituents (return on investment for customers, stockholders, employees, regulators, business partners, etc)?

•           What is the cost (ultimate risk after preventive and contingent actions are in place)?

•           What is the strategic fit (consistent with strategic vision, beliefs and direction)?

•           What is the ease of implementation (capital and human resources deployed, speed, management support, and labour-intensity)?

5. Which behaviours and attitudes within our organisation must we change, adapt and monitor to be successful? Let’s be clear: the investment risk must align with the internal risk tolerance in the corporate venturing firm and its rewards system.

There is no point investing in a high-risk cyber risk management business if internal managers in the larger corporate organisation are incentivised to take minimal risk. Equally, the best firms assign leaders who are ‘champions’ of the venture investment, and are exemplars of the desired behaviours to allow the strategic investment and their key people to thrive within the larger business.

 

James Berkeley, Ellice Consulting, London, Europe

Intelligent Insurer