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14 September 2017 Insurance

Do or die: 5 changes insurers must make now

Sometimes, a perspective from outside an industry can be clearer than that of those embroiled in its day-to-day battles. On this basis, we asked Campbell Macpherson, change leader and author of The Change Catalyst: Secrets to Successful and Sustainable Business Change, to cast his eye over where reinsurers are going and discuss the risks of not changing with the times.

His conclusions should be a must-read for reinsurance CEOs everywhere. Here, Macpherson details the five things he believes reinsurers must act on now if they are to avoid becoming irrelevant to their customers—and this is not for the faint hearted.

Insurance CEOs are more worried about change than the leaders of any other industry, according to PwC’s 2017 CEO survey. And it is easy to see why.

Comparison sites have made it almost impossible to make a profit at the consumer end of the market. Combined ratios of US P&C carriers are above 100 percent. GI and life insurers are finding it tough to augment premium income with investment returns given the low-rate global investment environment.

Cybersecurity is both an enormous opportunity and a real threat to the industry. Lloyd’s estimates that up to 90 percent of cyber attack losses could be uninsured, but this is also a very difficult risk to price and understand.

The reinsurance industry is being turned on its head due to a surfeit of capital entering the market and new risk transfer mechanisms and vehicles putting this money to work

New accounting standards could lead to more volatile profits for life insurers and cost billions to implement. Gone are the days when actuaries can manufacture short-term ‘profit’ almost at will.

“Change is inevitable,” Benjamin Disraeli proclaimed almost 150 years ago. This fact is still very true today. But a fact the then British prime minister may not have been aware of is that 88 percent of changes fail. According to a 2016 report from Bain & Co, seven out of eight change initiatives fail to deliver the outcomes they set out to achieve. A similar number of business strategies, mergers and acquisitions suffer the same fate.

Change may indeed be inevitable. Successful change, however, is not.

Given the volume of change the industry is facing and change’s spectacular failure rate, what are the top five things insurers should do to avoid being left behind?

  1. Banish complacency and smugness

Complacency is the financial services industry’s most deadly disease. Awash with cash and rewarded with generous remuneration packages and anachronistic final salary pension schemes, there has been little incentive for executives to embrace genuine change. Most of the change has had to be forced on the industry by its myriad of regulators.

However, genuine change, sustainable change comes from within. It comes from a genuine commitment to change—for the benefit of customers and employees; for the good of the company; for the long-term benefit of shareholders; and lastly for the benefit of the senior executives.

In far too many financial services companies, these priorities have been overtly in reverse order.

The industry must overcome its inherent smugness, for complacency kills. Just ask Polaroid, Kodak, Blockbuster, TWA, MCI Worldcom, Compaq, Woolworths, HMV, Bear Stearns, Lehman Brothers and a plethora of ex-market leaders that no longer grace the pages of the Financial Times.

Continual improvement and genuine innovation are now hygiene factors for running any business in today’s fast-paced world. This will most likely require a change in attitude among your most senior executives. As I say to many clients: “If you can’t change your people, you may have to change your people.”

  1. Change is a way of life: be ready

Change is not a programme. It is a way of life. Your business will need to change constantly and continually. The companies, executives and employees who cope with change will survive. Those who are able to seek out change and embrace it will thrive.

You must never forget that a) change is all about people; and b) change is personal. Treat them like disposable resources at your peril, for only your people can deliver the new future you desire.

Your people will need help if they are to embrace change willingly. This will require the establishment of an environment where people readily look for improvements in the way things are done, are allowed to question the status quo and are encouraged to learn from failure. Today’s leaders must be able to take their organisations in new directions swiftly and decisively when the need arises. To do this, your people will need to be ready, willing and eager for change.

  1. Emotion trumps logic: understand your customers

Even after decades of regulator-induced reforms, the customer can often be an after-thought in board room discussions. Capital adequacy, return on investment, combined ratios, business operating profit, distribution, EBITDA, margins are the measurements that exercise the imaginations of much of the industry. Yet of course, without customers, none of us has a business.

Customers are better informed, less loyal and have a myriad of choices that were not available to them in the past. You need to genuinely understand what they are trying to achieve but perhaps more importantly, you need to understand the emotional reasons for their behaviour—for it is emotion, not logic, that drives our decisions.

The Welsh voted ‘leave’ in the June 2016 referendum despite the enormous sums the EU has invested in Wales. In the US ‘rust belt’ voters chose a billionaire to be their president despite the fact his branded products are made in cheap overseas factories. Emotion trumps logic every time.

  1. Stop thinking short term

Short-termism destroys shareholder value. Quarterly reporting distracts the leadership from running the business and discourages them from investing. Research by Focusing Capital on the Long Term
(FCLT, www.fcltglobal.org) revealed that 78 percent of finance directors would delay investment if it negatively impacted short-term earnings targets.

This is bonkers. If this is happening in your organisation, I suggest finding out the internal causes of such behaviour and addressing them. Addressing the external causes will inevitably involve changing the frequency with which you report your financial results. If you do, your shareholders will thank you.

A 2017 white paper by FCLT Global and McKinsey indicates that the market capitalisation of long-term oriented US companies grew $7 billion more than that of other firms between 2001 and 2014.

  1. Be paranoid: question your right to exist

Reinsurers don’t have a monopoly on reinsurance. Many corporations are finding other alternatives to lay off their risk. Pension companies don’t have a monopoly on long-term savings. Insurers don’t have a monopoly on insurance—after all, investment and insurance are just two sides of the same coin.

Your company must earn its right to exist every day. But to do this effectively, you must be very clear about why your company exists in the first place. What is your firm’s purpose? Is it clear to all stakeholders? What lies at the heart of your organisation? Are your values genuine? What are the implications of your purpose? What must you excel at? Is your business model sustainable?

To avoid being left behind, your organisation needs to remain alert, and continually looking for new challenges and opportunities. To use the words of Andy Grove, Intel’s founding CEO, it needs to stay paranoid: “Success breeds complacency. Complacency breeds failure. Only the paranoid survive.”

Campbell Macpherson is CEO of Change & Strategy International
(www.changeandstrategy.com), business adviser, author and speaker. His book, The Change Catalyst: Secrets to Successful and Sustainable Business Change is a 2017 Wiley publication

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