As the older managers retire, the mid-management people – those with five to 15 years of experience – really need this training. They don't need entry-level training in terms of basic product characteristics or risk classification. But they need advanced training to learn how to deal with the most difficult company decisions.
We often say that about 10 percent of the business creates about 80 percent of the issues regarding good risk assessment or exposure to loss. These are the tougher cases that have in the past been handled by that group of managers and senior specialists who are retiring now. The middle managers have not been exposed to the management of tougher or larger exposures and these kinds of decisions. Recognizing them is one thing, managing them is another.
Despite the cultural or business differences among companies in this broad group, training is training and knowledge is knowledge. Decision making in this industry is based on similar actuarial information and market pricing, regardless of company.
And so there is a general curriculum of training that could be broadly applied across this large universe of companies. If you talk individually to each one of those companies they’ll say, “Oh no, we’re different because of X, Y or Z.” With few exceptions, differences are small and similarities are great. Most companies overestimate their uniqueness and underestimate their needs for straight-ahead, professional and technical training.
Insurance companies 40 years ago were IBM’s favorite customer. The first round of technology was processing massive amounts of data, but there hasn't really been much change since. Of course the industry has adapted technology to the task of rating an insurance policy – taking asset values, sales, square feet, or the number of employees, and entering that into an algorithm which gives you the “company official price” for a particular insurable risk.
But that price is adjustable based on a variety of factors for each particular customer – factors that could change its risk profile and the appropriate price. And the interplay of applying debits or credits to the company official price remains a matter of human judgment, not technology.
Large national and some regional companies adopt data-driven analysis to try to look inside their customers and determine which groups are better, which groups are worse and why. Although success with keener insight is often trumpeted, there is no consensus that the industry is really underwriting risk or paying claims better than before.
Innovation in this industry has to do with products. Is there a new element of risk out there that needs to be insured? There are also innovations in the delivery of the product. The most stunning example of that are companies like Progressive and GEICO, who are entirely delivering their product online. They have a highly specialized product and are delivering it to a highly targeted customer base. But, basically, there's been very little product innovation and very little delivery innovation at the general agency companies.
The only notable example of a recent product innovation is cybersecurity coverage. Companies large and small have become acutely aware that they are the holders of sensitive data, and that that sensitive data can be attacked at any time, and is there a way to insure against some of the financial risk associated with that. But on the whole, the last great innovation was 30 years ago when claims-made coverage was introduced.
Small- and medium-sized insurance companies are and have been targets of acquisition activity for quite a few years.
This really has to do with efficiencies of scale. Some of the most profitable insurers are regional insurers, companies that have limited themselves to operating in a limited number of states. Generally speaking, those insurance companies have a better profitability profile than the ones that are national in scope. When a larger insurance company has money burning a hole in its pocket – and a lot of acquisitions are made for that reason – they’ll go after a small- to mid-sized company based on superior underwriting results or targeted customer bases.
If you are in a small- or medium-sized company you might want to be thinking about how you can grow or define yourself in such a way so that you are not a target. And if you are an acquiring company, then you have the whole issue of integrating an acquired operation into yours. When do you leave it alone? When do you integrate it? There are always cost efficiencies to be had, but quite often those efficiencies come at the cost of the very reason why you made the acquisition.