The insurance sector is often criticised for its reluctance to accept new technology, and recent criticism has been more pointed than ever. Insurers have been focussing investment on enabling process and efficiency improvements, when they should be using technology as a driver for business strategy. During a recent survey, Intech Solutions conducted face-to-face interviews with 25 senior executives in the London market and concluded that these attitudes towards technology investment still prevail. It is here, however, that this editorial parts company with some of this criticism. It's true that the insurance industry lags behind in technology investment when compared to other sectors, but it can be argued that the insurance sector has the balance right.
Criticism of attitudes to change and technology is often misplaced. Firstly, it is not the place of insurance to lead social-economic development; the manifestation of insurance places it towards the back-end of the lifecycle. To insure anything, the recognition and articulation of a risk must prevail. The position that the industry occupies means that practitioners are behaviourally attuned to following, analysing and responding to change, whilst still having to manage the status quo. With the possible exception of the healthcare business, it's a struggle to think of any other industry sector with a workload as diverse, involving aspects of past, present and future.
For a decade or more, the reinsurance market in London has been locked into the present because of the past. Recent events illustrate only too well how unforeseen acts can have a catastrophic impact upon risk managers. As well as being masters of risk management, practitioners need to be skilled in the science of change management. Put bluntly, in the 21st century successful insurers need to have one hand firmly on the management of risks with the other pressed to the pulse of change. That's difficult.
Unfortunately, the insurance industry receives more than its fair share of criticism as a result of its inability not only to bring about change, but also to use technology as part of that change process. Is that criticism unfair? Arguably, it is. If you want to trade and administer insurance on a global basis nowadays, you need competent technology infrastructure and high levels of IT competency amongst employees - nothing more. The industry still has some way to go to achieve aspirations of totally seamless connectivity, but the right moves are being made in areas such as standards and the establishment of exchanges. In London, 90% of firms tend to be small-to medium-sized enterprises (SMEs), and as a result, practitioners need to develop composite skills sets including an understanding of technology.
The criticism against the re/insurance industry comes from many quarters, and a disproportionate amount comes from the suppliers of new technology. However, it is these critics that often stand to gain the most. Setting that aside for a moment, there is strong support for competitive strategy being sustained by the benefits of being a first-mover. Insurance is culturally attuned to following other industries, but what rewards could be reaped if re/insurers were to change this position and start to lead the rest of the pack?
On the strength of all the evidence available, the answer is not a lot, if anything. For many years, studies have shown that organisations looking to obtain first-mover advantage usually fared worse in the long run compared to those not aiming for first-mover status. The findings of these studies were echoed once again only last year in reports compiled by the international business school INSEAD and management consultant McKinsey & Co. Although there are exceptions, overall it's better to follow than to lead.
Following is certainly less risky than leading but it is still difficult, particularly when technology investment still occupies such a large slice of the expense ratio. It is even more perilous when the technology being changed is markedly different to that which has been used before. In insurance parlance, risk and change are inextricably linked. Try as we might to limit and exclude where we ought, change always introduces risks beyond reasonable control, which contradict well-honed theories of probability. Unfortunately opting out is a failure strategy; some action has to be taken. The burning question is when?
In the subscription market, managing change often seems analogous to a 10,000m steeplechase. As a community, everyone comes to the line and starts together. There is a pacemaker and as the race progresses entrants jostle for position, careful to avoid the occasional faller. In the final 1,500m the pace picks up, climaxing in a sprint to the finish. Someone will be first, but being last does not mean you have lost. Generally it is the taking part, completing the race and improving your performance that counts most. But more importantly, taking part involves developing a strategy to plan how the race would be run, and training to improve reaction times. In short, preparation was needed to ensure getting into the right position.
There are many instances in the market now where the steeplechase analogy holds true. The cross-market reforms manifest in the London Market Principles are one such example.
Looking beyond the UK, the flow of capital into Bermuda and the loosening of government regulation in China may all influence London's insurers to change the way businesses operate. Whilst intelligence quotients and management capabilities will have the greatest influence upon outcomes, the primary enabling tool is technology. The evolution of e-business over the last five years has resulted in technology significantly different to that which existed before.
A different kind of change
During the last years of the 1990s, e-business supportive media bombarded firms with rhetoric about the need for change. E-commerce growth was predicted to increase exponentially in 2001, accelerating into `hypergrowth' by 2004. Under that model, e-business would have an impact on a par with the development of the steam engine, electricity and telegraphic communications. By 2005, all businesses would be internet firms or would not be firms at all. Expensive mistakes were made as investors - which should have known better - abandoned long-standing business fundamentals. Inexperienced dot.com firms were urged to move with reckless speed to achieve specific targets that were well beyond them, burning money and resources too quickly. Not surprisingly, boom turned to bust as the dot.com bubble imploded.
Does that mean, therefore, that this long wave of technology change is now over? The answer is, definitely not. What is happening is that a much shorter, second wave has started; e-businesses have returned to basics, emulating the flexibility and cost consciousness of traditional bricks and mortar firms. Perversely, it is companies and sectors that were more cautious about technology - rather than those high on competitive adrenaline that changed too quickly - that now have the opportunity to reap the benefits of five years of e-business learning. The lessons learnt can now be exploited, but only when the time is right.
Returning to the steeplechase analogy, the next five years will see the pace increase, and firms need to remain prepared and positioned if they want to finish on time. When Intech Solutions joined the e-business steeplechase, it wanted to make sure that it was positioned correctly to ensure its own well-being and that of the clients.
Positioning for change
Whilst experience has shown that insurance e-commerce is constrained by the complexity of products traded on the internet, it also demonstrates tangible evidence to suggest that e-business is being successfully deployed to improve process. Generically many insurers have similar strategic aspirations - to strip out unnecessary cost, improve the quality of underwriting with better business intelligence and enhance customer service by streamlining inefficiencies and adding value. Technology is available to help insurers address all of these strategies and remain positioned for the next change hurdle.
The business investment case for document repositories is well proven and the deployment well tested. When it comes to business intelligence and data warehouses, the IT industry is quickly gathering acceptance in insurance circles to aggregate and dissect data for risk reporting, trend analysis, prediction and monitoring. There is no doubt whatsoever that as a result of commoditisation, information portals and knowledge management technologies will play an increasingly significant role in the accumulation, analysis and distribution of information and know-how.
As Charles Darwin said, "It is not the strongest of species that survive, nor the most intelligent, but the one most responsive to change." In the insurance industry, that means following change, not forcing it.
By John Saunders
John Saunders is director of business development and consulting at Intech Solutions. He can be contacted at: firstname.lastname@example.org