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Beyond tomorrow—The "what if"? Reading the tea leaves presents interesting challenges for the insurance industry By Emanuel Levy
No matter how one massages the crystal ball, the future is not within any one’s certain grasp. But that doesn’t mean it should not be contemplated and envisioned so that future directions are on the shelf to be put in place as needed. Of course, changes usually come gradually, as they mostly have up to now, but we are reaching a time where the past may no longer be prologue. Part of the reason is “The World Is Flat” as Tom Friedman, New York Times columnist, puts it in his recently published book of that name. That’s obviously not a physical reference to the shape of the earth, but rather a suggestion that super modernization in heretofore underdeveloped countries is taking center stage, and that it will create, as it already has to some extent, challenges to the world’s economy and demographics. It is not clear whether the “what if?” signs and portents of this thrust have been taken seriously by economists and business leaders in the United States and the European Union; but, if not, the oversight may be attributed to a degree of over-confidence, perhaps arrogance. Viewed negatively, it may well indicate surprise at the unanticipated burgeoning of huge countries like China and India into industrial giants. But the signs have been clear for a good many years even though the large populations were viewed as only offering cheap labor to be exploited by the manufacturing giants of the West. The question is whether those in the United States who monitor trade and economics anticipated the intensity of the growth of the new entrants and the lightning speed of their technological and commercial advancements. A more cogent question is whether U.S. leadership was looking far enough into the future to recognize what was happening, not necessarily for the purpose of thwarting these countries, but rather as a means of understanding how these patterns might be directed to the advantage of our own economy. Measured by the unfavorable balance of trade now besetting the United States, and the fact that China has become our leading creditor nation, planning may have left something to be desired. That’s a somewhat long introduction to the motivation of this observer, wondering whether the insurance business in the United States has mechanisms in place to recognize short- or long-range institutional changes that may call for slight, to major, operational modifications. Look around corners The insurance business is unlike any other enterprise. That observation has been offered before, but it bears constant repetition. Insurance is irretrievably linked to risk faced by every other aspect of life and commerce. Consequently, wherever change occurs, there is an impact on the business. But the insurance business has been resilient and adjusted to the variety of needs of its customers, large and small, often with creative ideas that anticipate exposures and innovations. However, in the long history of performance, companies and producers have taken their lumps. The scrapbook of history clearly shows the many that did not make the cut for a variety of reasons, perhaps most prominent the failure to adapt to new demands, administrative growth, fiscal reality, and the inability to answer the “what if” question. That truth applies both to seemingly impervious giants and the brokerage or agency stores on Main Street. But entrepreneurship has been the driving force in continuity, and the insurance business remains the economic bulwark worldwide. The point is, however, that to avoid dangerous dislocations, it is vital that the industry not only rely on its current ability to roll with the punches, but also to look for what may lie around future corners. For example, the P-C industry, including reinsurers, which took such a devastating blow from Katrina, has noted, with some satisfaction, that because of the good financials, including investment income, it is able to remain on the positive side. That is not necessarily true of the federal flood insurance program, which recently reported that losses may become unsustainable. But “what if?” is something the private insurers need to ponder, before predictions about the prospect of hurricanes and tornadoes increasing in number and intensity in high-density locales throughout the country eventuate. No doubt the industry is mindful of disasters, but the inquiry should possibly be long-range rather than year to year. It should also involve efforts to work with state and local governments toward increasing demands for wind resistant construction requirements for dwellings and even commercial structures, as well as the fulfillment of governmental obligations for protective levees and the like. Plans are on the drawing boards in many heretofore undeveloped areas for new urban communities, according to recent newspaper reports. State and local governments cannot permit the building of new structures without mandating windstorm resistant components. Where feasible, retrofitting also should be considered. Looking to the immediate and longer-term, the insurance industry— and that certainly includes the very influential producer groups—should consider making demands for construction mandates, not only in the public interest, but in their own, to keep affordable rates and acceptable loss ratios, to say nothing of saving lives and minimizing suffering. The industry’s Institute for Business and Home Safety, based in Tampa, Florida, has been in existence for a long time and has fought for construction safety, but perhaps it has been under-utilized. It has been researching this kind of structural defense and has achieved some success, but it may not be aggressive enough to reach clogged legislative and administrative ears. After all, protection of life and property depends on answering, with assurance, that futurist question of “what if?” The role of technology And, on another front, the precursor of tomorrow is already making its presence loud and clear. For some years, information technology (IT) has been catapulting relationships toward astounding levels. But the reference to IT is really only conceptual. Gregory A. Maciag, president and CEO of ACORD, who has specialized in insurance technology more than 30 years, offered this observation in a report he prepared in January 2003. He said: “While I relish the attention when CEOs talk about IT, they sometimes talk about topics they seldom understand.…so I guess I should be pleased. But unless there is an appreciation for IT enabled changes, we’re not really going to transform our very complicated business processes.” And Maciag, in the prologue of his recently published book, Business Insurance Solutions, was even more emphatic, asserting that IT is “an engine of business revolution.” The prologue declares that business information is “the wealth” and the “lifeblood” of a business. It is all you have, Maciag adds, suggesting that “you create it, acquire it, aggregate it, process it and trade it.” But he offers the admonition that “if you are not managing those activities, you’re not in business: you’re going out of business.” The “what if?” here is how the industry applies the principles of information. Extolling the past, Maciag says that the industry’s future can be “equally exciting, if not more exciting.” The ACORD leader says the book establishes “the prominent role of standards in all successful industries and markets. It lays bare the real, enduring economic actuality of our networked world and its ever-advancing technological capabilities.” Also, he says, “it shows how all the players in the insurance industry—from underwriters to customers, via software vendors and media commentators—must combine and collaborate around better ways of getting things done.” It is important to note, however, while viewing the future, that the once highly touted boast that the United States was the paragon in all things insurance and the world technology leader, may, in the not too distant future, be open to serious challenge. He noted that Lloyd’s, other insurers on the continent, and new developments in China, India and who knows where else, may be strong contenders for market share. The universally available technology levels the playing field. United States business organizations, including banks, unquestionably swung open technology doors, with their outsourcing practices, taking advan-tage of the universality of IT skills in what may be distant lands but which, in reality, are as close as the click of a mouse or the dialing of an 800 number. Outsourcing may be cost-effective and convenient for U.S. companies, but evidently there was no research as to whether it was creating technology specialists who will enhance competition by the host countries. That’s why “what if?” needs to be employed by industry leadership, as well as the rank and file, to better understand where we are, where we want to be, and how best to get there. That is not a one-dimensional premise. There are many concurrent dilemmas in this vast and complex industry that deals in the vagaries of risk, man-made and natural, with concentration on actuarially measurable future events. Is this industry unaware or not concerned with the future? Such a suggestion would be far from accurate. The very development of IT clearly shows that the future is very much a part of the insurance landscape as it is of many other aspects of life. There are associations and groups which consistently look ahead, such as the Society of Insurance Research. On its annual conference program in mid-October 2005 were presentations: “Preparing for the Unthinkable: Natural Catastrophes and Mitigating Strategies,” “Using CI to Help Reveal Unseen Exposures and Better Prepare for the Future,” and “The Role of Technology in the Future of the Industry.” Then there was the statement by Ernst Csiszar, president and CEO of the Property Casualty Insurers Association of America, before the American Legislative Exchange Council, calling for “regulatory modernization” in the handling of catastrophic risk; and a new service by ISO to provide a geographic system to help insurers better manage catastrophe exposures. Of course there are more, but my aim is to urge all elements of the industry—associations, research groups, educational institutions, individual insurance companies, and producers’ associations—to be more imaginative and creative in peering into the future. Producers, in particular, have to look ahead to preserve their markets and hold on to their customers. They have to be more aware of competition through the use of cyber marketing by their own insurers; the danger to incomes from governmental intervention on contingent income; and on loss of individuality through expansion of franchise systems. Thought should be given to assuring a continuous availability of a competent and dedicated workforce. This is particularly true of technical help, in the face of almost certain competition with other businesses and with government. Where technology is headed and whether smaller brokers and agents can get into the game is also a cogent question, particularly if their markets and customers will no longer entertain manual operations. The advances in technology must be a consideration of all the working elements of the business in a race to keep market share not only with domestic competitors but worldwide. How will that impact the insurance business? What will be the effect on workers compensation if there is a large move to home employment because of the cyber technology? There must also be some thought given to the changes in the nature of risk as new products and services are developed. Will the adjusting of claims undergo change? And, will there be a sufficient pool for leadership roles? This is not, in this writer’s opinion, a laundry list of improbabilities. The purpose for calling them up is to suggest to the industry that we are on the cusp of significant changes in the world of commerce, business and people, and that we need to be alert so that the “if” does not come before the “what if?” * The author |
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