Carriers and Insurtech
I deal with the insurance world daily. Conventional wisdom says there is much more money to be made in a future, fantasy world where technology always works, even when the code is only partially written and the legal agreements for sharing data do not yet exist. To me, a dreamlike or a dreamland culture has developed whereby reality is no longer a factor in many people's minds, including powerful and intelligent leaders, i.e. "because some private equity firm believes in my idea, as proven by its investment, I am real" (see FTX). No matter if my technology does not work, it is accepted that it works because someone invested in me. Even at the ordinary worker level a belief has taken root of a fantasy land where you do not need to work because the government will always write more checks seems to have profoundly changed mind sets.
Insurance companies are investing in all kinds of technology and promising all kinds of great experiences to their insureds and investors (rarely to their agents). Yet, their existing technology is so awful that I am sure they must employ two separate technology departments that never, ever communicate. There is the technology department of the future where technology always works, never needs to be integrated with existing technology that marginally works, and never has to facilitate the day-to-day reality involving the immensely complex data integration required to have a successful insurance company (I used the word "successful," not marginal, not poor).
The technology in which insurance companies seem to be investing so much venture capital are add-on technologies. Add-on technologies are largely worthless if the foundational system does not work. I hate to rain on anyone's parade, but like any construction project, if the foundation is weak, whatever is built on top of it will most likely collapse. Many insurance company executives do not appreciate or perhaps do not even understand, how weak their existing foundational systems are. They talk about it but talking about it is not fixing it.
Here are some reality points I have come across over the past twelve months. Previously, I have written about how the insurance industry was founded on a cost-plus basis. My family worked in mining and oil and the service companies, the really successful ones, always wrote cost-plus contracts whereby no matter the cost (with some, often superficial, restrictions), they were paid an extra 20% (or whatever they had negotiated). Therefore, the more expensive they made the project, the more money they would make.
Private equity sort of has the same deal. Traditionally there was a base fee (regardless of performance) as a percentage of the money managed, plus a percentage of the profits if there were any. Therefore, the larger the portfolio, the more money they made even though as portfolios grow, returns tend to decrease. They win even if their clients lose.
Insurance has historically operated in much the same way. Agents made the same commission percentage, and earned enough to not worry about expenses, much. Someone else always set the price. Insurance, being a de facto public utility, was priced as a public utility with X% of the profit baked in, regardless of the cost.
Insurance companies' systems and procedures therefore did little to focus on a manufacturing environment cost accounting basis. Manufacturers focus on reducing costs. Reducing costs for insurance companies would only reduce their rate filings resulting in lower profits per share. However, a couple of insurance companies have bucked the culture and are now forcing competitors to greatly reduce their expense ratios or else be eliminated. These companies are like Amazon -- if competitors do not reduce their costs, they will put those competitors out of business. They are slowly doing so quite successfully.
To succeed, all other insurance companies must cut costs and do so intelligently. They must adopt a manufacturer's cost mindset to become more efficient. In order to do so, consistency of processes must be the focus, just like in the manufacturing world. Yet when talking with many insurance company executives who oversee day-to-day operations, it is clear their companies do not have a method for measuring the consistency of their processes, much less have procedures in place. Technology is great but depends on consistency to work well. Adding new technology when the data is haphazard and inconsistent is of marginal value. Data will be inconsistent without a uniformity of procedure.
Furthermore, when I ask more detailed questions, it is clear the companies do not have the initiative to fix the problem.
It is almost as though they want to create new insurance companies and leave the legacy aspects completely in the dust, people included. This is partially why many companies have fallen in love with the new GA/MGA (admitted and non-admitted) models.
Another aspect that cannot be left behind involves claims and claims data. I recently ran across a situation where the initial reserves were input incorrectly at least 75% of the time. It was a programming error and no one at the insurance company was intellectually capable enough to put two and two together. That error created a multitude of problems. As the saying goes, one can put lipstick on a pig, but it's still a pig. All the lipstick Insurtech in the world does not change the fact that a company's data is still a pig, and an ugly one at that.
Over and over in the claims data I review, it appears that insurance company data and data management has not improved since I began reviewing claims runs in 1988. Some company's data/reports actually look to have regressed to a 1970 level. Because of group think and the C-suite drinking too much of the company's Kool-Aid, I suspect the C-suite does not even know a problem exists. In a cost-plus model, the sense of urgency to fix the problem rates a one on a scale of ten. The companies have bigger issues to solve or at least management thinks they have bigger problems.
Bad data, poor fundamental technology and a weak foundation is the epitome of a cancer. The time to fix cancer is when the problem is small, not catastrophic. The problem now is a large but inadequately known and definitely inadequately diagnosed disease -- at least in the real world. I am not crying wolf because the executives running these insurance companies will have incredible retirement programs and will be enjoying those programs prior to their company's collapse. The collapse is not likely to happen any time soon.
The day to day, real world weaknesses of poor technology and poor operational management go on and on. If a company collapse ever occurs, rather than being sold, authors will diagnose it like an airplane crash. It was not some single factor that caused the plane to crash. It was a combination of factors and events, any one of which being absent would have enabled the plane to land safely. But what those authors will miss is THE single factor that caused the crash. That single factor is the leadership who did not live in the real world and understand and appreciate that insurance companies cannot succeed in a world that is no longer cost plus.
If you are an insurance company employee on some kind of bonus plan, check the data to make sure the data being used is correct so you are certain you are not being shortchanged. The reason I began to analyze this kind of data was because years ago when I was working for an insurance company, I was being shortchanged. The home office's response was always the same, "That's interesting. No one has ever brought that up before. We'll get it fixed next year." That company no longer exists.
As an agent, do you trust your insurance company's numbers? Do you trust that while they are focusing and spending tens of millions, maybe hundreds of millions, of dollars on Insurtech even though they cannot provide reconcilable production documents, that they will fix the reports next year?
If you are a CEO or C-suite person, what do you want your legacy to be? Or is the money still too easy to the point that you will continue to ignore reality while reaping the marketing and publicity of investing in whatever Insurtech comes along?
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