The fallout from the financial crisis and the prolonged soft market is keeping many in the insurance industry fixated on the tactical moves necessary to survive. Nonetheless, an assessment of how a company succeeds over the course of decades is still a fruitful exercise.
Recently, at the National Association of Mutual Insurance Compaines Annual Convention in San Diego, two speakers took the long view on what makes a company successful. Best-selling business writer and Stanford professor Jim Collins said that all companies, irrespective of industry, have the ability to achieve greatness if they make a conscious decision to do so. "Greatness is a function of choice and discipline," he said.
Part of this discipline is managing growth in a responsible way. Collins cited a maxim from Hewlett-Packard founder David Packard, in which the operational indigestion caused by sudden growth was a bigger threat to companies than slow starvation due to a lack of it. Much of the problem with rapid growth, Collins said, happens when the pace of growth exceeds a company's ability to put the best people in critical positions. Indeed, Collins said that it's hard to overstate the value of human capital when investigating what makes certain companies thrive and others die. He highlighted the example of Darwin Smith, former CEO of Kimberly-Clarke. Smith boldly put the company on a different path (some say he bet the ranch) when he decided to jettison the company's century-old sawmills to focus solely on consumer products. Given the nature of insurance, the odds of a CEO making a move as radical as Smith's seems remote. Yet the willingness of a top executive to reexamine and overturn long-running assumptions is illustrative.
To the contrary, in his presentation on the lifecycle of insurance companies, Robert Hartwig, president of the Insurance Information Institute, stressed the value of consistency. He noted that while it's rare for businesses, like people, to live more than 100 years, the industry has many companies thriving past the 100-year mark. Indeed, some 650 members of NAMIC have reached that distinction. Hartwig said that three characteristics were most prominent among the centenarians: they were family owned, they were geographically modest and they concentrated on one core product or business. "Diversification leads to complexity," Hartwig said.
So how does Hartwig's endorsement of simplicity reconcile with Collins' admonition to explore new avenues for growth? Insurance is something of an odd duck among industries because its regulatory framework and widespread mutualization encourage conservative business practices. "Mutualization leads to long-term thinking that is rare in the business world," Collins said.
This complexity versus simplicity debate will likely only metastasize in light of pending regulatory changes. Post financial crisis, regulators and rating agencies will favor more diversified operations. The prospect of smaller insurers merging to stay in regulators' good graces seems a perverse outcome to a financial crisis that was caused by interconnectedness and the sheer size of certain firms. Whether insurers choose to seek growth through diversity or instead refocus on their current niche and improve core operations such as underwriting, they need to pick a path and stick to it. "The signature of mediocrity is chronic inconsistency," Collins said.
