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 keep their heads above water. This makes a long-term assessment of how a company succeeds over the course of decades 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 that the indigestion caused by not accounting for sudden growth was a bigger threat to companies than slow starvation due to a lack of growth. 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 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 regulatory realities of the insurance industry, an insurance executive making a move as radical as Smith’s seems highly improbable. Yet the willingness of a top executive to reexamine and overturn long-running assumptions is illustrative.
To the contrary, in his presentation on the life cycle of insurance companies, Robert Hartwig, president of the Insurance Information Institute, stressed the value of consistency.
Hartwig noted that while it’s rare for businesses, like people, to live more than 100 years, the insurance industry has great deal of companies that are 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 Collin's admonition to rethink core principles? Collins readily admits that insurance is something of an odd duck among industries in that conservative business practices are endemic and often mandated by law. Hartwig also noted that it’s probably not a coincidence that two-thirds of insurers more than 100 years old have a mutual structure. “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. For example, the pending Solvency II regulations in the European Union will award more diversified operations with lower capital requirements. Post financial crisis, regulators and rating agencies here may well follow suit. The prospect of smaller insurers merging to stay in regulators good graces seems an odd perverse outcome of a financial crisis that was caused interconnectedness and sheer size of certain financial services 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.
Bill Kenealy is a senior editor with Insurance Networking News.
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