There’s been some chatter lately about an interesting insight published in a McKinsey 2015 report. It revealed that in 1990 the top three U.S. automakers had among them $250 billion in revenue and 1.2 million employees.
The top three tech companies in 2014 had roughly the same revenue and only 137,000 employees.
There are a number of potential reasons for this shocking contrast, but regardless of the mix of factors, it demonstrates a readily apparent shift in the way the economy is evolving. Traditional ways of doing business will not provide the profitability required to compete.
I view the insurance industry more like a tech business than an automaker. It is data-driven. We deal almost exclusively with communication, data and financial transactions—activities that are ripe for effective automation. Other industries have already modernized these types of activities, but in nearly all cases, we continue to lag behind. Given our transactional nature, we should be closer to the revenue/expense ratio of a Google than we are to a General Motors.
To understand the threat of continuing to accept our traditional ways of doing business, we have to understand the concept of hyperscale. Simply put, hyperscale is the ability to automatically process massive amounts of transactions. For example:
- Google processes four billion searches every day.
- Twitter processes 500 million tweets every day.
- Alibaba processes 254 million orders every day.
These numbers are so large, their impact is likely lost. In contrast, the average midsize agency processes between 1,000 and 5,000 transactions in a day, often with a healthy dose of manual handling at every stage.
Hyperscale is achieved through the combination of effective data processing and an optimized business process. Our industry is not known for either; however, the paths to both of these are well defined. The struggle for most agencies in choosing to innovate is both the risk involved with wholesale change and the fact we have historically been able to both grow and exit businesses regardless of our efficiency.
Despite the fact that so much of our work is transactional, we know the value of the independent agency market is not in the transaction but instead in our role of trusted advisor. However, our effectiveness at processing transactions actually improves the value of our advice. The ability to process more transactions leads to greater revenue. The ability to process transactions more efficiently leads to greater margins. Higher revenue and higher margins enable agencies to develop more analytical capabilities, which lead to higher value as a trusted advisor. This is the model for the agency of the future.
I’m not suggesting we run off and immediately build systems that process at hyperscale, but we could benefit from some significant improvement. The castoff technology from organizations that produce hyperscale is enabling new entrants to approach transactional markets with a different model and value proposition. These entrants are focusing their efforts on financial services including insurance.
What kinds of castoff technologies are making their way into insurance? It’s all about that data, baby—from big data tools that automate data collection to disparate database integration to automated data governance. Software is basically sitting on the ground waiting to be picked up by those with the willingness to step into the future. Data visualization tools are now affordable enough for college students to buy. In 2002, building a predictive modeling capability was expensive, confusing and risky. There were limited tools available and no guarantee the models would produce meaningful insight. Today, the concept is proven, and models often can be built online with only a base knowledge of data analytics. If you have the willingness to change, there is now a path to get there.
When you consider the size of the property-casualty market is about $620 billion, one would assume that we are investigating these concepts—either individually to increase market share or as an industry to protect our market. Unfortunately, we are not. Our focus seems to be on growth through legacy business models. This does not bode well for us.
Let’s Get Some Jets
So, what’s the problem? We effectively operate the same way the Army Air Corps did at the end of WWII. Good thing we won when we did. The other side began using jet aircraft near the end.
Here’s a quick airplane history primer. Need a plane to go faster? Spin the propeller faster. Funny thing, though: when you spin the propeller past a certain speed, the air turbulence at the tip of the propeller drags the engine speed down. So then you bend the propeller tip to give yourself more RPMs before it happens again. Eventually, you’ll spin the propeller at its absolute limit. Want to go faster? You need a jet.
How does this tie into our world? Let’s get real about the mystery and celebrity behind insurtech. As someone with a tech background, I have to admit I like the rockstar status given to tech firms, but there’s a reality. We’re just a bunch of nerds with jets.
At some point, someone is going to put good pilots in those jets. When that happens, this little $620 billion game will be over. Spoiler alert: we are the better pilots. Let’s get some jets.
How do you change your fate? We need to consider our business process first. How do we approach servicing? Where does manual work help, and where does it hurt? We have to be willing to challenge why we work the way we do. Efficiency and automation does not always equate to low-touch client service. There is a balance where we have the advantage. We have to fix our business models first, then bring in the technology to make it work. The idea that software and tech are silver-bullet solutions just simply doesn’t ring true. As an industry, we have traditionally expected software to solve our problems, but in reality, the software available to us just boxes us into the old ways of doing business.
Unless you’re currently executing your exit strategy, you’ll likely be among the generation of agency executives left behind. (Yes, that’s you I’m talking about.)
“Not on my watch” just isn’t going to cut it anymore. Those who choose flexibility and an openness to change will find a place in the future economy. Make sure you secure your place.
Gagnon is The Council’s CIO. firstname.lastname@example.org