In today's information age, the time frame for an insurance company to benefit from any competitive advantage is shrinking rapidly, which means the speed at which a carrier can shift gears and seize emerging opportunities will likely separate market leaders from laggards.
In such a volatile environment, nimble needs to be the new normal for multiline property-casualty insurers.
Ramp up or scale back
“Nimble” in this context refers to the ability of carriers to rapidly ramp up or scale back the focus and capital allocated among lines of business to benefit from potential profitability variations. However, while the case for becoming more nimble may be compelling, accomplishing such a transformation will likely be easier said than done, given that most companies are set in their ways when it comes to organizational structure and standard operating procedures.
Insurers are often siloed by product, leveraging the same brand but managed almost as independent entities. This may lead to tunnel vision, which can inhibit a broader strategic view.
Under these circumstances, how can insurers adapt their business models to better anticipate movements in the market — positive or negative? How might they transform their decision-making processes to respond more proactively to new opportunities and threats?
How can they revise the way they leverage internal personnel and external distributors to be in position to change targets more quickly as business conditions develop? Ultimately, how might insurers improve their return on capital?
Intrigued by this challenge, the Deloitte Center for Financial Services started researching factors that may be keeping carriers from becoming more nimble, as well as whether such operating flexibility actually makes a difference in performance. What we found was quite revealing.
For one, using a portfolio simulation approach, we confirmed that if multiline insurers can fine-tune their portfolio mix to scale down in underperforming lines and ramp up to capitalize on those that appear poised to outperform, they should be able to achieve an improved return with lower overall risk. Second, as we interviewed in-house and external subject matter specialists, it became clear that while carriers in general acknowledge the opportunity to achieve higher returns by responding swiftly to market shifts, few have the end-to-end capabilities to do so systematically and effectively.
Siloed ops may be hindering collaboration
As we dug deeper into the factors inhibiting flexibility, we realized that the traditional, decentralized operating model for most standard market, multiline insurers could be one of the roots of the problem, since such siloed operations may be hindering cross-divisional collaboration and speed to market.
Internal resources, such as capital and personnel, once committed could be difficult to withdraw or repurpose quickly, particularly for underwriters or claims staff specializing in a certain line of business. As a result, insurers often lack the structural flexibility to adapt quickly as market conditions change.
However, since the decentralized model has its advantages — such as faster decision-making and greater specialization — the solution to becoming more nimble across a multiline company lies not necessarily in dismantling the entire organization, but in building bridges among silos to infuse greater flexibility. This calls for a more nimble, portfolio-management approach to business strategy, distribution, human capital, processes, and capital allocation.
Technology can be a key enabler of nimbleness. (Photo: iStock)
So, how might insurers become more nimble?
As insurance value chains rapidly digitize and advanced analytics becomes pervasive throughout an insurance organization, technology can be a key enabler of nimbleness. New tools that allow systematic two-way information sharing with sales channels could help develop the capability of carriers to more effectively sense market moves by integrating first-hand intelligence from the front lines (their distribution force) with more scientific and comprehensive market research capabilities.
Predictive models that leverage emerging big data sources, while at the same time applying concepts of modern portfolio theory, could empower insurers to make faster and improved capital and personnel allocation decisions.
However, achieving greater flexibility will likely require more than just technology or analytical upgrades. To become a nimble insurer, companies may also need to revamp their governance architecture, including a rethinking of talent management to encourage cross-training of personnel.
Informed, prepared, and incentivized
In addition, even as insurers change product strategies and flex targets, they need to make sure their agents and brokers — as well as their internal people — are fully informed, prepared, and incentivized to implement shifts in the company’s product or market focus.
In our recently published research report, “The Nimble Insurer” (co-authored with David Montgomery, a managing director with Deloitte Services LP), we posit a new strategic framework featuring five key elements that can infuse greater flexibility and agility into insurer operating models (see Figure 1 below).
It all starts with flexibility governance, which orchestrates the other four elements — market sensing, product portfolio analysis, distribution flexibility, and core operations flexibility. Incorporating these elements into organization-wide standard operating procedures should help insurance executives respond more quickly and decisively when faced with two fundamental strategic questions: "Where to play?” and "How to win?”
- “Where to play?” is about bolstering an insurer’s forecasting capability so they can determine with sufficient certainty (and before their competitors come to the same conclusions) which lines of business are likely to outperform or contract, assess potential market opportunities against their own capabilities, and develop resource allocation plans accordingly.
- “How to win?” is about developing and implementing nimble capabilities in distribution and other core functions, which can help the carrier reap maximum benefits from the organizational transformation.
Figure 1: Five elements of a nimble insurer’s flexibility framework
The objective is to effect a series of adjustments in day-to-day operations and create a competitive advantage that could be sustained over time. Carriers can make the transition in a phased manner, test driving the nimble concept with a pilot focused on segments or lines that are more viable for capital adjustments and personnel transfers.
However, while becoming a full-fledged nimble insurer could turn out to be a multi-year journey, those that begin the transformation early on may beat competitors to the punch as new opportunities arise and formerly hot markets begin to fade.
(For a deeper discussion of “The Nimble Insurer” concept, download the full report.)
Nikhil Gokhale is an insurance research manager at the Deloitte Center for Financial Services in Mumbai, India. Connect with Nikhil on LinkedIn. Opinions expressed are the authors' own.