Paying Attention

Making compromises is not unusual in any company where there are competing pressures–whether within or outside the enterprise. Ernst & Young has addressed the issue for property/casualty insurers with a report called "Focused Innovation."

"The norm in the industry is to react to these forces and look at them somewhat in isolation," says Chris McShea, a partner with E&Y. "When you do that, it tends to create tradeoffs, so you compromise a focus, a commitment, or an investment somewhere else when you are dealing with a single issue."

In its report, E&Y identified the issues that are driving the industry and looked to see whether it could find issues directly in conflict with each other. "If [carriers] were able to step back and work on two or three issues at a time–which we are defining as focused innovation–they might make a breakthrough in that space so they wouldn't have to make compromises," says McShea.

An example of this involves carriers pondering the outsourcing question while at the same time studying the need for improved customer service. "Bringing those two together creates a possibility [insurers] might be able to outsource strategically some activities and actually improve customer service at the same time," he says. "You don't have to handle those two issues separately."

E&Y found 11 different competing objectives in three categories for its report. McShea lists the first category as strategic–the big-picture issues CEOs have to worry about for the future. An example is the catastrophe issue where the public policy of carriers is focused on availability and consistent pricing, whereas the industry is interested in managing the exposure with appropriate pricing and handling the volatility of its results, according to McShea. "There is a pretty good conflict between those two objectives right now," he says.

The second category, reports McShea, involves structural issues, where two segments of the industry are doing things that are opposite. An example he gives compares one insurer focusing on price when it advertises, while direct competitors might be advertising service, value, or responsiveness. "One segment is driving commoditization into the customer's mind, and another is trying to drive it out at the same time," he says.

The last area involves operational issues. For the past 24 months, pricing has been declining in the industry. McShea contends that can be driven by shareholders, outside analysts, or some other stakeholder. On the other hand, most companies have a mandate to grow and create value in the organization for that management team to continue in its current position, he adds. "Despite soft-market pressure, companies are trying to grow, but that creates a dilemma because when you are cutting rates 10 percent or 20 percent, it's pretty hard to make it up in volume, and if you do [make it up in volume], you can have some pretty disastrous results," McShea says. "What we're talking about are fundamental ideas that might support innovation in that space."

Insurance companies have to create a balance–something McShea calls "normalizing the value chain performance levels." He points out companies have certain elements within their value chain that are particularly effective and provide a dominant amount of value. Those values can be on the distribution side, the technology side, or even the service side, according to McShea. If companies rely too heavily on one element, they often fail to bring the other parts of the value chain along as far as development and progress are concerned, and that's where competitors attack. "Competitors find your weakest point, and they attack," he says. "If you are great in distribution and bad in service, your competitors can advertise based on their service, and that's going to accelerate the competition."

Carriers also need to be realistic when they discuss growth strategies, particularly in the soft market, explains McShea. "Sometimes when you look at the growth aspirations of a company and you add it up, it's more than the size of the pie," he says.

"If you are going to grow 10 percent in a soft market, you are going to take [business] away from someone," he continues. "You better know whom you are taking it away from and what the reaction is going to be. You better have a sustainable advantage to do that; otherwise they'll come back and undercut you on some of your better risks."

Experimentation with innovation can be very dangerous for carriers, warns McShea, but he adds it's probably more dangerous not to experiment. "What you need is controlled innovation where you can test the process, manage the risk, and if it's not driving the results you expect, you end the experiment without any broad problems for your organization," he says. "Technology is the key to everything."