Um, Which Way is Downstream?

My boss sometimes laments that we’re in a declining industry and, to be honest, the statistics do show the absolute level of employment in Reinsurance on a steady downward trend.

That doesn’t mean the industry is declining, though. Quite the opposite: it grows with the economy.  Insurance is a business that passes the ‘grandmother test’ because “there will always be insurance”.

So what’s happening?

Here’s Paul Krugman, commenting on an old article of his:

[I argued that] information technology would end up reducing, not increasing, the demand for highly educated workers, because a lot of what highly educated workers do could actually be replaced by sophisticated information processing

And again, citing the work of Autor:

[they] argued that the crucial difference in terms of possible replacement of humans by machines was one of routine versus non-routine, rather than white-collar versus blue-collar

So, to the degree that the insurance business is a collection of routine processes, folks get replaced by flops and the balance slowly moves from labour to capital.

I’m rather obsessed by this macro trend, as a quick flick through this blog would plainly show.

But it’s bigger than insurance, of course. And ain’t no recent thing.

I like to think of economic progress as the decline of the share of our income spent on food, water, shelter and other ‘necessities’. As they get cheaper, we get richer.

Here’s Arnold Kling:

As the cost of food and durable goods falls, what are you going to do? You only consume more health care services if you think you are sick and that the doctor can do something for you. So you either consume more education or more leisure.

These trends matter. The strongest businesses don’t fight the current, they ride the crest.

So, at the margin I expect three types of businesses to grow in the near term. The first is the medical industry (easy).

The second supply things people do in for leisure and/or education. The Silicon Valley social media types are all over this, along with self-help gurus and tv producers.

The third business joins the chorus crushing the costs out of the the rest of life’s pursuits. Think commodity producers (insurance!) and the news media. Over time, their quantities supplied grow with the (world) economy, but their share must fall.

To my boss, then, I say: “watch your margins, insurers grow by adding capital in innovative ways”.

If he’s still worried, I say: “write a book and go on CNBC: become a media darling and guru”.

Still upset? Go to med school.

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