Disruption In Insurance

My latest on insnerds.com. Here is the intro:

For any company, it’s good to be relentlessly focused on the customer: success means knowing what they want and delivering that with discipline and low prices.

Or maybe not! The amazing thing about disruption theory, as defined by Clay Christensen, who coined the term in his 1996 HBR article and subsequent book, is that it reveals this strength to also be a deadly weakness.

Do click through and read!

Study Tips – How To Be Awesome in 10 Steps

My latest for insnerds. Here’s the intro:

I have a longstanding love/hate relationship with professional exams since starting my career. I’ve done CFA exams and actuarial exams (CFA are easier.. just). I’ve passed exams; I’ve failed exams. I’ve panicked in an exam and failed. I’ve cried after passing an exam. I was once so ashamed of myself after failing (fourth fail in 7 months) I couldn’t bear to talk to anyone and hid in a coffee shop for hours. And when I emerged I lied about the result!


And I persevered. Here’s what I’ve learned.

Please do click through and read!

I Blogged Elsewhere

I was asked by a reader to post for a neat insurance media startup, insnerds.com. Somehow an organization with nerds in the name didn’t have any actuaries involved. Well, I’m happy to put an end to that! Here is my contribution. One excerpt:

In any negotiation, you are introducing a seriously high risk of human fallibility, and the shareholders of these organizations have very strong preferences for the kinds of errors they want their organizations to make. Risk taking organizations want fewer false positives (doing fewer bad deals), and sales organizations want fewer false negatives (ditching fewer good deals). They fight it out to correct for cognitive bias.

Please do read the whole thing.

Big Company, Small Company

Some time ago I was toying with the idea of opening a retail franchise. Now, I didn’t know a thing about retail, but I remembered one of my marketing professors was a retail specialist, so I emailed him. He suggested a textbook and I ordered it (older version because, come on, $120!?). Then, for the first time in my life, I read a textbook trying to learn rather than just get through a course.

Complete waste of time. No real advice on how to actually run a business. Instead, lots of features for memorizing a load of minimally useful jargon: summary bullets in the (large) margins, more bullet summaries at the end, narrative summaries, Q&A and very little actual advice.

I eventually passed on the franchise but was left with the impression that the academy has very little to offer business owners. So with that in mind, this article from the OECD has got me thinking of the big picture of my own business.

The core idea boils down to this graph, which charts the increasing gap between labor productivity of the top firms and the rest (note how much stronger this is in service firms):


They also note that the churn in firm rankings is dropping, too, so firms at the ‘global frontier’ are getting older and that

“..evidence from eight European economies suggests that MFP growth over the 2000s was weaker in sectors that recorded larger declines in the share of young firms (under 6 years), and in particular start-ups (under 3 years)”.

The authors like this explanation:

More importantly, the rising gap in productivity growth between firms at the GF and other firms since the beginning of the century suggests that the capacity of other firms in the economy to learn from frontier may have diminished [emphasis DW].

They go on quite a lot about how firms should learn from each other and that promoting this should be the key policy goal.

I don’t buy it.

Firms do learn (steal) from each other but I think the biggest difference in success is management’s desire and ability to take raw (stupid) ideas and turn them into great businesses. That is about high quality people, effective management, perseverance, passion. Those things aren’t any more scarce than they were 50 years ago.

Interestingly, there’s a hint of an explanation I much prefer in the paragraph following the quote above:

Firms at the global productivity frontier are typically larger, more profitable, and more likely to patent, than other firms. Moreover, they are on average younger, consistent with the idea that young firms possess a comparative advantage in commercialising radical innovations (Henderson, 1993; Baumol, 2002) and firms that drive one technological wave often tend to concentrate on incremental improvements in the subsequent one (Benner and Tushman, 2002). However, the average age of firms in the global frontier has been increasing since 2001 (Figure 12). To the extent that this reflects a slowdown in the entry of new firms at the global frontier, it could also foreshadow a slowdown in the arrival of radical innovations and productivity growth [emphasis DW].

The big point the authors miss here is that the large firms, which are themselves young, were once small firms that beat the frontier firms du jour. They did figure something out. Then they sat on that idea and mined it.

Here’s Peter Thiel:

Thiel flagged top entrepreneurs such as Bill Gates, Larry Page, and Mark Zuckerberg as people who had built their businesses on unique ideas, and advised future innovators that, “if you’re copying these people, you’re not learning from them“.

Now I summon Horace Dediu:

What really causes a company to fail is disruption. The business model around which all products, customers and priorities are built; the culture, the skills and “DNA” of the company; is vulnerable. This vulnerability is why companies have considerably shorter lifespans than the people who work there. They are one of the most fragile of organisms: high infant mortality, with short, unpredictable lives.

Microsoft ascended because it disrupted an incumbent (or two) and is descending because it’s being disrupted by an entrant (or two). The Innovator’s Dilemma is very clear on the causes of failure: To succeed with a new business model, Microsoft would have had to destroy (by competition) its core business. Doing that would, of course, have gotten Ballmer fired even faster.

The key thing that Disruption Theory taught me is that profitable firms can’t make big changes. Management snuffs out the raw (stupid) ideas instead of building businesses with them. Their first priority is to protect the existing business which real disruption necessarily destroys. Any other innovation is called sustaining innovation, in that it can be adopted by incumbents, making them stronger, not weaker. So if I observe older firms and stagnant rankings my question is: why aren’t the younger firms innovating? Peter Thiel again (video):

It’s not a fact of nature that the slowdown has happened. We’ve become risk averse, we’re regulated to death, we’ve become incrementalist and we’re not really willing to take bold steps. We’ve talked ourselves into thinking that throwing angry birds at pigs is the best we can do.

“We” don’t want innovation? I think that’s right, actually.

There happens to be an enormous amount of confusion over disruption in insurance circles because people think you’re talking about the periodic purge of the market cycle. The laggard firms do tend to take a lot more damage during cycle turns and cyclical startups do tend to use the newest tech so cyclicality acts as an accelerant for innovation. The fact remains, though, that the cycle of the insurance business is much more powerful in the short term (ie for your career) than innovation. The vast majority of startup firms in insurance businesses owe their scale to good cycle timing.

The average culture is thus highly aware of cyclical change but under-appreciates structural change. I work at a small company, dwarfed by our competitors by 10x, 100x, 500x and I see every day how the large organizations are slower to react to new ideas than we are. They can’t jeopardize that existing business! So though it makes me feel good to say that we are leaders in much of what we do, quicker to invent, quicker to adopt, we feel our lack of resources all the time and resources have been enough to keep the incumbents entrenched. They do a good enough job! No innovation we’ve led has been so novel that our competitors can’t either steal it or ignore it and cede to us the moderate growth that rewards moderate innovation.

But moderate innovation is still something and we’ve capitalized on maturing technologies in data capture, storage and analytics. These are sustaining innovations so everyone benefits but they’ve still been transformational on a longer time scale.

Back in the dark ages, decisions were made at the hyper-local level and only consolidated for financial reporting purposes. Large organizations could not be centrally controlled because it was too expensive to answer any question other than: are we making an accounting profit?

So they had a culture of delegated decision making: independent, proud, cunning and highly social. Deals were done on the proverbial napkin because a low oversight, high trust relationship meant mistakes could be corrected or swept under the rug with ‘special deals’ later on.

Then technology facilitated oversight and accountability from a distance. People who could manage systems and build models to oversee operations were suddenly empowered at the expense of grass roots freedom. This concentration of information (power) enabled a wave of consolidation, snuffing out the need for individuals to manage external relationships. Less freedom, more oversight, less (individual) trust, more transparency. We all became a bit more corporate and the culture changed.

My story is that this drove the consolidation of reinsruance brokers, too. Back in the old days, an individual broker would spend half his career working for someone else, building up a book and then selling that book to a bidding firm or starting his/her own shop. The individual relationship was what mattered. Today the value of those relationships is significantly eroded. Business is ‘corporatized’, more services are required and a whole hierarchy of relationships are needed to manage the hierarchy at client and counterparty organizations. The actual change has been long and painful, yet the firms that remain are mostly the same ones that we started with, excepting for a whole lot of M&A.

Now we can test the OECD observations and analysis against my experience.

  • Are the small firms lagging behind the large ones? Check.
  • Is the gap widening. Yep, probably.
  • Is it because they can’t learn from the large firms? No, I don’t think so.

I think small firms are disappearing because the industry wants scale to supply capital-intensive and relationship-intensive services. Small firms generally have the same ideas as the big firms but they just lack the resources to implement them. To win (survive), small firms need to have better ideas.

My company has been different from other small firms in that we’ve been able to implement new ideas that large firms haven’t. We have a superior process. But our ideas haven’t been powerful enough to unseat the megas in a meaningful way.
Scale rewards itself and it’s hard to break into that virtuous cycle. M&A works, but it is difficult not to revert to the cultural mean doing that.  And scale the ‘easy’ way yields the most stagnant of entities: constantly fighting over itself. Maybe most importantly of all, there are very few small firms still in existence in my business, so nobody to buy.

And that’s the key feature that the OECD report misses. Something is different out there that is killing startups before birth. I say increasing rewards to scale have kept smaller firms from getting a seat at the table.

The market prefers scale to the innovations it’s been presented.

Things I Like To Say

As I’ve been publishing them I’ve been thinking more generally about these little phrases that I occasionally parrot at people (I do actually like to say these things) and the ones I like best are the ones that are a little bit wrong. They’re all a bit right, too, but the more wrong they are at the same time the bettter because it makes you think.

People like pointing out how others are wrong and if being wrong is the price to pay for getting people to think critically about the question, so be it! Focus is the precious thing and the meta story here is that I believe these topics aren’t thought about hard enough.

*There is no such thing as innovation in insurance*

There is only innovation in risk management. As an industry we keep rediscovering the idea of bundling or unbundling risk in transactions and call it innovation. It doesn’t change the pie, though, so I’m not calling it innovation. Innovation is changing the risk itself.

*Underwriting is stopping your client from screwing you. Risk management is stopping God from screwing you*

Insurance is obsessed with information asymmetry and moral hazard. When you’re responsible for the costs of your behavior, you’re probably much more careful than if someone else is paying the bill. That’s the client screwing the risk taker and that insight underlies about 95% of the complexity in insurance. The rest of the risk is from acts of God and chance.

*Good Writing is Invisible*

The bad writer’s idea of a good writer is someone that impresses you with their writing, not necessarily with what is being said. ‘Big’ words, complex metaphors. You should write at a high “reading level”, thinly veiling criticism of simple language.

Writing is about communication. If there’s an idea or story that you’re trying to get out, the greatest sin is confusing your reader. Be clear.

On complicated topics, really great writing makes the reader feel smart, not the writer.

The Holy Trinity of the Master Broker

[This essay is about sales and is adapted from a talk I gave to actuaries and modelers at our internal analytics conference. Sales skill is incredibly underappreciated, if it’s acknowledged at all. Perhaps the most underrated profession in the world. I try to changes minds where I can!

Remember that all of my sales experience comes from being a reinsurance broker where we facilitate transactions between sophisticated financial institutions. I’d say investment bankers probably face similar forces. Mileage may vary for people in other industries.]

Let’s first talk about what sales is not: Sales is not manipulative. It’s not a version of Gelengarry, Glenross, for those who have seen that film. Just thinking about those despicable sleezebags makes my skin crawl.

Truly great salespeople care only about finding out what the customer needs and giving it to them.  They like and respect their customers and genuinely want to help them succeed. So great salespeople sell great products. The strategic answer to getting better at sales is to just find better stuff to sell. Well, that makes it easy, you might say. Exactly! 

In some ways, sales is miraculous, particularly at specialist intermediaries like mine. You just have hire people with phones and bam, you start generating revenue. I think that generates feelings of empowerment and self-control and fuels the optimism of sales culture: the universe is full of opportunity. There are only two categories of obstacles: poor product fit (unsurmountable) and cognitive bias (surmountable).

The worst salespeople overdetect problem #1 (nobody wants to buy so I won’t try) and the second worst overdetect problem #2 (everyone will buy if I just try harder). It’s that second worst group that bothers people because they won’t go away. But at least they make money for their company.

So a great salesperson is armed with a great product and an earnest desire to make money doing the right thing. What else?

[remember all the tactics below presuppose good customer/product fit]

Preamble: the reframe

Called also the ‘spin’. The most basic and well known sales tactic. The caricature of the salesman is one that awkwardly forces an implausible narrative over weak evidence to try to ‘pull a fast one’ on someone. There is of course such a thing as a flawed narrative that should be corrected and this is an important tool.

But we’re talking about the tools of the master broker today. Journeyman brokers work on the reframe. To the master, frame detection and correction is second nature and hardly worth discussion.

Tool 1: The Breakdown

We need to cut through complexity. 

Overwhelmed buyer: “It’s too hard, we can’t get there” (everyone on my committee will have problems with this)

MASTER BROKER: “What exactly are the problems?”

Overwhelmed: “Well, A, B, C, D”

MASTER BROKER: “Ok, let’s go through those”

Psychology addressed: the most common cause of (first world) misery is feelings of overwhelm. 5 small problems = 100x the emotional load of one small problem. This is ridiculous, of course, but inescapable. Breaking the problem down lightens the load.

Inevitably what you find is that 3 of the 5 can be solved very quickly leaving only one or two really tricky ones. But one or two things can be focused on much more effectively.

Tactic 2: The Anti-Broke

We need to build trust. 

MASTER BROKER: “I’ve got a tough one here. A, B, C, D make it suck. There are some redeeming features but I’m not sure they make it up.”

Intrigued Reinsurer: (shields down) “Why? Let’s have a look”

MASTER BROKER: [cleared to talk about all the good points]

Psychology addressed: key to most human conflict is a need to feel heard and understood. Our bias is to hunt out negatives against the current of constant positive framing by (journeyman) brokers.

Emphasis of shared perspective encourages a search for agreement. If they feel like you understand their need for vigilance, they’ll be more open minded. Some of my colleagues are terrified of the anti-broke because you don’t ever really spend time talking about the virtues of a deal unless asked directly. Others are full-time anti-brokers and their success seems like magic. Everyone good uses it from time to time.

At a minimum, anti-broking is optimal when you want to have quick, low-engagement conversations with people to feel them out. The failure rate is probably a bit higher (including false negatives!) but that effect can be mitigated by an experienced anti-broker. The prize is many fewer false positive leads and deeper engagement.

Tactic 3: The Stall

We need to build focus. 

Busy reinsurer: “We can’t do this deal because of [stupid reason x]. Decline”

MASTER BROKER [one week later]: “hey, we addressed [stupid reason] like this, have a read of the attached (long-ish document)”

Busy reinsurer [one week later]: “we can’t do this”

MASTER BROKER: “did you read my note?”

Busy Reinsurer: “um, no” [Bingo!]

MASTER BROKER: “let’s have a call to go through it. When are you available?”

Busy Reinsurer: “ok, how about two weeks from now?”


Psychology addressed: often a value-adding but (apparently) borderline deal is just not worth their time now. If they don’t want to say so explicitly, they try to shove the broker off.

Don’t stop the process, slow it down. Let it play out. Eventually the pressure changes from “I don’t want to put this on my desk” to “let’s just get this off my desk”.

[Four weeks later]
Busy Reinsurer: “Are we still talking about this?”

MASTER BROKER: “Yep, you had this concern and that and we’ve addressed this way and that”

Busy Reinsurer: “Ok, sounds good. What’s next?”

This is a delicate one because you’re being a bit of a pest, which is a critical skill in getting things done with busy people. Let them lead, be patient and vigilant. Windows of magnanimity open from time to time. Wait for one.

Epilogue: A Few More Forces at Work

A good relationship is critical to all sales; it increases engagement and motivation to come to the *right* resolution quicker.

The best way to build relationships? Doing a deal! Doing a difficult deal creates a special kind of bond that makes the next one much easier.

This is why financial middlemen exist: we are repositories of negotiating success. Those that deal direct with financial markets don’t have the relationships that we do because they don’t do deals all the time. Those relationships foster better outcomes.

Politics matter, too. Deal decisions are made in committees by several layers of an organization. A good broker has relationships with all of those layers. This is often too much for one individual broker to handle so we have a “my boss calls your boss and his boss calls her boss” situation. 

I think this drove a lot of consolidation of intermediaries over the last twenty years. The clients and market organizations consolidated and grew more layers so we did, too. The structure of broking organizations reflects the deal-making structure of their counterparties. That has seriously raised the costs to new entrants, which are more or less nonexistent. More on that another day.

Sales is about overcoming many barriers: informational (do you have what you need?), psychological (are you giving this an honest shot?) and political (can you sell internally?). These are life skills. Everyone gets better at their job by getting better at sales.

Things I Like To Say

*Maintaining relationships is the hardest thing to do*

The distinction of humans is that we are social beings. We have relationships. But every day we learn and learn again why this is a unique achievement in nature. Holy cow are relationships are hard to do well. As a manager, my job is to maintain the relationships among my reports and within the organization. You know how in action movies every time someone fires a rocket launcher it looks like it’s spiralling kind of out of control (how do they hit anything with those things?). That’s communication and that’s relatinships. It goes wrong sometimes. Managing relationships is preventing and cleaning up those messes. 

That means I get outsourced the uncomfortable conversations to bring people back onto the same page. Repairing damage, understanding perspective, bringing diverging priorities together. I have to have a good enough relationship with all parties to reconcile the priorities with common ground to the blunt the tough message.

*Management is Managing Relationships*
A deeper fact is that leaders exist to solve the hardest problems organizations face. The different between a manager and a direct report is that the manager’s job is to take reponsibility for the communication within the team and then within the organization. Think of all the stakeholder priorities a company needs to reconcile using strong relationships: customers, suppliers, capital providers, mother nature, even! 

We only get the benefits of modern organizations with a class of worker to ease the social burdens of large scale cooperation. Management. 

Trump Evolving

The most prescient of Trump commentators in my little bubble has been Scott Sumner. His point all along has been that Trump doesn’t care about anything and is just saying whatever it takes to win. He willl, Scott predicts, reverse every single position he’s ever taken.

No, this is not from The Onion:

Presumptive Republican presidential nominee Donald Trump said on Saturday that he wouldn’t characterize his immigration policies as including “mass deportations,” drawing a sharp retort from the campaign of Democrat Hillary Clinton.

Trump, in an interview at his golf course in Aberdeenshire, Scotland, said that rather than a blanket ban on Muslims coming to the U.S., a position he took in late 2015, he’d focus on those from countries with links to terrorists. The Republican also said he would start from scratch on the sweeping Trans-Pacific Partnership trade pact.

Trump said his immigration policies would have “heart,” suggesting he may be shifting tone to transition into general-election mode after the bruising primary season.

“President Obama has mass deported vast numbers of people — the most ever, and it’s never reported. I think people are going to find that I have not only the best policies, but I will have the biggest heart of anybody,” Trump said.
Pressed on whether he would issue “mass deportations,” Trump answered: “No, I would not call it mass deportations.”

I’m sure my neo-Nazi commenters will be thrilled to learn that on immigration Trump will have an even bigger heart than Obama.

The reckoning proceeds.

His opponents (ie everyone I know) could easily draw all of the wrong lessons from this of course by dismissing the success as being deeply fraudulent. It was not. Trump legitimately appealed to many and to the evil side of many more.