In this global recession, most companies focus on issues such as interest rates, compliance, new regulations and declining markets, but the biggest threat facing regional insurers is that of becoming irrelevant. This often silent killer lurks underneath every boardroom table and behind every manager’s desk as decisions, and more often non-decisions, are made daily that kick the can of innovation down the road. Barbados is not unique in this regard, but being generously populated with 14 local general insurers and a handful of life and health insurers, each one is small enough to respond quickly to change and embrace innovation, the natural enemy of irrelevance. Sadly, this is not happening enough, and just saying you are innovative is not enough.
Everyone has an excuse, and in these tough times there is no shortage, but opportunities abound for those who are looking for them. The problem is that those opportunities may not lie within the traditional stagnant pool of reinsurance carriers and brokers that have serviced the region for the last 30+ years. At a retail level the story is much the same, with the same pool of insurance companies and brokers competing for pieces of the same pie, where the product is generically the same due to many insurers all using the same reinsurance brokers who access the same reinsurance companies. There is therefore limited incentive at the supply level to differentiate on product or service.
Insurance is an intangible, with the single most valuable component being the security it offers. This security enables confident decision-making and bold planning. Given that perception equals reality, anything that serves to erode this sense of security is a significant threat to the product. Hence, examples of collapsed insurance giants and unpaid claims erode customer confidence in an intangible product where insurers bombard the press with messages of trust and security. This lack of trust in tough economic times serves to reduce customers’ appetite to risks they can easily perceive such as catastrophe property insurance or those which are required by law or by their financiers. This presents two problems:
- Lack of product differentiation makes the market price sensitive and the resulting war of attrition to compete on price has taken its toll, keeping rates low and underwriting profit thin.
- No upside in that revenue from new market space, new products tailored to risk exposures that are readily identified are not being developed.
Insurers often further compound the problem by destroying trust through poor service and hands off claims approach using loss adjusters on claims who often destroy previously developed relationships. The good cop / bad cop routine often employed between adjusters and insurers is getting old as clients want to deal face to face with insurers and feel secure. Much like how companies increasingly seek private equity financing in these tough times as banks rush headlong into irrelevance through increased rates, ridiculous layers of security and costs, clients will seek other options such as self insurance and reduction in values to save in poor economy. The challenge for insurers therefore is to try to reclaim this market space that they are helping to create.
A negative reputation in the insurance market has a further crippling effect in that it becomes a last resort in the minds of best and brightest talent. The sad truth is that every time there is a major change in an insurance company through retirement or otherwise a musical chairs of sorts takes place in the industry with top managers shifting from company to company before the vacancy is filled somewhere else, often from overseas. Local underwriters need to actually underwrite as opposed to marking up reinsurance average rates and get out and visit clients to see the risks and actually take responsibility for providing a promise to pay legitimate claims. Local underwriters therefore end up with a limited understanding of clients business needs, and following many acquisitions carriers end up with limited autonomy and must report to their principal offices before making decisions on risk acceptance and claims settlement. This scenario erodes client confidence even further as they seek solace in trying to rest assured that they will not run afoul of the legendary fine print of insurance policies.
So how should insurers respond to this crisis and stay relevant? Currently many companies have retreated even further and have tried to diminish the insurance product through complex (often hidden) warranties and conditions, while competing on low rates. This is suicidal and sets off a vicious cycle that has proven disastrous internationally. As insurance & reinsurance giant XL Group CEO Mike McGavick puts it “You can’t exclude your way to prosperity and sublimit your way to relevance”. Insurers must understand that their purpose is to cover risk, and by cutting cover they make customers question the relevance of their product. As one client put it succinctly after receiving a slew of warranties one renewal “If everyone and everything worked as it should I would not need insurance. I need insurance for when things don’t go according to plan”. This is a fact that many underwriters fail to grasp as they rush headlong to exclude cover for client transgressions.
The key is to look at your product offerings and develop client relationships and seek to provide the widest possible cover in areas where your client needs it most. Embrace the client’s broker and see them as the client’s representative and approach every situation with the mindset of “how can this be covered?” Gone are the days of the Tariff market, and a successful company is one that will get interested in their client’s business and be proactive in getting to know their operation and offer products that may be unique to them like supply chain insurance or cyber risks cover. Companies are looking for insurance products that respond to the changing nature of risk, and are also seeking innovative service offerings that make the insurance process a positive experience as opposed to a necessary evil. Relevance, therefore, is not just about the product offerings, but all aspects of the insurance process which flows from advertising through engagement, education, the contract and the settling of claims. Unless customers develop a positive attitude towards insurers and brokers, the market space will continue to shrink and all sectors will disappear into irrelevance.