Getting to the Core: Finding the Right Pace for Change in Commercial Insurance
Insurance is a complex business. This shouldn’t be news to anyone operating in this industry, but it also shouldn’t be shocking to anyone who has ever had to purchase insurance. As with any complex system, insurance companies have developed processes and guidelines that enable them to operate consistently across different offices, regions and often national borders. And just like any complex system with longstanding processes and ways of executing, these same concepts that enable companies to operate effectively can also become shackles when external or internal forces demand change and adaptation.
Stability is the core of any such business system, which is why insurance “disruption” has often backfired. This industry is expected to be stable and reliable by consumers. However, even though the structural risks (buildings, vehicles, people, business operations) have remained fairly constant, the impact of both natural phenomena and technological advancements on those risks is accelerating. So how can we, as insurance professionals, adapt to these accelerations without completely disrupting the business of underwriting?
In this article, I will address how to model the system to understand the necessary changes. In subsequent articles, I will go into more detail about potential strategies for developing programs to drive sustainable change within organizations.
Pace Layering Applied to the Insurance Industry
In his 2018 paper “Pace Layering: How Complex Systems Learn and Keep Learning”Stewart Brand discusses a model for civilization that involves different layers of behaviors and concepts that change at different speeds, or paces. The layers and their relationships are critical to understanding how civilization evolves over time and how to think long-term about the problems we face today. The outer layers change more quickly than the inner layers, which provide long-term stability to the system. I wondered if a model of such grand scale could be time-constrained to model the way insurance operates. Would it be insightful to use this model to devise strategies to help insurance companies navigate change? I developed a first cut of what an underwriting-focused “pace-layered” model could look like.
In a pace-layered model, the outer layers change at a faster rate and are less stable, the inner layers change more slowly and are more stable, and the thickness of the layers represents the difference in pace among them. It is not an execution model for change management, but rather a way of thinking about the system as a whole and the relationships between its different parts, including how they evolve.
The Fast-Moving Layers
The impact of technology and climate on risk evaluation is changing at an accelerating pace. The ability for carriers, MGAs and reinsurers to provide effective technology solutions that supply the essential data to assess risk and its potential complexities is becoming increasingly prevalent. The major challenge is that introducing these technologies into standard operating procedures in underwriting is often met with a mix of resistance, fear and grief. These reactions stem from a multitude of factors, but the biggest one is that these innovations temporarily destabilize long relied-upon aspects of the system.
Meanwhile, forces like the weather patterns, global political environments and developing technical trends are accelerating the need to reassess how risk is evaluated. The resulting scale requires a shift in how industry participants behave. Note that this pressure is not a result of the mere existence of these influences – instead, it comes from the rate of change in terms of their frequency and severity.
The Sea of Strategy
The bridge between the fast-changing outer layers and the bedrock of stability in the center layer is product strategy. The work of that layers is developing a strategy to address market needs. Product strategy is also the widest layer for a couple of key reasons. First, it’s not a discrete activity, but a continuous process involving executives, actuaries, underwriting managers, claims managers and more. Insurance companies typically have a role for product development (insurance products) that manages how to evolve product offerings to match market conditions and needs. Often, these changes are foisted on underwriting as a rate change or similar, and underwriters are expected to adopt the latest offering in the market.
As carriers and MGAs, in particular, evolve their offerings and appetites to capitalize on market opportunities, they need to see that the guidance, tools and incentives they are providing their teams are being adopted. Without this knowledge, any strategy is typically doomed to mediocre results or, at best, luck.
Underwriting and Its Discontents
Underwriting is traditionally a deeply analytical and specialized process. Underwriters know the products they are writing inside-out and can often estimate an indicative rating or benchmark premium in their heads. That said, despite the amount of data available to assist with this process, incorporating new data and technology into underwriting departments is rarely a seamless transition. Rather than creating an art in the science, many processes cater to the art only, leaving underwriters to often rely on anecdotal constraints (I call these “worst-day rules”). Underwriters also tend to do business with people they know, immersing themselves in those familiar and comfortable processes and relationships, rather than nourishing opportunities that exist elsewhere in the firm’s distribution network. Instead of an underwriter calling their broker to discuss the “heresy” of an account, they can call their broker already knowing the risk and exposure specifics, provided by technology, and have a more productive conversation.
This is the layer we need to break into to be successful. The goal is to elevate and enhance the experience of underwriting so that humans remain a critical part of the formula. However, as can be seen above, moving too fast between layers and introducing disruption without providing the proper stabilizers can result in failure to achieve desired change, poor outcomes and residual fear of and frustration with technology and data initiatives.
The Foundations of the Industry
The innermost layers are just foundational to the business. It’s critical that people have the ability to transfer risk and ensure appropriate management by a trusted party – not only for insurance companies, businesses and individuals, but for the very functioning of a market economy. It might feel odd to mention capitalism here (I almost did not), but I believe that insurance and the market economy are so intimately linked that it would be problematic to ignore this.
Like the foundational layers of any model, these considerations likely feel obvious. However, the stability of these factors is vital, enabling us to consider how we can adapt all outer layers to achieve more profitable growth and better overall underwriting results.
Cute Model. What Now?
The goal of this article was to raise the idea of using a pace-layered model as a tool to understand how key aspects of the insurance business interrelate through their speed of change. The next step is to inspect how interactions between the layers can help insurance companies and their technology partners effectively navigate introducing change to the underwriting process. In some cases, this process has assumed the top four layers are the same, creating hurdles to developing a profitable underwriting business model. In my next article, I will discuss how to think about technology and data as they relate to the quickening pace of change in influences on risk.