It’s often said (and I’ve said it myself) that you can plot the major sectors of financial services – insurance, banking, and securities – on a continuum of risk attraction/aversion with respect to technology adoption. Insurance would be on, say, the leftmost side as the most risk averse, securities would be on the right as risk attracted, and banking would be in the middle of the two. Thus, it explains, capital markets have the most sophisticated information technology, insurance has the least sophisticated, and banking is somewhere in the middle. You also see this reflected in the technology provider arena of each of those three sectors with insurance technology providers being many and fragmented, banking providers being more consolidated and mature, and securities with advanced outsourcing solutions (instead of each firm licensing and deploying software or, even less, building its own software applications).
That the insurance technology provider community is fragmented is obvious from the size of the vendor directory at www.InnovationInInsurance.com. But is this because the insurance industry is risk averse…or are they just averse to technology risk? And if it’s just the latter, can something be done about that?
An insurance company CEO marveled to me recently that his board of directors would heavily scrutinize every million dollar IT decision he proposed while his underwriters and claims examiners were making million dollar decisions every day without such scrutiny. He knew, of course, that his directors were distinguishing risks which it was the company’s core competency to manage (e.g. the limits on an insurance policy) and those risks (e.g. the licensing of enterprise-wide software) that were outside of its core competencies.
When it comes to insurable risks, insurance companies are not only not risk averse, they actually embrace risk. In fact, risk is their business model. They accept risks that others don’t want, and then manage those risks by amassing enough of them to make them manageable. After all, when it comes to whether a house will burn down next year, it’s impossible to know. But if you are considering a thousand of them or more, while it’s not possible to know which ones will burn, you can be pretty sure of the number of them that will.
If technology vendors just assume that insurance people don’t like risk, they will deny themselves opportunities. Nathan Conz makes that point well in his Oct. 21 blog at Insurance & Technology in which he points out that “The Curse of the Bambino” which was supposed to explain why the Boston Red Sox couldn’t win the World Series was not only debunked by their winning of the 2004 and 2007 series, it was an urban myth which gained currency only in the 1980’s when Boston sportswriters wanted a clever way to express their frustration. “The Curse of the Bambino” was a canard, and Conz’ point is that assuming insurers have always lagged, or will always lag, in technology adoption is similarly distracting and counterproductive. (At least credit him with productively channeling his own frustration with the Sox bowing to the erstwhile last-place Tampa Bay Rays.)
Insurers will adopt technology that will increase their profits sufficiently as long as the risks associated with implementation and usage can be properly managed. If we want them to buy more, therefore, we simply need to give them more compelling value propositions – value propositions that address the management of risk as well as the return on investment.
Tags: insurance IT spending, insurance outsourcing, insurance software, risk management
October 24, 2008 at 7:50 am |
Mike – I enjoy reading your blogs – - this one struck a nerve –
I agree…Insurer’s business model is all around risk and where insurance is in relationship to banking and capital market vendor maturity – they are laggards.
I believe that vendors have no incentive to change what they are selling – because insurers continue to buy what they are offering. North American insurers spend over $40b a year in IT – - they are implementing and trying just about everything out there…. however, most of this is being driven by technology/IT and not the business.
I believe the other part of this puzzle is the Business Executives are afraid of technology, not because of the risk, but because they do not understand it – - unlike the business of insurance – - they just delegate it to their CIO’s. There is no business accountability.
In today’s world of technology – - it is interwoven in all aspects of our personal and business lives – - -business executives needs to understand the power of technology, look at their needed business capabilities and how technology can help drive change, agility, and flexibility – - – they clearly need to work with their CIO’s to drive the vendors to start building what they need – - instead being the ‘victim’ of misaligned IT solutions that do not satisfy their needs.
To me, this will release this ‘log jam’.
October 24, 2008 at 8:04 am |
Releasing this ‘log jam’ is a compelling vision. The one advantage to being a laggard is that it gives you the opportunity to leapfrog. I look forward to a time soon when other industries take notice that insurance is leading the way in technology deployment. A greater portion of insurance industry processes are capable of being automated than almost every other industry because the product itself is intangible – that is, a promise to pay. Therefore, let’s indeed get at releasing that ‘log jam.’
October 24, 2008 at 1:28 pm |
[...] the Insurance Industry Risk Averse? Posted on October 24, 2008 by Mike Mahoney Is the Insurance Industry Risk Averse? (Mike Gantt’s Insurance Technology Blog) An insurance company CEO marveled to me recently that his board of directors would heavily [...]