It has become clear, as we enter into new phases of pandemic response, that the road ahead will be long and variable. Like other seismic shifts in economics and society, many of COVID-19’s impacts are so large that they have passed into unplanned territory. The business case model is broken, in effect. New thinking may be necessary.
I worked at a multi-line carrier when Hurricane Andrew devastated South Florida. The level of destruction was beyond anything our cat-models had anticipated. It caused us to look at the geographic diversity of our entire book of business. We realized that everything we had was in coastal regions. The company decided to sell the business because the downside risk suddenly seemed so much greater than the upside potential. That decision appeared prophetic when hurricane Sandy slammed into New Jersey in 2012.
One benefit of older, multi-line insurance business models was that the diversity of businesses offset any particular business hitting a downdraft. These multi-line models also helped to counter the impact of specific business cycles. Over the past 20 years, many insurers have adjusted their go-to-market strategies to focus on specific business with targeted earnings potential. Many also doubled down on specific businesses that have evolved into spaces where economies of scale are critical, given the cost of supporting infrastructure.
Several recent carrier conversations with Novarica have highlighted the challenges this lack of diversity can create. Focusing on specific lines of business will enhance profitability when the economy is strong. However, it can have significant adverse impacts on financial results when the cycle turns south.
Diversification provides a kind of insurance that avoids hitting harsh lows by sacrificing exuberant highs, much like investment portfolio management on a personal or corporate level. It is especially important to understand this now. Many of the cycles that impact the profitability of investment decisions may last much longer than the run-up to the next earnings call or annual financial statement production.
Novarica has heard both sides of this issue recently. Some insurers lament the lack of diversification leading to “crashes” in earnings; others note that low-growth lines of business have helped them avoid hitting damaging financial guardrails in 2020.
Business composition is not an IT issue per se. It is, however, an area that CIOs and other IT leaders should understand and speak to, given the given role technology plays in all lines of insurance. It can have a meaningful impact, for example, on the technology strategies that are most appropriate as companies think about the competing forces unleashed by business strategy decisions.
The balance between “best value” and “lowest cost,” for example, needs to be contextualized to determine which is best. Contextualization could help determine whether a low-cost approach is best if it also sacrifices future flexibility or precludes the organization’s ability to execute on opportunistic, unexpected events, e.g., the pursuit of an M&A strategy.
The pandemic has given CIOs a welcome seat at the senior leadership table, which reflects the successful execution of business continuity plans. Moving forward, efforts to refine IT strategies to support evolving future-state needs can allow CIOs to avoid wasting a good crisis, to paraphrase Winston Churchill.
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