Insurers Can't Grow by Breaking Even
Insurance Experts' Forum, April 13, 2011
Late last year, Deloitte's “Center for the Edge” published a very thorough analysis of the state of North American businesses, contrasting value and productivity from four decades ago to what we see now. Their conclusion, to put it mildly, was very grim.
The overall conclusion was that the return on assets of most businesses is only a quarter of what it was in 1965. Turbulence, measured by ever-briefer life expectancy of Fortune 500 firms and executive tenures, is only growing. Even the “winners” among us are only doing so because they're breaking even—“barely maintaining previous performance levels, while the losers experience rapid deterioration in performance.”
In addition, the “topple rate” at which big companies lose their leadership positions has more than doubled, “also suggesting that ‘winners’ have increasingly precarious positions.”
So how does the insurance sector fare in all this long-term misery? The overall asset profitability of insurance firms is about half of what it was in 1972—the first cycle year measured in the study. However, this varies by type of carriers. For life insurance companies, return on assets stands at barely a fraction of a percent (0.2%), down from 3% some 40 years ago. P&C insurers are holding a little more value, now standing at 1%. But they are also down from 3% in the early 1970s. Only insurance brokers held some ground, with a 3% rate of asset profitability, but this is down from 6% in 1972.
Labor productivity is an important part of the equation, and this is the glimmer of good news in the Deloitte study. While Deloitte did not provide productivity numbers for the insurance industry, the productivity numbers for its sibling sector, banking and securities, showed a doubling in employee productivity rates between 1987 and 2010.
The problem, Deloitte concludes in the report, is that the current and ongoing business environment is far more unforgiving toward businesses that don’t adapt swiftly enough to changes around them. Technology is accelerating labor productivity to new heights, but may also be shortening the windows of opportunity for companies. “The exponentially advancing price/performance capability of computing, storage, and bandwidth is driving an adoption rate for our new ‘digital infrastructure’ that is two to five times faster than previous infrastructures, such as electricity and telephone networks,” Deloitte says.
A vital component of this emerging digital infrastructure is the ability to quickly adapt and move with markets. This comes from building a culture of innovation that taps into the creativity and energy of both employees and customers.
The ability to respond to customers is especially critical to insurance companies. Part of the big shift Deloitte talks about is the increasing power of consumers over product choices. In fact, insurance products (home and auto) rank third on the list of products where choice has shifted to consumers, surpassed only by search engines, restaurants and home entertainment.
Joe McKendrick is an author, consultant, blogger and frequent INN contributor specializing in information technology.
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