Do we even need insurers anymore?

Voltaire once said that "if God did not exist, it would be necessary to invent him." Could you say the same about insurers today, I wonder?

It is striking that as organisations have sought to come to terms with the pace and scale of change now confronting them, the story of Kodak's rapid decline from controlling 90% of US film sales and 85% of camera sales to eventual bankruptcy, has emerged as the cautionary tale of what can happen when you fail to keep pace with technological change. The corporate equivalent of the man who failed to sign the Beatles.

However, what many people forget is that Kodak actually invented the world's first digital camera - in 1975. Far from being some sort of industrial dinosaur, therefore, Kodak was an innovation driven company operating right at the cutting edge of photographic technology. And while endless books and articles have been written about the reasons for Kodak's demise, in my view the principal issue was less their failure to keep pace with change and more their lack of imagination.

They could not imagine a world where a digital camera would be for anyone but the dedicated professional, given its (at the time) prohibitive cost. They could not imagine a world where processing speeds, image resolution, battery life and storage capacity would increase exponentially, at a fraction of the cost. They could not imagine a world where people would not wish to take rolls of film down to the chemist to get them developed, pick them up a few days later and then diligently stick that "Kodak moment" in an album. They could not imagine a world where everyone would carry a mobile phone that contained a camera that allowed images to be instantly shared on vast online networks.

If it hadn't been for the fact that Kodak was helping invent this new world, their failure would have perhaps been more understandable. At the time, such a world must have seemed to have been drawn from the pages of a science fiction novel. But their lack of imagination was compounded by a fatal cocktail of arrogance - Kodak famously saw little point in sponsoring the Los Angeles Olympics in 1984 given its dominant position, allowing Fuji to gain a foothold in the US market and grow its market share from almost nothing to 17% by 1997 - and a complete failure to articulate and execute a plan once the scale of the threat to their core business had become clearer. Fuji, faced with the same market dynamics and yet without the benefits of Kodak's pioneering R&D, did not fall into the same trap.

To my mind there is a clear read-across to the financial services industry, right now.

There is no shortage of activity. Market commentators and the media are lining up to sell their vision of both the Eldorado that lies just over the horizon and the Sixth Circle of Hell (Heresy for those of you that don't know their Dante!) that awaits those who fail to convert to this new religion. Every large player has got some sort of incubator or lab or Chief Innovation Officer, whatever that is. Joint Ventures are being formed. Data scrubbed. Analytics teams hired. Digital strategies unveiled. Billions of dollars is pouring into FinTech and InsureTech start-ups, most of which will likely not survive their first round of funding.

But does it go far enough? Are the incumbents correctly reading the signs, but merely agitating the surface in response, while deep down changing nothing? Are they like Kodak, incapable of, or unwilling to, imagine what tomorrow's world could look like, because to do so conjures an image so fearful that it implies that they should torch their existing business so as to give birth to a new one from its ashes?

This question is of particular relevance to the insurance market, an industry whose often archaic business practices and antiquated operating models, not to mention huge frictional costs and under-invested IT systems, must have the financiers and techies in Silicon Valley licking their lips in anticipation. Show me another industry where a US client, say, will find their risk placed via a local broker, via a US wholesale broker, via a London wholesale broker, via an MGA, into a Lloyd's syndicate, only to be reinsured via a FAC reinsurance broker to a reinsurer and then potentially via another treaty reinsurance broker to another reinsurer, with each stage of the chain clipping the ticket. How much of every $ of premium goes to providing the actual cover versus feeding a serpent in danger of swallowing its own tail?

It doesn't take much imagination to see the huge potential for eliminating or automating steps in this chain, creating value for the disruptor and hugely improving client outcomes in terms of cost and service levels. But the real winners here will be those who have the scale, firepower and smarts to invest in the analytics and systems to drive not just marginal efficiency improvements in discrete parts of the value chain but to challenge the very basis of the way things are done. Traditional small to medium sized players, therefore, unless they are operating in very specific niches, may find themselves at a long term, structural dis-advantage to larger and smarter players with more access to data and more ability to invest in the people and systems required to drive insight from it.

More critical than ever, however, will be client relationships / access. Improved analytics and slick systems is all fine, but if you don't have the customer or the products / marketing skills to get to them, you're wasting your time. That, at least, has not changed. In fact if anything, in a more clinical, automated, digital world, client contact and warmth is set to become more important than ever.

This is turn raises an interesting thought, though. While for years, many brokers have operated under the somewhat existential threat of disintermediation, is the boot not now very firmly on the other foot? Unlike the insurers, who only know what they underwrite, the larger brokers, in particular, potentially have access to vast swathes of client and claims data across every single class of business and geography. Armed with this and the client relationships, and with a wall of capital looking to be deployed in the market (as the rise of the ILS market bears potent witness) why do they need the insurers at all? Why not just rent the capital, underwrite the best business themselves and use the traditional market for the rest and to reinsure out the peaks? And if the brokers can do that, why not Google or Amazon who have huge client reach and brand loyalty, unmatched analytical ability and the firepower to build, buy or hire in whatever insurance expertise they might need?

Of course it is not that simple. The market has not evolved in the way it has by accident. Large, complex and long tail risks require huge balance sheets and often syndicated underwriting and reinsurance towers to be written at all. Shareholder returns vary massively between brokers and insurers for a reason. In the rush to embrace the new, we risk ignoring all that works and that is good about the old. And because of this change, when it comes, is likely to be more gradual and evolutionary.

But change it will and as the Kodak story shows, the key risk may well not be that people fail to recognise that the change is coming - I believe they do - but that they fail to imagine quite how radical that change could be and be willing to plan accordingly.

Henry Ford famously said that "If I had asked people what they wanted, they would have said faster horses."

Many risk now falling into the same trap.

? James Twining 2016

Please read my other posts on whether we need insurers anymore, the enduring mystery that is the insurance broker, moving on from the concept of an annual policy, making sense of the various London Market trade associations and the long term threats to Lloyd's future.