State Farm / Florida: Insurance Intelligence?

Summary

* Executives at large insurance organization are accountable for KPI’s to stakeholders; not for providing “socialistic goods, regardless of the financial considerations”.

Analysis

Background:  Business is not just one Normal Bell Curve; rather it’s made up many.  It’s my belief, the #1 driver that determines how well an industry (relative to other industries) performs, is determined by the Talent that chooses to participate in each of the various industries.

 

Does the Best Talent (or good, but average talent) pursue careers in Insurance (traditional product lines, P&C)?  Given the consistent research findings on the lack of innovation, average KPI’s and observation that smaller, more talented companies have consistently moved up in the rankings, objectively; the majority of the best talent does not pursue / stay in P&C (although many are very nice people).  The culture of average performance, creativity, systems, methodologies, execution-success, etc. punishes and encourages top business talent to pursue other industries.

 

So why do investors accept this average industry that appears to reap most of its performance gains based on the “tide” of the industry?  My belief; consistency without wild swings makes sense as part of an investment portfolio.

 

Are there tremendous financial opportunities for Insurance companies that are willing to elevate their performance, reduce expenses, diversify risk and improve KPI’s such as Operating Profit per FTE or loss ratios?  Significant … but, our Bell Curve prevents most of them from seeing / pursuing / implementing these huge improvements.

 

Florida; what should be done?  Here are three of my beliefs on what would be good for the industry.

 

1. Let State Farm, or any other insurance company, adjust its risks in the state.  If the other 49 states didn’t exist, would any insurer be in business in Florida; given the current premiums charged?  If the answer is no, then the question should be directed to the other 49 Governors to find out if they would like to have their constituents pay a Florida surcharge.

 

2. If an insurance company wants to pull out of a state, the financial forecast probably isn’t even close to break-even.  Let them pull out and if it is a poor decision, competitors will punish them for the decision.  The actuaries in these companies are some the brightest people in the industry.  If there is $1 to be made, with xx% probability, they will find it (and this is healthy / good for the company).

 

3. Florida, or any other State, can become a “competitor” and offer insurance to its residents if the private sector doesn’t find it financially attractive (and they can “do it better”).  If they aren’t able to “do it better”, then continue to regulate the heck out of Insurance Companies, but allow them to charge a premium closer to their true, average costs over any random 7+ year period.

 

Talent, Leadership and Execution:  Given the challenges in the industry, when intelligent business decisions are made, support and encourage more of them.  The winners will include the policyholders in all 50 states, the insurance companies and the individual states (prices will reflect the overall value).

 

Finally, when decisions that save a company $1, $10 or $100+ million are made, if you’re going to “penalize the company” because the social value negatively impacts your geographic-based constituents; charge a one-time, 20-30% fee that gets paid to a World Social cause on behalf of the State.  The recipients of the money will be in far worse financial condition than the average U.S. citizen, the company gets a Tax Break and receives the benefit of the expense savings; 70-80% in the 1^st year and 100% in each subsequent years.

 

Hopefully, there's an idea or two that you can start with, improve and then use to achieve your desired outcomes!