We are sure that our readers are familiar with Schumpeter’s concept of “creative destruction”, now over 70 years old, in which a capitalist economy goes through various cycles, during which businesses are created and destroyed, unless they can adapt, in an unending and brutal process of value-destruction and creation, which has historically usually produced a net benefit to societies.
The P&C or general (re)insurance industry in its traditional forms is an ancient one, that has survived decades, if not centuries of change, conflict and turmoil; and gradually become embedded in the fabric of all developed economies, being able to adapt and create new products and serve new needs. However, it is now subject to a sustained challenge, not only from external sources of capital and some non-standard business models; but potentially from those who dominate other industries outside finance.
So, we believe it behooves industry participants to think deeply and without constraint about how they can adapt all aspects of their business (capital structure, product offering, pricing, cost structure) to meet threats that, in our view, are more systemic and systematic than many realize; because, like the ratings agencies who have long procrastinated in acknowledging the extent of the challenges that many industry participants face, seemingly successful managements are often reluctant to adapt until a threat is potentially existential.
After all, if one has a combined ratio firmly below, say, 90%,; a solid capital base; quiescent investors; and conservative investment policies, what can possibly be a problem? Well, what if demand simply migrates elsewhere and price competition becomes such that so-called “technical levels” are breached? If you do not have alternative sources of income and are unwilling to consider new business lines, or approaches that are “not the old, tested ways” in existing ones, you may find that you have no business and that someone else has walked off with your stamp! Opportunities, customers and capital will simply migrate elsewhere, even if the industry (or pockets of it) remains ostensibly profitable, because it is increasingly seen as irrelevant or ill-adapted.
At Awbury, we have learnt that we have to spend considerable time researching and anticipating threats and opportunities to our own business model and goals; and that “adapt or die” is not a trite, pseudo-Darwinian tag, but a fundamental component of being able to build a sustainable business. We would not be so naïve as to pretend that we have all the answers; but those in our industry who do not give serious thought to their environment, may find that they do face devastation, not just creative destruction.
-The Awbury Team