The Productivity Paradox – Part 3

In our two previous posts on this topic, we tormented our Readers with a discussion of the current debate over the concept and paradoxes of productivity; and how a concept that seems obvious is actually rather difficult to define and can obscure the realities of this world.

Now, in this third and final post on the topic, we thought we’d turn our attention to the (re)insurance industry; and how the concept of productivity may apply to it and have an impact on its future.

So, in an unfriendly world, in which premium levels remain under pressure and investment returns constrained (in the absence of accepting greater risk and volatility), the goal is to be able to maintain underwriting discipline, so that one’s Combined Ratio remains as far below 100% as possible. Yet, such an approach, particularly in the NatCat arena, would and does rationally lead to turning away business and premium income, with implications for whether a (re)insurer’s cost base is sufficiently flexible to adapt. Implicitly, the entire industry faces the requirement to “do more with less”, and thus become more productive, or face disruption from those with a new, different or better business model.

However, the question arises as to what does improving “productivity” really mean in our industry? Cutting headcount? Rationalizing organizational structures? Investing in “Big Data” and AI? Pursuing transactions with higher “value”?

And what is the true measure of success? Higher return on capital? Lower Combined Ratio? Less volatility in losses and reserve development? Higher revenue per capita?

As always, one could provide a complex, well-reasoned argument, fit for the appropriate academic and industry journals; but would that really add any value or make a difference? At Awbury, we are, above all, pragmatists, focused on the appropriate approach to generate the best, high-value, risk-adjusted returns. In such an environment, many things can be productive as measured by their ultimate outcomes: focused research; market education; product development; improving our “hit ratio” for converting opportunities to real transactions; and honing our structuring, pricing and execution capabilities. To us, equating “efficiency” with “productivity” becomes self-defeating, because it confuses short-term, “hard” outcomes, with longer-term value creation and franchise-building. In reality, innovation is a fundamental component of productivity, being focused on creating and adding value for a business or economy, while “efficiency” tends merely to re-distribute value. At Awbury, innovation is a key component of our business model.

Being candid and open with our partners, so that they understand that our and their interests are always aligned; or being transparent with our clients about how we structure and price a transaction would never pass academic muster as being “productive”, yet each is fundamental to creating economic value for those involved and the wider economy. We do not deny that one also has to focus on revenues and costs, and ensuring that resources are deployed as efficiently as possible; but we are also convinced that emphasizing the obvious and “measurable” at the expense of the less tangible ways in which value is actually created in our complex society, for everyone’s benefit, is a much more rational and effective way to view “productivity”- and not just in the (re)insurance industry.

It, therefore, saddens us when we see short-term, reactive approaches, which seem to be “productive” because they may, perhaps, increase earnings per share, or squeeze out another 1% higher return on capital, yet ultimately lead to value destruction because the truly productive elements are somehow confused with a need for “efficiency”. Of course, duplication and process inefficiencies should be eliminated; obsolescent and commoditized businesses culled; reporting lines and organizational structures adapted to meet changed circumstances; and talent focused on generating sustainable revenue streams. However, too often the endemic management consultants’ approach overlooks the fact that, in a knowledge-based industry such as ours, focusing on the numbers and “productivity” improvements can actually be counter-productive in the longer term.

So, when you are told that your team, department or company needs to be more “productive”, ask whoever makes the statements: : “What do you mean by ‘productive’?” With a bit of luck, they will blanch!

The Awbury Team

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