Innovate effectively, or become a Zero…

The news of the creation by Google’s DeepMind unit of an enhanced and self-taught AlphaGo Zero, which trounced its own progenitor AlphaGo, and appears to play not only differently, but at a different level from human experts, set the Awbury Team thinking about the topic of innovation and change.

FinTech and InsureTech are all the rage, with more and more (re)insurers announcing “venture” units that seek access to new ideas and technologies externally; while predictions are made constantly about the industry being yet another one to be “disrupted” (another newly-fashionable term). Executives may wish to ponder the meaning and consequences of the word, and the fact that it implies that they are in danger of losing control over the destiny of their own businesses to others- disrupt, or be disrupted, because business as usual is not an option for most.

Whether rightly or wrongly, there is also a perception that the (re)insurance industry itself is “out of ideas”; and at the mercy of the latest “fad”, as it seeks desperately to find revenues that will augment its current “zero-sum”, commoditized business lines, and tries to justify losing tens of billions of dollars as a result of the recent spate of NatCATs, wiping out years of profit accumulation.

One can see similar patterns in other industries, where the incumbents, having become complacent, find that they are no longer able to generate significant ideas themselves, and have to rely on third parties to do the basic research that they themselves used to do- “Big Pharma” now being a classic example. The glory days of Bell Labs and Xerox PARC are long gone, while many governments seem to regard funding basic research (other than for “defence” and “national security”) with disdain, because it does not serve the particular vested interests to which they are in thrall. Clearly, there are pockets of excellence such as DeepMind and various university research departments, but too much of what passes for innovation is merely disruption and a “re-hash” rather than original- such as Uber, or WeWork. The so-called “gig economy” is hardly a step forward in human progress.

This matters; because, while the “D” in “R&D” is also essential, without the basic research on which it builds, there can be no progress. Incrementalism is all very well, but Humanity’s welfare has historically improved because of step-changes resulting from different modes of thinking.

So, the (re)insurance industry needs to focus on how it can generate truly fresh ideas itself, that will enhance its offering and margins. If it does not, others will consume its premia, and it will become increasingly obsolescent, as investors lose patience with moribund returns that do not even meet the cost of capital. There is absolutely no reason why a Google, Amazon, or Apple cannot create (re)insurance businesses built upon new business models, and almost certainly using artificial intelligence (AI).

The ability to generate executable and scalable new intellectual property is a fundamental requirement for any business that wishes to survive and prosper. Note the use of the word “executable”. Paradoxically, while basic research and new ideas underpin progress, if one cannot then execute on them, the enterprise is pointless. One’s lunch will still be eaten!

At Awbury, while we regard ourselves as an integral part of the industry, our franchise depends upon both innovation and execution; and we have absolutely no intention of becoming “zeros” as we build for the long term.

The Awbury Team

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