Addressing operational resilience can be a daunting task. That’s why, a few months ago, we introduced you to a new way to think about operational resilience. Since then, Alchemy Crew proudly hosted experts for a day of talks and discussions as part of our Transformation Economy virtual event.
During our conversation on operational resilience, participants drilled down into the ideas shared in that first article. Today, we’re here to share an update on the key concepts, exercises, and practical approaches to operational resilience that were discussed during a session led by William Hawkins.
Whether or not you were able to attend the talk, the takeaways shared below could help you to change the way you approach business strategy and planning during a time of economic uncertainty. Don’t forget to check our companion summaries of Sustainability, Health & Wellness, and Mobility.
Technology will be the major driver of resilience in the 2020s insurance space
Observers might assume that whether or not an insurance business gets assigned an ‘outperform’ or ‘underperform’ rating comes down to something as straightforward as the Swiss Solvency Test.
However, the analysts setting those ratings actually spend a good deal of their time thinking strategically and considering how a particular business model interacts with broader industry trends. Due to the 2008 financial crisis and the low yield environment that followed throughout the 2010s, cash flow management was key as investors focused on dividends and cash generation.
Although regulation evolution is shifting the playing field too, the single most important megatrend in the insurance space for the coming decade is emerging insurance technology.
Fintech is still in its infancy when it comes to disrupting insurance, and the expectation is that the predominant cash management framework, which has been anchored to cash acceleration since the financial crisis, will shift significantly due to the application of new technologies. For a lot of incumbent insurers, this is likely to lead to some difficult decisions about how capital is deployed over the next few years.
Change happens, even in insurance
For dominant insurance firms, it can be easy to assume that market shares will remain static, but the truth is the industry is shifting over time. Even over the last 15 years, the market cap has moved dramatically. Five of 2004’s largest insurers no longer exist in their original form and the relative share of market capitalization amongst other players has changed radically.
Aside from the megatrends we’ve already discussed, there’s no crystal ball to tell us how the insurance marketplace will change in the future, but implementing a comprehensive framework enables us to understand the ramifications and importance of the shifts that do occur.
The framework shared with participants that joined Alchemy Crew’s resilience discussion saw that William broke down operational change into three categories — risk management of the front end product, back end service business management, and customer engagement. Each of these areas flows into another, illustrating the point that successful technology-driven change is as much about execution as planning and strategy.
Blending physical and transitional risk
One of the most significant points raised during Alchemy Crew’s resilience discussion surrounds the distinction between physical and transitional risks. If you’ve already worked with the Task Force for Climate-Related Financial Disclosure (TCFD) guidelines, you may already be familiar with the distinction between physical risks (direct economic impacts from physical events such as severe weather) and transition risks (markets shrinking as the economy becomes greener).
Often, we think of operational resilience as concerned only with physical risks. Of course, questions like “how do you ensure that you are going to keep your business alive day-to-day?” are at the heart of resilience, but it’s important to recognize that robustness over the long term is equally important.
Couching transition risks in the same language approach typically applied to physical risks can be a great solution here — begin by setting your resiliency goals and exploring what you want to be resilient to (for example, market forces and external pressures).
Operational resilience as a leadership style — takeaways from an open-ended discussion
To a certain extent, large businesses can be distinguished from smaller enterprises by virtue of the fact that they can’t pivot their strategy overnight. How should a large insurer manage operational resilience?
The tricky thing is that the insurance leadership team needs to be capable of taking contradictory approaches simultaneously — they need to both refine and optimize the old business model while introducing new variants via an innovation management system to find out what changes to make.
Observations suggest that the only effective way to do this in the insurance space is to introduce a new disruptive business at a distance from the old one. Even though it might seem frontline workers are those who know best about what needs to change in a business model, if a disruptive business is paired closely with its incumbent model, it will fail because it will be held to the same standards as the more established operation.
Our thanks go out to all those who took part in the Alchemy Crew Transition Economy Operational Resilience discussion. The debate was lively, leading to a fascinating exchange of views on the way that operational resilience topics interact with the insurance sector.
What are your thoughts on the points touched on above?
We would love to hear your views, please leave a comment below.
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