Lessons in Risk, Leadership, and Life

I've had the good fortune to work with some remarkably talented people over the years. Some were entrepreneurs who saw opportunities that nobody else seemed to recognize. Others were seasoned businesspeople who understood that sometimes the best way forward was to challenge the way things had always been done.

I've learned a great deal from both.

I've also learned that just because we can do something doesn't necessarily mean we should.

That thought has been on my mind lately as I've watched what's happening in the InsurTech world.

There are some incredibly bright young people attracting enormous amounts of investment capital to build insurance organizations around artificial intelligence and other emerging technologies. Some of what they're doing is genuinely exciting, and I believe our industry has plenty of room for improvement.

Frankly, some of the things we've been doing for decades deserve to be challenged.

But I find myself wondering whether some of these entrepreneurs, and perhaps even some of their investors, fully appreciate the business they've decided to enter.

Because insurance isn't quite like most other businesses.

And that brings me to something I've been thinking about.

When a Good Marketing Idea Creates a Whole New Set of Risks

Imagine you're running a relatively new insurance technology company. You're looking for creative ways to get in front of entrepreneurs, technology developers, and investors.

Someone suggests opening coffee shops where these folks can gather, work, exchange ideas, and develop relationships.

I actually like the concept, at least from a marketing perspective. I've always believed that relationships are built around conversations, not advertisements.

But then I start thinking about everything that comes with that idea.

First, you're getting into the restaurant business, whether you intended to or not. That means permits, employees, food safety, premises liability, leases, and all the operational headaches that come with hospitality.

I've worked with enough restaurant operators to know that there's considerably more to running a successful coffee shop than making a good cup of coffee.

Then there's something else.

Suppose two entrepreneurs are sitting at a table discussing an acquisition, a new invention, a potential investor, or a sensitive employment matter.

Would they be as comfortable having that conversation if they knew the establishment was owned by an insurance company?

Would they wonder whether someone might be listening? Whether information could find its way into the wrong hands?

I'm certainly not suggesting that anyone is secretly recording conversations. I have no evidence of that.

But I've been around long enough to know that perception can sometimes do nearly as much damage as reality.

Insurance companies already struggle with public trust. Why introduce another reason for people to question your motives?

And before spending millions of dollars pursuing an idea like this, wouldn't it make sense to have someone sitting at the table asking whether the potential reward justifies the additional risks?

That's not being negative. That's simply good management.

Something Else That Concerns Me - Who's Actually Carrying the Risk?

Another trend I'm watching involves newer insurance organizations using risk retention groups and other alternative insurance arrangements.

Now, I don't have anything against risk retention groups. They've been around for years, and some have done an excellent job serving industries that traditional insurance companies either couldn't or wouldn't accommodate.

But there are some important distinctions that buyers need to understand.

For starters, risk retention groups don't participate in state insurance guaranty funds. If one becomes insolvent, the policyholders generally don't have the same guaranty fund protections that may be available with a traditional admitted insurance company.

That doesn't mean every risk retention group is financially weak. Far from it.

But it does mean we ought to pay close attention to who's standing behind the promise to pay claims.

We also need to look carefully at the policy language. RRG policies aren't necessarily narrower than traditional policies, but they can be quite different. And those differences sometimes become painfully apparent only after a loss.

Here's what troubles me.

Many of the entrepreneurs buying insurance through these newer platforms are remarkably sophisticated when it comes to technology, raising capital, and building businesses.

But that doesn't necessarily mean they understand insurance.

They may not appreciate the difference between defense costs being inside or outside policy limits, how claims-made coverage works, or what happens when an insurer becomes financially impaired.

And let's not forget something else.

Just because the technology company selling the insurance has a multibillion-dollar valuation doesn't mean the insurance company actually assuming the risk has billions of dollars available to pay claims.

Those are two very different things.

I wonder how many buyers understand that distinction.

Who Has the Courage to Say No?

This may be the part that concerns me most.

I've worked with business owners and executives who were brilliant at what they did. Some built extraordinary companies. Others made mistakes that cost them dearly.

And I've made my share of mistakes along the way, too.

One lesson I've learned is that surrounding yourself with people who agree with you isn't necessarily a recipe for success.

Sometimes the most valuable person in the room is the one willing to raise a hand and say, "Have we really thought this through?"

When I see a young company raising hundreds of millions of dollars and pursuing several very different business initiatives at once, I wonder who's asking those questions.

Who is looking at the financial commitments? Who understands the regulatory requirements? Who is evaluating the exposures that might not become apparent for years?

And in the case of an insurance organization, who's bringing the experience of having lived through difficult underwriting cycles, catastrophic losses, reserve deficiencies, and claims that take years to resolve?

I'm not suggesting that young entrepreneurs shouldn't be running insurance companies. Age has very little to do with good judgment.

I've known some exceptionally wise young people and some older folks who never seemed to learn much of anything.

But experience does matter, particularly in a business where the consequences of today's decisions may not show up on the financial statements for another five or ten years.

I would hope that the boards of these emerging insurance organizations include people who have actually managed insurance risk, not just people who know how to raise capital, build software, or grow a business.

And I would hope those experienced people have both the authority and the willingness to challenge management when necessary.

At the End of the Day, Insurance Is Still a Promise

I think this is the part of our business that sometimes gets lost in all the excitement surrounding technology.

Insurance is a promise.

We collect premiums today and agree, subject to the terms and conditions of a contract, to respond to certain losses that may occur tomorrow or years down the road.

That's a serious responsibility.

I've seen what happens when insurance works the way it was intended. I've watched businesses recover from devastating losses and families find some financial stability during terribly difficult times.

I've also seen what happens when the coverage wasn't what someone thought they purchased, when an insurer couldn't meet its obligations, or when a claim became a long and painful dispute.

Those experiences tend to shape the way you look at this business.

Technology can help us do a better job. It can make underwriting more accurate, reduce unnecessary administrative work, improve communication, and help us recognize exposures we might otherwise miss.

I'm all for that.

But technology doesn't change the fundamental obligation.

Someone still has to understand the risk, price it responsibly, maintain appropriate financial resources, and administer the contractual promise when a covered loss occurs.

And someone needs to be accountable when things go wrong.

So, Is There a Better Way?

I certainly believe there is.

I hope we continue to attract talented young people into the insurance industry. We need their imagination, their energy, and their willingness to question things that many of us have simply accepted for too long.

But I also hope they'll seek out people who have spent their careers learning some of the lessons that can't be found in a textbook or written into an algorithm.

And I hope those of us who have been around the business for a while will be willing to share what we've learned without getting in the way of progress.

There's room for both.

We ought to be able to embrace new technology while insisting on sound financial management, thoughtful governance, and a healthy respect for the risks we're accepting on behalf of others.

I don't think those things are mutually exclusive.

In fact, I believe they're essential to one another.

The goal shouldn't simply be to make insurance faster, cheaper, or easier to buy. It should be to make the entire process better for the people who depend on us.

Because when the excitement surrounding the latest technology fades, when the investors have moved on to their next opportunity, and when a policyholder suffers a serious loss, somebody still has to be there to honor the promise.

And that, to me, is what this business has always been about.

Is There a Better Way?

- Dana Coates