Bureaucracy or autonomy: control vs innovation

13-12-2021

Bureaucracy or autonomy: control vs innovation

Greg Lang, RAIN

Today, most underwriting decisions are made by committees, split equally between the lawyers and the actuaries rather than the underwriters, without bringing better results, says Greg Lang of the Reinsurance and Insurance Network.

Attendance is up at many in-person conferences. That’s good. The bad news is it is still hard to find and meet with decision-makers. This is not a criticism of the attendees. Decisions today are often made by committee.

I recently had a Letter of Intent (LOI) rescinded by an insurance carrier. A seven-page document that took over a month to craft. It was reviewed and revised several times by counsel, but it was later tossed out—rescinded. I was told there was no path forward. Someone must have forgotten to check with someone else.

Unfortunately, situations like this are becoming more common, and it’s frustrating for all involved. And it’s not just insurance companies. Many large firms struggle with analysis paralysis. Before we talk about some solutions, let’s take a deeper look at the problem.

In 1989 James Wilson wrote what some consider one of the best books ever written on the topic of bureaucracy, "Bureaucracy: What Government Agencies Do and Why They Do It". The book looks into various government agencies and attempts to explain why they act the way they do. Sometimes, these agencies' actions defy logic. Who doesn't have a frustrating story about a personal interaction with a government agency? 

For example, securing a licence or the amount of paperwork required to form a captive. We're putting our own money at risk here people. Hopefully, we know what we're doing. But I digress. 

This same level of bureaucracy can be found when working with many traditional insurers, brokers, and the service providers that support them. It’s why I’m sure so many of you reading this chose the alternative market as a carrier path.

Wilson’s book is worth a read. I found three points in one chapter particularly telling. It pretty much sums up this problem as I see it:

  1. If senior management can be sent a message about making a decision, they will be sent that message.
  2. If management has the time to listen, they will be told what they want to hear.
  3. Decision-making leads to the creation of specialised teams, and these teams then demand more information to justify their existence.

When I started my career, the underwriter was king. Today, most underwriting decisions are made by committees, split equally between the lawyers and the actuaries. Unfortunately, this bureaucratic group has not yielded any better results.

In “Bureaucracy”, chapter 10 is titled “Turf.” One of many bureaucratic conundrums is a willingness to accept less money for greater control (more “turf”). I’ve known individuals who have chosen this path. The chapter goes on to look at the executive and the role autonomy (control) plays in innovation.

When should executives defer to subordinates and when should they overrule them? The consultant’s answer is: “It depends. Use good judgement”—not very helpful given the points highlighted earlier. To further complicate matters, organisations that encourage innovation are often different from companies that make innovation easy to implement.

The American philosopher Henry David Thoreau offered this advice: “Simplify, simplify.” His good friend and mentor Ralph Waldo Emerson replied that “Simplify” would have been enough.

There are no quick fixes. Often as in this case, the answer is sometimes sitting right under our noses. Do it yourself.

“We now have enough domiciles, captive managers, actuaries, and consultants to fit almost every situation.” Greg Lang, RAIN

Autonomy

Philip Selznick, a noted author in organisational theory, defines autonomy as a condition of independence sufficient to permit a group to work out and maintain a distinct identity. There are two parts to Selznick’s definition, an internal and an external one: a minimum of constraint imposed by superiors (external) and a widely approved understanding of the group mission (internal).

This is how I view the long-term success of the captive insurance community. With appropriate internal and external influences, captives have flourished. We now have enough domiciles, captive managers, actuaries, and consultants to fit almost every situation. If not, a new law will pass, or a new domicile or service firm will be created. Wouldn’t it be great if the rest of our industry worked this way?

Real innovations are those that alter core tasks. Risk retention groups might be the best alternative market example I can think of. The liability crisis of the 1980s got so bad that a solution beyond traditional insurance companies was required. This innovation is now 40 years old. I gave up holding my breath waiting for property to be added. Parametrics might be one of the latest innovations.

Most changes we see today only add or alter peripheral tasks. A peripheral activity or issue is one that is not considered very important compared with other activities or issues. Peripheral change is usually a response to one’s environment. Sometimes entrepreneurs bring about peripheral change in large organisations. Success depends on persuading others that the changes are peripheral and threaten no core interest. The rise of insurtech and app-based modes of distribution are good examples of peripheral change. Most of the activity is focused on removing human decision-making and of course removing the middleman.

Many entrepreneurs are willing to accept less money in exchange for autonomy when trying their hand at the latest innovation. Successful entrepreneurs know the status of both are temporary. Many companies have hired chief innovation officers and/or tried to develop theories of innovation so that it can be replicated. Good luck. True innovations differ so greatly from one another that trying to find one theory to explain them is like trying to convince the captive insurance industry that we need only one conference.

 

Greg Lang is the founder of the Reinsurance and Insurance Network. He can be contacted at: glang@rainllc.com

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