It has been said that to prepare for the future, we should look to our past. I believe that if insurance is to adapt and grow in the coming years, we need address the ever-growing sector of insuretech and its implications on the insurance business model. To that end, one might look to past industry leaders, and I offer a hidden gem of advice found buried in the shareholder letters of Warren Buffet.
In March of 1979, Warren Buffet wrote requirements for investing large sums of their insurance company net worth into other companies that would then generate income for Berkshire Hathaway.
These four guidelines – as simple as they can be – are brilliant, as they are easy to follow for almost anyone or any entity looking to invest hard earned capital. (Emphasis is mine).
“We get excited enough to commit a big percentage of
insurance company net worth to equities only when we find (1)
businesses we can understand, (2) with favorable long-term
prospects, (3) operated by honest and competent people, and (4)
priced very attractively. We usually can identify a small number
of potential investments meeting requirements (1), (2) and (3),
but (4) often prevents action.”
These guidelines, which have helped Buffet and Berkshire Hathaway become titans of investment banking, provide a basic framework for due diligence for any one person or company to invest their money.
While these rules are over 40 years old, their relevancy applies to insurance and the growing field of insuretech. Now, with some updating and modification of Buffet’s guidelines, I present my 4 guidelines of dealing with insuretech.
- Know Your Needs– For an insurance company, looking into potential insuretech partners can be both very exciting and very daunting. Glitzy technology may appear to modernize your business, but it is not uncommon to lose sight of the key problems that need to be solved. It is best to sit down in the time before meeting with potential vendors and map out what issues you want to address. Be specific. If you want to address corporate vehicle misuse, find the vendor that can help you with that. Don’t get distracted by the vendor that has cool technology to fix distracted driving in fleet accounts based in the Midwest. Knowing your needs for success before you meet a vendor or get lost in a dazzling exhibit hall can be the difference in moving towards a solution and still searching for one.
- Know the Company– Is this a start-up or a seasoned veteran company? What about having any experience in insurance? Is it just one person or is there several key, senior-level team members who know (and lived) the insurance world for a reasonable amount of time? These may seem like odd questions to ask when first looking at a partner company, but these are very useful in what can be a slow and arduous process during contract negotiations. Insurers have rules (sometimes a lot of them) that need to be followed to keep in line with legal and regulatory entities. For some fast-paced insuretech firms, this is difficult to understand, and they may press to get a contract through unreasonably fast. Thus, it can be a major advantage for an insuretech company to have an insurance veteran on staff who understands industry nuances.
- Know the People– First impressions are huge. HUGE. While the internet and modern communications make it easy to meet virtually, they don’t replace a good handshake and in-person discussion. You may not initially know if that smooth-talking person you meet in a booth at an insuretech conference is just a hired spokesperson, a sales rep or a midlevel manager; a few questions and inquiries of the service you’re interested in can help clear up some confusion. Often, at the better-known trade shows companies there will be a business manager or other rep on site who you will be working with. Regardless, if the person you meet with and have more than one conversation with doesn’t sit well with you, move on.
- Know the Numbers– This one is tricky for a lot of reasons: financials are never a pleasant topic. For an insurer’s strategy, knowing the financial soundness of the insuretech company is incredibly helpful. The best way to handle this is to look at Mr. Buffet’s guidelines above and see that his fourth guideline filters out a lot of potential investments. When dealing with a potential partner, no matter how closely their product or service fits your needs, you need to know how stable they are in their own finances. While this may seem obvious, it is not something thought about until deep into the contract process- if at all. A simple series of questions on funding rounds or who they are owned by could save a lot of potential trouble from a vendor going belly-up.
By following these four guidelines, it is possible to filter out a lot of potentially wasted time via meetings, dinners, or sidebar discussions and more time being productive and engaged. These guidelines are not foolproof, but they are a good guide to help one navigate the insuretech world.