Models, Moats and Moat Mortality

Insurance companies, like all companies regardless of industry, should have several management capabilities — a strategy to differentiate themselves in the marketplace, a business model to enable the strategy, a moat to defend the business model, and a plan to strengthen (or replace) any deteriorating or dying components of the moat.

In this column, I will discuss business models, moats and moat mortality. But, because moats depend on the existence of business models, I will discuss business models in some depth before moving on to moats and moat mortality.

I’m not going to discuss corporate strategy. Of course, I wouldn’t disagree with any person about the critical importance of companies needing to have a strategy (e.g., an initiative that provides a company with a unique, differentiating position in their markets of choice). However, I plan to put aside any discussions of strategies for other writers and columnists.

Business Models

Start with the key question: What is a business model? Investopedia defines a business model as “a company’s plan for generating value to targeted market segments through its provision of products or services (or both) and simultaneously generating a profit.”

There are many other descriptions of business models available from a multitude of management texts and similar sources. However, the essence of a what I consider a traditional business model comes down to four major components: a value proposition; a profit formula; a set of resources; and a set of processes.

Diving Into the Four Components

First, a firm creates a value proposition, which should be defined in a manner by the firm to help someone (e.g., consumer or corporation or both) accomplish a job (i.e., fulfill a need) affordably, conveniently and effectively.

Second, the firm establishes a profit formula to deliver the value proposition in a profitable manner.

Third, the firm identifies the resources it needs (i.e., buildings, equipment, people, skills, products, technology and technology applications) to support the value proposition (and deliver it profitably).

Fourth, processes are created and maintained that are required to support the firm’s value proposition and resources simply and affordably.

Creating a Robust Business Model

I believe that firms need to take a further step to create what I call a “robust business model.” My concept of a robust business model is the expansion of the traditional business model with three components — activities, technology applications and technologies.

Consider the process of providing customer service, which encompasses several activities, technology applications and technologies, of which:

One activity is a CSR searching for the information to answer a customer’s question.

Two supporting technology applications are: 1) the CSR using a System of Record (SoR) that the information is stored in the CSR is searching for; or 2) the CSR asks a SoR for the information using an enterprise virtual assistant.

Two supporting technologies enabling the technology applications are: 1) a data repository located on-premises or off-premises, or 2) an AI-enabled voice recognition system that responds to the CSR with the requested information by transforming textual information into sound.

My rationale for expanding the traditional business model is driven by two realities:

Processes are comprised of one or more activities that can be, and usually are but not always, supported by one or more technology applications that can be, and usually are but not always, supported by one or more technologies.

Companies need to explicitly monitor and manage trends and challenges of the three expansion components of the robust business model with the same importance as explicitly monitoring and managing the trends and challenges of the four components of the traditional business model.

Managing to the Critical Realities of an Industry

There is an extremely critical point that company executives must keep in mind regarding creating and managing traditional or robust business models. Firms, regardless of industry, must always manage to the realities of their industry. Operating, market, competitive and regulatory dynamics are not equivalent among and between industries. Business models that are appropriate for information technology or telecommunications firms are not appropriate for insurance companies. A business model that is appropriate for property/casualty insurance companies is not appropriate for life insurance companies.

What are some of the critical realities — whether an insurer has a traditional or robust model — of our insurance industry?

Insurance firms must always conduct commerce in a manner which: is underscored by the reality that no line of insurance is a commodity; complies with insurance regulations in the jurisdictions the insurer conducts commerce; offers products that are priced according to sound actuarial principles; takes into consideration that the industry’s product is a legal contract with terms, conditions, and restrictions.

Those four insurance realities reinforce that an insurer cannot wholesale take a business model used by another industry.

Consider the reality of paying claims. Yes, insurers are in the business of paying claims but only the claims or the parts of a claim that meet the terms, conditions and restrictions of the claimant’s policy. There will be situations when claims can’t always be paid immediately or even in a time frame that any reasonable person would consider as real time even if claimants have been conditioned by other industries conducting commerce in real time or near real time.

Why?

Insurance fraud happens unfortunately far too often. Advances in technology including Deep Fakes will accelerate insurance fraud. (Might the emerging metaverse become a fraud amplifier?) Lawyers, whether in-house or outside counsel, will always be critical players in the insurance industry, as will Special Investigative Units (SIUs).

Moats

With my business model discussion as context, let’s turn to moats.

The word “moat” is used as a term to describe the resources a firm uses to protect and enable its business model. Firms, regardless of industry, wanting to become and remain successful, need a defensible moat to protect and support their business model.

It is very chic, very “au courant,” to discuss moats as if the essence of a moat is entirely comprised of technologies or technology applications. I find it extremely frightening to believe that technology and technology applications are the be-all and end-all of protecting any firm’s competitive success, inclusive of insurance companies.

There are more, and more significant, attributes beyond technology or technology applications that could (or should) comprise a moat and work in an interdependent manner. As an example, I show 10 attributes in the visual (p. 47) that could comprise a moat.

Note that Cost (Low or High) means only one or the other for a specific product, service or business unit. I realize that the same firm can employ both low cost and high cost moat components depending on the product, solution or market segment.

Moreover, I believe successful firms are built on two (and preferably more) of the moat attributes (with a few insurance industry-related comments):

Culture: The ability to create and maintain a shared sense that cascades throughout the firm from the boardroom to every functional department and support department (i.e., infrastructure staff, cleaning staff, cafeteria staff) of the firm’s value-add to its target markets.

Scale: The ability to reach and retain the numbers of customers the firm requires to generate profitability shaped by the realities of the industry (e.g., hockey stick growth is an unreasonable request for scale in the P/C insurance industry).

Brand/Reputation: The ability to create and maintain a strong, positive mindshare in the marketplace.

Technology Applications: The ability to create, maintain and update the portfolio of applications from current and emerging technology to profitably get and keep current and future targeted customers.

Customer Focus: The ability to create and maintain the firm’s abilities to develop a laser focus on current and future targeted customers, but insurers should maintain claimant satisfaction according to the realities of the insurance industry.

Logistical Efficiency: The ability to create and maintain an efficient delivery system of the firm’s products and services to the firm’s current and future targeted customers regardless of the product or service being purchased and regardless of the customer’s location.

Cost (Low or High): The ability to establish the prices of products and services that simultaneously adhere to regulatory requirements, meet (if not exceed) current and future targeted customer expectations, and generate profit for the firm.

Product Design: The ability to continually craft, inclusive of design considerations where applicable, products and services to meet, if not exceed, the needs the firm’s current and future targeted customers. Of course, insurers must always adhere to product or service regulatory requirements.

In-depth Industry Knowledge: The ability to continually build, maintain and update the firm’s knowledge of current and planned regulations, pathways to profitability, and market requirements and expectations of the specific industry lines of business it conducts commerce and of the larger industry the firm in which the firm participates.

In-house Talent: The ability to attract and keep the wide array of talented professionals the firm needs to get and keep current and future targeted customers.

Moat Mortality

“Guests, like fish, begin to smell after three days.” — Benjamin Franklin

Regardless of which attribute or combination of attributes a firm uses to create its moat, a key question arises: What is the quality of the moat? That is, how fleeting is the defensibility of the moat? What might cause the moat to dry up? What might cause any of the components of the moat to deteriorate to the point of being useless? What will cause the firm’s moat to last more than one month, three months, one year, or longer?

Moats will dry up. The attributes of a moat will age, wither and die over time. The mortality of a moat depends on a host of factors including, but certainly not limited to:

• Emerging technologies and their applications
• Changing customer needs, expectations or demands
• Staff reductions
• Damage to the firm’s brand/reputation
• Labor shortages
• Changing economic policies (at local, state, federal, or international levels)
• External shocks (natural, man-made, acts of war) to supply chains
• Strength of new competition

Moat attributes will deteriorate. Examples of deterioration include specialized industry knowledge becoming known by competitors; technology applications copied by competitors; or the current technologies and associated applications your firm has implemented replaced by competitors deploying newer technologies that enable effective and/or efficient applications to what were your target customers.

The major ongoing challenge is for each insurance firm to continually determine the mortality of each of the components of the company’s moat.

Finally, people who know me know that I believe that technology and associated technology applications components of a moat will dry up more quickly than other moat components. If you’re a (re)insurer looking for a long-term competitive advantage for your insurance firm based on using new(er) technologies to protect your business model, I have a bridge to sell you.