The law of nature is, do the thing, and you shall have the power;
Ralph Waldo Emerson, “Compensation”
but they who do not the thing have not the power.
Power is at the heart of competitive strategy. Winning customers from competitors requires an advantage of some sort, and a successful business comprises at least one advantage. Hamilton Helmer, author of 7 Powers: The Foundations of Business Strategy, characterizes the types of advantages available to a business[1] in seven categories (powers), and in terms of both a business’s position and motion (statics and dynamics). Helmer claims[2] that his list of powers is mutually exclusive (the powers do not overlap) and comprehensively exhaustive (these powers represent all the options for business advantage). This series will examine the insurance industry through the 7 Powers lens. The 7 Powers are as follows:
- Scale Economies
- Network Economies
- Counter-Positioning
- Switching Costs
- Branding
- Cornered Resource
- Process Power
I will define (in Helmer’s terms) and break down each power as they relate to insurance industry in this series, providing both real and hypothetical examples of each. In the meantime, let’s take a look at the insurance industry in general and introduce themes that will recur in future posts.
The insurance industry is facing inflection points brought about by advances in science and technology, coupled with big investments in applying these advances by incumbents, venture capitalists, private equity, and the industry’s shovel-makers. Other industries have ingested advances in the last several decades more quickly; the regulatory barriers to innovation have been high. Many of these challenges remain and traditional regulated insurance may yet be slow to turn. However, the nature of risk management is changing.
With the rise of predictive algorithms, sensors, and near-real-time deep data streams, the blindness that enabled the pooling of risk will dissipate. Increase risk understanding, rather ironically, breaks down the value of traditional insurers[3]. As society’s knowledge of risk increases, the ability to mitigate losses also rises. While we can’t stop hurricanes, we can build houses that can withstand high winds and flooding. People will always be unsafe behind the wheel, but we can outsource driving to sensors, algorithms, and robotics. While fires and leaks will still happen in homes and businesses, we can predict them, proactively change infrastructure/behavior, and respond to them in real time.
Regulatory barriers to change won’t leave prices and inefficiency painfully high forever in even a moderately functional democracy. As barriers to entry shift and new models for risk-sharing arise, piggybacking alongside the wave of insurtech funding across insurance value chain categories, traditional risk pooling is at risk. This series will work through each of the 7 Powers sequentially, following the three stages that Helmer sets out. At the Origination stage, a business is just getting going and has not yet started growing rapidly. Think the first years of a startup, when the product or service is being honed and the first several customers are being acquired. Acceleration happens at the Takeoff stage, when a business’s growth rate is at its highest level. The Takeoff stage is the several years in which Facebook went from a college-only network to a globally dominant social network. In the Stability stage, a business’s growth rate stalls, competitors are on the scene in full, and the war is over inches instead of miles. Many insurance companies would struggle to remember any but the Stability stage, as their growth happened very slowly, and their Origination was so long ago.
Helmer’s evidence indicates that each power primarily applies at a specific stage in a company’s development:
Origination
- Counter-Positioning
- Cornered Resource
Takeoff
- Scale Economies
- Network Economies
- Switching Costs
Stability
- Process Power
- Branding
Helmer’s stage-based lessons apply to insurtechs, entrenched
insurance companies, and shovel-makers (Guidewire, RMS). Each will need to exploit
different power(s) to win against their competitors and create sustainable
advantage.
[1] Helmer defines the principal actors in 7 Powers at the level of a discrete line of business. For example, the reinsurance arm of a diversified insurance company.
[2] Backed up by significant research conducted by Helmer and his partners/students at Stanford University, in addition to his experience working with Bain’s eponymous founder and consulting independently.
[3] https://economistsview.typepad.com/economistsview/2006/11/is_catastrophe_.html
Roman Ryan 