In insurance you win by bringing up your average

In elite sport the top coaches ration their finite resources to give their best athletes the greatest chance of success.

They take the best quartile from a large group, then the top quartile from the top quartile, and repeat. So the process continues until they have distilled their sample down to a manageable group.

This cohort of the ultra-elite is granted the coaches’ undivided attention, analysing, codifying and correcting every minuscule detail of their performance until they have become as good as they possibly can.

Could insurance learn a thing or two from the world of sport?

Unfortunately for the legions of sports fans in management, insurance is the polar opposite of an elite sport.

It is not a game where success is measured in how many great players you turn into world-beaters. There are no knockout wins, titles or championships. Winners cannot even win by a great margin on the scoreboard.

Teams aren’t able to keep a clean sheet and combined ratios do not tend to zero the better and more skilled the underwriters get. The product must have value or customers won’t buy it and regulators won’t be happy.

No – in insurance you win by bringing up your average. Winning is measured by the compounding of a few percentage points’ outperformance over long periods of time. You win by finding ways of doing more of the slightly more profitable stuff while still giving enough value and service to keep your customers returning.

In this world, success is all about portfolio management. The top quartile can and should be largely left alone – there is very little you can do to make it outperform any further, and whatever you do, market forces will always be there to level things out over time.

It is the bottom quartile, and particularly the bottom quartile of the bottom quartile, that needs the undivided attention of your management team. Improvement of the laggards is more powerful at bringing up the average of the whole than the nurturing of the elite. You win by avoiding calamity and foolishness and by stopping your losers from dragging you down.

In this context the move by Lloyd’s – revealed by this publication – to give its top players a degree of autonomy in the business-planning process is a sensible use of its finite resources.

In a highly regulated world, being left alone is reward for good behaviour and an incentive to continue to outperform. It is also virtuous. The less time you spend on proving how good you are at what you do, the longer you will be able to spend actually doing so, thereby allowing you to outperform still further.

There is only one note of caution to sound.

Lloyd’s history is littered with fallen angels – highly successful businesses boasting decades of unblemished profitability and outperformance that fell victim to their own overconfidence. Ill-advised diversification into new lines or a failure to deal with the succession of key staff have all brought businesses crashing down below the average to plumb the lower quartiles.

When their wings are clipped, these angels can fall to earth very quickly.

So, provided Mr Hancock and his team can provide just enough vigilance to keep the angels from flying into anything, this strategy should be a great success.

Let the angels fly.

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