Ivory Towers and Reality
A few months prior to initially drafting this article, a semi-famous economist, Janos Kornai, died. He was famous for explaining why socialistic economies, which are heavily planned economies, do not work. He was also famous for making the connection between the failures of planned economies and the failures of businesses with too much capital or political capital protection.
I found his analysis as to why planned economies fail, proven to be correct time and time again, to be at least partially applicable to easy money in capitalistic societies. His analysis showed that companies favored by socialistic economies had no need to fear loss as the state would continue to prop them up.
This lack of risk encouraged lack of financial discipline which enabled massive over building, a focus on the wrong industries, bad products, bad service, and political, but very powerful, idiots running companies all to the injury of their employees, consumers, and ultimately even the state.
No matter what the experts in the Ivory Towers think they can plan, if they do not consider human greed, hubris, incompetency and the need for survival, those plans will not work. The experts never think this part through as they think they are generally too smart to need to make that consideration.
What is the difference between the socialist planners with their five-year plans and a world where the right salesperson convinces private (and often government because most private equity money comes from government protected pension funds) equity and venture capital that losses do not matter and to just keeping giving them the money? How many firms have you seen that did not try to hide the fact they did not know how to make a profit and did not care?
Take away the decisions of the capital contributor, whether it be the state or a pension fund funneled through private equity and if the receiver has so much capital that financial discipline is unnecessary, why should anyone expect a different outcome from that experienced by socialistic economies? If you flood the economy with so much money that the consequences of bad decisions are mitigated or mooted, why expect any different outcome, much less a good outcome?
The knee jerk reaction of the experts in Ivory Towers is that the free market will fix it through the invisible hand, but that only works if the government does not manipulate the invisible hand. I look at insurance companies that have never made a profit with no indication whatsoever that they will ever make a profit, but their capitalization exceeds that of much better run firms. The main reason they are even allowed to exist is because they have convinced investors to give them so much money they can continue running losses while maintaining adequate surplus to please regulators. The damage to the industry is that well-run companies are damaged and the consumer and economy do not get anything solid in return. The same result happens in socialistic economies when the government favors one company over a completely independent company.
Too much of anything is bad. Just ask your grandmother. Folklore's advantage over Ivory Tower wisdom is that folklore is embedded with reality, including human vices and foibles.
Most grandmothers, at least historically, did not occupy Ivory Towers but they knew more about reality than those residing there. The fact is capitalist governments have decided to sponsor certain industries and even certain companies through their monetary policies. Simply by not stating this is what they are doing does not mean they are not doing it, though they prefer that people not notice. It is what it is.
What does everyone else do to counter these powerful forces? Look at what the opponents possess. They have more capital than you can possibly imagine relative to their actual size. They have incredible salespeople with more charisma than their capital. You, even if you are Travelers Insurance which is a well-run company, are not going to beat them on either count.
Then they have great marketing, although this feature is less equally distributed. Sometimes the marketing consists of slideshows of what they hope to build someday, but nothing works yet. Sometimes they are not quite ethical (you mean I need a license for that?).
In fairness, not every company has boatloads of cash and/or overflowing pockets of charisma.
Competing against those that do have money and charisma is hard. Focus on what the businesses favored by the state do not have. What don't they have? What they may not possess is a viable business or a business built on the need to put enough other businesses out of business to make their business viable. Sometimes with such large balance sheets, they are just going through the motions until they can buy competitors.
What else don't they have? They don't have the ability to make connections at a local, human level. They don't have the ability to educate their clients about the coverages they really need. They usually don't have the ability to connect with clients who care about buying the right coverage. I saw a press release recently from one showing their average premium per personal lines client as about $250. Halfway decent agents selling to clients who care generate $250 COMMISSION per client. People who care tend to not be as attracted to the seemingly simple answers as those who do not care. People who don't care about quality until after the fact correlate closely to people who seek easy solutions without question. Give them some snake oil and tell them it will cure whatever problem they have, and the odds are good they will drink it, especially if the snake oil has a cache' name related to green, technology, fast money, or is politically correct.
Another key is to not get distracted. Do the basics real world style really, really well. Two straightforward variables make a massive difference. The first is to fix your operations. Carriers in particular seem to have significant operational issues. They simply don't run with enough consistency and cannot adequately track what is happening internally which is increasing their costs unnecessarily. Charismatic leaders, especially those with big balance sheets, never worry about expenses until the last moment. Expenses are beneath their ego. To beat them, you must focus on efficiency to decrease your expenses while not being cheap.
It is a war of attrition. How do you beat someone with a big balance sheet that has a lousy business model? You must make your balance sheet last longer. The only possible ways to do this are to raise capital and/or become more efficient so that your bank account outlasts your opponent's. Period. Lowering costs without sacrificing quality virtually always wins if enough scale exists.
An additional key is to sell to one client at a time and sell the right coverages. I don't think most agents will beat many of the new providers in mass. Slop and slop go well together. To pretend to sell quality while not understanding coverages and exposures is a sham. Therefore, education levels must increase significantly. As a really simple example, I see that 90%+ of experienced producers and CSRs do not understand or appreciate the full scale of how ordinance and law coverage works, and how the throw-in amounts are almost never going to be sufficient in a major loss. Most do not really understand how ITV's work or should work (and this goes for carriers too, maybe even more so). These are quite basic coverage level factors. If the failure rate is this high on basic level coverages, what is the failure rate for complex coverages?
The Ivory Tower experts are betting billions of pension fund monies that not caring about customers and not building quality operations is a winning bet. They have put all their money on black. Too much money with too little care for expenses is dangerous. Will you take advantage of them?
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