WIN Magazine - Fall 2014 - (Page 34)

fEaTuRE INNOVATION, DISRUPTION, AND THE SIXTH FORCE: BY ERIc MARTIN r UNINTENDED CONSEQUENCES OF REgULATION E Gu L aT E D I N Du S T r I E S BEWarE-aND that includes all of us in the insurance industry. Disruption is headed your way, too. Companies whose incumbency has been protected by regulation face devastating competition from entrants none too concerned with pesky legalities. Whether you're benefitting from the "freedom of regulatory rate and form" in the excess and surplus lines segment of the insurance market, or transacting business on the admitted side, we have seen state, federal and international regulators take an increasing interest in the marketplace. Michael Porter, in his seminal book Competitive Strategy, proposed a model of five forces that can be used to analyze the attractiveness of an industry. While in business school at Harvard, I had the good fortune to share the podium in an address with Porter, a faculty member there, in what I believed to be an important SIXTH force-regulation. We were discussing the 3 4 | v i e w t h i s i s s u e a t | airline industry at the time, and I argued that since some players yield relatively more influence over regulation, and since regulation sets the boundaries of the playing field, one cannot look at only Porter's five forces to accurately describe a competitive setting. Over the subsequent two decades, scofflaws, aided by technological advances, have spurred disruptive innovation at a staggering pace. Regulation, viewed in Porter's earlier works as of little competitive concern, is now at the heart of the matter. Unsurprisingly, incumbents in the industries under assault don't go down without a fight. Instead, they turn to the weapons that helped structure an industry in their favor in the first place. What they desperately want is inertia. They want the object at rest to stay at rest. It's not that they are anti-innovation. They are anti-cataclysm. The rules that built the industries were often designed to protect consumers from the risks posed by asymmetric information, monopoly power, or utter disdain for their well being. Certainly, some regulation was over-done or even wrong-headed. But, for the most part, the rules provided a safer, fairer marketplace. Companies worked hard to shape regulations in ways that would not disadvantage them relative to competitors. If possible, advantages were sought. In the end, some equilibrium was reached-a set of boundaries within which Clay Christenson's "sustaining innovation" could emerge, but where discontinuous change was unusual. Investments under these circumstances could be made with less risk. Profits were more predictable. Management approaches and organizational structures emerged to reliably turn out like quality products and services at standard costs. Competing and prospering wasn't easy, of course. But the rules of the game were better understood. Over time, technology was adopted by incumbent competitors creating mainly marginal improvement at the customer level and to generate more profound impacts through internal efficiency. The spoils of these gains benefited the owners of the most powerful firms,

Table of Contents for the Digital Edition of WIN Magazine - Fall 2014

Cover Story: Finding Success in a Crisis of Trust
Catastrophe Bonds vs. Traditional Reinsurance: The Effect of CAT Bond Issuance on the Traditional Reinsurance Market
Contractors’ Professional Liability Exposures and Coverage
The Latest Update on Employment Background Checks
Wait…You Want to Work in the Wholesale Insurance Industry?
N Update on Additional Insureds, Certificates of Insurance, and the 2013 Iso G/L Changes
Insuring Supply Chain Risk
Innovation, Disruption, and the Sixth Force: Unintended Consequences of Regulation
In the WIN-Ner’s Circle
Index to Advertisers

WIN Magazine - Fall 2014