Mere Efficiency Insufficient for Securing Positive Return-on-Assets

With the announcement of the Deloitte Shift Index this morning, a recent I&T Blog contribution from Guidewire's Marcus Ryu gains credibility. Readers may recall that Mr. Ryu discussed diminishing returns from mere efficiency improvements, arguing that insurers should emulate the transition that occurred in manufacturing from efficiency/automation-orientation to precision-orientation, lean manufacturing techniques and just-in-time production/inventory approaches.The argument about the limits of mere efficiency appear to be supported by Deloitte's report that despite major improvements in labor productivity over the last four decades, many US industries - including insurance - have experienced alarming decreases in their return-on-assets.

According to a Deloitte source, the insurance industry's average return-on-assets has dropped by 142% from 2.6 to negative 1.1%. The source further asserts that technology does emerge as a differentiating factor between insurers, with adoption of digital infrastructure the key difference between top and bottom performers.

Delioitte shared with me other factors affecting capital performance within the insurance industry:

- Insurance is labor intensive, which is not expected to be alleviated except by technology.

- Inability to grow market share - with gains generally at the expense of competitors rather than the opening of new markets - pressures profitability.

- Firms with the best return-on-assets capitalize on technology to generate higher returns.

- The rate at which companies lose their return-on-assets leadership is due to greater dependence on the a volatile stock market. Low competitive intensity, mainly due to high barriers to entry, benefits insurance.The argument about the limits of mere efficiency appear to be supported by Deloitte's report that despite major improvements in labor productivity over the last four decades, many US industries - including insurance - have experienced alarming decreases in their return-on-assets.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio