Category Archives: Allianz

Fireman’s Fund Insurance Ravaged by Allianz Bureaucracy

Once again bureaucracy is shown to be the most efficient way to snatch defeat from the jaws of victory.

A German newspaper recently reported that insurance giant Allianz, owner of California based Fireman’s Fund Insurance Company (FFIC), is planning to dismantle the company and sweep it into the dustbin of bureaucratic failures. Allianz has tacitly confirmed the report but only complaining that the planned action became public before intended by the company. As with any bureaucratic failure, the hope of those responsible is that no one will notice.

The newspaper (Sueddeutsche Zeitung) article revealed that Fireman’s Fund commercial business is to be folded into another German industrial insurance company owned by Allianz, while the “personal lines business” of FFIC will be allowed to “runoff” until it is gone or FF2offered to another company interested in scavenging the the tattered remnants of the deceased company.

This is a sad and totally unnecessary ending for Fireman’s Fund; a valued, 150-year-old company that had survived the 1906 San Francisco earthquake, but could not withstand the upheaval heaped on it by the bureaucratic management minions of Allianz who virtually squandered the $3.3 billion in cash Allianz paid to acquire Fireman’s Fund in 1991.

Good Idea Soiled by Bureaucracy

When Allianz purchased Fireman’s Fund the transaction seemed (and was) a sound strategic move that would provide Allianz – the largest casualty insurer in Europe – with an entrance into the American market that it had heretofore desired but lacked. For Fireman’s Fund the affiliation with Allianz promised to offer the resources, credibility, expertise and capital of one of the world’s largest insurance companies; providing it with the capability to become a substantial player in the American market. But the relationship was star-crossed from the beginning.

The timeline of activity and actions following the Allianz acquisition of FFIC offers the mother of all examples of how a bureaucracy-riddled company can ravage the value of any investment and kill the opportunity to leverage it to success. In the interests of transparency, I both worked for Allianz as the CEO of a company (LifeUSA) it acquired in 1999 and served on the board of directors of Fireman’s Fund; so I had a front row seat to observe (and experience) how a bureaucratic company functions. In fairness, the vast majority of those I dealt with at Allianz in Germany were extremely intelligent, highly ethical and well-intended; it’s just that they were raised to be bureaucrats and excelled at practicing that art. Even more revealing to me was that the most senior executives of Allianz – especially the CEO – recognized and were frustrated by the inadequacies of a bureaucratic culture, but felt powerless to change it.

The conundrum is that when bureaucracy ridden companies – such as Allianz – are able to scrunch up the courage to make a strategic decision such as an acquisition, they immediately retreat into a bunker mentality, trying to protect their investment, rather than leverage it. Bureaucrats are dedicated to analysis, but terrified by action.

Bureaucratic companies seem incapable of understanding that an investment to acquire a company is the start of the process, not the ending. The clear message given to those leading the acquired company is, “Okay, we took the risk of putting up the money to buy the company, now it is your job to grow the company, but we are not going to risk any more capital to help make that happen.”


This mentality triggers a chain of events that invariably emasculates the culture of the acquired company, leading to the diminution of the initial investment, if not the outright destruction of the company. This inevitable process starts when the bureaucrats of the parent company, begin to impose their stifling bureaucratic rules and controls on the acquired company; limiting the actions and strategies that made it an attractive acquisition. The suffocation of the entrepreneurial culture of the acquired company soon begins to trigger the departure of those individuals capable of creating the desired growth. This leads to a string of increasingly less capable executives charged with running the acquired company. These executives are hired, not for their creativity and independence, but rather for their acquiescence of and compliance with the bureaucratic culture.

It is noteworthy that in the past nine years alone, Fireman’s Fund has had seven different CEOs; all hired and fired by the Allianz bureaucracy. (Believe it or not, one of these CEOs, in the midst of downsizing the company and laying-off hundreds of employees, purchased a Rolls-Royce and parked it at the company for all employees to see.) In the end, the acquired company is populated by managers with the same attitude, aptitude and recalcitrance to action as the bureaucrats who hired them. And then the executives of the parent company wonder why the company fails!

Fireman’s Fund also serves as a classic casebook example of how a bureaucratic culture will send good money chasing after bad money. To comprehend this process it is critical to understand that a bureaucrat will do almost anything to avoid acknowledging and accepting responsibility for failure. As failure looms the bureaucrat will become more and more frantic and irrational in their actions to hide the failure.

Despite investing $3.2 billion to acquire Fireman’s Fund as an entrance into the American casualty insurance market, Allianz was unwilling to allocate the additional capital necessary to bring FFIC up to the competitive levels of the other players in the market. AllianzPressed for growth, but lacking the necessary capital and falling deeper and deeper into the catacombs of the Allianz bureaucracy, Fireman’s Fund was forced to take risks that became gambles, that turned into losses. As the losses at FFIC mounted the bureaucrats at Allianz had the choice of acknowledging the failure of its initial investment or to hide the fact by pouring in additional funds to keep the company afloat. Soon good money was chasing bad money in a bureaucratic effort to avoid the inevitable. But this money was only intended to cover past mistakes, not invest in the future. As such it only accelerated the downward spiral that ultimately destroyed both Allianz’s investment and Fireman’s Fund.

Over a decade ago Allianz executives internally acknowledged that the investment in Fireman’s Fund was a failure and sought to sell the company. Unfortunately, the bureaucrat culture at Allianz had already triggered a decline at FFIC that made the company unmarketable—at least at a price anywhere near what Allianz initially paid. Not wanting to publicly admit failure, the Allianz bureaucrats hung on, but in so doing they took actions that made the situation even worse. Allianz not only refused to invest the capital necessary to build up the capabilities and competitiveness of FFIC, they began to suck as much money as possible out of the company. (One year Allianz required FFIC to pay a dividend of $1 billion dollars to the parent company.) Having reached the conclusion that it would not be possible to sell Fireman’s Fund without exposing the failure of Allianz management and the loss of the company’s investment, it was decided to let the company “bleed-out” and die. What we are witnessing now are the attempts of Allianz bureaucrats to dispose of the decaying body.

And The Moral of the Story …

Don’t let your kids grow up to be bureaucrats! If success is what you seek, then you must do anything and everything to keep bureaucracy at bay in your company. Recognize bureaucracy as the Ebola virus of management that ultimately destroys all it infects.

The comments expressed here are not an attack on Allianz, but on bureaucracy. Allianz is one of the largest companies in the world, but it is also the epitome of a bureaucratic culture. Just imagine how much more successful Allianz could be and how effective Fireman’s Fund could have been as an entrance into the American market, had it not been for the ravages of bureaucracy. Instead, the investment has been wasted, Allianz is still not in the American casualty insurance market and Fireman’s Fund is dead. It is a lesson anyone in any company needs to learn and remember.

The Best Thing About Good Government is that it Works Best When it Doesn’t Work

Efficient and effective government is a dream that could turn into a nightmare

Are you fed-up with the way the government in Washington is gridlocked? I certainly am. But, you know what? We should really count our lucky stars for a government that functions in this manner, because the alternative would be so much worse.

As a whole, Americans are dissatisfied with their government. The frustration engendered by the perceptible stalemate and ineffectiveness of the government translates into a steady and pitiful 15 percent approval rating for Congress and 46 percent for the president. Here’s the way the latest Gallup poll sees the issue:

Congress

The problems the country faces are obvious – the economy, deficit spending, national debt, national security and immigration. And yet the response by our political leaders to solve these difficulties has been nothing more than a gobbledygook of charges, counter-charges, recrimination and demagoguery. Our leaders seem to prefer this approach as a substitute for solid solutions. This state of affairs conjures up the vision of a sterile rooster let loose in a barnyard of promiscuous hens. The result is a lot of commotion and feathers flying, but in the end nothing productive happens.

Who Can Blame Us?

It is understandable that we are disgruntled with the stagnation of our government, but there is one group (at least most of them) who would be standing and cheering if they could witness the inability of the government to act with unrestrained alacrity and adeptness. The Founding Fathers of our country – for good reason – deliberately adopted a form of government calculated to be dysfunctional; and they certainly got their wish.


The real debt of gratitude owed the Founding Fathers is not for the revolution that freed the American colonies from Great Britain, but – and this was their real brilliance – for their adoption of the inefficient, unwieldy and ponderous republican form of government that has not only survived, but has flourished for over 225 years. But it was not easy.

Led by Jefferson and Madison, many of the country’s founders – called “Republicans” – favored the cumbersome, diffused, constrained and purposeful division of power that defines the republican formula of government. The central theology of such a government is that power is broadly vested in the people. These “Republicans” believed that power should move upward through the elected representatives of the people.

Another group of early leaders – led by Hamilton and Adams – did not trust the “judgment of the masses” and feared that a republican form of government would – as it had in all previous republics – degenerate into mob rule, anarchy and chaos. This group, known as Federalists, believed that the most efficient type of government – and what was needed for America – was a strong central government, much like a monarchist system, where the power resides at the top, vested in leaders who serve for life and then pass that power on by heredity.

Jefferson and his followers recognized the inefficiency and cumbersomeness of a republican government, but felt it was small price to pay for rejecting the Jeffersonmonarchist type of government that – while efficient and fast-acting – could easily morph into a totalitarian government that would eventually nullify the very rights and freedoms they had risked their lives to win. For them, the right to disagree, deliberate and delay the actions of government trumped the threats to individual liberty inherent in a government that was efficient and effective.

Jefferson recognized the necessity of a viable central government, because as Governor of Virginia and a Congressman under the Articles of Confederation (America’s first government) he understood the frustrations of responsibility without the power of authority, but feared a government that had the ability to usurp the power of the people because history had taught him that it would. He was convinced that if the public were educated about the issue – by extended debate and discourse – then by and large the majority would come to the right conclusion. As Jefferson wrote in 1798, “In every free and deliberating society, there must from the nature of man be opposite parties and violent dissensions and discords. This division is necessary to induce each to watch and debate to the people the proceedings of the other … A little patience and we shall see … the people recovering their true sight.”

To Hamilton’s credit, once the constitution implementing the republican form of government was adopted, he agreed to “give it a chance;” even though he felt Hamiltonit would lead to failure and the disintegration of the country. From a pragmatic standpoint, Hamilton set about to stretch the limits of government power under the constitution because he also believed that a weak central government would put America at risk and disadvantage in commerce and diplomacy when dealing with other world governments that were totalitarian and monarchist.

The philosophical conflict between Jefferson’s belief in the need for a central government but one that was constrained by a dispersion of power, and Hamilton’s equally honest and patriotic view that the best way to protect the rights of the people was to give the government the power to overrule the excesses of the “masses and mobs,” became the central – and highly emotional – political discourse of that time. And it is has echoed through the ages to frustrate us even today.

This is a good thing, because it has been this dynamic political tension that, in all likelihood, is what has enabled the American Republic to survive longer than any republican form of government in the history of the world. It turns out that – given all the other options – a government that is fractured and diffuse and seems powerless to work efficiently actually works best.

And the Moral of the Story …

When it comes to government, be careful what you wish for, because when you get it, you may not want it. It may seem like a good idea to have a government that functions in an efficient and effective manner, but the only way to achieve this is to increase and consolidate power at a central point. Power is not elastic, so power granted or taken by one faction is power lost by another. Power set in motion in one direction tends to continue in motion in that direction. For a society to function, the people must be willing to share power with their government, but it should be like a library, where power is loaned but not owned.

That is the beauty of the American republican constitutional form of government. The structure of the document encouraged the debate, discourse and disagreement among those who feared the granting the government too much power and those who feared that without enough power, the government and the country would fail. The result is messy, confusing and frustrating, but the longevity and success of the American government proves that – with patience – in the end, the government that works best is the government that is designed not to work.

 

Defending the Future of Independent Marketing Organizations: Part Two

The future for IMOs is bright, but only if they are willing to step up and control it

Last week’s blog suggesting that IMOs have it in their power the choice to “live free or die,” created quite a stir. The general reaction seemed to be: The idea of IMOs buying an insurance company future seems like a great idea, but could it really be done?

Probably the most telling comment came from one IMO who said, “I like this idea, but I am concerned about what my company would do [to me] if they discovered that I was involved.” If that does not capsulate the current intimidating environment, nothing will. Many wondered, “This seems like a simple solution, but if it is so good: why hasn’t it already been done?” The answer to that question is that too often there is a tendency to believe that the solution to a complex problem can be found in complicated answers, when in reality the solution is simple; it just has to be recognized.

 

For example, it is believed that the wheel was invented in the late Neolithic period, around 3500 BC. The idea for luggage was invented shortly after women determined that they needed 10 pairs of shoes for a three-day trip. Ever since then, travelers have lugged and dragged their luggage around – straining tempers, backs and arms. Believe it or not, it was not until 1989 that a guy named Bob Plath came up with the idea of mating wheels with luggage. And, as they say, “the rest is history.” This was the ultimate simple idea that was right in front of everyone for centuries, but no one recognized it.

A Good Offense is the Best Defense

There is no doubt that defending against the efforts of the companies to reduce the options and independence of the IMOs is a difficult task. Companies seem to hold all the leverage and have only one interest at heart– the interests of the company. Worse, those who work  for companies owned by foreign powers have scant gumption to challenge the bureaucratic corporate line because they have become little more than timid toadies, perched precariously on the lily pads of their next paycheck.

To push back  against company actions, a number of IMOs have banded together is a loose affiliation attempting to gain leverage when dealing with the companies. There is even a movement among some IMOs to consider litigation against these companies. Unfortunately these approaches seem destined to fail. Aside from the fact that it is futile to negotiate with the devil, these approaches are too fractured and complicated; they address neither the heart of the problem nor the simple solution needed to level the playing field with the companies.

To understand the solution, it is important to understand the problem. The insurance business is divided into three parts: manufacturing, distribution and service to the distribution system and policyholder. The insurance companies already control two of the parts – manufacturing and service – and they now seek to control the final distribution piece. The path for IMOs to protect their control of distribution is not to fight the companies on their terms, but to diminish the strength of the companies, which is in manufacturing. If the IMOs can gain access and control of manufacturing the product, they will nullify the leverage used by companies in an effort to contain and control distribution.

Another factor the IMOs should take into account as they consider becoming involved in the manufacturing process is this: Just how much backing and service are the companies providing to the IMOs today? Aside from commissions, do the companies offer financial assistance to help fund growth? Are the companies doing anything to assist and protect in the recruiting and retention of agents? Sure, they have meetings with PowerPoint presentations that tediously explain product details, but are companies doing anything positive to assist the IMOs in teaching the agents to prospect, present and close? If the IMOs are hard-pressed to identify value being provided by the companies, they have another reason to question why they put up with the shenanigans of the companies.

The path for IMO control of their future and enhanced value of their organizations is to take actions that give them options and reduce their dependence on a single company. The way to do that is to turn the tables on the companies and take control of the manufacturing piece of the insurance equation. The crucial question is: How can that be accomplished?

Mighty Oaks from Acorns Grow

To start, a group of leading IMOs needs to unite with the common purpose of protecting their future. These IMOs should  demonstrate their seriousness by agreeing to put some “skin in the game” by investing a portion of their own capital as part of an acquisition of a company. It does not have to be a huge amount of capital, but enough to demonstrate to investment companies that the IMOs are committed to the venture. Once the group has been assembled and an appropriate amount of capital pledged, the group should identify an experienced, credible core group of management that would manage the acquired company.

When these two steps have been completed, investment bankers could be retained and they in turn would put the group in front of private equity firms that have experience or interest in investing in the life insurance and annuity business. Once the investment firms have been brought on board, the process of identifying a target can begin.

With the power of distribution held by the IMOs, there is no need for huge amounts of capital to acquire a large company. (The IMOs will quickly make it large!). The best guess is that an acquisition of a company in the $50 to $100 million range would meet the initial needs of the IMO. (The irony here is that for the investment firms, the larger the acquisition the better.) Once the company has been acquired and the IMO management team in place, product development, support services and administration can be quickly developed.

This process may seem complicated and time-consuming, but it would not be. With the control and power of distribution that IMOs offer to the investment firms, they will find that this is just as simple and easy as attaching wheels to luggage, with the same revolutionary results.

And the Moral of the Story …

Many go through life frustrated with the lack of control they have over their future. They feel trapped and constrained when their future is held hostage to the whims and actions of others. Even most of those who rise to the heights of the corporate world often lack control over their future. Real power is the power to control one’s future. It does not assure future success but it does assure a future in which success can be attained.

Due to their proven ability to recruit, train and motivate individuals to sell insurance products, IMOs are in a unique position to control their future. Intimidated by this power, some insurance companies are attempting to denude the IMO by limiting their options and creating a dependence on the company.

The good news is that the IMOs have the power to get “mad as hell and not take it anymore!” The bad news is that if the IMOs meekly allow the companies to succeed if their efforts to control the future of IMOs, then that is the future they will deservedly reap. Unlike others, IMOs have the power to control their future and how they respond will determine if they live free or die.