In this episode of the Inside the Strategy Room podcast, Roger W. Crandall, chairman, president, and CEO of MassMutual, speaks with Pradip Patiath, a leader in McKinsey’s digital financial services group, about embracing the disruption that is transforming the insurance industry. This is an edited transcript of the conversation. For more discussions of the strategy issues that matter, follow the series on your preferred podcast platform.
Pradip Patiath: With a lengthy pandemic and now a war in Ukraine, it seems there is more risk in the world. What role does the insurance industry, which is fundamentally about lubricating commerce by mitigating risk, play in the current era?
Roger Crandall: The insurance industry was started by people betting on whether ships would return from trade voyages, and in today’s global economy, insurance is critical. Everything from the devices we use to the coffee we drink to the food we eat—none of it happens without insurance. Our corner of the business is life insurance, which comes down to helping people manage risks around mortality, morbidity, and longevity. And all the assumptions we have built our business on have been thrown into some question. We had a pandemic, we have geopolitical instability, and volatility is hitting the financial markets. All this is happening at a time when inflation is at a level we have not seen since the early 1980s.
That said, MassMutual was founded in 1851. We recently had a board meeting where we said, “This is bad, but we had the Civil War early in our company’s history, we lived through World War I, World War II, the Cold War. We had the Cuban Missile Crisis. We had the inflation of the 1970s, the rise of the dollar as the predominant global reserve currency, the creation of petrodollars, Eurodollars, Bitcoin. Yes, a lot is going on right now, but there has been a lot going on throughout our history.” Volatility is high, but this is the reason our company exists.
Pradip Patiath: Your company has a mutual structure, meaning it’s owned by the policyholders. Do you see that as an advantage in these turbulent times?
Roger Crandall: Yes. In fact, some of the longest-lived organizations in the world are co-ops. Insurance, which is built on the concept of pooling risk, originally came into being through this construct. Our oldest policyholder is typically a woman between 105 and 115 years old. She has had her policy for 75 to 95 years, and it awes me to consider what the world was like when that policy was issued.
Because this is such a long-term business, having one set of stakeholders—our policyholder customers—to drive us is a huge advantage. We get to think about a long-term business in a long-term way. We never have to wonder, “Should we invest in something that would have a longer-term payoff, or should we respond to an equity holder’s shorter-term time horizon?” Our publicly listed peers have to respond to their shareholder demands, for good reason. And when we talk to customers, they understand that they are the company, which is interesting in a world of social media where people want companies they do business with to align with their values and purpose. It’s one of the reasons why MassMutual has been growing at well above industry rates for more than 15 years.
Because this is such a long-term business, having one set of stakeholders—our policyholder customers—to drive us is a huge advantage. We get to think about a long-term business in a long-term way.
Pradip Patiath: You have been at the helm for nearly 20 years. How has your role as CEO evolved?
Roger Crandall: There have been a couple of big developments. One is that employees and customers now expect CEOs to express their views. For a long time, when CEOs were asked, “What is your opinion on fill-in-the-blank?” they could say, “Not my job.” The purpose of business was to make a profit and leave everything else to others. That began to change with the environmental movement in the 1960s but accelerated, at least in corporate America, with the murder of George Floyd and questions about racism and diversity, equity, and inclusion. The current focus on environmental, social, and corporate governance [ESG] issues makes it much more difficult to say, “I don’t have a comment on that.” Our employees are asking. Policyholders and customers are asking. Regulators and politicians are asking.
The other big change is the rise of technology and social media, which means that the narrative is being written for you in millions of daily tweets and posts. The days of taking your time to put out a press release or write an op-ed are gone. Now it’s real time, all the time. This means that hard questions you might have been able to avoid can get asked, and if you are not consistent in your mission, values, purpose, and actions, someone will call you out on it. That is not a bad thing, but it certainly has changed how corporate leaders need to think.
Pradip Patiath: Both your employees and your customers are changing. Which group is a bigger force in MassMutual’s evolution?
Roger Crandall: Well, anyone who doesn’t realize that it is always about the customer will end up losing. In the day to day, however, engagement with employees is critical. The labor market is extraordinarily tight, with fierce competition for talent, and inflation is driving wage growth. The US is very polarized around some big issues, which makes it all the more important to be thoughtful about when to have an articulated view and when it is reasonable to say, “We don’t have a view on that,” even if some constituents are pushing hard for one.
Pradip Patiath: Given the growth of digital, it seems that being technology savvy or at least tech literate has become almost mandatory for CEOs. Do you think technology will fundamentally change the industry and how CEOs lead?
Roger Crandall: I think we are in the midst of the biggest transformation of our industry ever. We are a very stable industry. If you consider the top ten carriers in the United States, the industry does not look much different from 100 years ago. What moved the sector in the past was product and distribution innovation, and today, technology is what makes that happen.
Consumers now want instantaneous access to everything on a mobile device and our sector came to that probably last among financial services, for a simple reason. Most people buy a handful of life insurance policies in their lives. When you buy your first home or you have a child, you put together a plan, but you don’t check it regularly as you do your retirement plan or bank account. Eventually, however, people wonder, “Why am I still doing an application on paper? Why is it taking me 45 days to go through the underwriting process? Why is my life insurance financial product not integrated into my financial view?”
These issues were percolating and then, boom, March of 2020 arrives, and we go from the way the world was to the way the world is today. You often hear that the pandemic accelerated trends that were already in place. That was very true for our industry. At MassMutual, we had been making investments to build a fully digital insurance company from the first interaction with a client through a machine learning–driven underwriting model, through policy administration, and ultimately to paying the claim. We had built a platform and our big question was, how will we drive distribution partners, agents, and customers to it?
The pandemic accelerated that mightily. Well over half of our business is now running through that platform, whereas it was less than 1 percent at the end of 2019. And we are being pushed both by customer demand and by new players coming into the market to continue to improve the customer experience, but our sector is challenged by legacy platforms. Because customers don’t buy a lot of products from us and switching costs grow over time, investing to make the customer experience better on old platforms does not appear to have a high ROI. So there are still many old policies sitting on old platforms. We are about 20 percent into this journey, but we have laid the foundation that will allow us to grow more quickly and be significantly more efficient, not just from a cost perspective but in our ability to bring out new products.
Pradip Patiath: What kind of product innovation are you seeing?
Roger Crandall: Product innovation in our industry has been driven in part by market volatility. Insurance agents used whole insurance products, brokers sold mutual funds, and the two didn’t overlap. The [Federal Reserve] said to banks, “Here is what you are allowed to pay in a savings account.” Then along came money market mutual funds, and in the early 1980s [former Federal Reserve chair Paul] Volcker said, “We will stamp out inflation,” which drove short-term rates up dramatically. Suddenly, people could borrow against old life insurance policies at 5 percent and drop the cash into a money market mutual fund at 18 or 20 percent interest at the peak. That gave birth to a new type of insurance product, universal life insurance, which allowed people to retain their life insurance coverage but get a better return. That was massively transformative for our industry.
Interest rates have been on secular decline since, and there is debate now about whether that trend has broken and we will see long-term rates trend much higher or whether the deflationary forces of technology and globalization will keep them low. Globalization appears to be in retreat, although technology sure doesn’t. But if we can bring products to market at lower cost and do it faster, we will win over time. If we can lower fixed costs by 50 or 75 percent by moving to a digital platform to power our manufactured products while syncing up with the markets so we can manage risk by rigorously understanding our exposures to interest rates, foreign exchange rates, equities, and credit spreads, we will get more market share.
A great many Americans either don’t have insurance or need more, but 7,000 or 7,500 agents and advisers cannot get to 10 million or 30 million people. The big opportunity is to tackle that by linking up our technology with distribution. We have now put the technology and associated intellectual property we develop to transform MassMutual into a new subsidiary called Haven Technologies, and we are talking to other insurers about how they can use it in their businesses.
Pradip Patiath: Are new fintech entrants helping to drive some of this innovation?
Roger Crandall: Any established industry, particularly one that is regulated, will look at new entrants that are doing things differently and be tempted to say, “They are distorting and harmful. They don’t get it. They don’t play by the same rules.” But if you take the long view, that is how innovation happens, so I think they are a positive influence on incumbents. Consider how some established players have transformed themselves. I’m old enough to remember when you couldn’t get money if you couldn’t get to a bank before 4:00 p.m. I do all my banking on my phone now, and I bank with one of the big players. Banks saw what fintechs were doing and responded to customer demand.
Any established industry, particularly one that is regulated, will look at new entrants and be tempted to say, ‘They are distorting and harmful. They don’t get it.’ But if you take the long view, that’s how innovation happens.
This is where being a private mutual company has been beneficial. It has allowed us to say, “Look at the transformation in the banking and securities brokerage sector. Where is this puck going in our piece of financial services and life insurance?” We were then able to begin investing despite unclear payoffs and uncertain timelines.
Pradip Patiath: So the fintechs lead and the big players make the innovations available on a broader scale. Where are the new entrants focusing their attention?
Roger Crandall: There is an annual insurance technology conference that used to have fewer than 100 attendees; now it’s thousands. Venture investors see insurtech as an opportunity throughout the entire value chain. The big early focus was at the front end in distribution, in part because distributors got paid at the time of sale. When we sell our primary products, which are participating life insurance policies, we break even on them in ten to 12 years, but they will sit on the books for 50 to 70 years. So it was not a surprise that when new entrants came in, it was at the customer acquisition point, which gets paid at the point of sale.
Many fintechs address individual segments of the value chain. With Haven Life, we quickly realized that if you revert to analog in the middle of the process, the business wouldn’t work. Our “aha” moment was realizing that we needed to build an entire digital insurance company. Being an incumbent was a great advantage there because we had tons of data. We took every paper policy application that we had received in the past 20 years—both from people we sold policies to and those who didn’t buy one—then digitized it to figure out how to build a machine learning mortality model based on that data. Access to historical data at scale is one thing start-ups don’t have.
Pradip Patiath: How did you create a culture that was open to such a big change in how you operate?
Roger Crandall: That gets back to the role of the CEO. It’s not trivial to build a culture in a large traditional company that will let you disrupt yourself. We had a long history of owning asset managers and the difference in the cultures in asset management and traditional insurance was significant, so we kept them separate. Now we want to make them work together. The culture that comes out of start-ups has some valuable attributes. A challenge for me is, how do you make sure you take advantage of them but also take advantage of what allowed this company to grow for 170 years from $100,000 of initial capital to $35 billion in capital? How do you take those positive pieces and connect them to the change agents?
My answer is to talk about vision and purpose. I joke that we were a mission-driven company before mission-driven companies were cool. It was our mission to have people join the company by selling policies. Everyone made a little deal: “I will leave a little behind for the next generation,” because otherwise our business falls apart. Stop selling new policies so you don’t have to deploy capital, stop investing in new technology, and for 30 years things look fine but then the business falls apart. Here, everyone stands on the shoulders of those who came before them. That is true from a policyholder perspective and from an employee perspective. When you talk about that, people who never thought they would work for a mutual insurance company based in Springfield, Massachusetts, say, “This is pretty interesting. I like this idea of paying it forward.” And every day, we may win one or two more fights for talent, maybe someone decides to stay, or someone innovates in a way that helps us instead of helping somebody else.
Pradip Patiath: That brings up another dimension of CEO leadership, which is around ESG and stakeholder capitalism. What do you think of the argument that business leaders can use the notion of ESG as an excuse to underperform?
Roger Crandall: There is a healthy debate. But big companies don’t live in a vacuum. They live in a political system, a legal system, and a societal system with norms. All those things change over time. I look at ESG in that context: What are the appropriate environmental regulations? What should be done by law, and what should be done by the markets? Think about the Russian attack on Ukraine: sanctions were put in place, particularly in the financial sector, but customers of some companies that were not affected by those sanctions said, “We will boycott you if you continue to do business in Russia.”
Pradip Patiath: Last question: does cryptocurrency matter for life insurers?
Roger Crandall: In the short run, no. In the long run, it could matter a lot. When crypto first came out, every fiduciary said, “Absolutely not. This is insane.” But there was also a time when people wouldn’t invest in companies that didn’t pay dividends. I do think being involved in the conversation about how the financial system evolves is important. No one thinks about what money is. You never wake up and say, “Will these pieces of paper in my pocket or these numbers in a bank account become worthless?” We made a small investment in Bitcoin to understand how it works. If our customers want to own crypto assets and have some of their policy benefits paid in crypto, it’s important for us to listen to that.