The dynamics of managing a life insurance company

• Published in: System dynamics review 1995-09, Vol.11 (3), p.219-232
• Main Authors: Doman, Andrew, Glucksman, Maurice, Mass, Nathaniel, Sasportes, Michel
• Format: Article
• Language: English
• ISSN: 0883-7066; 1099-1727
• DOI: 10.1002/sdr.4260110304

This article reports the findings of an internal McKinsey research and development project designed to test the value of applying system dynamics thinking to the life insurance industry. The aim was to understand better how management decisions and actions can affect the success or failure of a typical direct sales life company. The study compared the evolution over 20 years of two companies, which in the interests of confidentiality, we will refer to as “Tortoise Life” and “Hare Life”. Starting out in 1975 from virtually identical competitive positions, Tortoise Life has become one of the U.K.'s most successful life companies, while Hare Life had to be rescued from near insolvency in 1989. We found system dynamics a powerful means of identifying which managerial actions had accounted for the extraordinary divergence of the two companies. The lessons learned include many counterintuitive insights that have relevance for any life‐company manager. Through simulation we were able to isolate which management actions made the difference to long‐term performance. In particular, we show how attempts to exceed the maximum sustainable growth rate specific to any individual company can lock it into a slow but relentless spiral of decline, from which there is little hope of escape. This growth ceiling can be quantified and we also identify a number of long range early warning signs. Consequently, we believe that our conclusions are likely to change the way life companies are managed in the future.