The Face of the Intangible Economy


In my industry, small firms are going extinct. It’s crystal clear in the reinsurance broker world but the same thing, I think, is happening to all links in the insurance risk chain from agents to reinsurers. Why?

I’m looking forward to an upcoming podcast conversation where I’ll try to make some progress on that question and in advance I’ve been brushing up on all kinds of literature. This year a key book came out, *Capitalism Without Capital* which has interesting things to say about the rise of the intangible economy.

What I love about this book is that it refers to data that is available to download, so I did! My question: how have firms actually been changing over the last 20 years?

The big three intangible categories were R&D, software and something called “organizational capital”. All are growing in the amount of ‘capital’ they represent in firms of all industries though R&D is growing more slowly than overall capital growth (so its share is declining) and software much more quickly.

No big surprises so far and much of the commentary I’ve read on this topic tends to focus the mind’s eye on R&D and software when drawing up interpretations of what is going on. But what on earth is organizational capital? It’s growing at about the same rate as the overall capital growth so its share is constant. Oh, and it’s the biggest (in the UK*)!


To find its definition you need to dig into the source material, specifically this paper by Carol Corrado, where she describes two components of “organizational capital” (I’ve transcribed the description below in a giant quote):

    1. an external component, being money paid to management consultants; and,
    2. an internal component, being the proportion of payroll paid to management.

I haven’t been able to find a breakdown of the internal vs external component. I used the UK data above because it was easier to get the nominal data as a check. This doesn’t include any judgmental adjustments for how much of the spending creates a persistent asset (obviously much time is wasted and some time from managers for example will be spent on things that aren’t necessarily related to intangible assets).

So, compared to fifteen years ago the average firm today spends a ton more money on software, a lot more money on consultants and management and somewhat more on R&D. 

That makes sense to me. More thoughts to come in the podcast.. stay tuned!


*The US data has much more R&D and much more mineral exploration than the UK, the latter of which I think distorts things a bit. Organizational capital is about 15% of the US figures and its share is rising quite fast.

the giant quote from Corrado:

Investments in organizational change and development have both own account and purchased components. The own-account component is represented
by the value of executive time spent on improving the effectiveness of business organizations—that is, the time spent on developing business models and corporate cultures. The purchased component is represented by management consultant fees. The purchased component is estimated using the SAS annual revenues from the management consulting services industry, which rose substantially in the 1990s, from $27 billion at the start of the decade to more than $80 billion during 1998–2000 (table 1.3, line 9a).

The own-account portion is estimated as a proportion of the cost and number of persons employed in executive occupations, which rose very rapidly in the 1990s. Given that executive median pay exceeds the median pay for other employees, the fraction of total private payroll spent on executives and managers is substantial, almost 22 percent in 2000 (Nakamura 2001). Applying the executive and manager payroll share to total private business-sector compensation yields an estimate for managerial and executive costs of nearly $900 billion per year in the 1998–2000 period.

If just one-fifth of management time is spent on organizational innovation, then businesses devoted more than $200 billion per year to improving the effectiveness of their organizations during 1998–2000 (table 1.3, line 9b). This figure is highly sensitive, of course, to the admittedly arbitrary choice of one-fifth as the fraction of time managers spend on investing in organizational development and change; as a result, our estimate for this component ranges from $105 billion (based on a one-tenth fraction) to nearly $350 billion (which assumes one-third). Adding in the $80 billion annual expense for management consulting (described above), our point estimate of total spending on organizational change and development is nearly $300 billion per year from 1998 to 2000.

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How Ted Blanch Left His Dent in the Universe (or at least in Minnesota)

This episode features Ted Blanch. Ted to me is one of the greatest leaders the reinsurance industry has ever seen and one of the most underrated leaders of any industry in any era. Ted ran the firm EW Blanch, taking over at about 50 employees and growing it into a billion dollar company by the mid-90s. That alone puts Ted among the most successful businessmen in the world but EW Blanch was also a pioneer in catastrophe modeling and has as its legacy a reinsurance industry in Minneapolis. How many can say they reshaped the economic geography of the United States? How he did it, his philosophy of management and Ted’s downright humility shine through in our conversation.

Two things I learned in this conversation that I’ll carry with me for a long time are how catastrophe modeling as an investment for the firm (and they were a pioneer) followed the classic startup path: it was a stupid idea.. until it wasn’t. I’ll let Ted tell the story:

If we had laid a bigger egg, it would have to have been dropped by an albatross.

And then a wonderful thing happened. And the wonderful thing that happened was Hurricane Andrew. Where all of the people who had their own systems for measuring their cat exposures found out just how wrong they were. Did they have a desire to be right? I don’t know. But I’ll tell you one thing, the guy sitting in the corner office didn’t want to have to go to the board or the shareholders and say we’re not doing anything about this. So everybody started using modeling.

On the organizational front, two things stood out. First that he hired young and trained folks obsessively. Here Ted explains the development program:

TB: We had professional educators who were doing it. We never had them teach, we only had them organize it and help develop the curriculum. The teachers were always the people who worked at the firm.
DW: What did it look like for a new student coming into the program…
TB: Basically it was divided into two parts: one was classroom work and the other was we gave them jobs to do so they were always working…
The classroom work was basically half days to whole days and it went on for, I don’t know, my recollection is we were doing about 9 weeks of classroom work which was divided into sections in a syllabus to cover a bunch of different things. And then we would test them and they liked being tested…

Second, he shared in the equity of EW Blanch with his producers. Ted one last time:

TB: My belief was that I would be better off having a smaller share of a much larger pie than I would having a big percentage but not being able to attract and work with people who really felt good about what they were doing.

DW: did you always know that would work?

TB: No, no I didn’t know it would work it just seemed like the right thing to do.”

There’s so much more in our conversation, including what Ted thinks of Minneapolis, a discussion on whether or not he fired his father and what he’s learning about now after almost 60 years in the business.

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Sales, CEOship and Unknown Unknowns with Bart Hedges

Next on the Not Unreasonable Podcast is Bart Hedges. I’ve been doing business with Bart for years and I’ve always liked his style. Bart is an actuary, former teenaged entrepreneur and the son of a car salesman. He recently stepped down as the CEO of Greenlight Re, an affiliate of David Einhorn’s Greenlight capital and an innovator in the reinsurance business. On top of it all, Bart’s ‘good guy quotient’ is off the charts.

One book we discussed on the show is The Mental ABC’s of pitching, which I actually came across in a David Brooks column. Here is the passage that got me to buy the book and the key lesson from it that I carry with me to this day:

A pitcher is defined, he writes, “by the way the ball leaves his hand.” Everything else is extraneous.

In Dorfman’s description of pitching, batters barely exist. They are vague, generic abstractions that hover out there in the land beyond the pitcher’s control. A pitcher shouldn’t judge himself by how the batters hit his pitches, but instead by whether he threw the pitch he wanted to throw.

Dorfman once approached Greg Maddux after a game and asked him how it went. Maddux said simply: “Fifty out of 73.” He’d thrown 73 pitches and executed 50. Nothing else was relevant.


Focus is one of the most powerful forces in the universe. Cultivate it!

Do listen to my interview with Bart. And if you want to receive an email when I publish a podcast, please sign up here!

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The Not Unreasonable Podcast Episode 3- Don Mango

The first Not-pilot episode of the Not Unreasonable Podcast is up! thinking-chimp_card

Don Mango is one of the most important thinkers in insurance. He has published numerous papers and helped, in my mind, the rest of us figure out what on earth to do with all the computational advances of the last 20 years.

In this episode we talk about that as well as how publishing research changed his life; what is relative strength is among published authors; the peculiarity of the intellectual community of actuaries; how capital should be modeled (you can all eat the pie!); the future of technology in insurance and more!

I’m happy to say Don’s also an excellent guy and very gracious interviewee.

In the conversation we discuss a few papers I enjoyed:
Mango’s first publication

Capital as a shared asset (eat the whole pie!):

On his paper on random number generation: “This is really valuable and I couldn’t imagine an actuary in a more traditional role would have had access to”

risk load and default rate of surplus, which got him attention from the more traditional capital markets:

His pragmatic papers:
how the normal copula is flawed.

How to present DFA results to the board of directors (including stories of his errors!)”

The Kreps reserve range presentation (I think… two choices here):

Writing on actuaries as engineers (and the future!):

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Interview with Me

I did an hour-long interview with Nick Lamparelli for his Profiles in Risk podcast. Nick and I met when he commented on this very blog a few years ago, an experience that he says inspired him to engage with social media, blogging and podcasting himself. Needless to say, Nick’s rocketed past me in accomplishment there.

In the interview we cover:

    • That time I cried and other exam experiences
    • How my two main jobs now, sales and analytics, are both things I hated/feared before starting work
    • Honesty and being real
    • Reinsurance and the recent hurricane events

Link to the full interview here. I did enjoy it. Maybe there’s something to this podcasting thing. Stay tuned!

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A couple of years ago I (once again) swore off exams and this past January I (once again) broke that promise. I started studying for CAS Exam 7.

There wasn’t a lot of room for this. I had a pretty demanding job and three kids at home under 5. I bathe them every night, read them books and tell a story before bed. Now I was to detonate this nice little balance with a first attempt at an upper level actuarial exam? No way.

But a colleague started studying for 7 and I felt a pang of.. jealousy? Brutal though the exam process is, that feeling of pushing yourself to your limit is addictive. Real life problems are hard, too, of course, but real life payoffs tend to take a long time. That buzz of a duel on exam day and the rush of the result with genuinely high stakes is hard to get anywhere else.

So this was an experiment. Can I start four solid months out and study only on my commute and in little chunks here and there and pass an exam? Well, the self-talk went, if I can cover the whole material twice by the signup deadline, I’ll go for it. But that was in March! To get there I needed to commit hard in January. If this was nuts at least I’d only lose two months of my life.

Turns out it wasn’t nuts! Or at least it was achievable. It was definitely nuts. I had my 500 cue cards done by mid Feb. I scheduled daily close reading sessions with my co-studying colleague (we actually got to about 2 a week). Every minute I was focused.

In the back of my mind I knew that the chances of my delicate little balance blowing up in my face was pretty high. That means I was scared. Constantly. For months.

It works, you know, fear. Learning is so painful your mind desperately looks for every little way to procrastinate or avoid the work. You convince yourself to focus on the things you’re good at. You self-deceive about the stuff you’re not good at, like, “oh, I get that” after one problem (Liar!).

The way to suppress the fear is to feel mastery over the material. But since exam outcomes are always a bit random true mastery is almost impossible. That’s why the fear comes back fast and drives you on.

I tasted the lash of fear for four months. I had good weeks and bad weeks but contained studying to my commute and the cue cards I literally carried everywhere. Still reading to my kids at night, I started cautiously feeling good.

Then the wheels came off. We had the floor replaced in our house and it went wrong. I had to take the week off work (no commute!) and we moved into a hotel for 5 days. With the kids of course. Two weeks before the exam. The very day we move back in I fly to Europe for a week-long business trip. And on the first night in Europe, I get the flu. Influenza B, from a Chuck E Cheese we visited trying to kill an afternoon while they demolished our living room. All three kids and my wife got it, too. And they were home sick while I was away. I had it bad. They had it worse.

I wasn’t able to crack a book until Saturday night having not studied for 13 days. The exam was the following Thursday morning. My family was exhausted. I was exhausted. But fear had been there all along, growing stronger. It was terror now. Did I have enough time?

I sat for the exam. Felt good about it. But I was burnt out. Normally after sitting I sheepishly look up the next exam’s syllabus: what’s next? Not this time. I couldn’t bear to look at it. Others download the exam when it’s released and replicate their answers to guess their grade. That thought made me nauseous. My colleague was all ready to dig into Exam 8. No way. I don’t want to do that again. I’m burnt out.

Where I come from a burnout is a kid that smoked too much weed and has that heavy lidded, slow talking disposition welded to their personality. This feeling is similar. It’s not laziness, really. Lazy people are lying to themselves about the consequences of them parking their ass for another week. Burnouts know what we’re missing. We’re making an informed decision to sit stuff out. It ain’t worth it!

So my result notice went to my junk mail and I got it late. I was in no rush. This exam didn’t mean much on its own if I was truly done. A pass, though! It still feels good, I have to say, but…

No more exams.

(again! I know..).


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Disruption In Insurance

My latest on Here is the intro:

For any company, it’s good to be relentlessly focused on the customer: success means knowing what they want and delivering that with discipline and low prices.

Or maybe not! The amazing thing about disruption theory, as defined by Clay Christensen, who coined the term in his 1996 HBR article and subsequent book, is that it reveals this strength to also be a deadly weakness.

Do click through and read!

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