JM_HBS's Profile

Thanks for your comment, Michael! I agree that the most imminent threat to BMW is probably not coming from obvious American competitors, such as Lyft and Uber, but rather from groundbreaking innovation in the self driving car business. BMW is definitely associated with their driving experience and technicality in Europe, where large parts of the population, especially in Germany, actually still prefer driving non-automatic cars.
I think it is commendable how BMW was one of the first car companies to accurately recognize the looming danger of car sharing on future car sales. Furthermore, their strategy of partnering with car rental companies instead of trying to get market share from them was genius, in my opinion. I have been an enthusiastic DriveNow user for years and hope that BMW will be successful at their second attempt at entering the US market. So far, they are only active on the West Coast (in Portland and Seattle), but I hope they’ll expand to the East Coast soon.

Thank you for your comment. Yes, I agree, I think BMW has to adjust their model to the American market. When they first entered the market in San Francisco, their biggest problem was the strict parking regulations in San Francisco. Parking is included in the DriveNow price, so this model ended up being very expensive for BMW. Now they rebranded as ReachNow and actually started out in two different cities: Portland and Seattle. Their focus also seems to have shifted more towards a clean car value proposition with a large number of cars being hybrid or electric. I think that the tech savvy, but environmentally conscious citizens of Portland and Seattle are the perfect customers for BMW: they probably don’t remember the DriveNow experience of 2015 which was only rolled out in San Francisco as you correctly mentioned above, so they view ReachNow as a new player in the market which offers a convenient eco-friendly, but stylish car sharing alternative to Zip Car and Uber. I am very excited for ReachNow in the US and hope they’ll roll out the initiative to Boston, soon!

Thank you for this interesting post, Alicia! Having followed the insurance industry closely for the last few years, it has amazed me how many fantastic opportunities big data will bring to this industry. On the property/casualty side of the business, insurance companies could obtains much cleaner data sets of customer behavior which would immensely benefit their actuaries in correctly pricing individual risks, especially if they are behavior related, such as car insurance. On the life/health insurance side, insurance companies could help customers adopt healthier lifestyles and thus save costs in the long run. Generali, an Italian insurer, has recently launched a health insurance product (‘Generali Vitality’) which lets customers opt into a program which makes recommendations regarding a healthy lifestyle. If customers follow the advice, they can earn rewards and thus lower their health insurance costs. It remains to be seen, however, how much customers will end up valuing product components, such as privacy or simply the ability to make their own decisions, over cost savings. How much are we willing to sacrifice in terms of lifestyle in order to save money on health insurance?

Thank you for this fascinating post! I definitely agree that digitalization is one of the most important topic for insurers world wide, both due to the disruptive effects of digital/fin-tech start-ups which offer alternative insurance concepts or access to data for holistic risk calculations which could potentially compete for market share, and due to the opportunities big data represents for the actuary side of the business. So far, my impression is that regulation and data security concerns (both on the side of the customer, especially in Europe, and on the government side) have held the industry back in adopting broad disruptive digital programs.
I found that Italian insurer Generali is an interesting case study on digital solutions in the health insurance industry, similar to the company you wrote about. Generali recently introduced ‘Generali Vitality’, a program which rewards customers if they keep a healthy lifestyle based on big data analytics and managed via a custom app. It remains to be seen, however, how customers react to the different pricing options in the long run.
https://generalivitality.com

Great post, Sonja! What strikes me most about digital innovation in the oil industry is the fact that the whole industry seems to have underestimated the impact of digitization and only now ramped up major research into digital oilfields. Do you think that the low oil price and generally heightened price volatility in global markets was the ultimate trigger for the recent focus on digital oilfield activities for many oil and gas companies? Were oil and gas companies complacent for too long, underestimating the competitive angle of renewable energy sources, such as wind and solar? It seems to me that the renewable energy industry has included digital/big data initiatives from the beginning and as a result is now way better equipped to use big data for competitive activities, not least pricing.

Fascinating read! I had never thought about the skewed age profile in the oil and gas industry before and was fascinated by your description of “The Big Crew Change”. It sounds like a fantastic opportunity to make a radical digital change in an industry that is often regarded as very conservative and stuck in its ways.
The HBS Energy and Environment Club held their annual Energy Symposium recently and one of the topics discussed was “Digital Oilfield” and the myriad ways operating models can be enhanced by analyzing big data. Hearing from the oil and gas professionals we invited, I sometimes wondered whether digital innovation is also driven somewhat by a push towards digitization in the renewable energy sector where cutting edge technology has been the bread and butter business since industry inception. As the renewable energy becomes more profitable and oil and gas prices continue to suffer from volatility and uncertain carbon regulation, the pressure to innovate is heightened in the oil and gas sector.

Thank you for this interesting post, Chad! Being a music aficionado myself, I am struggling a lot with recent innovations on the digital music front. You can clearly argue that higher resolution files are outside of the human hearing spectrum and thus digitally compressed files should be deemed equally as good as traditional formats, but I can’t help disagree with that. When listening to classical music on Spotify, I am convinced that the sound comes across as somewhat flat and is not comparable to traditional media. It might come down to the deeply engrained skepticism in a very traditional and conservative industry which up until very recently had not seen any large innovation for hundreds of years (in the classical music industry in particular). It might also explain why classical musicians are (in my experience) least likely to use services such as Apple music or Spotify. I myself am very excited to see innovations in the music industry which try to preserve music’s sound, even if it comes at a hefty price tag.

I agree, the BMW brand recognition is substantially lower here than it is in Europe. One of the reason why many people use DriveNow in Germany is the fact that driving a BMW is considered really cool. I think that ReachNow might work in certain environments which are more ‘European’, if that makes sense. They have entered the US market in Portland and Seattle this time which are definitely more liberal and environmentally friendly cities. A large portion of the ReachNow cars are electric vehicles catering to eco conscious crowds in Portland. I am excited to see how ReachNow will develop in the future and whether they’ll be able to take market share from Zip Car.

Kenny, thanks for your comment. I think the most interesting part of the US market entry here is the fact that DriveNow has actually tried entering the US market in San Francisco a couple of years ago already. At the time, restrictive parking permits and similar regulations have prevented DriveNow from successfully expanding operation so that they left the market again.
I agree that scale and price are the two most important value components of this model. One of the studies, I cited above (Zoepf and Keith (2015)), looked at the relative importance of these value components and found that “for an average user obtaining a vehicle when and where they want it is of greatest importance. Traveling one mile for a vehicle or rescheduling a trip by up to one hour are each worth approximately $2/hour in vehicle price”. Regarding utilization rates, DriveNow has been quoted in AutoNews recently saying “The utilization is two, three, four hours a day — so that’s about four times what the average is.” http://www.autonews.com/article/20161003/GLOBAL/310039970/bmws-drivenow-is-profitable-now
Therefore, I disagree that DriveNow faces the same challenges as ZipCar, at least for the European market. It remains to be seen if they can repeat this success story for the American market where fundamentals are arguably different: competitors, such as Uber and Lift are stronger, brand recognition is lower than in Germany, and cities don’t follow the common European hub and spokes structure so that you will need to employ a larger number of vehicles in order to guarantee sufficient coverage.

Thank you, Elizabeth, and I agree! Car sharing is made for Millennials living in urban environments where car ownership becomes futile due to high cost of parking and insurance or simply due to very good public transport and infrastructure. DriveNow is definitely one of the services I miss most in the US and I was very happy to hear that DriveNow entered the US market in April this year (in pilot cities on the West Cost, Portland and Seattle among them). In my opinion, BMW did a great job at spotting the transformative power of the sharing economy and recognized that there was a potential for disruption in their business model. Partnering with one of the largest rental companies in Europe, Sixt, was also genius in my opinion, because car rental companies might as well have responded with starting a price war on this market in order to save their business model.
Regarding your thought on tracking users’ driving ability, BMW and Allianz have actually partnered with a Silicon valley based start up called Nauto which is using camera equipment place on the car’s windshield in order to track drivers’ behavior. This could be used to detect harmful behavior, such as texting or drunk driving, and help insurance companies to detect fraudulent claims. It remains to be seen, however, if European regulators will allow the collection and usage of this data. From a customer point of view, I think it would be a great idea to participate in this system, if insurance companies adjusted their premiums accordingly. We have seen similar developments in the health insurance business, where companies offer discounts if employees participate in certain health initiatives or allow tracking of their health status regularly, one of the most prominent examples being Italian insurance company Generali, see link below.
https://generalivitality.com

Samuel, that’s an interesting thought, thanks for commenting! Regarding Uber in particular, I do not think that DriveNow has to worry too much about competition. Uber has been substantially less successful in Europe, be it due to our strong taxi unions and associations or stricter labour laws (for instance, regarding part time employment, social security including insurance for employees, etc.). In the UK, one of DriveNow’s European core markets via the city of London, taxi driver are required to pass an exam and enroll in special taxi driving programs which can take up to 4 years of full time instruction. From my own experience, I can attest that taxi drivers in both Germany and the UK are way more knowledgeable and professional than their Uber counterparts and many people value these qualities enough in order to justify the price markup versus Uber.
So much for ride sharing facilities. Regarding self-driving cars, I too wonder whether this innovation might change the game for the car sharing industry. In the end it comes down to the fundamental question whether you believe that a GPS based system is superior to human knowledge/skills. DriveNow is a car sharing service where you rent a BMW and drive the car yourself, i.e. it is not directly comparable to either Uber or a taxi service. If regulation allows self driving cars on Europe’s streets (and in my mind this is the biggest IF), BMW might as well enter this market themselves and provide a self-driving car option, similar to their hybrid and electric vehicles. And if Tesla were to offer a similar program, I would be surprised if they could do it at a low cost similar to DriveNow.

Thank you for your answer and the valuable links. I totally agree regarding the distinction between oil/coal extraction on the one side and natural gas exploration on the other side. Given that many countries are also phasing out nuclear energy at the moment (many of them as a reaction to the Fukushima catastrophe), we need to make concerted efforts to find energy alternatives which are capable of keeping up with rising energy demands.
On the other hand, I am a firm believer in consistent messaging at all costs: if we want to meaningfully incentivize renewable energy research, we as a society need to go all in and focus all our efforts on finding a solution to the looming energy crisis asap. Phasing out oil and gas (i.e. any carbon intensive energy source) will only become attractive to the market when the cost of oil and gas exploration becomes unsustainable and renewable energy as an alternative gets enough support (research funding, tariff subsidies, etc.) to sway the market equation in its favor. Refusing to underwrite these industries would increase direct insurance premiums and thus make the oil and gas industry incrementally less profitable. I do agree that insurance costs by themselves will never be the main driver for total oil and gas profitability. However, many little increments may accumulate and make a difference over time. If any re-insurance company could do it, though, it would be the market leader – Munich Re.

RYR – thank you for your comment. I do agree that we are likely to see a snowballing effect from insurance companies’ demand for reinsurance cover. However, in the case of Munich Re, I would argue that the effect will likely be less severe compared to single line reinsurance companies.
1) Munich Re has a very diversified business with several direct insurance lines in their company portfolio (ERGO as a direct insurer, for instance). If they were at some point to decide that reinsurance is not a profitable business anymore (for instance, because new business underwriting cannot manage to capture underlying probabilities anymore), Munich Re among all reinsurers should be best equipped to deal with the potential loss in revenue from its reinsurance business in my opinion.
2) Given the current growth in the market for cat bonds, I would argue that we might see an end to the reinsurance industry at some point if cat bonds cannibalize the reinsurance business model. In an extreme low yield environment where investors are constantly scrambling for higher yielding investments, cat bonds could become an attractive fixed income investment opportunity for investors seeking diversified exposure for their portfolios. Munich Re is already helping companies issue these cat bonds, which could become a future revenue source as a replacement for classical reinsurance business. I am really curious to see if the capital market will at some point become the reinsurer of tomorrow!

Thank you for this fascinating post! I was really surprised to read that Poland’s emissions are above the EU average by such a substantial margin – 50%! With this in mind, it makes sense that established energy companies, such as France’s EDF, are taking the opportunity to tap the Polish renewables market ahead of the 2020 renewable energy deadline.
When first reading your post, I wondered why there is not more competition already from established renewable energy investors, but thinking about it more in-depth I do agree that the regulatory environment must be the key element for financial success of renewable energy investments given that the cash flows are directly correlated with government decisions on tariffs. In times where rich countries, such as Norway, have been seen cutting tariffs by as much as 90% (in the now famous gas pipeline project Gassled), investors have become wary of government actions in general, not least in markets with a less established investment track record (which does include most of Eastern Europe). It remains to be seen how the new Polish government will influence the market going forward given their more conservative leaning in general. My hope is that the core European countries will refrain from making these same mistakes and stick to a transparent and consistent tariff and subsidies policy. In the end, this is a classic prisoners’ dilemma situation where we could all achieve a superior outcome if our governments would just commit to a unified electricity pricing and tariff framework (-> more renewable energy production and in turn less carbon emissions, more renewable energy projects providing stable cash flows to investors in a safe regulatory environment, etc.). With the current political turmoil in many European countries, however, this outcome seems to become ever less likely going forward.

The impact of climate change on the skiing and winter tourism industry has always fascinated me. Climate change is essentially threatening their entire existence. Yet, when asked about it, the most immediate change agents (i.e. hoteliers in the winter regions, producers of skiing apparel and equipment, etc.) often seem only mildly concerned. Being an avid skier myself, I have noticed tremendous changes in weather patterns in my home region in Europe and have often wondered why the industry is not more actively lobbying governments to act on their behalf. Compared to this, regions threatened by the other weather extreme, i.e. flooding (such as the Maldives, for instance), have been way more visible in the dialogue on climate change. It remains to be seen how extreme weather patterns will ultimately need to be until the winter tourism industry will finally become more active and lobby for actionable change. I am happy to hear that Vail is starting to become a thought leader and change agent on climate change and hope that smaller companies in the field will be inspired by it and follow suit soon.

Thank you for sharing this interesting topic. I find it fascinating how the energy project finance environment is becoming more diverse with non traditional market players joining the competition. Google, Apple, IKEA, now Amazon, too! What worries me, though, is that this might create pressure on pricing of these investments. While it seems that Amazon is mainly developing greenfield projects, I would be concerned about declining yields in the alternative investment space if large players, such as Google and Amazon, were to start bidding aggressively for brownfield and advanced greenfield projects, especially if market supply for these projects continues to grow slower than demand. In this current low yield environment, investors, such as sovereign wealth funds or insurance companies have increasingly joined the real asset space, buying wind farms or solar projects. These projects offer higher individual yields than traditional bond investments and contribute to maintaining stable overall portfolio yields for these companies. Higher competition for renewable energy projects might lead to distorted valuations and thus lower yields. It will be interesting to see how traditional investors, such as insurance companies, sovereign wealth funds, and energy focused PE funds will adapt their investment strategies to account for the new players on the market going forward.

I really liked your post! I shows how a company traditionally assumed to be negatively exposed to climate change can turn this adversity into a business opportunity. Allianz has been widely regarded as a thought leader on climate change solutions, not least since they established their Munich think tank Allianz Climate Solutions. Furthermore, Allianz has been able to respond to the demand for climate change related insurance solutions very well. Their subsidiary AGCS offers consulting services and insurance coverage for renewable energy providers, e.g. wind and solar energy providers. Other climate change related products offerings would be crop insurance and micro insurance solutions for countries which will see a big impact in climate change related damages in the future.
Furthermore, it should be kept in mind that Allianz is also well positioned to change investment standards around ESG topics by being both a thought leader on environmental topics and a large investor in terms of assets under management. They were one of the first financial services providers who signed the UN Principles of Sustainable Investments and rank consistently high in sustainability driven indices, such as the Dow Jones Sustainable Index (where they are currently the leader in the insurance space). This shows how seriously the company has taken both the direct impact of climate change on their business and their societal responsibility as a large player in this market.

I really enjoyed reading your post, Ben. Allianz is a really fascinating case of a company exposed to climate change from various different angles. As you pointed out, the P/C business lines of an insurance company are classically the first to get direct climate change exposure in the form of hurricane/flood/storm related insurance coverage with probability distributions likely to change in the future, thus making underwriting a very intricate part of the business. On the positive side, the company has a chance to benefit from climate change related risks which will necessitate new types of insurance coverage in the future. Prime examples for this would be crop insurance to protect against higher levels of volatility (and higher levels of expected losses) across harvest yields as you mentioned in your post, but also coverage for the emerging (and fast growing) renewable energy sector. Allianz’ subsidiary “Allianz Global Corporate & Specialty (AGCS)”, a specialty insurance company with HQ in Munich and a US location in Chicago, leverages Allianz’ global network and immense technical knowledge to provide insurance solutions among others for wind and solar energy providers (e.g. environmental liability coverage, insurance against mechanical failures, transport insurance, etc.). In addition to that they also provide consulting services for the latter product category, essentially diversifying their business across new business lines. All in all, I would therefore disagree that their climate change related product offerings are small.
Another aspect that should be kept in mind is that Allianz is one of the largest investors worldwide, owning asset management companies, such as PIMCO and Allianz Global Investors, as well as managing their own portfolio of currently more than EUR 600bn. Allianz has been a thought leader on ESG related investment topics and has been one of the first insurance signatories for the United Nations Principles for Responsible Investments. They are the leader among insurance companies on the Dow Jones Sustainable Index and have dedicated in-house investment teams focusing on real assets, such as renewable energy and infrastructure. This is evidence that Allianz has successfully managed to turn climate change into an opportunity while at the same time taking action to ensure that their traditional P/C insurance business will be ready for and resilient against the impact of climate change in the future.