If there's one constant in today's world it's that change is an absolute and ongoing necessity. Organizations that take a "business as usual" approach and fail to evolve their practices and cultures are doomed to mediocrity, if not outright failure. It takes only a glance at the business landscape to view the wreckage of once high fliers that have crashed and burned.

In the early 2000s, two mighty insurance companies, Kemper Insurance and Reliance Group, fell into the dustbin of history—taking hundreds of millions of dollars in capital and tens of thousands of jobs with them. Although the industry has recovered and moved forward, there are lessons to be learned from the inability of these once mighty companies to adapt their practices and cultures to changing conditions.

It's no minor issue. "Companies must constantly examine how they can adapt and evolve," observes Michael O'Halleran, executive chairman of Aon Benfield. Adds Paul Karon, chairman, Americas, of Aon Benfield: "We live in an era of enormous change. Companies that do not adapt put themselves at enormous risk. Kemper and Reliance are textbook examples of how companies can go wrong."

A Numbers Game

For years, Kemper and Reliance were successful companies that earned a solid profit. But times change, and during the late 1990s, rapidly shifting business practices—largely the result of technology and the Internet—altered the equation in ways that leaders at these companies couldn't have imagined. This, combined with a string of poor management decisions, doomed these organizations. The final straw was 9/11. The terrorist attacks on the World Trade Center in New York City and resulting payouts exposed myriad equity flaws and poor management practices.

At the heart of the problem for both these companies was a willingness to underwrite policies carrying too much risk—particularly during a period of soft market conditions. "These companies were too eager to grow their business at any cost," O'Halleran points out. "They overextended capital and wrote premiums that had no chance of being profitable—simply because they wanted to expand the business. It was an unsustainable model."

Unfortunately, both companies also lacked the talent to manage risk adequately. "They didn't have the expertise and understanding of market dynamics proportional to the level of risk they were assuming. The people leading these organizations were either under-qualified or completely unqualified," O'Halleran explains. "They made decisions that were unsustainable."

A third problem was that the corporate boards for these two firms shirked their responsibilities—while rating agencies such as Standard & Poor's, Moody's, Fitch and A.M. Best applied the wrong metrics. This left the two companies with solid ratings while they crumbled. "In each case," O'Halleran says, "the boards were controlled by a powerful CEO, and appropriate oversight and controls weren't in place."

At Reliance, the business had been managed—some would say mismanaged—by Saul Steinberg and family members for three decades and, according to observers, there was frequently "a wink and a nod" from a board that didn't fully understand the business. In fact, when Robert S. Miller, currently chairman of American International Group (AIG), took the reins of Reliance in 1999 (presumably to turn the company around) he found himself completely shut out, he would later claim. The president of the company was excluded from executive board sessions and working lunches with major decision-makers. Only a secretary reported to him. Not surprisingly, Miller left after only three months.

Yet the failure of Kemper and Reliance extends beyond poor management. It's also clear that the corporate cultures weren't equipped to deal with business in the 21st century. As financial mechanisms and underwriting became more complex, these companies didn't stay current with technology and processes. It's not an uncommon problem, Karon says. "Every year a person becomes 20 percent obsolete," Karon explains. "So, if you don't upgrade your knowledge and change your skills sets you're obsolete after five years."