Many people are dealing with levels of inflation that they have never experienced before. However, in some countries, inflation has been a way of life for years. To explore the realities of what living in an inflationary economy is like, this week’s host, Aon’s Chief Operating Officer James Platt is joined by CEO of Aon’s South Cone, Franco Di Lucca. Franco discusses how inflation is a normal phenomenon in Argentina and shares six key steps for managing high levels of inflation.
Many people are dealing with levels of inflation that they have never experienced before. However, in some countries, inflation has been a way of life for years. To explore the realities of what living in an inflationary economy is like, this week’s host, Aon’s Chief Operating Officer James Platt is joined by CEO of Aon’s South Cone, Franco Di Lucca. Franco discusses how inflation is a normal phenomenon in Argentina and shares six key steps for managing high levels of inflation.
Additional Resources:
The One Brief: 2021’s Top 10 Risks: The Pandemic Shines a Spotlight on Interconnected Risks
Tweetables:
“We are trying to take advantage of all of the skills we have in different countries.” — Franco Di Lucca
“The best thing you can do today is to be clear and honest with your clients.” — Franco Di Lucca
“You need to be faster than inflation. If you’re ahead of inflation, you’re doing good.” — Franco Di Lucca
Voiceover:
Welcome to “On Aon,” a podcast featuring conversations between colleagues on, well, Aon. This week, we hear from Franco Di Lucca around inflation. And now, this week’s host, James Platt.
James Platt:
All right. Hi. Hi everyone. I'm James Platt and I'm the chief operating officer at Aon. I've been here about eight years and I'm excited today to have Franco Di Lucca with me. Franco has been with the firm actually nearly I think 15 years now, Franco, and is the chief executive of Aon’s South Cone. But maybe before I go further, Franco, what is the South Cone?
Franco Di Lucca:
Okay. Hello everybody. Hi James. Yes, I'm the oldest of the session of this conversation. Well, what is... I'm in charge... Two months ago we did a reorganization around the globe and also LATAM so we decided to run four subregions instead of having split countries in LATAM so we aggregated the countries into four areas, Central America, Caribbean and Mexico, which is led by Juan Segura. Then we have the Andean region, which is led by Mauricio Acosta. Then we have Brazil, which is 50% of the region which is one subregion and they deserve it because they are the big brother of us and then we have our subregion, the South Cone, which is Chile, Argentina, Uruguay, Paraguay and Bolivia. So we have offices today in Argentina and Chile and we have representatives in the other countries. So this is my current role in the company.
James Platt:
I suspect, Franco, if you looked at geographic size, the South Cone's a pretty massive area that you cover. We've invited Franco with us today really because there's a topic that Franco is genuinely an expert on. He's an expert on inflation and while many of us have only really thinking about inflation now, it's something that Franco has thought about over many years and we just thought it'd be brilliant to have him talk a little bit about his business and how he deals with inflation. Maybe though, Franco, just a little bit more broad perhaps to start with. I'd love to just understand what is the role in the South Cone and what does it mean? What do you get up to?
Franco Di Lucca:
What we're trying to do is to consolidate and to create a new geography and to take advantage of, I would say, all the skills that we have in the different countries and try to escalate one way of doing business and try to escalate one way of serving clients and being consistent. So I would say that this is my role today. This a growth play for us. We are not doing this to save money. We are doing this to sell more and to give a better service to our clients. I would say that it's been two hard months, a lot of expectation and I think that it will be a good play for all of us.
Franco Di Lucca:
And let me tell you one thing on this expert on inflation, because it's a little bit funny for me because we are a good example of a bad thing. It's weird when you called me and asked me about this conversation, I said, "Well, I don't have anything to add, to be honest," and you told me, "Oh yes, you have. You have been living in an inflation environment for the last 15 years and we are beginners so believe me that you can tell things that are maybe silly for you that are not so silly for us." So this is the conversation that we will have together.
James Platt:
Franco, you're right. For our listeners, you say I had to persuade you to join this podcast. It took a bit of persuasion because for you, maybe, as you say, it's natural. Let's jump in a little bit. So what is, and I know the South Cone's big, but perhaps Argentina is a starting place. But what do you face every day when we talk about inflation because maybe not everybody realizes the environment.
Franco Di Lucca:
I'll give you some examples of the normal life of the people that maybe can be useful for you to understand inflation. I have a very good example that, when I talk to beginners on inflation, it's a little bit shocking for them. For example, the automobile depreciation. It's normal in the world when you buy a car and you use it, the car costs less during the years and the months. It doesn't happen here. The cars increases their value. You are depreciating your car. Meanwhile, increase their value because of the inflation and inflation on the assets. So it's weird. It's a bit difficult to understand, but it happens. You can save money buying cars and using your car. This is one example which is-
James Platt:
It's a little different.
Franco Di Lucca:
It is. I lived in Europe seven years and you know that I lived in Milano so I lived in the normal part of the world also so I know that cars lose their value. It doesn't happen here. Then, the second example that can be funny also is as the local currency lose and change its value, I would say weekly, in a weekly basis, people prefer spending their pay source, their salary, near the payday to avoid this disruption and of course it generates more inflation because of the speed of the money. Inflation, to me, it's a kind of simple phenomenon and if you have more money than goods, you have inflation.
James Platt:
And, Franco, I came to visit you probably, I'm trying to think now, maybe three years ago, two or three years ago and what surprised me on visiting was just how successful your business had been in this environment and I'd love to know a little more. I think our listeners would like a little more about... Tell us a little bit about your business and how you have succeeded and then maybe we'll get on to talking more specifically about inflation later.
Franco Di Lucca:
So what we did... This is, I would say, a multiyear strategy. What happened in the last 10 years? Well, at some point in time, we understood that we had a massive market share in the corporate business and we needed to do something different because we couldn't keep the pace of growing that the company would ask and so we decided to start entering into some adjacent markets using the expertise that we already had in the corporate business. So giving you a couple of examples, we decided to get into the market in the bank insurance business, for example, using the skills of the broking area on the corporate market and adding technology to this broking capacity. So we gave to the banks some capacities that they have never had. So we decided to get into that business and taking advantage of this capability, as I mentioned before, and it worked and worked very good.
Franco Di Lucca:
We have been diversifying our company and entering into different areas, I would say, not only to preserve or to de-risk our company, but also to de-risk our country. The corporate market in Argentina has been reduced by the crisis so we are all fighting on that arena and we wanted to change our focus, not losing our corporate business, of course, but I'd say just to give you the title, we had to survive. We had to de-risk. This is my sentence, "We de risk our company and the country together."
James Platt:
No, it's really interesting and obviously, Franco, our first conversations around some of the technology and your drive to agent. So it's been great to see that strategy beginning to pay off and I think that the lesson of diversification and how to continue to broaden is a really interesting one. Maybe let's then talk a little bit about inflation and, really, the question I have for you is, "How does it affect our clients and how do we help them?" What are the things that we should be doing and thinking about now as the globe faces more inflation at the moment? What should people be thinking in terms of clients?
Franco Di Lucca:
Well, inflation, it's not a good thing. It's not a good thing because things increase their value. So you have to pay more for the same thing. It's weird. Again, this is a conversation. I don't want to give a masterclass. This is what we do. We try to help our clients. So the first thing that we need to keep in mind is what we mentioned before. The assets increase their value so we need to advise our client to adjust their insured sums and when you start doing this, the first immediate counterpart of this is very clear. They will have a premium increase immediately because if the assets were 10 and now they are 12, and the rate is the same, so they will pay 20% more for the same thing. So they will not be so comfortable.
James Platt:
But you told me before, Franco, that this is not an easy conversation.
Franco Di Lucca:
It is not. No, it is not at all. Moreover, if you're paid on fees, because you have to increase also your fees. You need to adjust your fees based on the expected inflation, because otherwise your fees will be flat and you will be having five, six percent [inaudible 00:11:47] increase so you'll see a gap in your income. So you have to adjust two things and you are not responsible for that, but this is the economy. This is how it's going on these days. You have to explain to them why they have to adjust their values, their BI, for example, of the property policies and why they have to do it and because if have a claim and they are not well insured, they will have problems to get paid and we will have problems also, as their risk consultants because it is supposed that we need to give to them advice on how to deal with the risks and the asset adjustment is part of the risk.
Franco Di Lucca:
So, to me, this is the moment where the Aon United play is more useful than ever because you need to justify, you need to bring data, you need to bring information. You need to help them to take better decisions and you need to work together with the reinsurance people to get the best conditions because some markets are getting softer. So maybe you can match inflation with rates decreases on markets. This is the best thing to do today is being closer, being clear and honest with the clients because this is going on and it is not your fault or our fault. It is going on. This effect and working together as a company. So this is what we do today.
James Platt:
And, Franco, for me, this is the heart of our original conversation when we discussed inflation before that to you, it's something you do day in, day out, all the time, but I feel for, say, having these specific conversations, preparing for them and understanding how we can persuade clients on the change is not something that is natural for everyone and I'm sure it affects each solution line in different ways. Just moving on to a slightly broader question that I'm interested in because we talked a little bit about clients and client needs but how do you, in managing the businesses that you manage in this environment, and I know you said it's not a masterclass, but to me as a fairly... I think I last dealt with inflation, Franco, when I was the school boy or at least I was in the military...
Franco Di Lucca:
So it was many years ago. So it was many years ago.
James Platt:
So it was a while but what's your philosophy? Maybe that's too grand a word, but what are the key things you think about and how do you manage in your business?
Franco Di Lucca:
We usually try to have under control six areas which define, more or less, how you will perform under an inflation environment. First of all, obvious is revenue management and I mentioned before, if you are fee based, you need to adjust your fees and you need to add expected inflation to the fees and you need to and no one wants to do it. We don't want to do it. The client, they don't want to pay but we have to. So we have to adjust our contract so you need massive support of the legal area, which is not normal for them also. So that's why we need to be very, very clear on the value prop, to show the value and to show the data. We have tons of information to prove that what we are saying is true. We need to provide them, again, to help them to make the better decisions, because we do have the expertise and the data. So we need to process it and to give it to the client.
Franco Di Lucca:
Then if you're commission based, well, I would say it's a little bit easier because we don't have the fee conversation but you still need to adjust the sums and what we started doing many years ago, we started doing campaigns through Eloqua, preparing flyers, giving them information, numbers and explain to them why they have to adjust. I don't know in your part of world, but in Argentina, the responsibility of the sum is a client responsibility. It is not ours. They have to define the sum but if they don't know what is going on, they will not have the possibility to it. So you need to provide to them this piece of advice. So this is revenue, first thing.
Franco Di Lucca:
Second one is help you deal with the cash because the speed of the money, it's the key thing on inflation. You need to have under control, collection and payments. And by the way, also your clients want to have under control collection and payments and also the companies want to have under control these two areas. So we need to be careful because all of us are looking after this. I would talk a little bit-
James Platt:
Franco.
Franco Di Lucca:
Yeah.
James Platt:
And sorry, Franco. I was going to say this is because, as you say, over 30, 60 working days, what you're actually getting paid is decreased significantly.
Franco Di Lucca:
Yes, of course and moreover, if they don't pay you, they will invest their money and they will make money with your money and we would do the same. But the third one and maybe the most important one, people. When you have inflation, we all have the sensation that we are losing money and to me, it's crucial to talk about total compensation because maybe you have some mismatching during the year because some company adjusted their salaries two months before Aon. So maybe you can see some mismatching on that moment but when you see the total comp, usually the total comp of Aon is very good. We need to help our colleagues not to take wrong decisions because of this because we are taking care of the inflation as company and we do know that we have to look after this problem. So total comp is the recommendation. Be careful with that.
Franco Di Lucca:
Fourth, ABS. To me, it's crucial. We need to keep focus on a flexible and more IT company related operation to avoid inflation on salaries. When we have a proactive, fast, flexible part of our value prop, which is our core, our operation will have a better business.
Franco Di Lucca:
The fifth, I would say, it's broking involvement to gain business. We always say that we sell what a broking area buy. So we'll have a better probability to sell more if our broking area is more efficient. So these days that we are seeing, at least in Argentina, that some markets are getting softer. Maybe you can put the inflation in the policy without having premium adjustments. So now we are seeing some of these opportunities in some verticals and the last one and which is the move natural one is purchasing, when we spend money.
Franco Di Lucca:
And again, keep benchmarking prices is the key. So what are we doing? Well, two or three times per year, the most important parts of our spending is being revised and we are trying to invite more suppliers to quote and try to see, because you lose reference when you have inflation. This is the problem of the inflation. Then you don't know exactly which is the price of the thing.
James Platt:
It's interesting, Franco, as you work through them, it feels to me a lot of it is around, as you say, data and having the right data and information. A lot of it seems to be around managing expectations so that everybody gets aligned earlier and then moving fast. So thinking ahead, moving fast, having data, so all things that I think as a firm, we're pretty good at, but applying it to inflation and how it can affect, it's a great recipe for all of us.
Franco Di Lucca:
You need to be faster than inflation. This is a problem because inflation, it's a problem of speed of the money and the velocity of the circulation of the money. So you need to be speedest than the inflation. So if you are ahead on inflation, you are good. Otherwise, not so good.
James Platt:
But yeah, not letting inflation drive you. I like the term faster than inflation. I think it's good advice for everyone. Franco, it's been an absolute delight to talk to you and I hope you have felt... We'd say you has been a masterclass, so thank you.
Franco Di Lucca:
Thank you for inviting me and thank you for being open always because it's important to have someone on the other end of the line or of the world who is there to hear someone from Argentina, which is the southest part of the world, complaining about a little thing. So thank you.
Voiceover:
This has been a conversation “On Aon” and inflation. Thank you for listening. If you enjoyed this week’s episode, tune in in two weeks for a discussion on wellbeing at Aon. To learn more about Aon, its colleagues, solutions and news, check out our show notes, and visit our website at Aon dot com.