Insuring Success for the Road Ahead

State Farm CEO Ed Rustis always thinking about the future, whether he’s investing in education initiatives, promoting the benefits of financial planning, or making sure the insurance giant adapts to a changing market.
Insuring Success for the Road Ahead

A man in the insurance industry is always looking ahead. He’s constantly wondering what might go wrong next week or next year—and what he can do today to fix it. Edward B. Rust Jr. thinks about the future even more than most people in the business, because he’s not just focused on property and casualty insurance. As chairman and CEO of State Farm Insurance Companies in Bloomington, Illinois, he’s over-seen the expansion of the company into financial services lines, which allow customers to plan for college and retirement. And he’s turned himself into a champion of education, which is the ultimate investment in the future.

For someone who was practically born into the insurance industry, Rust almost didn’t realize his destiny. His grandfather, Adlai, ran State Farm from 1954 to 1958; his father, Edward, was CEO until 1985. Nonetheless, the younger Rust originally planned to pursue a career in engineering. Later, as he attended Illinois Wesleyan University, he became more interested in business and accounting. Another shift in career goals led him to obtain his joint JD/MBA degree at Southern Methodist University.

Having studied securities and tax law, Rust was all set to take an offer with a major law firm. But conversations with his father convinced him that he should give the insurance industry a try. He joined State Farm’s regional office in 1975 as a trainee. When his father died ten years later, Rust took over State Farm as president and CEO. He was 35 years old.

During his 20 years heading the company, Rust has maintained State Farm’s position as an industry leader. Outside the office, his deep interest in education has led him to co-chair the Business Coalition for Excellence in Education, serve on President Bush’s education advisory committee, chair the Business Higher Education Forum, and commit his organization to a number of educational initiatives. In one, a collaboration with the National Service-Learning Partnership, State Farm provides six K–12 school districts with $5,000 each to fund the integration of service-learning projects into the academic curriculum.

For his efforts in supporting education, Rust was one of six individuals honored with the National Promise of America Award last May. Sponsored by America’s Promise—The Alliance for Youth, the awards were presented at the White House during a dinner hosted by Laura Bush.

Rust will be a keynote speaker at AACSB’s International Conference and Annual Meeting April 21–23 in San Francisco, where he’ll share his views about the collaboration between corporations and educational institutions. An investment in education, he knows, is one sure way to guarantee that business will be on the right road in the future.

You were 35 when you became CEO of State Farm. What were the keys to being successful at such a young age?
I was most fortunate in that a number of people from my father’s senior management team mentored me and shared their time, perspectives, and experiences. In addition, having MBA and law degrees gave me analytical tools that helped me understand the business. Both law school and business school teach you to do a deep and thorough analysis of a situation, but in law school you don’t always have an opportunity to argue the side you want. That forces you to develop a broader understanding of an issue. The regimen of an MBA program also gives you analytical skills. You learn how to peel back the layers so you can understand the core issue. You also learn what kind of options you have in addressing that issue and moving it in a preferred direction.

What have you discovered on the job that you hadn’t learned in business or law school?
It’s often much easier to implement actions on paper than it is in life. Leadership requires understanding the people you work with and the organization you lead. You need to develop a feel for the organization—what gives it vitality, what motivates it, what issues are of deep concern. You have to be cognizant of these as you work to make adjustments.

Education is important to you as an individual and a CEO. What motivated you to take up education as your personal cause?
I think the whole concept of lifelong learning is more relevant today than ever before. It’s scary to realize that the skillsets we possess today are likely to be inadequate five years from now, just due to the normal pace of change. As more young people come into the workforce, they need a deeper, fundamental understanding of the basic skills—not just to get a job, but to grow with the job as their responsibilities change over their lifetimes.

Thirty years ago, some of the kids I went to high school with planned to take jobs at the local assembly plant, put in their 35 years, and retire. Those jobs don’t exist anymore. And the jobs that do exist demand much higher skillsets than the ones those people originally possessed. Workers today need to have the ability to grow with the changes.

Are institutions of higher learning effectively helping workers acquire these necessary new skills?
I think community colleges play an important role for the masses in terms of ongoing educational opportunities. Community colleges offer a chance for people to earn certificates that show they’re competent in a given area of expertise—in software development, for instance. A number of high-tech firms such as Cisco are helping develop programs that will allow people to become certified in their technology. That basically gives them a ticket into major data processing centers with Internet server applications.

Corporations are saying to educational institutions, “We’ll work with you, but we want to see programs that move the needle on student achievement. If they do, great. Replicate them and scale them. If they don’t, move on to something else.”

What do you think are the most important educational initiatives being undertaken today—by the government or by school systems?
Time will tell, but I think that the passage of No Child Left Behind has pointed public policy in the right direction. We’re looking at outcomes. We’re looking at results, as opposed to strictly looking at input. We’re developing metrics to understand student achievement, to evaluate what’s working and what’s not. When it’s working, we scale it. And when it’s not, we change or do away with programs. That’s a phenomenal shift in education.

As a corporation, State Farm makes a sizable investment in education. Do other corporations do as much as they could in this area? 
There is a significant amount of business investment in education. What’s happened in recent years is that corporations aren’t so much reducing their investment in education as looking for demonstrable progress in the areas where they are spending. They’ll say to educational institutions, “We’ll work with you, but we want to see programs that move the needle on student achievement. If they do, great. Replicate them and scale them. If they don’t, move onto something else.”

This is what’s really driving some of the companies that fund and support charter schools. They want to know what is improving student learning and how they can achieve it. That’s a profound positive change in the direction of business involvement in education.

In addition, many companies—including State Farm—do in-house training to help employees continue enhancing their skills. It may not be an investment in the public classroom, but it is a major investment in education. We run many programs through our learning and development department, teaching everything from data processing to human resources skills. We also do all our own training for claims representatives—our single largest group of employees.

When times are tough, why do so many corporations cut funds for employee education? 
It really depends on the business and the value of intellectual capital in that business. I think anytime you are helping employees grow their understanding of the markets they serve and improve the skillsets they bring to their current responsibilities—while it may be hard to measure—the investment pays off in the years ahead. 

A corporation can create an environment for learning, whether it’s done internally, by partnering with a university or a community college, or through a tuition reimbursement program. It’s important to encourage people in their desire to get a better understanding of the world where they live.

I want to talk a bit about State Farm itself. What do you consider its major accomplishments since you’ve been CEO?
One of the challenges has been to continue the company’s evolution—and sometimes accelerate its evolution—to keep pace with what’s happening in the marketplace. We have to know what our customers are demanding and understand how we can provide it.

In recent years, technology has had a significant influence on the way we think about business. We’ve also launched our own bank, started a small family of mutual funds, and expanded our product offerings in insurance. These are all significant changes from ten or 15 years ago.

Why did you decide to diversify into this new area of financial services?
Many people don’t realize it, but for more than 50 years, we used to partner with financial institutions across the country to provide car financing. More recently, we felt offering financial services would be a way to build up on the relationship we already have with more than 25 million households. Those customers are buying cars and homes. They’re taking out home equity loans, running checking accounts, and using credit cards. We already have an excellent relationship with them. We saw financial services as an opportunity to build on that relationship and sell deeper into that household.

Business students often study the risks and rewards that come when a company diversifies its product line. When they become top executives, how can they know when to diversify and in what direction?
Diversification isn’t just saying, “Well, let’s get into other things.” It’s really understanding the markets you want to serve. If you want to expand with current customers, look at their expectations and demands. Then look at your core competencies. What do you do well? 

When the vast majority of our customers think of us, they think of us as their local agents down the street, around the corner, in the neighborhood.

Diversification really comes down to doing your homework. Make sure the rationale for diversifying is one that meets reality. Your rationale can’t just be, “We want to get bigger.” If you can identify a frustration or an unmet need or a strong desire on the part of your customer, and if you have the core competencies that allow you to fill that need, you have a great opportunity in front of you.

The recent hurricane season brought devastation to Florida and the southeast coast—and put a huge drain on the companies that had insured property there. How does State Farm brace for such widespread disaster? How do you make sure no disaster is so great that it doesn’t take the company down with it?
I turn off the Weather Channel! Seriously, I can give you a better answer today than I could have in 1992 when Hurricane Andrew came ashore. Andrew basically caused a recalibration of all the best thinking in terms of what hurricanes could do as they hit major population centers. Most of the modeling—and we were part of that, as were our competitors and there-insurance industry—was off on Andrew by a factor of ten or more.

Coming out of that, we looked at our own exposure and how much business we could have in some of these low-frequency but potentially high-severity cases. We worked with the state governments and tried to determine how to structure programs to finance there building after major events. We learned a great deal and made a number of changes. Today we’re in a far better position from a financial standpoint and a risk management standpoint.

That does not minimize the agony and the emotion that go with standing next to people who are looking at where their beautiful home used to be, now seeing only as lab. On the other hand, that’s what State Farm is all about—being there for people in their time of need. Helping them rebuild. Being the person they’ve known for years who arrives with a check. And being a shoulder to cry on.

Today, many insurance companies—particularly health insurance companies—are seen as the villains in driving up costs and being reluctant to payout benefits.
Unfortunately, that’s true.

Does some of that mistrust spill over onto companies that provide home and auto insurance? How do you retain the good will of your clients and your stakeholders when your entire industry is being painted with such a dark brush?
What we rely on as our strength is the relationship people have with their local State Farm agents. We’re a huge organization—anywhere from a Fortune 10 to a Fortune 25 company, depending on the year. However, when the vast majority of our customers think of us, they think of us as their local agents down the street, around the corner, in the neighborhood.

In our business, the relationship is what we’re all about. If you went out and bought a new car on Friday night, you probably drove it a round all weekend. You took a few extra trips just because you wanted to smell the new leather and try out the features. With our product, you see a State Farm agent and you buy a policy. You don’t necessarily go home and say, “Gee, I want to read about the Newly Acquired Vehicle provision and see whether or not I can tow a trailer.” It’s an intangible. It’s not until after the purchase—maybe many years after the purchase, or never—that you really need to call on that product.

That’s why, when someone is in an accident or files a claim, it’s critical that we use that as an opportunity to reinforce why that person came to us. That’s where we try to shine, by taking an emotionally difficult experience and turning it in to a positive, professional experience with a State Farm agent.

So you’re really trying to live up to the famous motto, “Like a good neighbor, State Farm is there.”
Even with all the new technology, even with the Internet, when people have a question, they want to talk to somebody they know. They want to know someone is convenient to reach. Companies that have tried to use strictly 800-number or Internet approaches might pick up a little traction. But customers still come back, wanting—somewhere in the equation—to interact with people they know.

What do you think today’s business students should understand about the insurance industry to make it appealing to them as a career option?
In insurance, the issues you deal with and the thought processes you go through are similar to those of other kinds of business. Insurance can be as exciting and stimulating as investment banking. After all, we are major institutional investors. Insurance can be as exciting as doing research. We do some of our own crash and damageability assessment research. Insurance also follows demographics and market trends. If someone is coming out of business school and wants to deal with real challenges and issues, we’ve got our fair share in insurance.

What factors do you think will shape the insurance industry in coming years? 
Some changes will be caused just by demographic shifts. As the younger generation comes along, we need to understand how they interact and what they expect in the way of products and services. We need to understand how to adapt from the models that have served us so well for many years. That’s one of the biggest challenges the insurance industry will face.

In the broader field of financial services, we will be asking people, “Do you have a financial plan, and is it current?” Everybody needs to go through that process. We’ll see baby boomers aging, families planning for the future, parents saving for college, and individuals looking toward retirement. People need to start financial planning earlier than they typically think they do. That’s part of the change happening at State Farm. Now we’re in a position to talk to people about planning for the future, setting aside money, and considering some options.

What do you see specifically in State Farm’s future?
I’d like to continue to expand our leadership in markets we serve. To do that, we need to continually assess, adjust, and move. We all have old shoes that we keep going back to because they’re comfortable, but they might not be the best things to wear at the moment. It’s important to recognize when you have to make a change to position the organization to succeed tomorrow.

If you were asked speak to a graduating class of MBAs for 2005, what advice would you give? 
Know that the person you look at in the mirror every morning has a more profound impact on your success than anyone else. Realize that learning will be a lifelong process. Find something that really lights your fire and that makes you passionate. When it’s all said and done, that’s what life is really all about.