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Innovation in Insurance: A Cautious Imperative?

The innovation discussion is permeating the insurance industry. But beyond the talk, data suggest that, as an industry, we would prefer to be cautious in innovation development and deployment.

Some would say  that “cautious” and “innovation” don’t fit in the same sentence. But perhaps this is just the way of insurance. I would appreciate your thoughts.

About innovation: It is concrete and it breaks things

For common understanding, let’s use Celent’s definition of innovation: “Fundamental changes to products, services, or business models that break existing trade-offs and provide value to the customer” (emphasis mine).

Innovation is not theoretical. Writing in Management Information eXchange, Jim Stikeleather, Chief Innovation Officer at Dell Services, insists that innovation is “not an ethereal, mystical or nebulous thing. It has concrete attributes.”

Should insurance innovate?

In the introduction to KPMG’s recent report on innovation in the insurance industry, “A New World of Opportunity,” co-author Mary Trussell, Global Insurance Innovation Lead Partner, encapsulated the conundrum that insurers face when dealing with the challenge of innovation, noting that : “customers do not come to them for a specific product, they come to them to help manage the risks they face. But you cannot respond to that shift with a product-centric structure.”

So are insurers prepared for breaking existing tradeoffs? Perhaps in principle, but not, it seems, in practice.

The KPMG report is based on a survey of 280 insurance executives across 20 countries. Almost half the survey respondents indicated their business models are being disrupted by “new, more nimble competitors.”

So, innovation should be high on the list, yes?

Survey says: Incrementalism trumps innovation

When asked what would improve their business prospects, 62% of KPMG’s respondents indicated improving processes and use of technology and 52% indicated digital technology and integration (multiple answers were allowed).

Given that technology is inherent in today’s concept of innovation, this is necessary, but not sufficient.

While the majority of respondents recognize a direct linkage between innovation and growth, when asked about pace of adoption, “just 32 percent of respondents said that they consider their organization to be a first mover when it comes to innovation.” Of the balance, 40% were content to be fast followers.   Over one-quarter of the respondents reported “they had no discernible philosophy.”

One of Stikeleather’s innovation attributes is that “Innovation is not incremental”. He cites John Seely Brown’s construct of a ‘conceptual rut,’ which employed an example of 19th century clipper ships:

Improvements in speed and deficiency were achieved by adding more masts to carry more sail, with seriously decreasing marginal utility. It took inventors from outside the industry to break the paradigm with steam engines.

What is holding us back?

KPMG survey respondents identified internal challenges to innovation:

  • “We are running to keep up with what we do already.” (79% of respondents)
  • “Lack of internal core skills needed to drive innovation.” (74%)
  • “Lack of investment and cost pressures.” (71%)

When asked what innovation initiatives have been undertaken in the last 5 years, respondents said:

  • “Cultural change programs.” (51%)
  • “Partnerships with academics and third parties.” (43%)
  • “Training focused on innovation idea generation and/or process skills.” Tied with “Developing innovation hubs or labs.” (36%)

It is interesting that three of the top four initiatives are training or planning focused – very proper in a traditionally managed organization, but …

Stikeleather makes the point that innovation is “inherently dangerous” and “can’t be created with a five year business plan.” With regards to management, he writes, “Executives usually think that if an idea hasn’t been implemented, there is a reason. To foster innovation, they have to change their risk profile.”

KPMG makes a complementary point: “Simply conducting cultural change programs may not lead you to your desired results – programs need to be ongoing and outcomes built into the fabric of the organization, rather than a flavor of the day that is soon to be forgotten.”

A suggestion and request …

If you are interested in innovation and insurance, I recommend the KPMG report, as it provides deeper analysis, a number of case studies and an interesting discussion about the impact of regulation on innovation (a topic unto itself).

In addition, Insurance-Canada.ca will be providing several sessions on innovation at our 2016 Insurance-Canada.ca Technology ConferenceStay tuned for more detail.

Meantime, I would appreciate your comments. Is your organization running an innovation initiative? If so, what are the experiences? If not, is this the result of an active decision?

 

 

 

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