Innovation In Insurance - Deloitte
Innovationin insuranceThe path to progressA special edition of our Forward Focus seriesfor insurance executives
Innovation in insurance: The path to progressFurthering the conversationon innovationWe are pleased to offer this insight as a part of Deloitte’s innovation series—a collection of articlesaimed at providing ideas and practical insights specific to innovation.About the authorsHoward MillsHoward Mills is a director and chief advisor with Deloitte’s Insurance Industry Group. Howardcame to Deloitte after serving as superintendent of the New York State Insurance Department.In his current role, Howard offers thought leadership to Deloitte’s insurance clients in areas ranging from growth and globalization to managing the complexities of regulatory compliance. He is afrequent speaker at many industry conferences and events on topics such as enterprise risk management and the impacts of proposed US and global regulatory changes. He has been widely publishedin the national and international trade and consumer press.Bernard TubianaBernard Tubiana is a principal at Monitor Deloitte focused on insurance. He advises seniormanagement teams on their corporate, business unit, product, and market strategies. He alsoadvises clients on customer experience, merger integration, process redesign, and cost reduction and associated process, technology, and people-related changes. Bernard has spearheadedDeloitte Consulting LLP’s work applying innovation and disruption theory concepts to financialservices firms.Bernard co-hosts a number of forums for life, annuities, and group benefit carrier executives. Heis often quoted in insurance trade publications, including A.M. Best and National Underwriter/Tech Decisions.
A special edition of our Forward Focus seriesContentsInnovation 2What is innovation?EmpoweringSustainingEfficiency 3710 14How to innovateEndnotes 19Contacts 21 Acknowledgements17 21Cover iIllustration by Dan Page1
Innovation in insurance: The path to progressInnovationInnovation may be among the mostdesired but least understood of corporategoals. As shown in figure 1, interest in innovation, as measured by the relative frequencywith which it is mentioned in the millions ofbooks cataloged and digitized by Google, rosesteadily from the immediate post-World WarII era up until 2008, the last date covered byGoogle Books.12008, as we may remember, was the yearwhen a number of exciting innovations infinancial services ended in a crisis from whichwe are only now recovering. In hindsight, itmay be hard to remember how innovativeideas like credit default swaps (CDS) and similar derivatives were expected to increase profitsand lead to a new world of low-risk investments and continued economic growth.That didn’t work out as expected, and innovation sometimes doesn’t. The question thenbecomes whether it is worth the risk.Most corporate executives recognize thevalue of innovation, but few would be braveenough to boast of clearly understanding theprocess of implementing innovation in a business model, and even fewer of successfullyintegrating continuous cycles of innovation intheir own companies.That is not necessarily a mark of failure,but a recognition of reality. For a successfulbusiness, a commitment to innovation represents a gamble as to whether the innovation,if successful, will adversely affect the existingbusiness, or represent a substantial increase orimprovement in the business.And the gamble does not always pay off.But in today’s world of big data and rapid economic and technology changes, can companiesrisk not being innovative?Figure 1. Relative frequency of mentions of innovation in books cataloged by Google 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005Graphic: Deloitte University Press DUPress.com2
A special edition of our Forward Focus seriesWhat is innovation?Innovation as we use it here refers to anycombination of activities and technologiesthat breaks existing performance trade-offs inthe attainment of an outcome in a mannerthat expands the realm of the possible.This definition comes from leading innovation researcher and Deloitte ResearchDistinguished Fellow Michael Raynor, whosaid in his book The Innovator’s Manifesto:“Trade-offs define the limit of what is possible at a point in time, not what is possiblefor all time all innovation is about breakingtrade-offs.”2It is important as we examine this definitionof innovation to realize that innovation doesn’tnecessarily translate as “new and improved.”Madison Avenue notwithstanding, some of themost important innovations of our lifetimesmay not represent something objectively better than that which they replaced, but rathersomething good enough for a desired outcome,something good enough to expand the realmof the possible.That drives growth. Breaking trade-offsthrough innovation allows a company to reacha point in “strategic space” that competitorscannot, allowing a company to provide a product at a price or performance level competitorscannot match, Raynor argues.3 Among theexamples he cites is the personal computer(PC) industry.At the time they entered the marketplace,PCs could not even dream of approaching theperformance of the worst minicomputers. Butthe trade-off they broke involved price, and asthe performance of PCs evolved to the pointwhere they were “good enough” for almost alltasks minicomputers previously handled, themarket accepted that trade-off.How many minicomputer manufacturerscan the average consumer name now?Price is not the only trade-off one canbreak. The iPhone could have been just anexpensive way to look really cool, but usersquickly discovered it offered non-price valuethat trumped its higher cost. As with PCson the low end of the market, the iPhone onthe high end did not just disrupt the existingmarket, but created a new market of its own.They may not have had the greatest screens onwhich to watch the latest 3D movie, but on thetrain going home, they were “good enough.”They may not have offered the performance ofthe PC for Internet surfing, but again they were“good enough.”Raynor’s mentor, Harvard BusinessSchool’s Kim B. Clark, professor of BusinessAdministration and fellow innovation guruClayton M. Christensen argue that there arethree types of innovations:4 “Empowering” innovations move productsfrom costly items available to the few tomass-market items available to the many.These innovations expand the market.Consider the move from whole-life toterm products as an example of such anempowering innovation. “Sustaining” innovations are essentiallyproduct replacements, moving from onemodel to another that may be better, buthas a basic similarity. This represents themajority of current innovation, Christensensays, but translates into a zero-sum economic game. Here, replacing one annuitywith another slightly better but substantiallysimilar one seems an appropriate example.3
Innovation in insurance: The path to progress “Efficiency” innovations reduce productionor distribution costs. The use of the Internetby many auto insurance writers may be agood example of this type of innovation.Christensen sees these innovation types ascyclical. Efficiency innovations may cost jobs,but they may lead to more efficient use of capital that could then result, in Christensen’s view,in a commitment to empowering innovations,the results of which are leveraged throughsustaining innovations.One could reasonably derive fromChristensen’s argument the view that mostindustries or companies are always somewherein the process of innovation, whereas the otheroption may be a steady or even swift declineinto irrelevancy, much like what happened toblacksmiths or daily newspapers.Yet there are those who would argue thatthe link between insurance and innovation isso tenuous as to be nearly nonexistent. In thewords of the old cliché, innovation and insurance are found together only in the dictionary.But we would respond that the conservative reputation the industry enjoys has servedto camouflage a tremendous track record ofinnovation, from the first written insurancecontract inscribed on Babylonian columnsby King Hammurabi’s men5 to the industry’scurrent use of big data to lower costs andimprove results.The societal impact of insurance innovation cannot be understated. For example, theGreat Fire of London in 1666 led to the formation of the first English insurance company,The Fire Office, located behind the RoyalStock Exchange.In order to protect its investment, thatinsurer and the others established soon afterward set up their own fire brigades to fightfires at places covered by their policies. Then,in a triumph of reason and enlightened selfinterest, the insurers donated their firefightingequipment to the city in order to form andequip a municipal fire brigade that could fight4fires anywhere in the city, not just in the buildings the companies insured.6While American founding father BenFranklin had many noted accomplishments,what could have been more important thanhis founding of the nation’s oldest operatingproperty insurance company,7 The PhiladelphiaContributionship for the Insuring of Housesfrom Loss by Fire, after the great fire of 1730?But even the lasting importance of the existence of insurance against fire for individualresidences may be secondary to the safetyinnovations the company employed.The conserva tive reputationthe industry enjoys hasserved to camouflage atremendous track recordof innovation.Surveyors were sent to inspect each building before it was accepted for insurance, anda rate was then set reflecting the risk.8 TheIndependence Hall Association noted: “Housesbuilt not conforming to legal specificationswere denied insurance. Mrs. Lydia Biddle, forinstance, was denied insurance because of anunlawful wooden bakehouse adjoining herhome. Early policyholders had to have a trapdoor to the roof as a way of fighting roof andchimney fires. During the British occupationof Philadelphia in 1777, a chimney sweephired by the firm was sent around to occupiedhouses to maintain fireplaces. The lightningrod, invented by Director Ben Franklin, alsohelped to deter fires. Houses with trees in frontof them were not insured because early hosescould not maneuver around them.”9That last policy clause led to the formation of a rival insurance company that would
A special edition of our Forward Focus seriescover the risk, a reminder that the industry hasalways been highly competitive.The history of insurance product innovation is a history of human trade and development. The earliest policies largely coveredlosses by merchants going through foreignlands, enabling them to share the risk oftrade.10 Maritime insurance dates back to the13th century at least. Its expansion tracked thegrowth of seafaring trade, with many of thosewriting insurance in the 1680s gathering atEdward Lloyd’s Coffee House.Life insurance, accident, and health insurance, and now everything from businessinterruption insurance to cyber insurance,reflect innovations developed by insurers inorder to allow merchants to take risks forgrowth and families to survive in the face ofunexpected hardship.The secondary result of those innovationshas been life-improving innovation in othersectors, from the Underwriters Laboratorymark letting consumers know a product hasmet safety standards to air bags and seat beltswhose development and adoption were drivenin part by industry-funded sources like theInsurance Institute for Highway Safety.Underlying much of this were the internal innovations that drove insurance andallowed an industry based on trust to thrive.Few people buying life insurance or annuitiestoday need consider if the insurance companywill have the resources to pay when expected.But underlying that basic trust is a system ofreserving reliant on mortality tables developedby innovators like Dr. Richard Price, an 18thcentury British mathematician who authoredone of the major milestones in the history ofmortality calculations when he prepared theNorthampton Mortality Tables.11 His pioneering work in life insurance science with TheEquitable Life Assurance Society in London,at a time when life insurance was just gaining credibility, formed the basis of the vital,sustainable industry we see today.The few examples of innovation in insurance and by insurers cited here can hardlycapture the breadth and depth of such innovation over the years, but that is not to say thatthere is no room for improvement. Innovationin insurance has long been rightly married to acertain conservatism that ensures that companies do not get carried away by the latest fads,but preserve their capital for its intended purpose. That conservatism served most carrierswell during the 2008 crisis, but may also hinderthe flexibility needed to survive and thrive in apost-crisis environment, as the rate of changeappears to be accelerating.Empowering innovation, as defined byChristensen, may be by its very nature mostdisruptive to existing insurer business models.Trained as the industry is to focus on the bestproducts and justifiable investments, it may bewell positioned to implement both sustainingand efficiency innovations, but that may not besufficient. Insurers are great at analyzing data—but, as Christensen’s third principle in hisseminal work, The Innovator’s Dilemma, states:“Markets that don’t exist can’t be analyzed.”12Doing everything right for now may notbe enough if you miss out on the next wave ofinnovation. As he studied disruptive innovation, “in industry after industry, Christensendiscovered, the new technologies that broughtthe big established companies to their kneesweren’t better or more advanced—they wereactually worse. The new products were lowend, dumb, shoddy, and in almost every wayinferior But the new products were usuallycheaper and easier to use, and so people orcompanies who were not rich or sophisticatedenough for the old ones started buying thenew ones.”13Raynor uses a different model fromChristensen for describing types of innovation. For Raynor, innovation is split between“disruptive” and “sustaining.” Disruptiveinnovations are those like the iPhone andthe PC, mentioned earlier, that push through5
Innovation in insurance: The path to progressthe frontiers to create a new business model.Sustaining innovations expand the boundariesof a business model.Both models, though, seem to agree at leastin part on the differences between types ofinnovations and their effect on the market, andboth researchers convey the market-alteringpower of disruptive innovation.Insurance is, in many ways, a prisoner ofthe past. The industry relies on data to assessand manage risks and to create new products. Insurers are very good at expanding theboundaries of the current business model. Likeminicomputer makers, the industry is masterful at tweaking and optimizing its product. Aquick look at some of the new products madeavailable over the past few decades showsnumerous examples of sustaining innovation.The industry does seem to know how to meetthe needs of its consumers.On the other hand, a look at the percentageof the available market buying various insurance policies may lead one to be concerned6about the lack of movement toward expansionof that market penetration.Insurance may not readily lend itself to asdramatic a disruptive innovation as was termlife insurance at a time when whole life wasall there was, for example, but the market maydemand it. Whether one uses Raynor’s terminology and calls it “disruptive innovation”—creating a new market—or uses Christensen’sconcept of “empowering innovation”—dramatically expanding the market—insurers may dowell to work toward innovation that increasesthe size of the market they serve.While current customers may seem content with the choices available to them, with avast underserved population for products likelong-term care and life insurance, the industrymust be cognizant of the danger of disruptiveinnovation by an upstart creating a low-endproduct that, like the first Japanese transistorradio or automobile to hit the US market, istaken less than seriously in the short run, withdire consequences down the road.
A special edition of our Forward Focus seriesEmpoweringThe late Harvard marketing professorTheodore Levitt was known for saying, “Peopledon’t want to buy a quarter-inch drill. Theywant a quarter-inch hole.” One could extendthat to say that people don’t actually want aquarter-inch hole; they want a peg on which tohang their coats.With insurance, people want to buy thepeace of mind of knowing their risk is covered.For insurers, the issue is how to do this profitably and efficiently. The difficulties of doingthis in the United States are clear enough, butconsider the difficulties facing insurance companies in India.That vast nation, filled with nooks andcrannies, with giant cities and remote villages,with great disparities of wealth, is one of thefastest-growing and most-prized markets formost industries. Insurance is no different. TheIndian government liberalized the insuranceindustry in 1999 and detariffed the generalinsurance industry in 2008, leading to a periodof great growth. This growth is expected tocontinue, with the general insurance marketexpected to grow by about 20 percent per yearfrom 8 billion currently to approximately 28 billion dollars by 201614 and 50 billionby 2020.15The obstacles to companies reaching forthat prize are formidable. Even apart fromthe difficulty of finding the talent needed tostaff a growing company, the sheer geography of the country makes it difficult to reachsome consumers. This was territory ripe forempowering innovation.About two years ago, one company decidedto try. Part of a 12 billion business group,L&T General Insurance Company is a full-service, full-scale company offering property andcasualty insurance as well as health insuranceto individuals and small and large businessesacross many geographic areas in India. Theinnovative idea at its core, according to CEOJoydeep Roy, was the objective of becomingand remaining a company that depends onmobile solutions right from day one.16The sheer audacity of that idea is daunting,but the economics were compelling. Withinthe past seven years, India has moved froma nation of approximately 5,000,000 cellularphone users to one where more than 800 million people now carry a cell phone, most ofwhich are Internet capable. Being able to usethis mobile platform to reach potential customers as well as to administer claims wouldenable the new insurance company to quicklyand efficiently serve a vast range of consumers,its leaders thought.“India lives in its town and villages. What ismost important is to have an effective, lowcost, reliable, and consistent delivery mechanism,” said Roy.17But before beginning to use that platformto reach new customers, the company soughtto reinvent the entire insurance technologyfoundation. So far, it has built an end-to-endsolution that is completely service-orientedarchitecture-based, ACORD-compliant, andfully Web-based—and therefore normallyaccessible from the cloud. This enables thecompany to issue policies virtually anytime,anywhere, from practically any device. The system allows producers to scan image documentsanywhere. The company is able to handleclaims, automatically handle reinsuranceplacements, and manage external financialaccounting online.7
Innovation in insurance: The path to progressThese disruptive innovations have led to vast newmarkets at price points the average Americanexecutive may have consid ered noneconomic.How effective has this been? The companyopened 10 branches in its first year. In less thantwo years, it has been able to issue policies inmore than 1,040 different towns and cities.More than 100,000 policies worth 28 millionhave been issued and more than 6,000 claimsserviced, all without a single piece of paper.CEO
Howard Mills Howard Mills is a director and chief advisor with Deloitte’s Insurance Industry Group. Howard came to Deloitte after serving as superintendent of the New York State Insurance Department. In his current role, Howard offers thought leadership to Deloitte’s insurance clients in areas rang-
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