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Innovation in The path to progress

A special edition of our Forward Focus series for insurance executives in insurance: The path to progress

Furthering the conversation on innovation

We are pleased to offer this insight as a part of ’s innovation series—a collection of articles aimed at providing ideas and practical insights specific to innovation.

About the authors

Howard Mills Howard Mills is a director and chief advisor with Deloitte’s Insurance 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- ing from growth and globalization to managing the complexities of regulatory compliance. He is a frequent speaker at many industry conferences and events on topics such as enterprise manage- ment and the impacts of proposed US and global regulatory changes. He has been widely published in the national and international and consumer press.

Bernard Tubiana Bernard Tubiana is a principal at Monitor Deloitte focused on insurance. He advises senior teams on their corporate, unit, , and strategies. He also advises clients on customer experience, merger integration, process redesign, and cost reduc- tion and associated process, , and people-related changes. Bernard has spearheaded Deloitte Consulting LLP’s applying innovation and disruption theory concepts to firms.

Bernard co-hosts a number of forums for life, annuities, and group benefit carrier executives. He is often quoted in insurance trade publications, including A.M. Best and National Underwriter/ Tech Decisions. A special edition of our Forward Focus series

Contents

Innovation | 2

What is innovation? | 3

Empowering | 7

Sustaining | 10

Efficiency | 14

How to innovate | 17

Endnotes | 19

Contacts | 21

Acknowledgements | 21

Cover iIllustration by Dan Page

1 Innovation in insurance: The path to progress

Innovation

nnovation may be among the most Most corporate executives recognize the Idesired but least understood of corporate value of innovation, but few would be brave goals. As shown in figure 1, interest in innova- enough to boast of clearly understanding the tion, as measured by the relative frequency process of implementing innovation in a busi- with which it is mentioned in the millions of ness model, and even fewer of successfully cataloged and digitized by Google, rose integrating continuous cycles of innovation in steadily from the immediate post-World War their own companies. II era up until 2008, the last date covered by That is not necessarily a mark of failure, Google Books.1 but a recognition of reality. For a successful 2008, as we may remember, was the year business, a commitment to innovation repre- when a number of exciting in sents a gamble as to whether the innovation, financial services ended in a crisis from which if successful, will adversely affect the existing we are only now recovering. In hindsight, it business, or represent a substantial increase or may be hard to remember how innovative improvement in the business. ideas like swaps (CDS) and simi- And the gamble does not always pay off. lar derivatives were expected to increase profits But in today’s world of big data and rapid eco- and lead to a new world of low-risk invest- nomic and technology changes, can companies ments and continued economic growth. risk not being innovative? That didn’t work out as expected, and inno- vation sometimes doesn’t. The question then becomes whether it is worth the risk.

Figure 1. Relative frequency of mentions of innovation in books cataloged by Google Books

0.0025%

0.002%

0.0015%

0.001%

0.0005% Innovation 0% 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Graphic: Deloitte Press | DUPress.com

2 A special edition of our Forward Focus series

What is innovation?

nnovation as we use it here refers to any How many minicomputer manufacturers Icombination of activities and can the average consumer name now? that breaks existing performance trade-offs in Price is not the only trade-off one can the attainment of an outcome in a manner break. The iPhone could have been just an that expands the realm of the possible. expensive way to look really cool, but users This definition comes from leading inno- quickly discovered it offered non-price value vation researcher and Deloitte Research that trumped its higher cost. As with PCs Distinguished Fellow Michael Raynor, who on the low end of the market, the iPhone on said in his The Innovator’s Manifesto: the high end did not just disrupt the existing “Trade-offs define the limit of what is pos- market, but created a new market of its own. sible at a point in time, not what is possible They may not have had the greatest screens on for all time … all innovation is about breaking which to watch the latest 3D movie, but on the trade-offs.”2 train going home, they were “good enough.” It is important as we examine this definition They may not have offered the performance of of innovation to realize that innovation doesn’t the PC for surfing, but again they were necessarily translate as “new and improved.” “good enough.” Madison Avenue notwithstanding, some of the Raynor’s mentor, Harvard Business most important innovations of our lifetimes School’s Kim B. Clark, professor of Business may not represent something objectively bet- Administration and fellow innovation guru ter than that which they replaced, but rather Clayton M. Christensen argue that there are something good enough for a desired outcome, three types of innovations:4 something good enough to expand the realm of the possible. • “Empowering” innovations move products That drives growth. Breaking trade-offs from costly items available to the few to through innovation allows a company to reach mass-market items available to the many. a point in “strategic space” that competitors These innovations expand the market. cannot, allowing a company to provide a prod- Consider the move from whole-life to uct at a price or performance level competitors term products as an example of such an cannot match, Raynor argues.3 Among the empowering innovation. examples he cites is the personal computer (PC) industry. • “Sustaining” innovations are essentially At the time they entered the marketplace, product replacements, moving from one PCs could not even dream of approaching the model to another that may be better, but performance of the worst minicomputers. But has a basic similarity. This represents the the trade-off they broke involved price, and as majority of current innovation, Christensen the performance of PCs evolved to the point says, but translates into a zero-sum eco- where they were “good enough” for almost all nomic game. Here, replacing one tasks minicomputers previously handled, the with another slightly better but substantially market accepted that trade-off. similar one seems an appropriate example.

3 Innovation in insurance: The path to progress

• “Efficiency” innovations reduce production anywhere in the city, not just in the build- or costs. The use of the Internet ings the companies insured.6 by many auto insurance writers may be a While American founding father Ben good example of this type of innovation. Franklin had many noted accomplishments, Christensen sees these innovation types as what could have been more important than cyclical. Efficiency innovations may cost jobs, his founding of the nation’s oldest operating but they may lead to more efficient use of capi- company,7 The Philadelphia tal that could then result, in Christensen’s view, Contributionship for the Insuring of Houses in a commitment to empowering innovations, from Loss by , after the great fire of 1730? the results of which are leveraged through But even the lasting importance of the exis- sustaining innovations. tence of insurance against fire for individual One could reasonably derive from residences may be secondary to the Christensen’s argument the view that most innovations the company employed. industries or companies are always somewhere in the process of innovation, whereas the other option may be a steady or even swift decline The conserva­tive reputation into irrelevancy, much like what happened to blacksmiths or daily newspapers. the industry enjoys has Yet there are those who would argue that the link between insurance and innovation is served to camouflage a so tenuous as to be nearly nonexistent. In the words of the old cliché, innovation and insur- tremendous record ance are found together only in the dictionary. But we would respond that the conserva- of innovation. tive reputation the industry enjoys has served to camouflage a tremendous track record of Surveyors were sent to inspect each build- innovation, from the first written insurance ing before it was accepted for insurance, and inscribed on Babylonian columns a rate was then set reflecting the risk.8 The by King ’s men5 to the industry’s Independence Hall Association noted: “Houses current use of big data to lower costs and built not conforming to legal specifications improve results. were denied insurance. Mrs. Lydia Biddle, for The societal impact of insurance innova- instance, was denied insurance because of an tion cannot be understated. For example, the unlawful wooden bakehouse adjoining her Great Fire of in 1666 led to the forma- home. Early policyholders had to have a trap tion of the first English insurance company, door to the roof as a way of fighting roof and The Fire , located behind the Royal chimney fires. During the British occupation Stock Exchange. of Philadelphia in 1777, a chimney sweep In order to protect its , that hired by the firm was sent around to occupied insurer and the others established soon after- houses to maintain fireplaces. The lightning ward set up their own fire brigades to fight rod, invented by Director Ben Franklin, also fires at places covered by their . Then, helped to deter fires. Houses with trees in front in a triumph of reason and enlightened self- of them were not insured because early hoses interest, the insurers donated their firefighting could not maneuver around them.”9 equipment to the city in order to form and That last clause led to the forma- equip a municipal fire brigade that could fight tion of a rival insurance company that would

4 A special edition of our Forward Focus series

cover the risk, a reminder that the industry has The few examples of innovation in insur- always been highly competitive. ance and by insurers cited here can hardly The product innova- capture the breadth and depth of such innova- tion is a history of human trade and develop- tion over the years, but that is not to say that ment. The earliest policies largely covered there is no room for improvement. Innovation losses by merchants going through foreign in insurance has been rightly married to a lands, enabling them to share the risk of certain conservatism that ensures that compa- trade.10 Maritime insurance dates back to the nies do not get carried away by the latest fads, 13th century at least. Its expansion tracked the but preserve their for its intended pur- growth of seafaring trade, with many of those pose. That conservatism served most carriers writing insurance in the 1680s gathering at well during the 2008 crisis, but may also hinder Edward Lloyd’s Coffee House. the flexibility needed to survive and thrive in a , accident, and health insur- post-crisis environment, as the rate of change ance, and now everything from business appears to be accelerating. interruption insurance to , Empowering innovation, as defined by reflect innovations developed by insurers in Christensen, may be by its very nature most order to allow merchants to take for disruptive to existing insurer business models. growth and families to survive in the face of Trained as the industry is to focus on the best unexpected hardship. products and justifiable , it may be The secondary result of those innovations well positioned to implement both sustaining has been life-improving innovation in other and efficiency innovations, but that may not be sectors, from the Underwriters Laboratory sufficient. Insurers are great at analyzing data— mark letting consumers know a product has but, as Christensen’s third principle in his met safety standards to air bags and seat belts seminal work, The Innovator’s Dilemma, states: whose development and adoption were driven “Markets that don’t exist can’t be analyzed.”12 in part by industry-funded sources like the Doing everything right for now may not Insurance Institute for Highway Safety. be enough if you miss out on the next wave of Underlying much of this were the inter- innovation. As he studied disruptive innova- nal innovations that drove insurance and tion, “in industry after industry, Christensen allowed an industry based on trust to thrive. discovered, the new technologies that brought Few people buying life insurance or annuities the big established companies to their knees today need consider if the insurance company weren’t better or more advanced—they were will have the resources to pay when expected. actually worse. The new products were low- But underlying that basic trust is a system of end, dumb, shoddy, and in almost every way reserving reliant on mortality tables developed inferior … But the new products were usually by innovators like Dr. Richard Price, an 18th- cheaper and easier to use, and so people or century British mathematician who authored companies who were not rich or sophisticated one of the major milestones in the history of enough for the old ones started buying the mortality calculations when he prepared the new ones.”13 Northampton Mortality Tables.11 His pioneer- Raynor uses a different model from ing work in life insurance science with The Christensen for describing types of innova- Equitable Life Assurance Society in London, tion. For Raynor, innovation is split between at a time when life insurance was just gain- “disruptive” and “sustaining.” Disruptive ing credibility, formed the basis of the vital, innovations are those like the iPhone and sustainable industry we see today. the PC, mentioned earlier, that push through

5 Innovation in insurance: The path to progress

the frontiers to create a new . about the lack of movement toward expansion Sustaining innovations expand the boundaries of that market penetration. of a business model. Insurance may not readily lend itself to as Both models, though, seem to agree at least dramatic a disruptive innovation as was term in part on the differences between types of life insurance at a time when whole life was innovations and their effect on the market, and all there was, for example, but the market may both researchers convey the market-altering demand it. Whether one uses Raynor’s termi- power of disruptive innovation. nology and calls it “disruptive innovation”— Insurance is, in many ways, a prisoner of creating a new market—or uses Christensen’s the past. The industry relies on data to assess concept of “empowering innovation”—dramat- and manage risks and to create new prod- ically expanding the market—insurers may do ucts. Insurers are very good at expanding the well to work toward innovation that increases boundaries of the current business model. Like the size of the market they serve. minicomputer makers, the industry is master- While current customers may seem con- ful at tweaking and optimizing its product. A tent with the choices available to them, with a quick look at some of the new products made vast underserved population for products like available over the past few decades shows long-term care and life insurance, the industry numerous examples of sustaining innovation. must be cognizant of the danger of disruptive The industry does seem to know how to meet innovation by an upstart creating a low-end the needs of its consumers. product that, like the first Japanese transistor On the other hand, a look at the percentage radio or automobile to hit the US market, is of the available market buying various insur- taken less than seriously in the run, with ance policies may lead one to be concerned dire consequences down the .

6 A special edition of our Forward Focus series

Empowering

The late Harvard professor as well as Theodore Levitt was known for saying, “People to individuals and small and large don’t want to buy a quarter-inch drill. They across many geographic areas in India. The want a quarter-inch hole.” One could extend innovative idea at its core, according to CEO that to say that people don’t actually want a Joydeep Roy, was the objective of becoming quarter-inch hole; they want a peg on which to and remaining a company that depends on hang their coats. mobile solutions right from day one.16 With insurance, people want to buy the The sheer audacity of that idea is daunting, peace of mind of knowing their risk is covered. but the economics were compelling. Within For insurers, the issue is how to do this - the past seven years, India has moved from ably and efficiently. The difficulties of doing a nation of approximately 5,000,000 cellular this in the are clear enough, but phone users to one where more than 800 mil- consider the difficulties facing insurance com- lion people now carry a cell phone, most of panies in India. which are Internet capable. Being able to use That vast nation, filled with nooks and this mobile platform to reach potential cus- crannies, with giant cities and remote villages, tomers as well as to administer claims would with great disparities of , is one of the enable the new insurance company to quickly fastest-growing and most-prized markets for and efficiently serve a vast range of consumers, most industries. Insurance is no different. The its leaders thought. Indian government liberalized the insurance “India lives in its town and villages. What is industry in 1999 and detariffed the general most important is to have an effective, low- insurance industry in 2008, leading to a period cost, reliable, and consistent delivery mecha- of great growth. This growth is expected to nism,” said Roy.17 continue, with the market But before beginning to use that platform expected to grow by about 20 percent per year to reach new customers, the company sought from $8 billion currently to approximately to reinvent the entire insurance technology $28 billion dollars by 201614 and $50 billion foundation. So far, it has built an end-to-end by 2020.15 solution that is completely -oriented The obstacles to companies reaching for architecture-based, ACORD-compliant, and that prize are formidable. Even apart from fully Web-based—and therefore normally the difficulty of finding the talent needed to accessible from the cloud. This enables the staff a growing company, the sheer geogra- company to issue policies virtually anytime, phy of the country makes it difficult to reach anywhere, from practically any device. The sys- some consumers. This was territory ripe for tem allows producers to scan image documents empowering innovation. anywhere. The company is able to handle About two years ago, one company decided claims, automatically handle to try. Part of a $12 billion business group, placements, and manage external financial L&T General Insurance Company is a full-ser- online. vice, full-scale company offering property and

7 Innovation in insurance: The path to progress

These disruptive innovations have led to vast new markets at price points the average American executive may have consid­ered noneconomic.

How effective has this been? The company system, which includes risk and rules engines, opened 10 branches in its first year. In less than has also allowed L&T to reduce product launch two years, it has been able to issue policies in time by about 18 months. more than 1,040 different towns and cities. For the consumer, L&T’s mobile system More than 100,000 policies worth $28 million has meant that a scanned printout of every have been issued and more than 6,000 claims proposal form is included with every policy serviced, all without a single piece of paper. document a customer receives. “They can see CEO Roy says the company has been able to what they signed up for,” Roy said. This, he do this through differentiation based on three argues, leads to increased trust. That, after all, principles.18 First, it moved the ability to fully is all any insurer really has to sell. satisfy the consumer to the point of sale. The Roy sees more advantages in the future. agent is able to provide all the relevant infor- Collection is a constant challenge for Indian mation and documentation to the prospective insurers, he says, but with mobile transaction customer when the sale is closed. Second, the platforms now becoming popular, the ability to company moved to achieve proximity and trust transfer funds from one phone to another may through consistent delivery and by being close reduce that burden on insurers. Roy also sees to consumers, with the ability to reach them value-added services, whether for health, auto, through any medium. or homeowners insurance customers, as being Third, the company moved to retain control among those that his “everywhere” system will of the process, especially the back-office work, be able to offer his Indian customers in years through its technology. That enabled the com- to come. pany to provide different types of customers Some of the innovative practices L&T has with quick, reliable service. In a country where introduced have changed the broader Indian policies may be denominated in microdol- insurance market. Auto policies, for example, lars—small, low-dollar, and possibly expen- were normally issued with cover notes, Roy sive-to-service policies—as well as in sizes said, but L&T’s policy of issuing the full policy more familiar to Western eyes, its completely immediately with no cover note is an inno- scalable plug-and-play architecture gives L&T vation that has been followed by the larger a significant advantage in the marketplace, companies in the market. (Cover notes, usually because it can multiple market seg- given to consumers, are similar to binders ments with a single business model. given to agents or , offering evidence The benefits to L&T of this innovative of insurance until a policy is delivered.) By new system have been numerous. Because the immediately issuing a policy instead of a cover entire system is integrated and Web-based, note, the company not only manages adminis- the company can balance the operational load trative costs, but also helps provide a sense of so that a peak in one area can be handled certainty and trust to the consumer. by transferring a portion of the workflow to India is not the only place where mobile another. This results in balanced operational technology has transformed the insurance efficiencies across the enterprise. The modular industry, and with it, the lives of the people

8 A special edition of our Forward Focus series

it serves. In Africa, where there are an esti- protect[ing] the farmers from the inherent risk mated 735 million mobile phones, micropay- of entrepreneurial activities.”21 ments through cell phones have dramatically In both the Indian and African contexts, increased the availability of insurance. For insurers have managed to break the trade-offs example, the UK newspaper The Guardian that limited their products’ affordability and reports, “MicroEnsure … embeds life insur- distribution. These disruptive innovations have ance premiums in pay-as-you-go top-up cards. led to vast new markets at price points the A $3 minimum monthly spend gave kettle- average American executive may have consid- maker Rebecca Darko and her family, from ered noneconomic—markets poised to expand Accra, Ghana, a safety net of $140 in life insur- and potentially become even more profitable ance after a family death threatened to drown with economic growth. them in .”19 Contrast this activity to that in the United Two South African companies, mobile States, where mobile phones with Internet insurance pioneer Hollard and telecom giant access are widespread, mobile apps are ubiqui- MTN, teamed up “to establish a plan where tous, yet insurance companies are still trying to Ghanaians can pay premiums as low as one figure out how best to use these platforms. cedi ($0.65) per month on their mobile phones In the United States, the Federal Insurance through MTN’s mobile banking system.”20 Office (FIO) has been charged with looking This insurance provides a level of certainty at the effects of auto insurance costs on low- that makes taking risk possible. It adds value income and underserved . Life to the lives of those who most need it by doing insurance penetration (total premium $ as a what insurance at its very best can do—allow percentage of GDP) in the United States was people to participate in economic activity 3.5 in 201022 (compared to 9.5 in the United that may help them up the economic lad- Kingdom, 7.4 in France, and 8.0 in Japan). der. Researchers who investigated insurance Only between 7 and 9 million Americans for sows in a large, randomized natural field have private long-term care insurance.23 There experiment in southwestern concluded: seems to be plenty of room for growth. “Our results indicate that having access to What if some upstart company were to formal insurance significantly increases develop a new way to reduce distribution or farmers’ tendency to raise sows … Our find- costs, and provide a product that ing suggests that may be as is just good enough at a price point consum- important as in poverty allevia- ers find affordable? What would happen to the tion, and microinsurance can supplement market then? and strengthen the effects of microfinance by

9 Innovation in insurance: The path to progress

Sustaining

eality rarely falls into the discrete modes That’s the technical definition of insur- Rprescribed for it by academia. So it is with ance telematics. Here’s a description that may innovation. L&T’s innovation may rightly be better resonate with the average consumer: regarded as empowering, inasmuch as it fulfills “Telematics car insurance—sometimes called the criterion of broadening the market to the black box insurance, pay-as-you-drive, or pay- previously underserved by lowering cost and how-you-drive insurance—could help to lower other barriers to their participation. Possibly the cost of owning a car … Telematics car one of the most effective uses of emerging insurance is based on actual driving behavior technologies in the property-casualty space— and involves having a GPS-enabled ‘black and one of the most striking examples of inno- box’ fitted under the dashboard of your car to vation—has been the use of telematics. track the way you drive. The box records and Telematics may largely be considered a transmits data back to your insurer about your sustaining innovation in that, for the most driving habits.”25 part, it represents a zero-sum economic game. In other words, insurers get data, lots of Automobile insurance, after all, is prescribed data, real-time data, about how someone actu- by law, ensuring that the size of the market is ally drives. So is that a big deal? relatively constant. But even here, the sustain- Actually, yes. Telematics provides a fun- ing innovation that telematics represents may damentally new class of data for insurers, well be seen in part as an empowering innova- enabling them to price driver risk possibly tion because, with its ability to reduce costs more accurately than ever before. Previously, and lower some purchase barriers for poten- even the most sophisticated of insurers had tial automobile insurance customers, it may to rely on estimates, proxies, and predictors increase the market and reduce the number in order to determine an insured’s risk of of those illegally uninsured. This is especially incident. These proxies—including , important as both the US federal government age, marital status, driving history (includ- and state insurance regulators closely examine ing claims, accidents, and violations), and the auto insurance market, looking for ways to credit scores—were the best available, and did reduce the impact of the cost of this insurance provide a strong correlation to the risk of an on those with lower incomes. accident. However, telematics changes that Insurance telematics is defined as the paradigm, moving from proxies to causal indi- integrated use of user-generated source data, cators such as miles driven, when those miles telecommunications, and analytics to support are driven, how the car is driven, where the car insurance-related products and services. This is driven, and the conditions under which the involves the collection, transmission, normal- car is driven. ization, and analysis of and/or driving This data is likely to be a more precise behavioral data, usually through interactive indicator of risk, allowing for better pric- cellular or satellite service connections and ing by insurers. Underwriting is the obvious often with dedicated data collection devices, first opportunity for insurers, with ratings on although smartphone and mobile apps are mileage, time of vehicle use, and driving style gaining momentum.24 and similar variables added to traditional

10 A special edition of our Forward Focus series

underwriting factors in order to develop pric- would telematics have to offer them? Consider ing that more closely reflects actual risks. again the proxies currently in use. Consider For good drivers who may otherwise not also the concerns expressed by many, including have been properly represented by previous numerous consumer advocates, over the use proxies, telematics offers the promise of rates of proxies like credit scores or marital status in better correlated to their skills and inclinations. assessing risk. This is clearly a win-win. Actuarially, the validity of these proxies may This is not to say that there are not chal- not be in question. However, it may be difficult lenges. In a heavily regulated industry, privacy for a regulator to explain to consumers who are is probably one of the most significant chal- excellent drivers, have never had an accident, lenges any insurer using telematics can face. never speed, and drive relatively infrequently However, in our connected society, with loyalty why their educational or marital status should cards, electronic toll collectors, red light cam- be taken into account when determining rates. eras, and social media in common usage, more While the data association may be statistically and more consumers are willing to accept the valid, the optics are difficult. trade-off between privacy and the ability to Now these same consumers can get the save money. chance to be assessed based on their driving But what of regulators? Financial ser- habits. A simple black box plugged into their vices regulators, with good reason, are highly car will help determine whether or not they get protective of the privacy of consumers. What a discount on their auto insurance. That black

Figure 2. Telematics is more than just a black box Technology provides a rich feature set to draw from.26

Capabilities Descriptions

Tracks core measures like miles driven, time of day, and Basic data monitoring rate of speed Core features Uses hardware to identify risky behaviors, e.g., hard Driver diagnostics braking and cornering

Reports on metrics such as fuel consumption, /enviro impact analysis efficiency, and carbon footprint Advanced analytics Uses device features for advanced trip , driving Advanced driver diagnostics metric trends, and mash-ups with third-party data

Value-add services such as accident notification, vehicle Vehicle and other services recovery, navigation, geo-fencing, and alerts Interactive services Provides drivers with useful feedback on how they can Driver feedback improve driving habits

Data/ Historical telematic, premium, and claims data for Modeling datasets experience analytics and modeling

Source: Deloitte Consulting LLP

11 Innovation in insurance: The path to progress

box not only provides better information for Financial Services: What consumers expect from the insurer, but also gives a sense of fairness future and insurers. to consumers. Consumers believe they are The two liken most current insurer use of being evaluated based on their driving ability mobile platforms to “what Marshall McLuhan and driving preferences, not some other factor called the ‘Horseless carriage syndrome.’ The over which they have no real control and that first car looked like a carriage without a they feel should have nothing to do with their ... Financial institutions are still in this stage. driving risk. They are currently replicating existing regular That direct benefit may be just the begin- processes to the mobile channel; enabling cus- ning. The Tribune reported that not tomers to conduct their financial transactions, only did one company sell more than $1 billion or filling out a claims form. But from what in policies by using its popular telematics tool we’ve seen so far in mobile services, in the year that ended July 2012, but in addi- we think there is one denominator for tion, “Telematics users tend to improve their success: helping.”28 driving habits while reducing crash rates.”27 Telematics has already broken the price In that same story, the Tribune reported trade-off, allowing new customers into the another major insurer finding that “a recent market who can now theoretically control the test with a group of employees showed dra- price of their insurance through their behavior, matic changes in driving behavior. For exam- thus making it affordable. Telematics, with its ple, 25 percent of drivers in the initial group one-on-one link to the insured, offers insurers of testers scored in the ideal ‘safe zone,’ but an almost unprecedented opportunity to help. over the course of the test, that figure rose to By offering value-added services enabled by 75 percent.” telematics, insurers may be able to differentiate Sustaining innovation is a process of con- their services and exit the treadmill of com- tinuous improvement, and that may be where moditization and discount pricing. telematics has yet to reach its full potential. Remember the first iPhone? We would Auto insurers face a challenging competitive submit that part of the reason that that innova- environment with a relatively flat total pre- tion was so successful was the network effect. mium and no growth in aggregate premium This is where usage of a product by any user values. Like most insurers, they have made increases its value for other users. Having an large investments in advanced analytics. Yet iPhone with access to shared apps, or iTunes, the result for too many has been commoditized or FaceTime created non-price value for users. product offerings for which price-conscious, What if telematics were used to provide traffic informed consumers are able to focus simply information, or information on gas or repair on discounts and discount-related features, costs, or which movie close by is already sold turning those into the exclusive marketing out, or which nearby will give you a message. Auto insurers need to figure out how discount if you come in now? to add and differentiate on value. Clearly, in some , perhaps over the Interestingly enough, this is similar to iPhone, this can already be done. But what new the dilemma insurers face in using mobile innovation yet to be considered could telemat- platforms, as described by Roger Peverelli ics lead to, and what would happen to the first and Reggy de Feniks, authors of Reinventing company to introduce it?

12 A special edition of our Forward Focus series

Figure 3. Telematics: Innovation to opportunity—two scenarios29

Dad gets a discount Jon gets real-time and renews his policy feedback in the car

Jon plays driving games on his smartphone Dad can see Jon’s driving Jon’s trips and quality is gets alerts if recorded and there is a visible; good Jon can share problem habits are results with social rewarded network friends

Jon is 16 and just got his license; Dad is a little nervous

Sam is happy and tells all his friends

Police, tow truck, and rental car company respond to alert

He gets a OK? text to Accident make sure data goes to he’s OK legal team

Sam submits first Sam’s agent and notice of loss (FNOL) claims adjuster and pictures; are notified receives guidance

Sam’s accident triggers an alert to his carrier

Graphic: Deloitte University Press | DUPress.com

13 Innovation in insurance: The path to progress

Efficiency

hile auto insurance writers have the of the underwriting process for consumers. Wadvantage of requirements of law in Fortunately, may provide securing their customer base, life insurance is, the needed efficiency innovation. as the old saying goes, sold, not bought. How In November 2010, the Journal well life insurers market and sell their product examined the use of predictive analytics in is a subject for discussion, but there is no deny- life underwriting and found that one insur- ing that there is substantial room for overall ance company was able to “combine publicly market growth when the Life Insurance Market available data with that already gathered by the Research Association (LIMRA) reports that insurance company to enhance the workflow 56 percent of American households lacked an method by which applicant medical testing is individual life as of 2010—a performed.” The Wall Street Journal noted that 50-year high.30 the company found that “[t]he use of third- In a Deloitte Research survey published last party data was persuasive across the board in year, affordability was cited as one of the major all cases.” reasons non-buyer respondents did not have The article further noted: “[I]nsurers could life insurance.31 Fifty-five percent said they save $125 per applicant by discharging many had other, more important financial priorities. conventional medical requirements. … [T]he Another 51 percent wanted coverage but found cost to achieve similar results would be $5.”34 it too expensive. Twenty-one percent of non- With predictive analytics, the need for a buyer respondents had previous coverage, but medical examination is dramatically reduced. let their policies lapse because they could not So a social good (increased life insurance ) afford the premiums. This points to an afford- can be achieved at lower cost by using this tool. ability gap, and argues for efficiency innovation That would seem to be a no-brainer. to decrease production or distribution costs. But there’s a reason innovation is often Nor is affordability the only concern. For preceded by “disruptive,” and disruption is example, Gen Xers supposedly “have the not always welcome in a regulated industry. potential to buy life insurance coverage worth Concerns, often about privacy, have taken $3.6 trillion over the next 12 months,”32 but, center stage for many regulators, slowing the among other things, the tests and examina- speed of adoption or circumscribing its use in tions associated with medical underwriting underwriting-related areas. may turn off potential buyers. This comes at Some may say we have seen this play a time when, as the Wall Street Journal noted, before. Regulators strongly objected to the “The industry is grappling with how to get use of credit scores in auto insurance as policies into the hands of middle-class fami- an invasion of privacy, and it wasn’t until lies more cost-effectively. Sales of life policies the industry made a clear and convincing to individuals are down 45 percent since the defense of their use as a risk proxy that most mid-1980s.”33 regulators relented. What may help is a new system that reduces One might argue that, having seen how both the cost and the perceived difficulty this played out with auto insurance, regulators

14 A special edition of our Forward Focus series

should be more open to this type of innova- is no explicit trade-off to which customers tion. But that might be to misunderstand the have agreed. nature of regulatory process. This is a paradox of innovation in a heavily On one level, an easy way to understand regulated industry. In order for innovation to the regulatory concern is to compare it to be used, it needs to receive the imprimatur of that famous psychology experiment in which all stakeholders, including regulators whose students, told to focus on how many times natural bias may be toward maintaining the the team in white in a game passed status quo—often seen by regulators as protect- the ball, failed to notice a gorilla walking ing the consumer. Innovation also imposes a through their field of vision.35 Some call this compliance cost on innovators. This may be inattentional blindness, but a hyperfocus on particularly true in financial services, where,

There’s a reason innovation is often preceded by “disruptive,” and disruption is not always welcome in a regulated industry.

what one perceives as important to the exclu- as former Harvard professor Elizabeth Warren sion of all else may be a better description for argued, the specificity of some regulations this purpose. worked against their effectiveness, inhibiting In a recently published report, researchers beneficial innovations while failing to regulate had 24 radiologists look at a series of x-rays.36 dangerous innovations.37 One need only look As radiologists, these doctors were trained to at the pre-crisis mortgage market, where what look for even the least obvious sign of can- font and type size to use in mortgage papers cer, and focused intently on their work. The were prescribed by law but other possible researchers found that only four of 24 radiolo- negative outcomes may have been overlooked, gists noticed the image of a gorilla they had to understand how counterproductive too- inserted in a series of the x-rays. The bright specific regulation may be. side, if there is one, is that of 25 laypeople One lesson of that crisis may be that tested, none saw the gorilla. regulators and the regulated entities need to What do unseen gorillas and privacy work together more closely, and earlier in the concerns have in common? People tend to see process of innovation, with an open mind, what they are looking for. Regulators have to and with goals, not means, guiding approval respond to a public that may not necessar- decisions. In his review of regulation and ily be aware of or convinced of the validity of innovation in the United States, Luke Stewart, seemingly unrelated factors as risk indicators. an economic analyst at the Washington, Understandably, they may look at predictive DC-based think tank, The Information analytics, which by necessity uses a vast data Technology and Innovation Foundation, scoop for , and see only the privacy opined: “Regulation should be flexible, allow- concerns their primary constituents consider ing the firm and the market to decide the important. Unlike with telematics, there optimal path to implementation. Regulation

15 Innovation in insurance: The path to progress

should also be expedient—both in its imple- mentation and execution—and unambiguous, minimizing the facing firms when bringing new products or processes to the market.”38 Those hopeful of such an outcome can draw encouragement from what is happen- ing with solvency regulation. In the wake of the 2008 crisis, rather than move to more prescriptive, rules-based regulation, insurance regulators in the United States have instead introduced the outcomes-based, flexible Own Risk and Solvency Assessment (ORSA) as their major tool. Perhaps for insurers, one goal should be to work to extend this innovation in solvency regulation to product and other regulation so the regulatory drag on innovation may be minimized and the social good served by innovation maximized.

16 A special edition of our Forward Focus series

How to innovate

ne constant in the examples we have To boldly go where none has gone before Ocited is that they go beyond mere opera- is a challenging mission. The question is, tional improvements. Operational improve- as Christensen and Raynor asked in The ments do not in and of themselves constitute Innovator’s Solution: “What can make the pro- innovation. Innovation must allow us to go cess of innovation more predictable?”40 beyond the realm of the possible, to do what Their answer: “Understanding the forces no one could do before. that act upon the individuals involved in build- This is important because such innovation ing businesses.”41 requires going beyond the toolkit normally With that in mind, there are processes that used for operational improvement. Strategic can help nurture innovation. These are not differentiation enables a company to occupy its necessarily requirements, but they represent preferred spot on the current business frontier, leading practices distilled from the numer- but innovation—expanding the frontier or ous successful innovators with whom we creating a new one—requires insight beyond, have worked. sometimes far beyond, the practices on Let us touch on some of the main points that frontier. in this highly condensed summary. Basic to Professor David Gann, head of Innovation successful innovation is a formal framework and Entrepreneurship at the Imperial College (figure 4). Leadership involvement is essential, London Business School, observed: “In a rap- but so is involvement all down the ranks. This idly changing world, innovation is no longer an is aided by a clear definition of the vision and option, it is a necessity. Companies that inno- strategy for the innovation program, commu- vate have higher survival during downturns, nicated throughout the . are more profitable, and outpace competi- While it is important for key executives to tors in periods of economic growth. Success be involved directly in establishing the vision depends upon aligning innovation with your for innovation, a broader team of leaders firm’s strategy and using the most modern with executive sponsorship can be valuable in approaches to .”39 execution. An innovation board can govern the Many may agree with the sentiment, but execution of innovation processes. That board translating the desire for innovation into real- may consist of leaders of major functions, ity may require adjustments to a company’s service areas, geographies, and those directly business model. leading innovation teams. Its objectives could There may be as many routes to innovation include identifying policies and practices to be as there are innovations. Crowdsourcing or supported by the insurer’s leadership, identi- open innovation is one of the newest methods fying and recommending investments to be gaining attention. The late Steve Jobs, toiling by made in innovation, and identifying high- himself to create world-changing innovations, potential areas and ideas on which innovation may represent a different extreme. History should focus. demonstrates that both extremes, and many in Having such a board helps increase the between, can work effectively. of success by establishing innova- tion as a strategic imperative and allowing

17 Innovation in insurance: The path to progress

for the needed speed and flexibility in deci- to formally define the offering associated with sion making regarding innovation. It also the idea and to make a request for resources to provides an opportunity to identify and share incubate the idea. “best practices” throughout the company for Incubation involves and testing the recognizing and building strong fundamentals idea with the goal of gauging its market viabil- for innovation. ity. Having tested the feasibility of the idea, The process of innovation itself may be the next step is to commercialize it—establish- broken down into three segments: ideation, ing the methodology, hiring and training key incubation, and commercialization. personnel, and developing sales and delivery Ideation involves generating and collecting capability to facilitate revenue growth. ideas, sharing and enhancing ideas, and evalu- The end result of innovation properly ating the business viability of ideas toward deployed is broken constraints, new possibili- making an investment decision. When an idea ties, and progress for both insurer and insured. is found worthy of consideration for even a small investment, a business case is developed

Figure 4. An innovation framework

Leadership involvement

Vision and strategy: Define the need for a formal innovation program

Governance mechanism: Define leadership responsibilities

Culture: Create a that fosters innovation

Innovation process

Ideation Incubation Commercialization

Idea with Idea with business commercial Sales and Enhance Targeting and Tools and targeting potential potential methods idea marketing Tools and methods Source idea Internal Develop Ideate comm. Pilot and

feedbackGet scale Share Knowledge idea management feedbackClient

Organization Organization Initial High-growth funding

Supporting infrastructure

Innovation team: Set up a dedicated innovation team

Technology: Leverage the right technology

Funding: Invest in innovation

Metrics: Measure the impact of innovation

Graphic: Deloitte University Press | DUPress.com

18 A special edition of our Forward Focus series

Endnotes

1. Jean-Baptiste Michel, Yuan Kui Shen, 13. Larissa MacFarquhar, “When Gi- Presser Aiden, Adrian Veres, Matthew K. ants Fail: What business has learned Gray, William Brockman, The Google Books from Clayton Christensen,” The New Team, Joseph P. Pickett, Dale Hoiberg, Dan Yorker, May 12, 2012, http://www.newy- Clancy, Peter Norvig, Jon Orwant, Steven orker.com/reporting/2012/05/14/120514fa_ Pinker, Martin A. Nowak, and Erez Lieber- fact_macfarquhar. man Aiden, “Quantitative Analysis of Culture 14. Non-Life Insurance in India, Market- Using Millions of Digitized Books,” Science Line, October 31, 2012, http://www. 331, 6014 (January 14, 2011): pp. 176-182. marketresearch.com/MarketLine-v3883/ 2. Michael E. Raynor, The Innovator’s Manifesto: Non-Life-Insurance-India-7221338/. Deliberate Disruption for Transformational 15. Roy Joydeep, interview by Tushar Salgia, Growth (New York: Crown Business, 2001). “How mobile technologies are leap-frogging 3. Ibid. infrastructure in emerging insurance markets,” 4. Clayton M. Christensen, “Christensen: We 2012, International Insurance Society video, are living the capitalist’s dilemma,” CNN 16:59, http://www.iisonline.org/seminars/ Edition: International, January 21, 2013, archive/rio-2012/industry-focus-how- http://edition.cnn.com/2013/01/21/business/ mobile-technologies-are-leap-frogging-infra- opinion-clayton-christensen/index.html. structure-in-emerging-insurance-markets/ how-mobile-technologies-are-leap-frogging- 5. J. François Outreville, Theory and infrastructure-in-emerging-insurance- Practice of Insurance (USA: Kluwer markets-3/video, accessed February 28, 2013. Academic Publishers, 1998). 16. Ibid. 6. G. Barry Klein, The World’s First Insurance Company, International Risk Manage- 17. Ibid. ment Institute, July 2001, http://www.irmi. 18. Ibid. com/expert/articles/2001/klein07.aspx. 19. Monica Mark, “West Africa’s technological rev- 7. The Philadelphia Contributionship, “Company olution driven by mobile phones,” The Guard- History,” http://www.contributionship.com/his- ian, September 24, 2012, http://www.guardian. tory/index.html, accessed February 28, 2013. co.uk/global-development/2012/sep/24/ 8. Ibid. nigeria-mobile-phones-success-technology. 9. USHistory.org, Independence Hall Association, 20. Jenny Gross, “SAfrica’s MTN launches “The Philadelphia Contributionship,” http:// mobile insurance program,” The Wash- www.ushistory.org/tour/philadelphia-contri- ington Post, March 23, 2011, http://www. butionship.htm, accessed February 28, 2013. washingtonpost.com/wp-dyn/content/ article/2011/03/23/AR2011032303157.html. 10. Jack Bogardus and Robert Moore, Spreading the Risks: Insuring the American Experi- 21. Hongbin Cai, Yuyu Chen, Hanming Fang, ence (Maryland: Posterity Press, 2003). and Li-An Zhou, Microinsurance, Trust and Economic Development: Evidence from 11. International Insurance Society, “Insurance a Randomized Natural Field Experiment, Hall of Fame: Richard Price,” http://www. Working Paper 15396, National Bureau insurancehalloffame.org/laureateprofile. of Economic Research, October 2009. php?laureate=121, accessed February 28, 2013. 22. World Insurance in 2010, Sigma, 12. Clayton M. Christensen, The Innovator’s February 2011, http://media.swissre.com/ Dilemma: When New Technologies Cause documents/sigma2_2011_en.pdf. Great Firms to Fail (Boston: Harvard Business Review Press, 1997).

19 Innovation in insurance: The path to progress

23. Who Buys Long-Term Care Insurance in 33. LIMRA, “Trillion Dollar Baby—Growing 2010–2011? A Twenty-Year Study of Buy- Up, The Sales Potential of the U.S. Underin- ers and Non-Buyers (in the Individual sured Life Insurance Market,” news release, Market), America’s Health Insurance Plans/ September 6. 2011, http://www.limra.com/ LifePlans, Inc., 2012, http://www.ahip.org/ Posts/PR/News_Releases/LIMRA__Sales_Po- AHIPResearch/, accessed February 28, 2013. tential_for_Underinsured_Life_Insur- 24. Hill, Mark. “Insurance Telematics: Emerg- ance_Market_Doubles_in_Six_Years.aspx. ing New Rules & Strategic Considerations.” 34. Leslie Sciscm and Mark Maremont, “Insurers 2nd Annual Telematics Test Data Profiles to Identify Risky Clients,” ExecuSummit, Mohegan Sun Resort & The Wall Street Journal, November 18, 2010. Convention Center, Uncasville, CT. 14 35. Leslie Sciscm and Mark Maremont, “Inside De- November 2012, Conference Presentation. loitte’s Life Insurance Assessment Technology,” 25. Faith, Joanna, Your quick guide to: The Wall Street Journal, November 19, 2010. telematics insurance, YourMoney.com. 36. D. J. Simons and C. F. Chabris, “Goril- 08 February 2013, http://www.your- las in our midst: Sustained inattentional money.com/your-money/news/2242637/ blindness for dynamic events,” Percep- your-quick-guide-to-telematics-insurance. tion 28, no. 9 (1999): pp. 1059-1074. 26. 37. T. Drew, M. L. H. Võ, and J. M. Wolfe, “The 27. Mark Hill, “Insurance Telematics: Emerg- invisible gorilla strikes again: Sustained ing New Rules & Strategic Considerations,” inattentional blindness in expert observ- presented at the 2nd Annual National ers,” Psychological Science (forthcoming). Insurance Telematics ExecuSummit, Mo- 38. E. Warren, “Product Safety Regula- hegan Sun Resort & Convention Center, tion as a Model for Financial Services Uncasville, CT, November 14, 2012. Regulation,” Journal of Consumer Af- 28. Becky Yerak, “Devices map your driving fairs 42, no. 3 (2008): pp. 452-460. habits, can help save money on insurance 39. Luke A. Stewart, The Impact of Regulation premiums,” Chicago Tribune, September on Innovation in the United States: A Cross- 23, 2012, http://articles.chicagotribune. Industry Literature Review, The Information com/2012-09-23/business/ct-biz-0923-telemat- Technology & Innovation Foundation, June ics--20120923_1_biggest-auto-insurers- 2010, http://www.itif.org/publications/ insurance-products-claims-costs. impact-regulation-innovation-united- 29. Roger Pevrelli and Reggy de Feniks, states-cross-industry-literature-review. “Restore Trust and Become Part of Life,” 40. Tanya Gubbay, Imperial College Business Mobile Payments Market Guide 2012: School, Imperial College London, “Innova- Insights in the worldwide mobile financial tion is a necessity, not an option say Business services, The Paypers, March 2012. School academics behind new course,” May 24, 30. Mark Hill, “Insurance Telematics.” 2011, http://www3.imperial.ac.uk/newsande- 31. LIMRA, “ of Individual Life ventspggrp/imperialcollege/businessschool/ Insurance Falls To 50-Year Low, LIMRA newssummary/news_18-5-2011-10-33- Reports,” news release, August 30, 2010, http:// 38?newsid=99102, accessed February 28, 2013. www.limra.com/Posts/PR/News_Releases/ 41. Clayton Christensen and Michael Raynor, Ownership_of_Individual_Life_Insurance_ The Innovator’s Solution: Creating and Sus- Falls_to_50-Year_Low,_LIMRA_Reports.aspx. taining Successful Growth (Boston: Harvard 32. Sam Friedman, The Voice of the Life Insur- Business School , 2003). ance Consumer: What makes prospects 42. Ibid. tick? Deloitte Development LLC, 2012.

20 A special edition of our Forward Focus series

Contacts

Authors

Howard Mills Bernard Tubiana Director and Chief Advisor Principal Insurance Industry Group Deloitte Consulting LLP Deloitte LLP +1 212 618 4480 +1 212 436 6752 [email protected] [email protected]

Acknowledgements

Insights and contributions provided by Andrew N. Mais, Stephen Packard, John Lucker, and Mark Hill.

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