Innovation in insurance The path to progress A special edition of our Forward Focus series for insurance executives Innovation in insurance: The path to progress Furthering the conversation on innovation We are pleased to offer this insight as a part of Deloitte’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 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- 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 risk manage- ment and the impacts of proposed US and global regulatory changes. He has been widely published in the national and international trade and consumer press. Bernard Tubiana Bernard Tubiana is a principal at Monitor Deloitte focused on insurance. He advises senior management teams on their corporate, business unit, product, and market strategies. He also advises clients on customer experience, merger integration, process redesign, and cost reduc- tion and associated process, technology, and people-related changes. Bernard has spearheaded Deloitte Consulting LLP’s work applying innovation and disruption theory concepts to financial services 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 books 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 innovations 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 credit default 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 University 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 technologies 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 book 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 Internet 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 annuity 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 fires anywhere in the city, not just in the build- or distribution 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- property insurance 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 Fire, 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 safety 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 conserva tive 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 track 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 contract inscribed on Babylonian columns a rate was then set reflecting the risk.8 The by King Hammurabi’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 London 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 Office, located behind the Royal chimney fires. During the British occupation Stock Exchange.