Five steps to improve innovation in the insurance industry

Insurance executives are recognizing the power of innovation to accelerate the pace of company change. Yet for innovation to deliver long-term value, it must become embedded in a carrier’s DNA.

Insurance is not typically considered a bastion of innovation, despite a long track record of creating new and exciting markets around emerging risks and consumer demands. For example, the relatively nascent cyber insurance market is forecast to surpass $22.4 billion by 2026 at an annual growth rate of more than 25 percent in the next five years, according to market research and consulting firm IndustryARC. In reaction to the lockdowns of the COVID-19 pandemic, many insurers rapidly digitalized their customer and agent experience, permanently shifting away from a traditional face-to-face service model. Other carriers are responding to consumer demand for more meaningful interactions with loyalty and gamification programs that promote customer engagement. For instance, South African insurer Discovery’s Vitality loyalty program gives customers points as incentives for practicing healthy habits and good driving behavior, and then grants them access to rewards and benefits.

The C-suite is already taking note of the key role innovation will play in delivering long-term value: data from a 2020 survey show that while executive teams focused on short-term cash management and the welfare of their workforce at the peak of the pandemic, innovation now ranks as one of their top two priorities.

But while the industry as a whole has delivered pockets of innovation, few carriers have pursued innovation in a systemic way. Today, new customer expectations, low interest rates, and new sources of competition (such as leading tech companies, insurtechs, and third-party capital) are putting pressure on carriers to take a more systematic approach. For innovation to deliver sustainable growth, it must be embedded in the company’s growth model and fully integrated across the organization, bringing together cross-functional teams to approach challenges in new ways.

And that’s not easy. Successfully profiting from innovation is a complex, company-wide endeavor, and most insurers have not yet cracked this code—at least not on a consistent basis. In fact, a 2017 survey of life and annuities executives found that only 12 percent believe they have a process that delivers strong product innovation. And fewer than 30 percent of financial-services executives say they have the expertise, resources, and commitment to successfully pursue new sources of growth.

Fortunately, there are ways to establish and implement cross-cutting practices and processes to structure, organize, and encourage innovation for sustainable growth. Here are five steps for building innovation into the way an organization works, competes, and grows.

1. Shift resources from core business tasks to breakthrough innovation initiatives

Innovation is not just about creativity and generating unique ideas. It’s about identifying unmet needs and untapped markets and addressing them, sometimes with untested solutions and unproven business models. Yet too many leaders embrace these risks without shifting enough people, assets, and management attention to bring these ideas to life. Put simply, nothing comes from nothing; if a company wants to innovate, it must allocate resources to innovating.

In fact, one of the biggest challenges holding insurers back from innovation is capacity—both physical and human capital and executive mindshare. Business as usual has continued to be the priority for traditional incumbents, particularly as they have tried to provide stability to customers through the disruption and uncertainty of a global pandemic. Updating existing products, maintaining existing systems, and making incremental changes have taken the lion’s share of insurers’ time, attention, and effort. These short-term initiatives feel safer, particularly given the pressures facing insurers over the past few years. But robust opportunities await insurers that adjust their valuation criteria and free up capacity for bolder moves.

By reallocating the necessary resources from core business tasks to potentially disruptive initiatives, insurers can rebalance their product portfolios to move away from near-term product improvements and toward potential breakthroughs or new business models—forms of innovation that often hold greater potential to generate sustainable sources of growth and outsize returns.

2. Develop distinct product-development pathways and processes

Different innovation initiatives call for different approaches. For example, most organizations can predict with some certainty the likely gain in gross written premiums or combined ratio from an improvement to an existing coverage or tweak to a core process. This knowledge leads to clarity on the risks and how to mitigate them. This type of innovation is very different from developing a disruptive new product, such as a new life-insurance policy with unprecedented flexibility across living benefits. Disruptive products carry a host of risks—from understanding the market opportunity to communicating the value proposition effectively—and organizations have less clarity around them.

The rapid rise and fall of mutual-aid platforms in Asia illustrate the importance of maintaining a balanced innovation portfolio with different development pathways. In 2019, several companies launched platforms that provide simple access to basic health coverage by radically rethinking product design and customer engagement. Within weeks, the most successful of these platforms, Ant Financial’s Xiang Hu Bao, attracted tens of millions of users, peaking at more than 100 million participants. But these programs are now winding down. The model encountered both increasing regulatory requirements and adverse selection as young and healthy members dropped out of the program, increasing the costs shared by the remaining participants.

Managing the delivery of an innovation portfolio therefore requires organizations to develop distinct pathways for product development (Exhibit 1). Each pathway has a specific set of characteristics: