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Why innovating in insurance is uniquely challenging 27 April 2022 397

Efma senior advisor and judge for the Efma-Accenture Innovation in Insurance Awards, observer and actor of transformation and innovation in insurance, Rob Galbraith explains why strengthening innovation culture is paramount for insurance companies.

I have been privileged in my 25 years in the financial services industry to work for several organizations that have been on the leading edge of innovation in the insurance industry.  I have both participated in innovation efforts and led innovation teams, and I wrote a bestselling book on the topic called The End Of Insurance As We Know It.  For the past few years, I have had the good fortune to be one of the jury members for the Efma-Accenture Innovation In Insurance Awards program, and carefully reviewing the finalists in each category to vote for the top candidates is one of my favorite tasks each year.

Why?  Because I know first-hand how challenging it is!  Over my career, I’ve had some successes and many, many failures.  While I find the efforts to innovative to be both challenging and rewarding, it certainly comes with many emotional low points mixed with a few highlights.

In reflecting on this challenge ahead of the 2022 awards, I’ve found that there are 5 themes that I believe are unique to the insurance industry that make it particularly difficult for innovators to succeed, particularly those working within a traditional incumbent (although insurtech startups certainly face many of these challenges in some form as well).

Here is my list:
1. Highly complex products and services
2. Long history as an industry
3. Detailed nature of the main disciplines
4. Lack of customer engagement
5. Failure is seen as a sign of weakness

Let’s examine each one in turn.

1. Highly complex products and services

Insurance is one of the most complex products I have ever come across in my life for a variety of reasons.  It is both a financial instrument and legal contract all rolled into one.  It is intangible when initiated (except for the policy documents if printed) but often leads to physical products and services being delivered at some point during the relationship.  It does not require the same type of physical infrastructure or supply chains as manufacturing but does involve a similar level of dependencies and intricate processes (not to mention management of large IT hardware and data centers historically).   

On top of the complexity of the insurance product, it is challenge to market and sell because of the need to educate consumers (either as a direct B2C business or through B2B2C agent/broker channel) and the strict regulatory environment that the marketplace operates in.  I have not even touched upon reinsurance, asset management, third-party vendors, and claimants, etc.  All the processes and systems in use today to run insurance operations have evolved over time and contain many interdependencies which are often not clear or obvious.  Innovating within such a highly complex environment is a huge challenge – very different from a “green field” opportunity with little to no pre-existing structures in place.

2. Long history as an industry

The centuries-old history of the insurance industry goes together with the complexity of the products and marketplace.  As more complex needs arose, systems and processes were developed to meet those needs.  One common misnomer is that the insurance industry is slow to adopt technology; in fact, the opposite is true!  However, the widespread adoption of technology from the 1970s and 1980s is partially why the industry has so many challenges today: the technical debt that has accumulated comes with a price.  Certainly no one in the 1970s and 1980s could have anticipated how technology would evolve over time – but the decisions made in those decades did create dependencies that continue to exist until the technology is updated or replaced – no small feat.  Even insurtech startups that are 3-5 years old have told me their technical debt was too great and they have moved to new platforms.

3. Detailed nature of the main disciplines

Since insurance is complex and has been around for a long time, the requisite disciplines that make up an insurance firm has gotten more specialized. Claims adjusters, underwriters, actuaries, agent/brokers, et al. each have their own professional training, continuing education, and professional societies.  It takes many years of experience and learning to become an expert in each of these areas and crossing over to another discipline is challenging.  In addition, moving between product lines, geographies, and personal or commercial markets is difficult as well.  This specialization creates a narrow focus which makes it difficult to see broad possibilities in technological or societal changes – innovation efforts from within large organizations tends to focus on the “adjacent possible” and less on radical change that is disruptive in nature.  In many ways, it is more challenging to unlearn and relearn than simply to learn something in the first place where no preconceived notions existed.  It is humbling to recognize the limits of your own hard-won knowledge and that the world around us is constantly changing.

4. Lack of customer engagement

By the very nature of the product, insurance is generally perceived as a “set it and forget it” proposition.  Customers pay premiums and hope they never have to file a claim – but the few who do suffer a loss each year will be happy they purchased the product (assuming they have a position claims experience, which does not occur 100% of the time).  Firms have attempted to deliver value in other ways over the years, such as loss control or preventative care services, but given that the majority of premiums are used to cover losses, carriers are limited in how much value outside of paying claims they can offer to insureds.  As a result, when a customer pays significant sums of money and does not receive a commensurate tangible benefit in return, they are not as engaged with the firm as other consumer-facing products and services.  This lack of customer engagement directly results in a lack of meaningful customer feedback which drives innovation efforts in other industries.

5. Failure is seen as a sign of weakness

The first 4 factors that I’ve highlighted are directly tied to the nature of the insurance industry and there is little that can be done to change them; they reflect the reality of the sector and must be incorporating as limitations when planning innovation efforts.  This last factor – failure being seen as a sign of weakness – is not permanently ingrained.  Rather, it reflects a mindset that unfortunately is all too common among traditional insurance organizations.  There is indeed an irony that a business that specializes in risk is, in fact, quite risk averse.

Why is this mindset so widespread?  There are likely several answers to this question, but perhaps the best way to summarize it is based on a quote from a friend of mine, Tony.  He asked me once rhetorically: “Why are all insurance companies so conservative?  Because all the risk takers eventually went insolvent.”

I can point to examples that might be individual exceptions to this “rule”, but the spirit is correct in my view.  Due to the nature of the industry and the high degree of regulatory scrutiny, I do believe that people tend to not think as boldly as others in different sectors of the economy.  Add to that the most performance incentives are tied to annual goals such as premium growth, loss ratio targets, and expense optimization and it is easier to understand that true innovative efforts, which often require a multi-year time frame and have no guarantees of success, are deprioritized relative to other initiatives that are more predictable and lead to certain outcomes and benefits to the company.  Try as we might as an industry to celebrate failure, it is simply not in our nature and a tall cultural barrier to overcome.

Conclusion: building a culture of innovation - let’s celebrate!

The 5 unique challenges to innovating in the insurance industry are stark and - while not insurmountable - pose strong headwinds to those strong individuals, teams, and companies that dare to innovate fearlessly.  Yet thousands around the globe are doing just that today – innovating fearlessly to push their companies to better meet rising customer expectations and moving the industry as a whole forward to meet the evolving needs of society.  The firms that consistently innovate are the ones that have nurtured a culture of innovation – beyond individual success stories, they have provided their employees a safe space to create, design, build, fail, iterate, test, and launch new products and services – over and over and over again.

The Efma-Accenture Innovation In Insurance Awards provide a glimpse into a fraction of these efforts and all submissions deserve to be celebrated – for their courage, daring, and fearlessness in the face of big hurdles and major obstacles.  Take a moment to recognize and thank those within your firm who are working hard to innovate within your walls – their efforts deserve celebration!


Register for our next Innovation in Insurance meeting on 28th April. Bradesco Seguros, Colonial Life and Bank of Ireland will explain how they are shaking up innovation in the life insurance industry.

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