Insurance Industry Innovation – Ideas As A Capital Asset

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While innovation and insurance are words not often seen in the same sentence, the tide is changing.

The ever-present tension between short-range results and long range planning has had an interesting impact of the demand for innovation. It’s not surprising given the rapid shift in regulatory, distribution and consumer pressures that are driving a greater urgency for “what’s next,” or ensuring that there is a solid pipeline of new ideas that can keep your brand ahead in the best of times and the worst of times. Companies must also demonstrate that their ideas are a good investment, and that they are investing with skill rather than luck. Good ideas should be treated like capital assets because they can generate substantial returns.

Idea Portfolio Management – The “Asset Allocation”

It’s helpful to consider your idea inventory as a portfolio that should be managed similarly to a financial portfolio. Using an asset allocation framework, you can bucket ideas into four quadrants that are aligned with risk and reward. On the “X” axis, we have the level of market risk/uncertainty (do we know the market or not?), and on the “Y” axis we have the level of business risk/uncertainty (do we have the capability inside or not?).

Using these allocations as a starting point for a moderately risk tolerant environment, about 60% should go into enhancing current platforms. An example would be the evolutionary product tweaks such as adding a bell, whistle, or repricing.

20% should be going into doing things that differentiate you in the market place. An example might be offering a current product or service in a new way, such as online.

15% should go into quick testing and learning, or “fast failing”. If there’s no way to know if a new market will want your current offering and it’s cheaper to get the offering in market do so, learn what works, tweak and try again as an alternative to full-blown research. An example here would be offering your current products to an affinity group or ethnic market, collecting data about likes and dislikes and making adjustments.

And finally, you should put about 5% into the “revolutionary”, the things that nobody is doing in markets where you are not currently playing. These ideas are the ones that achieve the biggest headlines. They hold the most risk and when assets are allocated to these other quadrants, it mitigates the risks associated with ideas that don’t succeed. Because when they do succeed, they succeed big.

Business Certainty

Fear and Learning – The Innovation “Style Box”

An interesting dynamic in the insurance industry is that fear is a major driver of activity inside companies. Mostly, it’s fear of failure, or placing the wrong bet. Because fear is one of the underlying emotions creating demand for insurance products, and placing the right bet is how these companies make money there’s probably a connection.

Additionally, motivation is often the key to determining what “styles” of innovation are present at any given point in time. Motivations can be internal, such as the management team declaring that they want more innovative ideas, or from having created a culture that “pulls” creativity from people naturally. External motivations include competitor moves, regulatory changes, consumer demands shifts and the economy or interest rate environment. Consumer oriented drivers are usually more opportunistic. Regulatory, economic or competitive changes usually create more fear-based motivation.

Internal and External Motivations

Fear is not a bad thing if it motivates action, however if innovation and creativity are emerging requirements then the leaders of the future need to flip the fear coin over. It’s similar to “is the glass half full or half empty?”. The attitude of innovative organizations is that failure is the key to deep learning. Learning becomes knowledge, and knowledge is an asset that is quickly becoming more valuable than sheer capital. So instead of “we failed…let’s not do that again”, it’s “we failed, so we learned something that brings us a step closer to success…”

Hedging Fear – Process As The “The Efficient Frontier” of Innovation

If organizations recognize the need to create that culture of innovation, they may be ineffective in shifting from the familiarity of fear-based motivation into learning based motivation. So the answer is to “hedge” fear, and that requires a consistent, repeatable process for stacking the deck in the favor of success. In other words, promising the maximum return for a given level of risk in the innovation portfolio.

How is maximum return accomplished? It requires three things:

  1. Idea Parenting – recognizing that ideas need to be nurtured from the time they are a glimmer, to the time they are introduced to market. This requires an organizational structure of accountability that allows for that.
  2. Gaining insight BEFORE ideas are developed – Research and insight must be fully developed before ideas are generated. The focus must always be on the target consumer of your offering. Results diminish dramatically when brainstorming occurs too early.
  3. Getting “out of your jar” – This is the most important piece. If you have been doing anything for longer than a year, you are “inside your jar”. You cannot read the label when you are sitting inside the jar. So you need experts from outside your industry to help you figure out your answers. They need to become part of the process.

And the steps for innovation, hedging fear and moving toward a learning culture are as follow:
Process Steps

While innovation is associated with the excitement of the unknown, if done right, it can be more predictable than one might think. For some, it makes it less sexy, but for others, it provides relief, comfort, and most importantly, better returns.

Getting Into Innovation – Build it, Buy it, or Lease it?

While this all may make sense, the most difficult part is getting started. Insurance companies are generally very well capitalized and able to invest in the resources required for innovation, but it is not always clear how to structure those resources for the best results.

Here are the three ways insurance companies are responding:

  1. Building an innovation discipline as an enterprise function
  2. Buying/Acquiring a company known for its innovation discipline
  3. Leasing/Outsourcing the entire process (for a period of time) to an Agency of Innovation

What are the benefits and pitfalls of each?

Innovation by Insurance Companies

The upshot

If you are of the mindset that your organization needs to become more innovative, keep in mind these key points:

  1. Ideas are key assets to be managed
  2. The culture may need to shift from fear to learning based, in order for ideas to thrive
  3. Process is the key to predictability
  4. Consider leasing before building or buying. The training lessons will become part of your knowledge assets.

These points and ideas are not considered to be investment advice. For such advice, one should consult a licensed financial advisor. This is my former financial services company executive jar kicking in. I am going native. I am scared of the imaginary compliance department in my mind. I have to pinch myself to make sure I am really allowed to say this without approval. I’m mostly kidding here, but not in the rest of the article. It’s how I know if you’ve read all the way to the end.