Insurance must innovate or die

Insurance must innovate or die | Insurance Business America

Insurance must innovate or die

For many of those outside – and even inside – the industry, insurance and innovation may not seem to go together. Yet, rather quietly, most large insurers have been ramping up their innovation spending over the past decade. This is largely in response to the rise of more agile insurtech startups and to deliver complementary services like healthy lifestyle apps, data-driven pricing operations, transparency in policy specifics and other value-added consumer technologies.

While this is a good start, it isn’t enough to keep the industry on the stable footing it has enjoyed for generations. Recent difficulties in settling claims from the COVID-19 pandemic are only the tip of the iceberg. Thanks to climate change, large swaths of the global P&C insurance industry are coming into the crosshairs of generational change. The effects of our warming planet have begun making whole categories of property assets borderline uninsurable. As the effects get worse, the strategic options will only get tougher.

If insurance companies innovate in ways they already understand – tweaking their underwriting policies, pushing harder on claims or other ‘surface’ improvements – they’ll find themselves fighting over smaller pieces of a shrinking pie.

So what can be done on the innovation front to help the industry maintain long-term viability? These days, the typical industry response to looming threats is to create a fancy new innovation center or to go buy a bunch of startups. But by pouring knee-jerk resources and publicity into innovation, corporations are doing themselves a disservice.

It’s impossible to predict the future with perfect clarity. But it’s also easy to imagine how a warmer planet will affect various asset classes around the world. Insurers need to double down on innovations that can help them change the game – for example, using AI and weather data to predict where disasters will strike, leveraging Big Data and climate change models to anticipate changing patterns of risk, and building risk mitigation solutions to serve a growing ‘prevention’ side of the market.

One of the greatest myths in business is that innovation is incredibly organized and meticulously game-planned. The truth is, too many firms make tentative forays into innovation, often on a number of fronts, creating a tangled web of initiatives and priorities that are often incoherent. It’s impossible for any mission-critical business function to succeed without a clear and consistent vision that enables a strong operational foundation. Companies across the business spectrum don’t have the modern infrastructure in place that’s needed to drive widespread innovation success.

Other core departments, such as finance and marketing, benefit from experienced leaders, a clear set of modern measurement tools to track performance, and established protocols for reporting and reviewing progress. Yet most insurers have not formalized the central core of their innovation operations. They don’t have a centralized ability to track projects, coordinate global programs or evaluate the likelihood of success on anything but a finger-to-the-wind level. This has undermined innovation success and bred skepticism among senior decision-makers when it comes to funding priorities. Establishing a formal innovation operations infrastructure can go a long way in fixing the issues that exist on both of these fronts.

Pursuing broad-spectrum innovation means taking some strategic leaps. This is often where innovation efforts begin to fall apart, because it can be uncomfortable for leaders to commit when the outcomes are speculative. Unlike most executive decisions, investing in strategic innovation cannot be forced into a neat box. I’ve seen time and again that simply adding an innovation team or opening an innovation center without ongoing cross-functional coordination commits the effort to failure.

Future scenarios should be modeled, and innovation risk can (and should) be managed over time – but innovation endeavors won’t be crisply predictable, nor can they be de-risked to ‘normal’ levels of corporate comfort. But the do-nothing alternatives are far worse. The executive team must learn to adopt a specific, calibrated type of ambiguity tolerance.

The climate-induced challenges facing insurance companies are very real. But with the proper strategies, tools and leadership discipline, traditional insurers can retool their businesses to better meet the needs of the market, both today and in the future. 

Robert Lowe is CEO of Wellspring Worldwide, a provider of knowledge supply chain software systems. He is a former director of enterprise creation and professor at Carnegie Mellon University.