The Insurance Landscape: Introducing the Status Quo

Perhaps the most fundamental lesson from the collapse of the subprime market and the subsequent global recession must be that no institution is infallible. Neglecting to act when needed is the only thing that stands between an organization and its risk of failure, regardless of its market position, prestige, or pedigree.

Incumbent and established insurance organizations – whether insurers, brokers, loss adjusters, or claims corporations – are often criticized for failing to innovate or disrupt the insurance market and perhaps this is not without reason.

From the death grip of inadequate legacy platforms and a “that’s how we’ve always done it” mind-set to antiquated protocols designed by overly conservative and hierarchical internal committees, the status quo largely remains intact, particularly in the still heavily intermediated commercial insurance market where barriers to entry remain high.

Yet the industry press is littered with bold pledges from incumbents launching “exciting” new initiatives that promise to innovate, to “digitalize”, or to disrupt. If what we are reading is correct, incumbents have numerous vehicles for change and we are on the verge of seeing the impact of these upon their balance sheets and dated customer experiences, in a meaningful way akin to other innovative industries like Healthcare, which, according to PwC’s 2016 Global Innovation 1000 Study,¹ will pass both the computing and electronics industries to become the largest overall industry by R&D spending. However, the sum of all these efforts is not yet tangible and is likely to be in the magnitude of incremental change rather than wholesale transformation.

Anecdotally, innovation seems to be constrained to improving a single process, distribution or experience, and much of this work is incubated outside of the main business in a separate hub, often located in a hipster postcode. Which also leads to the question: why are modern business practices like business-led IT not being adopted as broadly or with the level of penetration they should, to ensure that large organizations remain relevant?

Why Innovation is More Difficult for Incumbents?

Innovation requires an organization’s ability to distance itself from the status quo. It is about starting from a blank sheet of paper and focusing the attention of the business on a specific outcome, usually the customer. However, for incumbents there is safety in the known. As an industry we make decisions based upon historical data. Separating ourselves from all the things we know have made us profitable is difficult, and the business of innovation can lack hard evidence of success. In addition, the incentive for change can appear underwhelming; the industry has seen many threats come and go and speculation of a huge disruptor waiting in the wings has been in play for some time. And habituation to this threat has kicked in.

Mind-set is key to successful innovation, and when that is threatened with change, while some may embrace it all heartedly, others, whether individuals or whole teams, will wed themselves to how things are currently done as a defense to this change. Culture and acceptance of change are fundamental but since employees are often conditioned to eliminate risk and cling to a process for safety, this can be one of the most difficult challenges to overcome.

It is this reluctance that makes many processes inside large organizations unfit for purpose when it comes to innovation. The traditional insurer’s procurement process, supported by RFPs or Requests for Proposals, and a tech startup’s engagement process are both as star-crossed as prospective partners could ever be in how they operate, especially if you then also add in the due diligence required by most IT departments and potentially lengthy legal contract negotiations that might ensue, should they make it through the financial and credit checks.

It is counter-intuitive to stop doing something that has previously been successful or, at least, has not had a negative outcome. The tipping point from cash cow to dog is never clear or even predictable, so it’s understandable that organizations cling to the masterplan until the proverbial fat lady begins warming up. Instead of a millennial style FOMO (Fear Of Missing Out), organizations are plagued with the rather more corporate FOF (Fear of Failure) but innovation is not for the fainthearted nor for the lacklustre.

Is it reasonable to expect boardrooms with little or no appetite to trail-blaze when the results are unpredictable to say the least and the duration of their personal career plan may consist of only single digit numbers? This difficult-to-turn vessel, the huge steamship that is our insurance sector, has been built over many generations based on sound and safe decision-making and processes that mitigate risk. It is therefore unsurprising that turning this boat around is going to take a while – and that’s assuming that the course will not change direction again, mid-manoeuvre.

In short, incumbents are not innovating because they are reluctant to move away from the blueprint. Their decisions are based on experience. However, the experience of those decision-makers often doesn’t include innovation or change management. This, coupled with an institutional and inherent fear of failure, means resistance to change.

A Mismatching Exercise

And so there is an inherent insurance innovation mismatch: idealistic startups who build great experiences with a customer that stands at the centre of their decision-making process but who often struggle to secure fundamental insurance underwriting capacity or significant bottom-line results. And incumbents who have a wealth of underwriting expertise and capability, but struggle to take it to market, adopt agile working practices, change mind-sets, and embrace new technologies (at least without diluting them by anchoring them to legacy systems). Together the two components would undoubtedly prove extremely powerful.

Imagine a startup with the resources of a large insurance group or equally an incumbent with the agility and out-of-the-box thinking of a startup.

Right under our Noses?

Let’s set aside the cultural change that is required by an incumbent to identify and implement innovation or transformative change. Instead let’s look at the significant advantages that your average incumbent has.

The key to success is to play to your strengths. Incumbents have phenomenal resources. It’s not just about the size of your war chest, existing distribution, and internal experts across legal, HR, marketing, and sales who provide advice. Unlike other existing potential entrants, the wealth of underwriting expertise and data mean that, in theory at least, the incumbents are the best placed to innovate.

Successful innovation in other industries focuses on delivering significantly better customer experiences by connecting suppliers of services and customers in the simplest way possible.

So, how does an incumbent innovate the way they take their substantial insurance experience and capacity to those who wish to transfer risk away from their own balance sheets?

How do we Learn not to Fail?

Well, there is no single right answer but there is certainly a wealth of behaviours and actions that, if adopted, will significantly improve the chances of success:

1. Leading from the front. Senior executives will need to sponsor innovation efforts and be prepared to be challenged and create new precedents when issues are escalated to them.
2. Enabling intrapreneurs. Find forward-thinking, customer- focused employees and empower them to innovate and challenge. Intrapreneurs can offer the incumbents a vision and a roadmap to bring about change from within but they will need authority and support if they are to be successful. The strongest candidates may not be the most obvious, and are just as likely to perform in the marketing or actuarial department as in underwriting.
3. Customer strategy is king. Ensure that a sound commercial customer strategy underpins your innovation objectives, so that it isn’t innovation for innovation’s sake. Let the opportunity be your guide, not the capability of the technology.
4. Create diverse teams. Innovation requires a broad range of skillsets unlikely to be found in similar groups of employees; diverse perspectives and experience aid problem-solving.
5. Challenge your processes. From appointing new suppliers to simplifying the due diligence review, ensure your processes are proportionate to the risk and allow empowered employees to get things done.
6. Don’t overthink it. Adopting agile working, using proof of concepts, and minimum viable product development mean that you can afford to learn on the job rather than be dictated to by your cost vs. benefit analysis.
7. Celebrate successes. Creativity can be infectious, especially where there is tangible benefit. Sharing success stories creates a more positive and open innovation culture, which will assist future initiatives.
8. Accept that there are limitations. Not every employee will engage with innovation nor do they need to. Not every initiative will be successful and not every launch will deliver. The key is to learn from the failures and apply the successes again and again.

Learning not to Fail

Indeed, it is not that incumbents are too big not to fail – that has already been proven. But are they too big to change and avoid extinction?

There is cause to remain wholly optimistic and look forward to an insurance ecosystem where InsurTech startups, new entrants, and the incumbents coexist to mitigate risk for people and businesses, allowing customers to make their own choices about how they put this protection in place.

How exciting that the insurance industry could be a case study for the innovating incumbent.

In essence, the mild irony is that the way large incumbents can prevent failing is to accept and embrace a degree of failure.