Digitalization has become of increased strategic relevance: insurance companies have to digitalize their existing businesses and at the same time innovate through new processes, products, markets, and business models.¹ This raises the question of how such an innovation process can be organized. Although not as prominent as in other R&D-intensive industries, innovation isn’t exactly new to the insurance industry. However, what has changed is that a more inward focus in sourcing new ideas has shifted to leveraging external partners, peers, and customers to make advances in innovation. So which guiding principles should be followed?

1. Look beyond incremental innovation

   Incremental innovation is foreseeable and easy to consider in strategic planning. Exponential developments and disruptive innovations on the other hand are much harder to cope with through existing systems. Nevertheless, drivers from the Internet of Things to improved data availability influence how disruptive innovation comes to the insurance industry:² it might be at the customer front end, in the underwriting process, or another function. Consequently, insurance companies need to adapt to become more open to more radical approaches. The goal of innovation should not solely be to drive efficiency further, and sell more of the same at lower cost to more of the same types of customers. Insurance companies should start experimenting even more outside their comfort zones as the competitors of tomorrow might not even come from within their own industry (e.g. car manufacturers selling car insurance products).³

2. Towards a fully digital insurance value chain

   Other industries such as banking have already shown what happens when startups stir up an industry: they accelerate the decomposition of the value chain.⁴ In the last three years we’ve witnessed many so-called InsurTech companies attacking the insurance industry through offering customers more attractive digital front ends by acting as a digital broker. European players such as Knip and Clark have pioneered contract administration tools that have a much more “digital feel” than anything that traditional insurance companies have provided so far.⁵ In fact, these examples only mark the first generation of InsurTech companies: founders had to learn that in order to be a real threat to existing insurance companies they have to integrate further back into the value chain and not just concentrate on one piece of the value creation process. This means that, for instance, they also have to offer a fully digital claims process and (co-)design products that are optimized for a digital customer journey.⁶ Otherwise, customers will be disappointed in the end, finding a nice customer front end with a traditional analogue product.

3. Innovation for corporates is an evolutionary process

   Insurance firms need to go through an innovation learning cycle. Most start with a phase of experimentation, where different formats can be tested and new processes are set up. Investing in startups is not something that all corporates have experience with, and spending €80 million as part of an M&A transaction may be familiar where investing €100,000 through a convertible note may not. This phase should be understood as a period of professionalization. This can mean that innovation topics are picked more selectively, and partnered projects organized more efficiently. Lastly, we observe pressure mounting to move to performance orientation where, in order to survive as a corporate function, corporate innovation needs to show KPIs that convince on real business impact. Metrics here can range from business goals such as improved online conversion rates, to fulfilling cultural goals, to reputational gains.⁷

4. You need to concentrate on the right innovation topics

   The concept of Gartner’s Hype Cycle gives a good first point of orientation for deciding on which topics of innovation to address.⁸ It can be argued that the early hype cycle topics are at too early a stage to realize any business impact soon. For example, blockchain in 2016 was still in its infancy and so most insurance companies had trouble finding profitable use cases for the foreseeable future. Here, joint industry initiatives such as the B3i are a solid foundation to lay groundwork before an actual go-to-market. At the other end of the scale are topics that are already established in most organizations (e.g. SEO, SEA⁹). Here, it can be argued that these topics too should not be the prime focus of an innovation function as they should be “business as usual” for relevant business units. So what is left? A lot! From “smart home” to “connected car” – customers will judge which innovations are here to stay.

5. Use scouting to partner up with innovative startups

   Scouting can be described as the systematic process to “identify new opportunities for partnership, co-development, licensing or acquisition”.¹⁰ How do you pick the right targets, and approach them? Scouting has many parallels with a sales function: leads are generated through different channels (e.g. demo days, conferences, desk research); startups are approached via scouts (sometimes the other way around); collaboration potential is discussed and joint ideas are developed until both parties agree to do a proof of concept … sometimes followed by a project that scales.¹¹

   However, to steer this process efficiently:

   1. Know what you are looking for! You need a clear picture of what is interesting for your organization. Without the buy-in of the business unit, collaborations will stay in the sphere of the innovation management function, and rarely scale.
   2. Get the right technologies in place to support your process. This means on the one hand internal tools (e.g. tracking databases), but also technologies for cooperation (e.g. APIs that allow startups to play with some test data).
   3. Get processes in place to be able to move quickly on pilots. Your startup partners don’t have the same amount of time and money as you think you do.¹²

6. Go where innovation happens

   Innovation does not necessarily come to you – you have to go where innovation is. Your HQ may be in Hamburg, but if InsurTech startups locate in Silicon Valley, London, and Berlin, you have to work out how to connect with them there. Although they are resource-intensive, especially for smaller insurance companies, there are clear gains in installing innovation scouts in major locations to be close to where “the magic happens”.¹³

7. Partner with the best

   Partnering with established accelerators (e.g. Startupbootcamp¹⁴), company builders (e.g. FinLeap), or venture capitalists to have good access to the latest trends, startups, and people is an alternative, saving on set-up and operational costs, and offering quicker impact and opportunities to learn from others.

8. Invest in startups

   This is growing,¹⁵ but is arguably still a novel activity for many incumbents. An investment can increase mutual commitment; and business units will always prioritize innovation projects differently, when an equity investment is involved. An investment is a very good chance to get to know a partner/industry/technology in depth relatively cheaply. You might secure important technology at the expense of a direct competitor. While you do not want to limit the growth trajectory of your startup partner, you still have more influence this way.

   External innovation management – i.e. leveraging external partners, peers, and customers to make advances in innovation – can be a major lever to advance an established insurance company in its digital transformation process. The author is an active investor and has worked with 250+ startups, and from this deep experience, this chapter has concentrated on the drivers that are important to implement external innovation management successfully, and as part of a digital agenda. The “silver bullet” to make it all work has not yet been found, but corporate innovation management can make a lasting contribution to the success of an insurance company. No guarantees – but trying and failing will take you much further than sitting it out.