The word "innovation" refers to something new or different that causes a positive change. In an effort to stay competitive, most industries embrace innovation as quickly and as best they can. But there are exceptions — the financial services industry, for example, and particularly the insurance business, is more circumspect. Innovation sparked by external events or technologies takes longer to penetrate. In insurance, the classic 25–30% early adoption rate for new technologies is not a median but — usually — an upper limit. Over the past twenty years, industry analysts and the press have reproached the insurance business for being so slow to adopt what are clearly important innovations. In the 1990s, it was the Internet and its potential to revolutionize sales, service, and consumer education. More recently, it's been wireless data communications devices for field professionals.
Why is the insurance industry slower to adopt new technology? For a partial explanation, we can point to the low volume and low frequency of insurance transactions: old practices appear adequate, but not for much longer. There are a number of drivers causing change — important developments in IT, global competition, new demands from consumers transparency threatening to commoditize insurance products, and industry consolidation and convergence. This is a time of change for insurance companies — a time that offers both promise and peril.
The innovators are getting beyond using IT for cost control (as has traditionally been the focus in the insurance industry). Rather they are embracing the new paradigm in technology to forge new business designs that improve their offerings, ability to market, distribution channels and risk assessment. Innovation often means deciding to use relatively new or even existing tools in new ways to produce the desired positive change. Innovation can and should include areas such as product and services improvements, as well as new business processes or reviews of corporate culture. Some of the most interesting and predictive cases of this phenomenon have occurred in the last five years.
For example, Jefferson Pilot Financial (Greensboro, NC) and Grange Mutual (Columbus, OH) all recognized the value of supporting their distribution channels and reducing barriers to using their systems. These companies have invested internally to develop effective web portals for their agent and broker customers, and the results have been impressive. Because of new innovation technology, Nationwide Insurance (Columbus, OH) has achieved a single view of the customer across internal divisions with a third-party technology that connects several data stores seamlessly. The result is a highly improved customer experience and a noticeable reduction in processing errors.
Increased use of data and IT architecture standards enable innovation by predicting customer demand and assessing risk more accurately. In fact, a precise understanding of customer needs, driven by perfect information could enable an insurance company to develop a product that will be bought by rather than sold to the customer. In a similar vein, a data-infused relationship could revolutionize the sales process changing the value proposition of life insurance from "a lump-sum of money" to "security for my family."
For a decade I have written about an innovative carrier that includes their mantra in their name: Progressive Insurance (Mayfield Village, OH). Yet the rest of the industry has had difficulty adopting Progressive's winning ways. The company, committed to success through technological and business process advances, has an impressive number of industry firsts. The company pioneered the concept of policyholder engagement during the claims process by announcing Immediate Response Claims Service in 1990 that had a company adjuster working at the scene of an automobile accident. This was followed up in 1994 with the introduction of the now ubiquitous Immediate Response Vehicles which today act as modern mobile claims offices as well as being rolling advertisements that Progressive is on the job. In many cases, the adjuster can write a check on the spot, lowering costs and increasing customer satisfaction — actually creating a positive customer experience out of a collision. In fact, the agent often impresses the other party in the collision so much that he or she becomes a Progressive customer.
Progressive also launched the first insurance web site, was first to offer online policy purchasing in real time, and was the first to pilot "usage based" insurance via GPS and cellular data modems (Autograph and then the simplified TripSense). Customers paid insurance premiums that were based on the actual behavior of the driver. This company's commitment to finding new ways to do business drives their industry-leading performance.
Those who argue that Information Technology cannot create or sustain competitive advantage say that standards level the playing field for enterprises and prevent them from using IT-enabled business designs and strategies to differentiate in their markets. Our research shows the opposite to be true. This is because IT is now integral to how companies operate and go to market. As the technology changes and new business models emerge there are surprising new opportunities for business innovation and growth. For example, innovative deployment of IT Standards facilitates global expansion by making it easy, inexpensive and fast to reach out to customers, partners and employees. Standards allow an insurance company to do backroom processing just about anywhere in the world.
Interestingly, IBM recently brought innovation to the Insurance Industry through the donation of selected components of its Insurance Application Architecture (IAA) to ACORD, the industry champion of Insurance Standards. The contribution of these business process models will allow for the standardized development of next generation insurance applications. These applications will make use of Service-O riented Architecture to connect hardware and software elements into an underlying Enterprise Service Bus. Insurance Business Standards support the integration of various componentized business processes into the operational fabric of the company to enable faster delivery of new business value.
This evolution of application development allows insurance companies to leverage existing heritage systems while moving into a more adaptable and flexible infrastructure. The result is that insurers can extend existing investments while taking advantage of best of breed application components. IBM's donation of these process models to ACORD was the first industry-specific intellectual capital donation by the company. Ultimately, important insurance industry innovations have to improve on how the business understands, develops, and services its markets. My recent research and experience shows that technology is now a powerful means to achieve this goal. However IT only provides the tools to execute the plans and strategies of the business. Proper investments in architecture, standards, and corporate infrastructure will create a foundation for innovation for the insurance industry. Most important, the evidence is strong that a new generation of insurance business innovators is beginning to understand the new business designs, strategies and opportunities to shift IT from being a tool for cost control to a tool for growth and competitive advantage.
Don Tapscott is the Chief Executive of New Paradigm, a Toronto-based think tank. He is currently conducting a multi-million-dollar syndicated research project into new business designs and strategies in the insurance industry.
James Bisker, is the Global Insurance Industry Leader, IBM Institute for Business Value. Jamie can be reached at jbisker@us.ibm.com
