Five steps to improve innovation in the insurance industry

Insurance is not typically considered a bastion of innovation, despite a long track record of creating new and exciting markets around emerging risks and consumer demands. For example, the relatively nascent cyber insurance market is forecast to surpass $22.4 billion by 2026 at an annual growth rate of more than 25 percent in the next five years, according to market research and consulting firm IndustryARC.¹Cyber insurance market – forecast (2021-2026), IndustryARC, June 2021, industryarc.com. In reaction to the lockdowns of the COVID-19 pandemic, many insurers rapidly digitalized their customer and agent experience, permanently shifting away from a traditional face-to-face service model. Other carriers are responding to consumer demand for more meaningful interactions with loyalty and gamification programs that promote customer engagement. For instance, South African insurer Discovery’s Vitality loyalty program gives customers points as incentives for practicing healthy habits and good driving behavior, and then grants them access to rewards and benefits.

The C-suite is already taking note of the key role innovation will play in delivering long-term value: data from a 2020 survey show that while executive teams focused on short-term cash management and the welfare of their workforce at the peak of the pandemic, innovation now ranks as one of their top two priorities.

But while the industry as a whole has delivered pockets of innovation, few carriers have pursued innovation in a systemic way. Today, new customer expectations, low interest rates, and new sources of competition (such as leading tech companies, insurtechs, and third-party capital) are putting pressure on carriers to take a more systematic approach. For innovation to deliver sustainable growth, it must be embedded in the company’s growth model and fully integrated across the organization, bringing together cross-functional teams to approach challenges in new ways.

And that’s not easy. Successfully profiting from innovation is a complex, company-wide endeavor, and most insurers have not yet cracked this code—at least not on a consistent basis. In fact, a 2017 survey of life and annuities executives found that only 12 percent believe they have a process that delivers strong product innovation.²Marianne Purushotham et al., Understanding the product development process of individual life insurance and annuity companies, Society of Actuaries, 2017, soa.org. And fewer than 30 percent of financial-services executives say they have the expertise, resources, and commitment to successfully pursue new sources of growth.

Fortunately, there are ways to establish and implement cross-cutting practices and processes to structure, organize, and encourage innovation for sustainable growth. Here are five steps for building innovation into the way an organization works, competes, and grows.

1. Shift resources from core business tasks to breakthrough innovation initiatives

Innovation is not just about creativity and generating unique ideas. It’s about identifying unmet needs and untapped markets and addressing them, sometimes with untested solutions and unproven business models. Yet too many leaders embrace these risks without shifting enough people, assets, and management attention to bring these ideas to life. Put simply, nothing comes from nothing; if a company wants to innovate, it must allocate resources to innovating.

In fact, one of the biggest challenges holding insurers back from innovation is capacity—both physical and human capital and executive mindshare. Business as usual has continued to be the priority for traditional incumbents, particularly as they have tried to provide stability to customers through the disruption and uncertainty of a global pandemic. Updating existing products, maintaining existing systems, and making incremental changes have taken the lion’s share of insurers’ time, attention, and effort. These short-term initiatives feel safer, particularly given the pressures facing insurers over the past few years. But robust opportunities await insurers that adjust their valuation criteria and free up capacity for bolder moves.

By reallocating the necessary resources from core business tasks to potentially disruptive initiatives, insurers can rebalance their product portfolios to move away from near-term product improvements and toward potential breakthroughs or new business models—forms of innovation that often hold greater potential to generate sustainable sources of growth and outsize returns.

2. Develop distinct product-development pathways and processes

Different innovation initiatives call for different approaches. For example, most organizations can predict with some certainty the likely gain in gross written premiums or combined ratio from an improvement to an existing coverage or tweak to a core process. This knowledge leads to clarity on the risks and how to mitigate them. This type of innovation is very different from developing a disruptive new product, such as a new life-insurance policy with unprecedented flexibility across living benefits. Disruptive products carry a host of risks—from understanding the market opportunity to communicating the value proposition effectively—and organizations have less clarity around them.

The rapid rise and fall of mutual-aid platforms in Asia illustrate the importance of maintaining a balanced innovation portfolio with different development pathways. In 2019, several companies launched platforms that provide simple access to basic health coverage by radically rethinking product design and customer engagement. Within weeks, the most successful of these platforms, Ant Financial’s Xiang Hu Bao, attracted tens of millions of users, peaking at more than 100 million participants.³Georgina Lee, “Ant Financial’s mutual-aid platform Xiang Hu Bao attracts 100 million users, boosts insurers’ sales by 60 per cent in first year,” South China Morning Post, November 27, 2019. But these programs are now winding down. The model encountered both increasing regulatory requirements and adverse selection as young and healthy members dropped out of the program, increasing the costs shared by the remaining participants.

Managing the delivery of an innovation portfolio therefore requires organizations to develop distinct pathways for product development (Exhibit 1). Each pathway has a specific set of characteristics:

• Derisking: This pathway competes with part of the core business and has a high level of ambiguity on the delivery path.
• Derisking and accelerating: With an unknown path to solution, this approach uses technologies and capabilities that are new to the company and requires significant cross–business unit (BU) and change management.
• Accelerating: This pathway has generally known solutions and previous use cases, but its cross-BU implications, infrastructure, and capability to deliver are limited.

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One carrier, for example, instituted different development tracks for different types of products:

• New-product development: Totally novel product that the organization has never carried before; not based on an existing product chassis.
• Existing product revamp: Building on an existing product chassis, but developing substantive changes to the product’s features, pricing, and experience to create a distinguishable new product experience
• Simple tweak of current product: Existing products that require very minor updates—such as repricing or adding minor features that already exist in other products

Creating a distinct product-development process for each track allowed the carrier to maintain market share by tweaking existing products while preserving dedicated capacity for new products that have the potential to unlock new markets or value pools.

Risk/return profiles are also used to determine product-development pathways. By analyzing each portfolio product’s economics and its odds of success, insurers can determine which products should be redesigned and which should be coupled with other products. Examples include embedding annuities and other guaranteed-income options in target-date investment funds.

3. Design value propositions that incorporate new approaches to customer engagement and distribution

Innovative value propositions aren’t just about products; they integrate insurance protection and prevention, customer engagement, and distribution and marketing. Historically, carriers have developed new products through actuarial innovation, often adding complexity that appeals more to agents than to customers. Separately, they invest in modernizing and digitalizing their distribution platforms and strengthening new-business and underwriting capabilities.

But carriers need to incorporate all three components in their innovative value propositions to deliver a differentiated experience to customers and distribution partners (Exhibit 2).

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Post-COVID-19, a changing customer landscape will continue to encourage carriers to adapt products to deliver a more personalized user experience. This means generating ideas based on unique customer needs and developing a more granular profile of customers to personalize offerings and tailor messaging for even the smallest customer segments.

4. Ensure that innovation is a continuous, integrated process

One common cause of failure is standing up an innovation lab or team without fully integrating it into the business-planning cycle. Innovation teams that are not fully integrated often lack clearly defined, near-term metrics for success. They may not understand how their own success is critical to the success of the overall enterprise and of specific business lines, and they may lack clear links with other parts of the organization to ensure the innovations they develop are implemented and scaled.

By facilitating constant dialogue between innovation and business teams, insurers can foster a common understanding of the market landscape, identify potential opportunities, and realize their aspirations. While the exact cadence may vary for each carrier, it typically includes three main activities throughout the year:

• Assess: During this phase, the team conducts a rapid sprint (approximately two to three weeks) to develop a clear market understanding within the strategic-planning cycle and identify key problems to solve (such as customer, distributor, or competitor opportunities). This research will both inform the carrier’s annual strategic planning and determine focus areas for innovation throughout the year. In faster-paced markets, this process may be conducted more frequently.

  The goal is to have a robust pipeline that is continually pruned and refilled, with a backlog of ideas that put constant, productive pressure on initiatives currently in development. This pressure helps leaders and teams avoid sunkcost biases and encourages them to weigh the relative value of investing in a current initiative against starting another.

• Aspire: In this phase, the team develops a vision for new product opportunities based on user testing with clients and distribution partners, establishing a pipeline of targeted opportunities that can be prioritized and examined before moving into detailed product design.

  Initially, a carrier may conduct an accelerated series of workshops to “collide” different ideas. But once the pipeline is established, it should be continually refreshed, and the backlog of ideas should be frequently evaluated and reprioritized. Critically, growth in premium and profit from this portfolio of innovations is incorporated into the overall financial plan and individual executive accountabilities, with the understanding that not all of the ideas will work out, but some must succeed for the organization and leaders to meet their goals in the coming years. We call this overall portfolio goal “the green box”—a quantification of how much growth in revenue or earnings a company’s innovation needs to provide in a given timeframe, translated into cascaded key performance indicators (KPIs) and incentives.

• Design, build, and launch: At this point, the team has identified one or more innovation opportunities to bring to market and is ready to proceed with detailed concepts, product design and build (including pricing and filings for insurance products), and go-to-market planning.

  Innovation teams should develop a business case for each product or initiative, carefully documenting all assumptions underlying the estimated value. These business cases can, in turn, inform a set of “deal-killing assumptions” that can be tested, refined, and tied to clear milestones and stage gates for each step of the development journey of a given product. For example, proof of concept may involve successful back-testing of a new underwriting approach that results in an increase of expressed interest to purchase the product among at least 20 percent of potential customers. These go/no-go decision points are critical to the team’s ability to reprioritize opportunities quickly, as this phase is typically the costliest and most resource intensive. By getting a clear line of sight into what each innovation needs to succeed, and by testing assumptions early, teams and leaders gain early visibility into which initiatives are likely to succeed or fail so they can refocus efforts and resources accordingly.

5. Pursue more significant product innovations with an accelerator

Building a diverse innovation portfolio and developing a differentiated value proposition require new, cross-functional ways of working. The right innovation operating model will hinge on an insurer’s innovation priorities—from developing capabilities that improve core operations to seeking more disruptive opportunities outside the core offering. External partnerships, strategic M&A, venture-capital models, and traditional R&D can quickly open opportunities to tap into innovative capabilities, products, and processes (Exhibit 3).

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But many companies can balance these approaches by standing up an accelerator to pursue transformational innovation and other “step-out” opportunities. Although an accelerator is a separate entity designed to drive product innovation, it must still be focused with clear KPIs and measurable success criteria, including defining the precise amount of innovation-led growth that will help fill gaps in the insurer’s existing growth strategy. Such a unit must also be carefully connected to the existing organization’s centers of strength—distribution, underwriting, and data—so that it can take advantage of those scaled capabilities while maintaining the freedom and space to explore opportunities that are more ambitious and less certain.

For example, after nearly a decade without launching a truly new product, one North American life insurer set up an accelerator and quickly built out a robust innovation portfolio that capitalized on the organization’s product, underwriting, and digital capabilities. The company designed and developed a fundamentally new value proposition for an emerging client segment in less than a year.

Now is the time for insurers to increase the quality, pace, and breadth of innovation. Customer expectations are evolving, challenging carriers to deliver personalized and consumer-centric products. At the same time, the C-suite is recognizing the power of innovation to accelerate the pace of change. For innovation to deliver long-term value, it must extend beyond risks and product offerings and become embedded in a carrier’s DNA through carefully considered priorities, mutually beneficial partnerships, and fully tapped resources.