Innovation in Insurance

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1 Innovation in Insurance Expanding Focus and Growing Momentum An Authors: Denise Garth, SMA Partner Deb Smallwood, SMA Partner Published Date: November, SMA All Rights Reserved Page 1

2 Table of Contents About this Report Strategy Meets Action (SMA) has actively tracked and promoted innovation in the marketplace for several years, with the first formal research study in 2012, Innovation in Insurance: Reality or Fiction followed by a study in 2013, Innovation in Insurance: From Strategy to Execution. SMA has now conducted its third annual Innovation in Insurance study in Q The 79 respondents are from North America and represent all lines of business. Innovation Infographic Innovation Gaining Momentum Innovation Approach and Technology Investment Business Drivers and Focus for Innovation Most Innovative Today Early Stage of Innovation Future Opportunity for Innovation Outside Influencers and Industries Driving Innovation for Insurance SMA Call to Action About Strategy Meets Action Use of Our Reports About the Authors SMA All Rights Reserved Page 2

3 Innovation Infographics Figure 1. Innovation Culture in Insurance Figure 2. State of Innovation in Insurance 2014 SMA All Rights Reserved Page 3

4 Innovation Gaining Momentum With the dizzying pace of change these days, the innovation initiative is not just nice to have; it is a must-have strategic, core mandate that is defining a new era for insurance and separating future winners and losers. Today it is not any one thing that is creating change. It is the convergence of many things that together are creating a seismic shift of massive disruption and transformation. The result? We are standing on the threshold of a new era, watching as a world of rapid change and great disruption sweeps into every industry, including insurance. We have never seen anything like it. This is the digital revolution. And it, like the industrial and dot-com revolutions, offers unprecedented opportunities for innovation. But unlike those revolutions, the convergence of multiple influencers of change, the pace and intensity of change, and the breadth of impact across all industries are unprecedented. We found that innovation was indeed happening wherever insurers were beginning to establish collaborative environments, starting to nurture a culture of innovation, and beginning to select initiatives, small or large, with which to set out on the innovation journey. We have emerging technologies like the Internet of Things, wearable devices, biotechnology, driverless vehicles, and 3D printing. Consider the arrival of the sharing economy with companies like Uber, Airbnb, and FlightCar. Don t forget about the rise of new competitors like Google, Facebook, Amazon, Apple and others; and new channels like Walmart, Overstock.com and IKEA. Collectively, all of these influencers are fueling and advancing innovation to an unparalleled extent. With so many views and definitions of innovation circulating in the world of business, Strategy Meets Action (SMA) decided to identify and pull together the various elements of innovation and define it in the following way: Innovation is the continual rethinking, reinventing, reimaging, or retooling of products, services, and processes for the purpose of transforming customer and employee experiences and achieving game-changing results. Innovation comes from the desire and a commitment to constantly improve, to think differently, and to envision and enact change. Strategy Meets Action (SMA) has actively tracked and promoted innovation in the marketplace for several years, with the first formal research study in 2012, Innovation in Insurance: Reality or Fiction followed by a study in 2013, Innovation in Insurance: From Strategy to Execution. In these studies, we found that innovation was indeed happening wherever insurers were beginning to establish collaborative environments, starting to nurture a culture of innovation, and beginning to select initiatives, small or large, with which to set out on the innovation journey. SMA has now conducted its third annual Innovation in Insurance study in Q The 79 respondents are from North America and represent all lines of business. As a framework to help insurers assess where they are and track their progress, the SMA Business Value Maturity Model maps out the insurer journey and lets insurers see where they are positioned competitively. The maturity model illustrated in Figure 3 on the next page depicts the innovation journey from replacing through modernizing, optimizing, and innovating. Modernization is the foundation for optimization and innovation, where new technologies build on and leverage modern core systems to accomplish new, innovative approaches from customer engagement to products to services and more SMA All Rights Reserved Page 4

5 Figure 3. SMA Business Value Maturity Model Source: Strategy Meets Action 2014 From the 2014 research, we see that, while there has been progress, the breakout during 2013 seems to have hit the brakes in 2014, with investment approaches returning to what we saw in Figure 4 highlights the pace of technology adoption across these three years, with over a third of insurers in the upper echelons as movers (28%) and market leaders (9%). Figure 4. Pace of Technology Adoption From SMA All Rights Reserved Page 5

6 SMA believes this change reflects the realization that modernization of core systems is a foundational requirement for innovation, table stakes to entering the mainstreamer level. As a result, insurers are regrouping and reprioritizing their strategic technology and business initiatives around updating or replacing their core systems. To further emphasize this, insurers innovation approaches and efforts are taking a broader view and approach to innovation, soliciting outside-in views, engaging open innovation, and developing an ecosystem of outside resources to fuel the journey, as depicted in Figure 5. This acknowledges a best practice from outside the industry, the recognition that no business can expect to harness the future and all its conceivable possibilities on its own. Figure 5. Groups Involved in an Innovation Ecosystem An ecosystem generates and integrates new ideas and thinking with help and input from outside the organization, providing the much needed outside-in perspective to help break down legacy assumptions. Within the ecosystem, insurers are primarily engaging industry relationships such as agents (64%), business partners (45%), software partners (45%), customers (34%), other insurers (11%), and the supply chain (2%) as a catalyst for ideas and innovation. However, more outside-in relationships are quickly starting to form with high tech companies (11%), other industries (4%), futurists (4%), venture capital firms (2%), and academia (2%). Why is an ecosystem so critical? First, due to day-to-day operational demands, there is a lack of time, expertise, and resources for tracking, assessing, and putting the various implications for insurance into context. Second, the network generates and integrates new ideas and thinking with help and input from outside the organization, providing the much needed outside-in perspective to help break down legacy assumptions. Companies in other industries have fueled their innovation and successes similarly. As noted in SMA s Next-Gen Insurer: Fueled by Innovation report, examples from Proctor and Gamble and Ford reinforce the value of this approach. At Proctor and Gamble (P&G), for every one P&G researcher there are 200 more that exist outside the organization in an external network of more than 3 million people. The result of this approach: the launch time for new products is halved and the innovation rate is increased by 75%. As 2014 SMA All Rights Reserved Page 6

7 for Ford, in 2005 Ford spent $8B on R&D and lost $17B. Ford then reinvented itself in 2008 and 2009, with innovation as a mission, and became a profitable market leader. Innovation Approach and Technology Investment Innovation has been a key topic within the industry, gaining greater focus in the last few years due to the level of innovation in companies like Google, Overstock.com, Apple, and others that have innovation cultures and are impacting or entering the industry in various ways. This is reflected in the survey results, with a majority of insurers focusing on innovation for five years or less (65%), evenly split between 2 years or less (32%) and two to five years (33%). In contrast, over a fourth of insurers (26%) have focused on innovation for five years or more. Surprisingly, 9% are not focusing on innovation. While the majority of insurers have either begun or are well into their innovation journeys, their approaches are different from the perspectives of people, process, technologies and tools, and culture, as reflected in Figure 6. Figure 6. Company Environments and Approaches to Enabling and Driving Innovation People Over a third of insurers have formal full-time or part-time teams focused on innovation. In addition, another third have ad hoc, part-time teams. Together, these indicate a high level of commitment to innovation by two-thirds of all insurers. Process A little more than a fourth of insurers are using a formal innovation process, providing structure for the organization and a cornerstone for innovation. Interestingly, a majority of insurers (55%) approach innovation on an ad hoc basis or with no process at all (19%). While ad hoc can work, it will too often be tactical rather than strategically focused SMA All Rights Reserved Page 7

8 Technologies and Tools Encouragingly, nearly three fourths of insurers (72%) are using some type of technology or tool, with nearly a third using collaboration tools like Spigit, Jive, IdeaScale, and others. As organizations mature their processes, the value of these tools will likely increase. Nearly 28% of insurers have their strategy or R&D leadership/areas lead innovation. SMA believes this reflects the resurgence of strategy and R&D to provide an enterprise wide approach for innovation, maximizing the strategic impact and value of innovation initiatives to the organization s Next- Gen Insurer vision and strategy. Culture Amazingly, 66% of insurers have a growing or strong culture for innovation. Yet, nearly a third (34%) of them have no organizational culture or support for innovation, putting them seriously at risk given the pace of change. Innovation leadership and organizational approaches can take many different forms among insurers. Interestingly, only 7% of insurers have a dedicated innovation area within the company. Nearly 28% of insurers have their strategy or R&D leadership/areas lead innovation. SMA believes this reflects the resurgence of strategy and R&D to provide an enterprise wide approach for innovation, maximizing the strategic impact and value of innovation initiatives to the organization s Next-Gen Insurer vision and strategy. In contrast, more than half of insurers (51%) have no single area of the organization leading innovation. Based on recent discussions with insurers, while departmental approaches can provide operational optimization, they can often create conflict among resources and minimize the strategic impact of some innovation initiatives. Investment in technology is a critical component for innovation, enabling the journey and positioning insurers competitively in the marketplace. As illustrated in Figure 7, it is encouraging that more insurers believe their investments are positioning them to first modernize with the continued implementation of modern core insurance systems that are subsequently enabling optimization and innovation. Yet there are still 9% of insurers focusing on enhancing existing systems (Replace+), limiting their ability to innovate using new and emerging technologies. All of these point to what appears to be a growing focus and clarity on the approach for technology investments, helping move investments from operational to more strategic initiatives. Figure 7. Primary Approach to Making Investments in Technology 2014 SMA All Rights Reserved Page 8

9 Business Drivers and Focus for Innovation The focus and business drivers of innovation are changing, likely reflecting the shifting landscape of influencers, threats, and competitors for insurance. Figure 8 ranks the top business drivers for innovation for insurers. Figure 8. Top 6 Business Drivers for Innovation in Insurance Interestingly, enabling growth and profitability moved into the top two spots, up from second and fourth in But a bigger shift has also emerged, indicative of the demands of the digital revolution and outside industry influencers. Interestingly, enabling growth and improving profitability moved into the top two spots, up from second and fourth in But a bigger shift has also emerged, indicative of the demands of the digital revolution and outside industry influencers. In 2013, improving existing products and providing great service were in the top six. In 2014, there is a shift in focus to developing new products and engaging and strengthening customer relationships, which is directly related to meeting the new demands and expectations of customers. Most Innovative Today While innovation is rarely confined to any one part of the business, most companies set priorities to focus on those areas they believe can enable their vision and meet the objectives of the organization. The top business areas are focused on the front-end engagement with customers as reflected in Figure 9 on the next page. Interestingly, IT is considered the most innovative today, which may be a reflection of the significant work in modernization of core systems, movement to the cloud, and experimenting with nextgen and emerging technologies SMA All Rights Reserved Page 9

10 Figure 9. Most Innovative Today Product development, a foundational part of the business for decades, is gaining heightened focus as the definition of product evolves based on customer expectations. New business and underwriting are also in the lead for the most innovative today at 36%, not surprising since it has a great influence on growth and profitability, the two top business drivers. The explosion of new data as well as tapping into existing unstructured data is expanding the focus to more precise, individualized underwriting. The pace of adoption of telematics, experimentation with the Internet of Things, and wearables will accelerate this focus for both P&C and L&A companies. We are quickly moving into a world of underwriting risk for one on a real-time basis. Marketing is third at 23%, consistent with the focus of the business driver on growth. While marketing continues to focus on traditional areas such as identifying and analyzing market segments and managing campaigns, brand, and customer experience, it is also about developing and implementing a unified digital strategy. This digital strategy seeks to create a consistent, connected, personalized customer experience by bringing together key business strategies including brand, marketing and communications, customer relationship, website, mobile, social, collaboration, and the company intranet. And with this focus, new data is being captured and analyzed about the customer to refine that personalized experience. Claims, customer engagement/experience, and product management and development are all evenly ranked as the next areas of innovation today at 14%. In particular, product development, a foundational part of the business for decades, is gaining heightened focus as the definition of product evolves based on customer expectations. With the emergence of niche products; usage-based insurance products (for both P&C and L&A); and the integration of services within an insurance policy to help reduce, eliminate, or mitigate risk, product development has moved well beyond a risk analysis focus to include components that engage, support, and provide unique services to the customer. Interestingly, channel management/distribution (7%) and partner management (11%) (not pictured) are not considered innovative today. In fact, channel management/ 2014 SMA All Rights Reserved Page 10

11 distribution dropped significantly from 17% in This may reflect the continued focus of independent and/or captive agents being the primary channels which continue to be supported via traditional agency management solutions or agent portals. At the early stage of innovation, we see an exploding focus on the customer, emphasizing growth, competitive positioning, and product innovation. Early Stage of Innovation At the early stage of innovation, we see an exploding focus on the customer, emphasizing the focus on growth, competitive positioning, and product innovation. Leading this focus at 43% are customer engagement/experience and product management/development with new, innovative products, along with claims with a move to engage customers to mitigate or eliminate claims. Following closely are customer/policy service and marketing, at 41% as depicted in Figure 10. This increased focus highlights the drive to become digital companies, providing a cohesive experience for customers from sales to service. Figure 10. Early Stage of Innovation Furthermore, some other business areas are seeing significant increased focus for innovation including channel management/distribution, billing, and claims (not pictured). The focus of innovation for billing and claims is likely due to insurers taking advantage of modern core systems in these areas to provide new, expanded, or enhanced services, from mobile payment and mobile FNOL to claims prevention and mitigation services. Future Opportunity for Innovation While current or beginning areas of innovation are focused on the front-end, or areas where there have been significant modernization of core systems, back-end areas are seen as future opportunities for innovation, as reflected in Figure 11. These include reinsurance, supply chain management, and asset/investment management, as well as channel management/distribution SMA All Rights Reserved Page 11

12 Figure 11. Future Opportunity for Innovation Just consider what the shift to autonomous vehicles will cause: a move from personal insurance to product liability insurance, or the potential for automotive companies to include insurance in the list price of a new connected vehicle. All of these will have major implications for insurance that will demand innovation. As innovation ripples through claims, product management/development, and new business/underwriting, the scope, need, and focus of reinsurance, as well as supply chain management will dramatically shift. As insurers increasingly focus on claims prevention and mitigation, their portfolios of risk should decrease, spurring changes in reinsurance. In addition, as businesses and individuals embrace and leverage technologies like the Internet of Things (IoT), new types of insurance products and services will be necessitated. Just consider what the shift to autonomous vehicles will cause: a move from personal insurance to product liability insurance, or the potential for automotive companies to include insurance in the list price of a new connected vehicle. All of these will have major implications for insurance that will demand innovation. Outside Influencers and Industries Driving Innovation for Insurance Powerful outside influencers and innovation in other industries are accelerating change, affecting every touch point of the insurance value chain, and in the process, redefining the business of insurance. These changes are challenging decades of business traditions and assumptions in ways that the insurance industry has never seen before. Now, changes are coming constantly, powered by new technologies, the mash-up of technologies, and new uses for these technologies. Because these changes are so disruptive and transformative, both business and IT insurance leaders must understand and develop a comprehensive view of the impact of the influencers of all of this change. They must proactively assess influencer priorities, define business scenarios, prepare plans, and experiment to effectively leverage and respond to these influencers not just to enable growth, but to safeguard survival SMA All Rights Reserved Page 12

13 Both business and IT insurance leaders must proactively assess influencer priorities, define business scenarios, prepare plans, and experiment to effectively leverage and respond to these influencers not just to enable growth, but to safeguard survival. Based on the survey, insurers increasingly believe that other industries will influence innovation in insurance, as depicted in Figure 12. The top four industries influencing insurance in the next year include healthcare (46%) with the potential influence of the healthcare insurance exchanges; high tech (45%) with the potential of Google, Amazon, and Apple entering or disrupting insurance; telecom (32%) with the race for the customer s connectivity, data, and services; and government (32%) with some states aggressively piloting new technologies such as driverless vehicles. And in three years, industry influencers will expand to automotive (32%) with crash avoidance and connected cars from Volvo, BMW, Ford, and others; education (29%) with increased virtual classrooms, degrees, and funded research around the shared economy; pharmaceutical (27%) with the growth in biotechnology advancements that can assess peoples' health proactively and offer new options to help avoid illnesses or lessen or cure them; and retail (25%) where companies with digital platforms like Overstock.com, Google, or Walmart can sell insurance, strengthening the customer experience and loyalty. Figure 12. Top 4 Industries Influencing Innovation in Insurance in 2015 and 2017 Because of the impact that these influencers are having on the lives of nearly everyone, there is the growing realization that customers experiences with these industries and companies are resetting expectations that insurers must meet to compete and retain customers. Many other industries manufacturing, entertainment, retail, etc. have recognized the trend of customer empowerment. Many have already made changes. Others are transforming their businesses from product-driven to customer-driven organizations, leveraging the enabling technologies like mobile, social, big data, analytics, and the new emerging technologies. Consistent with SMA s Emerging Technologies: Reshaping the Next-Gen Insurer report, insurers indicate that the Internet of Things (IoT), wearables, gamification, drones/aerial imagery, and semantic technologies are leading adoption and driving innovation. These 2014 SMA All Rights Reserved Page 13

14 technologies are quickly followed by the next group of emerging technologies including artificial intelligence, driverless vehicles, biotechnology, and 3D printing. This fast adoption of emerging technologies by outside industries and businesses is pushing insurers much farther along in their transformation and innovation journeys. This is why insurers must pay attention to the outside industries, and whenever possible leverage the changes and best practices that are transforming other industries. This fast of adoption of emerging technologies by outside industries and businesses is pushing insurers much farther along in their transformation and innovation journeys. This is why insurers must pay attention to the outside industries, and whenever possible, partner with them to track, assess, and where appropriate, leverage the changes and best practices that are transforming other industries. Insurers risk losing their customers to outside industries and businesses that can provide insurance to them. And new competition is materializing everywhere through the acquisition of an insurer, in creating a start-up, by redefining the insurance need or becoming the channel, through using access to capital markets to cover risk, or any combination of these. If traditional insurers ignore the new competitors, they will face the very real threat of becoming irrelevant. SMA Call to Action As we discussed at the 2014 SMA Summit, the innovation journey continues, expanding in focus and approach, helping to power momentum within companies and throughout the insurance industry. Companies across all industries are embracing innovation, creating an environment of fast-paced change and a new dynamic of market leaders. Challenged foundations... Change and disruption... Winners and losers. This is why an innovation mandate is critical and an innovation journey is essential. SMA believes that insurers on the innovation journey have to do three key things in order to achieve their innovation goals. They must cultivate, activate, and accelerate. Cultivate: Insurers must rethink and reimagine the business of insurance, creating a culture for change and cultivating it within the company and the industry. Insurers must energize fresh thinking, adapt quickly to rapid change, embrace outside-in views, encourage experimentation, accept risk and failure, and then learn from them. Activate: With a vision and strategy in place, insurers must aggressively begin the implementation of a wide array of initiatives, including a path to the modernization of core insurance systems. This foundation will lay the groundwork for future optimization and innovation that together can help achieve new levels of success and differentiation. Accelerate: As insurers accelerate their journey, they gain momentum and distance themselves from their competitors, becoming market leaders. Multiple areas of the business work together to rethink and reinvent the business, capitalizing on next-gen and emerging technologies while keeping the customer experience and relationship at the forefront. A new future is rapidly unfolding and the pressure is on. Innovation can never cease. It must advance with a sense of urgency. Each and every day, insurers must recommit to their innovation journey and the culture they have created for it and avoid falling into an operational trap. Why? Because the fast-paced emergence of new technologies, new business models, new competitors, new products and services, and most importantly, new customer expectations will wait for no one. Each insurer s journey will be unique, starting from a different place, with different priorities, a different focus, and evolving in different stages. But insurers must experiment, think outside the box, and look at outside-the-industry 2014 SMA All Rights Reserved Page 14

15 initiatives to gain an understanding of the potential of these demanding challenges. Leverage the individuals within and outside your organization who are outside-the-box thinkers. Leverage those individuals who can adapt to change. And leverage the bold dreamers and visionaries who will be advocates in experimentation and deployment. And remember what Charles Darwin said: It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change. Innovation will be a journey of great disruption, great opportunity, and great change SMA All Rights Reserved Page 15

16 About Strategy Meets Action Strategy Meets Action (SMA) is dedicated to helping the business of insurance modernize, optimize, and innovate for competitive advantage. Exclusively serving the insurance industry, SMA blends unbiased research findings with expertise and experience to deliver business and technology insights, research, and advice to insurers and IT solution providers. By leveraging best practices from both the management consulting and research advisory disciplines, we take a unique approach offering an unrivaled set of services, including retainers, research, consulting, events, and innovation offerings. Additional information on SMA can be found at Use of Our Reports The entire content and context of this SMA research report is subject to copyright protection, with all rights reserved. Reproduction or distribution of the report, in whole or in part, without written permission is not allowed. The material and observations contained in this publication have been developed from sources believed to be reliable. SMA shall have no liability for omissions or errors and no obligation to revise or update any data or conclusions should new information become available or future events occur. The opinions expressed in this report are subject to change without notice. About the Authors Denise Garth, a Partner at Strategy Meets Action (SMA), leads the firm s Innovation Practice and heads up the industry s first Innovation Communities, a unique avenue for fostering and facilitating innovation across the insurance industry. Denise is a recognized industry leader in the innovation space, noted for her fresh, outside-in focus and strategic thinking. Her extensive insurance experience and her strong grasp of day-today challenges, key business issues, and the rich opportunities ahead help insurers capitalize on the power of innovation to envision and embrace the future and do business in more sophisticated, productive, and profitable ways. Denise can be reached at dgarth@strategymeetsaction.com or Follow Denise on Twitter. Deb Smallwood, the Founder of SMA, is recognized for her expertise in how insurers can deploy technology to innovate and differentiate in the insurance industry. She offers a fresh perspective blending vision with practical realism. Exclusively serving the insurance industry, Strategy Meets Action blends unbiased research findings with expertise and experience to deliver business and technology insights, research, and actionable advice to insurers and IT solution providers. Deb can be reached at dsmallwood@strategymeetsaction.com or Follow Deb on Twitter Smallwood Maike & Associates, Inc. USA. May not be reproduced by any means without express written permission. All rights reserved SMA All Rights Reserved Page 16