Innovation in Insurance - Strategy Meets Action...2014/11/12 · Innovation in Insurance: Reality or Fiction followed by a study in 2013, Innovation in Insurance: From Strategy to

Innovation in Insurance: Expanding Focus and Growing Momentum

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SMA Research Report

Innovation in Insurance

Expanding Focus and Growing Momentum

An SMA Research Report

Authors: Denise Garth, SMA Partner Deb Smallwood, SMA Partner

Published Date: November, 2014



SMA Research Report

Table of Contents

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

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4

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9

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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 Q3

2014. The 79

respondents are from

North America and

represent all lines of

business.



SMA Research Report

Innovation Infographics

Figure 1. Innovation Culture in Insurance

Figure 2. State of Innovation in Insurance

Source: SMA Research 2014, Innovation in Insurance, n=79




SMA Research Report

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 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 Q3 2014. 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.

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 Research Report

Figure 3. SMA Business Value Maturity Model

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 2012. 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 2012 - 2014

Source: Strategy Meets Action 2014




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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

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


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.



SMA Research Report

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 Research Report

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.

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


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.



SMA Research Report

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 improving profitability moved into the top two spots,

up from second and fourth in 2013. 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 next-

gen and emerging technologies.


Interestingly, enabling

growth and profitability

moved into the top two

spots, up from second

and fourth in 2013. But

a bigger shift has also

emerged, indicative of

the demands of the

digital revolution and

outside industry

influencers.



SMA Research Report

Figure 9. Most Innovative Today

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/


Product development, a

foundational part of the

business for decades,

is gaining heightened

focus as the definition

of product evolves based

on customer

expectations.



SMA Research Report

distribution dropped significantly from 17% in 2013. 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.

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.

At the early stage of

innovation, we see an

exploding focus on the

customer, emphasizing

growth, competitive

positioning, and product

innovation.




SMA Research Report

Figure 11. Future Opportunity for 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.


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.



SMA Research Report

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


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.



SMA Research Report

technologies are quickly followed by the next group of emerging technologies including

artificial intelligence, driverless vehicles, biotechnology, and 3D printing.

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

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.



SMA Research Report

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 Research Report

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 experi-

ence 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 www.strategymeetsaction.com.

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-to-

day 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

[email protected] or 402.963.0198. Follow Denise at @denisegarth 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

[email protected] or 603.770.9090. Follow Deb at @dmsmallwood

on Twitter.

© 2014 Smallwood Maike & Associates, Inc. USA. May not be reproduced by any means

without express written permission. All rights reserved.

http://www.strategymeetsaction.com/

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Documents

Innovation in Insurance - Strategy Meets Action...2014/11/12 · Innovation in Insurance: Reality or Fiction followed by a study in 2013, Innovation in Insurance: From Strategy to