Importance of Intellectual Capital and Innovation in

Agricultural Insurance Sector

Mohammad Rahmani Karchegani

International Conference on Economics, Energy, Environment and

Agricultural Sciences

1/11//2014

Section Content No. of Slid

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Overview

Importance of Insurance Services in Agricultural Sector

Importance of IC and Innovation in Insurance Sector

Definitions and Importance of Intellectual Capital

Definitions and Importance of Innovation

Relationship between Intellectual Capital and Innovation

Intellectual Capital and Innovation in Insurance Companies

Conclusion

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Outline

There are many factors that influence performance of insurance companies.

In order to sustain competitive advantage an insurance company needs to

offer high-quality services at low cost.

Scholars assert that intellectual capital (IC) is one of the crucial assets which

helps organizations to create value and enables organizations to be innovative.

Many authors found that IC can boost organizational performance through

knowledge, experiences, skills of employees and also by defining new methods

of task performance and being innovative in their processes.

1.Overview

In many developing and developed countries, the agricultural sector is a critical

economic sector of livelihood (Mahul, 2011).

Normally, agricultural producers are often vulnerable to the effects of adverse natural

events, such as pest's attacks, various natural disasters, and unfavorable weather

conditions (drought, hail, flood, heat, storm, hot wind, sparrow attack). In fact, these

conditions have significant negative impacts of agricultural production.

Therefore, governments through agricultural insurance companies, provide assistance

to agricultural producers who successfully develop risk management and adaptation

strategies to survive these unfavorable events. Actually, these conditions have significant

negative impacts of agricultural production.

Utilization of insurance service in agricultural activities can psychologically,

economically, and socially improve the lives of farmers. Undoubtedly, farmers lacking

security cannot actively participate in programs for boosting production. Even

attractions of investments in agricultural production activities would face difficulties in

the absence of security (Rahmani Karchegani, 2002).

2. Importance of Insurance in Agricultural Sector

-Although, in the some industrial countries, agricultural insurance services have been

offered for more than a century, this kind of insurance services remains under serviced

in middle- and low-income countries.

However, since the late 1990s, reduced government funding for agricultural

producers in emerging markets have heralded renewed interest in agricultural

insurance. A recent study conducted by the World Bank has revealed that various

agricultural insurance schemes are in place in more than 100 countries, either as well-

developed programs or pilots (Mahul and Stutley, 2010).

In a similar vein, and as part of an overall agricultural risk management framework,

the global financial network supports the development of agricultural insurance

schemes. In these schemes, middle- and low-income countries are also assisted with

institutional and capacity-building support needed to design and implement traditional

and innovative agricultural crops and livestock insurance products. The World Bank

also plays a role in forming agricultural insurance pools. In a generalist sense, these

projects are usually linked to supportive efforts in agricultural extension and financing

(Mahul and Stutley, 2010).

2. Continued

Mahul (2011) argues that the potential role of agriculture insurance in emerging

economy is being revisited due to the notable expansion of agricultural risk modeling

techniques and the materialization of a number of insurance corporations and index-

based insurance. It was thus suggested that innovativeness to insurance of agricultural

products may lessen economic returns to farmers, herders, agricultural financing

institutions, and governments as the case of unfavorable natural events. This may be

particularly true for developing countries, which rely heavily on their agricultural

sectors.

However, Roberts (2013) posited that the management of insurance companies, as well

as business firms, has several developmental stages. These include market

identification; service's development; marketing; setting indemnity and premium

levels; collecting premiums; and handling claims. However, the extent of involvement of

the public sector varies from country to country. Roberts (2013), furthers that it always

has a role, even if this is exercised mainly through setting supportive and regulatory

policies. It may be particularly important in the early stages to developing of

agricultural insurance sector, and in situations where financial support is considered

both desirable and possible.

2. Continued

Agricultural insurance is an area of insurance that is technically demanding. One of

the many challenges in the insurance industry are maintaining the skills and expertise

at the underwriter, loss adjuster, and reinsure levels, not only to provide adequate levels

of insurance, but also to assist the agriculture industry improve its risk-management

practices to enhance production.

In fact, in insurance companies, employees as human resources play an important

role in building competitive advantage to sustainable of the their firms. For instance,

the insured trend is constantly dynamic, changing as lifestyle changes. Once changes in

insurance patterns are identified, the onus lies on employees to develop new services

that match the expectation of consumers.

In such situations, knowledgeable employees rise to the occasion with creative and

innovative ideas to meet the desires of consumers. As a result, the introduction of

technical, customized insurance services in the market may see to a firm gaining

competitive advantage over its contemporaries and competitors. Agreeably, such

company tends to eventually occupy a greater market share in the insurance industry..

2. Continued

Skandia a Swedish insurance company, was the first company that provided a complete report

on IC in insurance industry.

In Skandia’s annual report, IC has been defined as the possession of knowledge, applied

experiences, organizational technology, customer relationships and professional skills. This

insurance company divided IC into two components of human and structural capital. Human

capital is not a form of property that can be owned by an enterprise. Its value is attributed to

employee training, know-how, and competencies.

On the other hand, structural capital is broken down into customer capital and organizational

capital and remains in the possession of enterprise, even after employees have gone home at the

end of the day (Edvinsson, 1997). Based on Skandia’s experience, the scholars categorized IC

into three basic insights used in further implementation of IC term as follows:

The IC report of Skandia in 1997 was the first empirical analysis on the relationship between IC

and firm performance in insurance industry. This type of report provided a more systematic

description of the company’s ability and potential to transform IC into financial capital.

3. IC and Innovation in Insurance Sector

4.Definition and Importance of Intellectual Capital

IC

Component

Definition

Human

Capital

-Is the knowledge, skills, experiences and abilities that employees take with them when they leave

their firm. Some of this knowledge is unique to individual, some may be generic. Examples are

innovation capacity, creativity, know-how and previous experience, teamwork capacity, employee

flexibility, tolerance for ambiguity motivation, satisfaction, learning capacity, loyalty, formal training

and education (Meritum, 2002).

Structural

Capital

-Is the knowledge that stays within the firm at the end of the working day. It comprises the

organizational routines, procedures, systems, cultures, databases, etc. Examples are organizational

flexibility, a documentation service, the existence of a knowledge centre, the general use of

Information Technologies, organizational learning capacity, etc. Some of them may be legally

protected and become Intellectual Property Rights, legally owned by the firm under separate title

(Meritum, 2002).

Relational

Capital

-Is all resources linked to the external relationships of the firm, with customer, suppliers or R&D and

partners. It comprises that part of Human and Structural Capital involved with the companies

relations with stakeholders investors, creditors, customers, suppliers, etc., plus the perceptions that

they hold about the company. Examples of this component are image, customers loyalty, customer

satisfaction, links with suppliers, commercial power, negotiating capacity with financial entities,

environmental activities (Meritum, 2002).

Spiritual

Capital

-Is tacit knowledge, faith, belief and emotion embedded in the minds and hearts of individuals

within organizational employees that to the overall impact on performance of the firms (Ismail,

2005b).

Table 1: Definition of IC Components

5. Definition and Importance of Innovation

Innovation

Dimensions

Definition

Process

Innovation- Is the introduction of a new or significantly improved production.

Service

Innovation,- Is the introduction of a goods or service that is new or substantially

improved.

Marketing

Innovation,- Is the implementation of new marketing methods and introducing

significant changes in product design, packaging, product promotion and

pricing.

Organizational

Innovation- Is the creation or alteration of business practices, workplace organization

and external relations.

Table 2: Definition of Innovation Dimensions

Source: OECD (2010)

According to Edvinsson et al. (2004), the stage where “Knowledge” has been

known as assets already has interred to next stage, which is called

“Innovation” stage (Figure 1).

Nowadays, innovation has emerged as the newest generation of assets in

organizations, which recognized as vital driver of economic growth and

normally enables the organizations to offer better quality products and

services at lower prices as competitive advantage of firms (Edvinsson et al.,

2004) .

5. Definition and Importance of Innovation

VI Future as the Asset

IV Customer as the Asset

II Project as the Asset

I Product as the Asset

V Knowledge as the Asset

III Enterprise as the AssetB

A

Figure 1: Six Generation Emerged of Asset (Edvinsson et al., 2004)

6. Relationship between IC and Innovation

-Knowledge often defined in terms of IC is the source of new economic wealth.

Innovation is the process by which that wealth is converted into action, products, services, or

initiatives. Although activities can be based at the level of the group, function, enterprise, or nation,

ultimately real value is in what flows between the borders, creating collaborative advantage (Amidon,

2003b).

Roos et al. (1997), Edvinsson et al. (2004), and Zerenler et al. (2008), stated that the importance of

innovation and renewal in their IC framework.

Amidon (2003b), in her book “The Innovation Superhighway”, presented a revolutionary view of

innovation as nothing more than developing good ideas and implementing them to realize their value.

The author forwarded this vision to define the global imperatives contributing to a new world order

based on IC.

Based on the literature above, numerous studies have been reported on the relationship between

innovation and firm performance, and today, most innovation scholars seem to agree that innovation is

a powerful explanatory factor behind differences in performance among firms (Fagerberg et al., 2012).

Nevertheless, research on the relationship between innovation and firms’ financial performance has

traditionally focused primarily on innovations related to the development production and marketing

of goods, while the effects of innovations related to services have been given less attention (Aas and

Pedersen, 2011).

The research literature argues that the firm-level effects of service innovation are different from

those of other types of innovation. For example, service innovation effects have a more qualitative

nature, and for this reason, are less tangible than the effects of other innovation efforts (Aas and

Pedersen, 2011).

For example, the scholars suggested that service innovation typically transforms the state of the

customers and results in customer satisfaction and loyalty, rather than short term financial

performance. It has also been argued that due to the nature of services (intangibility, heterogeneity),

the impact of service innovations is harder to trace than in manufacturing.

In this order, Brown (2009) focused upon the characteristics of IC that foster and develop innovation

in both manufacturing and service sectors. The study covered the presence of organizational and

individual HC and the availability of organizational networking systems (Table 3).

The results indicate that there are different impacts of IC on innovation in the contexts of

manufacturing and service sectors

6. Continued

Driver of

Performance

IC

Component

Observed

Variables

Latent

Variables

Intellectual

Capital

Human

Capital

Knowledge that stays with employees,

Skills, Experience, Ability

- Cross functional

or team working

-Human Capital

Structural

Capital

Knowledge that stays with the firm

Routines, Processes, Culture, Datasets,

R&D

-Management

control of process

-Innovation process

Relational

Capital

Knowledge derived from networks

Resources linked to external

relationships customers, Suppliers,

Partners

-Extent of

networking

Innovation

Physical

Services

Tangible products and networks (e.g.

telecommunications and energy)

-Efficiency of

the innovation

process

-Effectiveness

(%revenue from

new products)

Human

Services

Social and individual wellbeing

(supported by technology)

Information

Services

Mass communications, Infomediaries,

(specialized knowledge providers)

Source: Brown (2009)

Table 3: Matrix of IC Components and Innovation in Service Sectors

Based on the results of Brown’s model (Figure 2) in the service sector, processes

(SC) have no impact on innovation efficiency despite the strong link with effective

revenue share. Team working (HC) has a strong direct relationship to innovation

efficiency and a weak relationship in the innovation process.

- Besides, HC is a key “individual” factor, which mediates innovation efficiency

through team work. While, direct influences of networking (RC) on performance

is negligible, networking does have a strong link to the innovation process in new

service development (Brown, 2009).

- Effective team work is associated with better organizational performance,

especially with creative and innovative ideas (Tidd et al., 2005). Arguably, two

different types of attitude can be linked to the different skills and knowledge types

6. Continued

Innovation Efficiency

Innovation Performance

Relational Capital

Human Capital

Structural Capital

Team Working

Management Control

Innovation

Process Innovation

Effective

Human Capital

Strong Link

Weak Link

Networking

Figure 2: Relationship between IC and Innovation in Service Sector (Brown, 2009)

Consequently, firms need to think of organization in terms of a series of

collaborative networks, not just a pyramid-shaped organization chart. In other word,

companies need to take a fundamentally different approach to strategic management.

They also need to build in a way to leverage the knowledge of organization’s IC

such as human, structural relationship and SpC, to find new opportunities, explore

new courses and stimulate innovation for their businesses (Adams and Oleksak,

2010).

By realizing and understanding the importance of IC and innovation, companies

can improve their competitive advantage. It shows the importance of relationships

between IC components and innovation and the importance of investment and

management of these capitals in organizations.

Therefore, top managers of the firm should sustain, protect, develop and manage IC

to increase organizational innovation as a creator of competitive advantage for the

company.

6. Continued

7. IC and Innovation in Insurance Companies

Ul-Rehman et al. (2011) stated that in insurance companies, knowledge is in

abundance. Insurance companies are known for being good in creating knowledge and

as knowledge-based acquisition. Although IC is extensively researched in large

organizations, it is yet to be explored in depth in insurance companies. Given the fact

that competitive advantage is becoming critical in knowledge-based economy, an

approach that uses KM and performance to effectively achieve this purpose is

increasingly popular.

More and more companies are trying to explore optimal methods of managing

knowledge-based assets, usually referred to IC as a propose to evaluating their

performance in this regard (Subramaniam and Youndt, 2005).

Customers of these firms, as well as insured, regulators, shareholders, and brokers

are eager to see insurers offer more and new services (or products) that extend

coverage to the economic activities, expand their efforts to improve disaster resilience

and are otherwise proactive about the climate-change threat (Mills, 2009).

The first empirical analysis on the relationship between IC and firm performance,

was in the Skandia report compiled by a Sweden insurance company by Edvinson and

Maleon (1997).

Although their report developed IC term for the first time, but a review of the

available literature shows the lack of studies that mainly focus on the IC among

insurance companies. In the literature review process of this study, it was observed that

just few studies have been undertaken on the evaluation of IC and its comparison

within insurance companies although available studies (Edvinsson, 1997).

These previous studies confirmed that IC influences performance of the insurance

companies (Table 4). According to Amidon (2003b), Edvinsson (2004), and Kong (2010), based

on emerging economic conditions, more recent concerns about the concept of IC have

shifted to analyze what and how various innovative attributes influence firm

performance through IC components, such as human, structural, and relational capital.

7. Continued

Author/s

Year/

Country

Title Findings

Skandia

(1996)

Sweden

-Visualizing IC in Skandia - IC is as hidden assets in the company

Iswati & Anshori

(2007)

Indonesia

-The Influence of Intellectual

Capital to Financial

Performance at Insurance

Companies in Jakarta Stock

Exchange

-IC rests on a potential link between IC on one

hand and corporate performance on the other

hand. Companies will grow up if a growing

number of physical capitals in the same line

with a growing number of IC.

Ak & Öztayşi

(2007)

Turkey

-Performance Measurement of

Insurance Companies By Using

Balance Scorecard and

Analytical Network Process

-Financial perspective is not enough to explain

an insurance company’s performance

Appuhami

(2007)

Thailand

-The Impact of Intellectual

Capital on Investors’ Capital

Gains on Shares: An Empirical

Investigation of Thai Banking,

Finance & Insurance Sector

-IC has a significant positive relationship with

its investors’ capital gains on shares. His

finding indicated enhance the knowledge base

of IC and develop a concept of IC in achieving

competitive advantages in emerging economies

such as Thailand’s.

Table 4: Previous Researches on IC in Insurance Industry

(continued)

Author/s

Year/

Country

Title Findings

Pardede

(2010)

Indonesia

-An Investigate on Effect of

Intellectual Capital on Financial

Performance in the Insurance

Companies listed on the Jakarta

Stock Exchange

-IC influence on Financial Performance in the insurance

companies.

Ul-Rehman

(2011)

Pakistan

Intellectual capital performance

and its impact on financial returns

of companies: An empirical study

from insurance sector of Pakistan

-The results have shown that human capital efficiency

plays a significant role in IC performance of both life

and non life insurance sector. The firm having more

efficient people means having better performance of IC.

Where as a significant and positive relationship was

measured between value added creation and financial

performance.

Alipour

(2012)

Iran

-The effect of intellectual capital on

firm performance: an investigation

of Iran insurance companies

- The findings confirmed that value added intellectual

capital and its components have a significant positive

relationship with companies' profitability. Insurance

companies better to benchmark themselves according to

the IC efficiencies and develop strategies to enhance

their company's performance.

Table 4: continued

An acknowledgement and a critical understanding of IC in insurance companies can

enhance their organizational innovation. This offers them the competitive advantage as

they achieve sustainable economic growth by focusing on IC (or intangible assets) unlike

the traditional approach of merely managing tangible assets.

This is so because IC and innovativeness are perceived and have known as sources of

competitive advantage for insurance companies. Therefore, this study has examined the

influence of IC not only on financial and/or non-financial of the firm performance, but

also on overall firm performance through mediating role of innovation.

On the other hand, Edvinsson et al. (2004), Roos et al. (2010), and Zerenler et al. (2008)

stressed the importance of innovation, renewal or development in their IC framework.

Further, according to resource-based view, determining the relationship between IC

and innovation activities among managers and employees can be one of the steps to

reveal the importance of HRM (Jinchveladze et al., 2009), strategic management (Marr and

Roos, 2005), knowledge management (Wiig, 1997), and accounting management

(Mouritsen et al., 2001) in enterprises.

7. Continued

Zerenler et al. (2008) investigated the impact of IC on innovation and confirmed that three

components of IC, human, structural, and customer capital have a significant positive

relationship with performance of innovation.

Moreover, they noticed that among these IC components, RC (or customer capital) has

the greatest impact on innovation in Turkish automotive supplier industry.

By realizing and understanding the importance of IC and innovation, insurance

companies can improve their competitive advantage. It shows the potential importance of

relationship between IC and innovation, and the importance of investment and

management of this capital, specifically in the insurance industry.

Therefore, the top management within the firm should protect, develop and manage IC to

increase organizational innovation as a creator of competitive advantage to the company

(Amidon, 2003b).

7. Continued

8. Conclusion

Firm performance is an obvious indicator of a firm’s success within insurance industry.

It is influenced by many factors such as diversity of insurance services, policies and

strategic planning, and human resource management practices, structure of

organizational resources and size of insurance companies.

Therefore, management of insurance companies should carefully monitor, measure,

report and manage firm performance based on quality of insurance services as their

nature of business (Houthoofd et al., 2010).

Karanja (2011) suggested that in order to improve the firm’s profit, it must be capable

of offering products and services with high quality at low cost in competitive

environment.

Many companies have responded to these competitive demands by implementing

advanced manufacturing technologies, innovative managerial practices, and emphasizing

quality, service delivery and being flexible to meet the stakeholder needs (Iazzolino et al.,

2013).

In this perspective, the structures of organizational resources have shifted from

material to intangible assets during the last two decades(Olalla, 1999; O'Regan,

2000;Moeller, 2009 ;Kaplan, 2010;Marr, 2005).

Accordingly, many proponents assert that the “Product-based Economy” and “Retail

Economy” have been converted to the “Knowledge-based Economy” (Alcaniz et al., 2011;

Cambra-Fierro et al., 2011; Canibano et al., 2000; Fagerberg et al., 2012; Huang and Kung,

2011; Jalali et al., 2013; Nonaka et al., 1996).

The authors claimed that “Knowledge” and IC are two vital intangible assets that help

organizations create value and wealth in this “Knowledge-based Economy” (Augier and

Teece, 2005; Marr, 2005a) and recently, have stated that IC is more and more recognized

as a cause of firm performance, which stand for “value creation” potential of Human

Capital, Relational Capital and Structural Capital and their interactions (Abhayawansa

and Guthrie, 2014).

Thus, with knowledge critical to the network society, information technology and

innovation and creativity, IC has become a vital source of value creation for

organizations and economics situations.

Besides, IC is a highly discussed topic within the field of knowledge management.

Edvinsson and Sullivan (1996) stated that knowledge firms derive their profits from

innovation and knowledge-intensive services, and such firms are called high IC firms.

8. Continued

Rosenbusch et al. (2011) believed that insurance companies same as software companies,

banking, and hotels, is an example of high IC firms. In comparison, low IC firms do not

invest highly in IC and do not apply knowledge properly, knowledge, structures and

relationships could not be used, in such firms as drivers to create value added (Sofian et

al., 2004).

In line with its importance, Usoff et al. (2002) suggested that firms with high IC are

more likely to use performance measures for the determination of a manager’s

compensation. Thus, insurance companies must develop services that capture IC and

change their traditional performance measurement system in order to achieve long-term

success.

In addition, IC scholars emphasized that IC is an important factors for knowledge

creation and innovation (Edvinsson et al., 2004). Knowledge and innovation have been

known as two drivers of competitive advantage for increasing organizational

performance (Aas and Pedersen, 2011; Amidon, 1997, 2003a; Andriessen, 2004; Bontis,

2002; Brown, 2009; Chan, 2009; Ismail, 2005; Kramer et al., 2011; Marr, 2005a; Tayles et al.,

2007). Human resource scholars also noted that IC leads to innovative creation, which in

turns plays a significant role in influencing firm performance (Santoso, 2012; Sharabati et

al., 2010; Spahić and Huruz, 2012; Wang and Wang, 2012; Wiig, 1997).

8. Continued

Furthere, at the beginning of the third Millennium, innovation is not only the source

of competitive advantage, but will also play a significant role in the next wave of

influence which is known as “collaborative advantage” (Amidon, 2003b). Furtheremor,

Rose et al. (2009) noted that innovation has been recognized as an important driver of

economic growth, and it enables firms to offer new products and services with better-

quality at a lower price. Edvinsson (2004), Kramer (2011) and Vincent et al. (2005)

emphasized that being innovative is necessary for a firm to create a sustainable

competitive advantage in today’s turbulent environment.

Therefore, organizations which do not have any plans to discover and manage their

IC will face unwanted consequences (Augier and Teece, 2005) .

Based on the multidisciplinary literature review of IC, Alcaniz et al. (2011) and Marr

(2005b) concluded that IC concept has emerged from the work of various scholars

with different perspectives such as Economic, Strategic, Accounting, Finance,

Reporting, Marketing, Human Resources, Information System, and Legal. Thus, as IC

and innovation are two crucial and vital resources to increase firm performance

(Brown, 2009; Zschockelt, 2009), companies must disclose and manage them well.

8. Continued

In light of the above discussion, this paper highlighted the IC components which

include Human Capital, Structural Capital, and Relational Capital, that foster four

dimensions of innovation include; Process Innovation, Service Innovation, Marketing

Innovation, and Organizational Innovation in insurance companies in order to improve

firm performance.

This is a pioneer paper focusing on the influence of innovation and IC on firm

performance among agricultural insurance sector.

8. Continued

Terima Kasih

Thank You Very Much

1.11.2014

The End of Presentation