Steve Jobs and Innovation in Insurance - Risk Transfer

Introduction

This article will explore the concept of innovation and specifically in the context of the insurance industry.?It will address why innovation is important, how it can happen and provide practical examples in the insurance industry with context.?The need to innovate is driven by consumers (buyers), but both brokers (intermediaries) and underwriters (sellers/risk bearers) must align; they have an equal part to play in product innovation.?The result should be a product which caters for the market and provides a societal benefit in terms of consumer protection.?It also provides the opportunity for brokers and underwriters to increase profitability, which is a key factor in driving innovation.

Why Innovation is Important

The Cambridge Dictionary defines innovation as ‘(the use of) a new idea or method’. Specifically, in a business sense, this innovation must drive profitability.

Insurance is different to some products as it is not tangible and is only realised in the event of a loss. ?Insurance is also a legal or regulatory requirement for some businesses. For Financial Institutions it can be a mechanism of ‘freeing’ cash which is ‘locked’ by the regulator in order to protect client money. ?Insurance also has a societal benefit so some would argue that these initiatives should be supported by governments.

According to a McKinsey survey 84% of businesses said that innovation is an important factor in their growth strategy.

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How to Innovate?

Both the broker and underwriter must be involved in the innovation process.?Compared with some industries, especially in Financial Services, the insurance industry has seen comparatively low innovation rates.?More recent successes include the wide scale adoption of Directors & Officers insurance despite it being invented in the 1920s/1930s and the tailored Investment Management Insurance policy, which meets the specific needs of the asset management industry in terms of the different exposures to investment managers and fund directors & officers.

Most ‘new’ insurance policies have been built from exclusions and policies such as Environmental Impairment Liability insurance, which can cover gradual pollution and clean-up costs have broadened existing covers.?Cyber insurance is now increasingly common, but some industry figures argue that this protection should be blended into existing liability policies and that emerging risks were mispriced causing a re-calibration of rating, thereby potentially affecting consumer confidence.

There are several examples of policies which did not gain traction such as Unauthorised Trading insurance for securities traders, but credit must be given for those who had the drive to build new products with perseverance being key in the innovation process.?Parametric insurance and Insurance Linked Securities are great examples of new ways of thinking about insurance and risk transfer.?We now hear about specific Digital Asset (including Crypto) insurance as well as policies relating to Environmental Social Governance protection.?It is important that these policies cover emerging risks and do not simply broaden out cover that already exists in the market.

There are three broad factors, which must drive the innovation process, with a customer-centric approach always being at the forefront.

1. Always meet the needs of the consumer

This is paramount and cannot be over emphasised.?Only when the product has a genuine need for consumers, and in turn their customers, will innovation succeed.

2. Methodical approach?and investment

Well known approaches now include an agile front-end model and the waterfall method.?Whichever method is used, investment must support this.?Investment does not just mean financial support, but people, senior management buy in, culture, time and consumer support.

3. Technology?

Big data, machine learning and Artificial Intelligence will play a huge role in business.?It will help to understand what consumers want but also how to price risk.

Pricing emerging risks becomes more difficult due to the lack of data and the unknown factors regarding homogeneity, frequency and severity, but technology can help in this endeavour along with real time data.

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Conclusion?

Consumers, brokers, underwriters, sponsors, the government, financiers, venture capitalists and other stakeholders all have a part to play in the innovation process.?

Steve Jobs was once quoted as saying that ‘Innovation is the ability to see change as an opportunity – not as a threat’.?

This sums it up perfectly.

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ABOUT THE AUTHOR

Daniel Lim (IMC, FCII Chartered) is a qualified risk and insurance practitioner with over 15 years experience in the London and International market. He has serviced a number of high profile clients including several notable PLCs but is also passionate about adding value to smaller businesses. He has a keen interest in finance and all topics related to risk management.

Daniel can be contacted on [email protected] or via the LinkedIn URL.

DISCLAIMER?

The contents of this article do not constitute advice in any capacity whatsoever and are provided for general information purposes only.?

There is no responsibility from the author for any information contained within this article.

The author excludes any liability in respect of the contents or for action taken based on this information.

This article does not necessarily reflect the views of an employer (past present or future), or any other institution affiliated with the author.