Insurance Article, The Insurance Times 2021, The Insurance Times December 2021

Product Innovation in Insurance: The Digital Dividend

Introduction:

“There is one thing stronger than all the armies in the world, and that is an idea whose time has come.”

Victor Hugo’s words resonate well with the roadmap of products and their launches in the Insurance landscape today. The volatile and uncertain world within which companies operate today is ridden with challenges. In order to stay relevant, competitive, and defend market share, companies today have to ride the turbulent waves of fickle customer loyalty, disruptions in traditional operating models, and ever-changing technology trends in the rough seas of business.

Companies therefore have to continuously redefine their business models and innovate. While the dictionary meaning of innovation is simple – process of finding and implementing a new method, product, or idea – the act of innovating is rather complicated. If the new idea or product fails to enhance the competitive advantage or the effectiveness of the company, it only serves as a hole in the ship of the business which can sink the enterprise. The new service or product also needs to meet the regulatory norms of the industry and ensure that it does not expose the company to unnecessary risks. For its own incubation the new product needs a supportive environment, management of inherent risk of failure, and an ecosystem that is willing to take risks and persevere. This makes the journey of an idea, from conception to fulfilment, a cycle that is not only lengthy but also complex. This is precisely why most companies continue to follow traditional methods that are heavily documented and protected fiercely like a stone walled fortress.

Innovation infuses fresh air into organizations helping them realise gains beyond imagination. This changes companies from a brick and mortar fortress into a living and breathing structure that is continually evolving. Only when organizations exude such a structure do they really begin to progress and maintain their competitive edge.

Insurance Product Innovation Background:

Innovation in product development is not an alien concept for insurance companies. From its origin somewhere in 1750 BC when the first maritime loss limitation loan was documented in the Code of Hammurabi to the modern day, insurance has indeed come a long way. Over the centuries and decades, the concept of insurance has evolved to encompass broader geographic coverage areas, newer verticals and products within these as the need and consumer preference surfaced. The most documented peril, the Great Fire of 1666 that devastated central London, brought forth a new product – the world’s first property insurance. Fire Insurance for houses became available and standardized only after Benjamin Franklin set up his company to provide fire coverage. This was in response to the Fire of 1730 which ravaged much of the Fishbourn’s Wharf in Philadelphia (USA). Franklin was hailed as the “Father of American Insurance” but the ease of providing insurance was a complex process. Houses needed to conform to certain design standards before they were accepted for insurance and this process entailed many man-hours where surveyors actually visited those houses.

Similarly, the need to divvy up money among the heirs of a deceased brought forth the first life insurance policy. Edmund Halley produced the first “life table” in 1693 but it was much later that statistics, mortality tables and actuarial science was used to establish the method for modern day life insurance. Accident insurance too was a product introduced in 1848 to respond to a need for insurance by the fledgling railway system where fatalities were on a rising trend.

All the above examples and product introductions highlight the backdrop against which new product innovation took place in insurance in the past. Need and not efficiency spurred the introduction of a product. Demand and not creation of an undiscovered market drove all insurance activity.

Insurance Product Innovation in India – The Current Scenario:

The Insurance landscape in India can be divided into two eras. The pre-2014 era had particularly low insurance penetration in India and products were sold through traditional brokers. As a field, the common man understood very little of insurance. The primary uptake for insurance products was limited to Life Insurance which was taken up as an annual tax saving instrument or Motor Insurance because it was mandated by law. All other products were taken up only if the dire need for them arose.

Post-2014, upon the further raising of FDI limits from 26% to 49%, the insurance landscape has seen a slew of measures that are all designed to improve the pace of product innovation. In this new phase specific innovative products have been developed and become available in the insurance market.

Today, insurance exists in all verticals viz. Motor, Health, Travel, Accident, Life, General, and many more. Innovation in Product Development is present in most verticals although the pace of innovation varies in each of them. There has been a tectonic shift in the way insurance now operates in the market. Distribution channels have multiplied, customer touch points have radically moved beyond just policy issuance and settlement to interim handholding by the insurer, and legacy systems are being replaced. Consumers are slowly changing their perception of Insurance and the uptake of products is slowly but surely increasing. Insurance is now not just a safety net perceived by consumers as the fall back option for hazards and perils, but also now as a partner to achieving financial independence and peace of mind.

On their part, the once slow to change insurance industry is also now becoming nimble and swift to respond to external changes. For example in India, the Real Estate Regulation and Development Act (RERA) passed in 2016 mandated the purchase of title insurance for all development projects. This led to insurers launching the Title Insurance Policy. The more recent Covid-19 contagion has also led to a spate of launches to provide cover to this disease.

The current ecosystem shift has also led to many insurers jumping onto the Platform bandwagon. The digital world has meant that there is a proliferation of tools, cloud, data and networks which can be leveraged to quickly achieve scale. Whilst earlier scaling up or ramping up a successful product innovation could take many years, now insurers are accessing various data tools and technologies quickly through Application Program Interfaces (APIs). Access to these insurance platforms built by technology providers is allowing insurer’s to accelerate product innovations at a relatively low cost.

In fact, this is also changing the way insurance is now sold. Earlier only tie-ups, brokers, agents, the insurer website were chief selling points where consumers could reach out for a purchase. Today insurers are partnering with digital giants that have built platforms and also investing in their own platform which then serves as a point of sale place. For example, a successful start-up in North Americaprovides Property and Casualty insurance for homeowners and renters. It set up shop just a few years back using digital technologies and this is how it changed the P&C insurance world into a simple, easy to understand product loved by millennials. After its launch it introduced its own API to other websites allowing real estate developers, ecommerce and other sites to sell its insurance as a cover for their own products as well. This greatly accelerated the pace of product innovation for this company.

Thus, the entire insurance industry today is now poised for innovation and growth with the help of new age technologies.

The Innovation Matrix and Innovator’s Dilemma:

Strategic Management has been a long told story about meeting company goals through a well thought through strategy. However, goals may be set but cannot be cast in stone in the face of a changing reality. This is where emergent strategy comes into play. Henry Mintzberg, the well-known Canadian author and management strategist, postulates that on the continuum of time, an emergent strategy that is always adjusting and evolving as per the changes in the environment works best. For companies that innovate, keeping abreast with such changes while they introduce new products and explore new markets is important to ensure that the risk-reward ratio is maximized.

The Ansoff matrix postulated by the famous mathematician Igor Ansoff, maps Markets (existing and new) against Products (existing and new). This matrix is often used to develop strategies around market penetration and product development. In the digital world that we inhabit today, product innovation is primarily of four types across a matrix that maps markets against technology. Most of the innovation in this digital world is incremental where it occurs within existing markets using the existing products. In this case, improvements are made to these products over time. However this is not the most rewarding innovation since any ‘Black Swan’ or high impact but sudden events can overturn the benefits that may accrue making all these products redundant.

Using new technology but still operating in existing markets, the disruptive innovation is born. This type of innovation brings new products that may build a niche in the beginning within an existing market. Often lead players in an industry may neglect certain segments of the market in their quest for bettering their own bouquet of products. Slowly, the disruptive innovation can even steal away a major chunk of the market share from the bigger and more established company since it can deliver a newer product that serves a better purpose. This is the Innovator’s Dilemma detailed in the book by Harvard Business School Professor Clayton Christensen (Book Title – The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail). Insurance companies using technology to disrupt the market are InsurTech companies that are slowly gaining a foothold and expanding their market share.

Architectural Innovation (using existing technology in new markets) and Radical innovation (using new technology in new markets) are other types of innovation.  A January 2019 report titled ‘The Future of Insurance, Vision: The Digital Insurance Strategy Playbook’, by Forrester Research suggests that the aim of insurance companies in the digital world should be to increase efficiency and reduce costs in order to drive business growth and defend market share.

However, in the current technological shift where consumer demographics are changing, channels of distribution are increasing, and the consumer interaction touch point multiplicity abound, Adjacent Innovation is perhaps the best way forward for insurance companies. Adjacent Innovation focuses on leveraging expertise in one area and applying that knowledge in another area to create a breakthrough and winning outcome or product. This type of innovation is often easier to implement and skewed in the favor of success since it carries a lower risk of failure.

The Need for Faster Product innovation in Insurance today:

Today the Insurance landscape has changed. The Fourth Industrial Age is upon us and New technologies like Robotics, Artificial Intelligence, Machine Learning, Internet of Things, 3D Printing, Biotechnology and the like are fusing together to create a New World. This has changed the face of the customer from being just a Policy Number residing in the Insurance portfolio of insurers to a living, demanding and dynamic consumer of products. This consumer enjoys the luxury of high end technologies and the power of information just with a right swipe of his or her smartphone. This has naturally led to a more informed and conscious consumer who will most easily travel into the books of another competitor to save money, get better or faster service, and often also to find a better product that is bespoke rather than mass marketed.

A faster pace of Innovation and New Product Development &Introduction is therefore a strategy and the new normal any company that needs to protect its portfolio book. Innovation today is not just the result of a direct market need but also the desire to provide higher levels of service efficiency while also tapping the customer’s hidden and indirect requirement for personalized attention. As an example car insurance recently saw a new product innovation. Pay-as-you-go car insurance created a market in a vacuum where people who used cars sparingly and would often not insure them due to their very short and infrequent car usage. The winning combination of technology innovation using telematics coupled with a tailor made insurance product brought forth a need that can now be serviced while also resulting in higher compliance to the law of the land. Similarly, car insurance for those who are planning a new vehicle or those who have multiple cars but drive only one car at a time also are areas where companies are creating products for markets that did not even exist.

Many will argue that insurance, being a highly regulated sector requiring large balance sheets and investment, often works within a framework that is conservative.  Since the buyer of the insurance (insured) is typically risk averse and in many countries dependant on brokers, insurance as an industry is slow to change. Products have been introduced only when they have cleared the dual hurdle of regulatory approval and acceptance from the insured. This naturally has taken time. However, in the VUCA world (volatile, uncertain, complex, and ambiguous) that we live in today, traditional insurance can no more operate with arcane models, unwanted products and legacy data. The need of the hour for all modern day Insurance Companies is a faster pace of introduction of innovative and transformative products. This pace is dictated by changing customer preferences, changing economic microcosm, the availability of cutting edge technology and the digital tailwind in the wings of every insurer.

Risks and Challenges ofInsurance Innovation:

Macroeconomic headwinds often stall the efforts of a company in its endeavours to go global with new product innovation. In the recent past, many economic crises have threatened to derail business operations of insurers. Challenges emanating from the 2008 economic downturn with the accompanying credit crunch caused the insurance industry to contract as sub-normal growth rates in the economy dogged the world. The industry already reeling under losses faced the additional whiplash of natural catastrophes with 2011 becoming the costliest year in terms of catastrophe related losses. In the year 2011 alone, the Nat-Cat losses were pegged at $ 386 billion. What made this year a study in itself was the fact that almost 70% of this loss was concentrated in the Asia region (floods in Thailand, earthquakes in Japan and New Zealand, and tsunami in Japan). In the US region, the insured losses were at a much higher number than before – $ 35 billion – stemming from Hurricane Irene, Tropical Storm Lee, and a damaging wildfire in Texas.

Cyber threats and sensitive insurer data breaches, trade wars, geopolitical risks and more can wreck damage on the insurance industry accounting books. A Swiss Re report titled ‘Global Economic and Insurance Market Outlook 2020/2021’ and published on November 13th 2019 published an uninspiring prognosis. With a likelihood of recession in US for 2020 at 35%, and weak leading indicators like PMI, the report forecast a flat combined ratio for the global insurance industry with outlook parameter marked at “Cautious”. The report further predicted that for 2020/21 the number one risk for the insurance industry was trade war risk. However no clairvoyant or crystal ball gazer could have forecast that the real risk for the insurance industry in 2020/21 was the outbreak of the Covid-19 pandemic.

A natural corollary of such an outbreak such as the highly contagious Covid-19 is the onset of a declining interest rate regime. A cut in interest rates usually happens in periods of ensuing economic downturns because the governments try to deter people from hoarding cash and try to incentivise purchases and loans. Therefore interest rates are cut. However negative or low interest rates pose a problem to insurers, especially life insurers who offer endowment or fixed interest rate policies. Due to mismatch or imperfect pairing of asset-liabilities, such insurers suffer a long duration gap. In Germany, insurers today face a duration gap exceeding ten years. In a declining interest rate environment the value of assets goes down while the liabilities stay same. This causes a mismatch and threatens to cause serious solvency issues for the company. In such scenarios, in the downturn, innovation from insurance companies suffers.

Insurance policies that are typically long tailed liability businesses such as Occupational disease claims (asbestos factory workers, environmental pollution exposed staff), medical malpractice claims, discrimination claims and the like are particularly sensitive to long term risks. These are areas where claims can come in many years after the policy has lapsed. In such areas innovation is often absent or negligible. In fact, these areas are the ones that especially need product innovation.

All innovation that happens in a company needs sponsorship and a champion. The internal champions are responsible in not only providing a supportive atmosphere but also in bridging the divide in the organization. Insurance companies have been reticent and fallen behind in the adoption of new disruptive technologies in the past. The primary roadblock cited has been the lack of interest in many parts of the insurance organization to embrace new technology. The fact that innovation budgets are constrained with allocation of scarce resources skewed towards existing products, and legacy systems that are complex, innovation is the likely sufferer in most companies.

However, with the consumers themselves now being cheerleaders and adopters of technology, insurers are left with little choice if they are to stay profitable. Of late, the insurance landscape has seen the mushrooming of InsurTechs that have adeptly married the benefits of Digital and the deep expertise in certain areas to create winning new product propositions for the consumer.

Data privacy has also been a much cited risk due to which many insurers fall behind in the race to innovation despite the falling costs of cutting edge technology. Data being the new oil, with proper usage and analytical modelling, has the potential to reduce insurance costs and create efficiencies in markets. However, the moot question at stake is whether the data is being harnessed intelligently. Public debate around how this private and individual policyholder data is being leveraged has been growing. That the personalization and customization of many policies translates into the intrusive and unfair use of data is something that many data protection groups are lobbying against.

A paper titled ‘Big Data and Insurance: Implications for Innovation, Competition and Privacy’ released by The Geneva Association (a leading international insurance think tank) in March 2018 highlighted some of these risks. The paper delved into the trade-offs of ushering in an era of Insurance using the digital technologies versus the risks that these technologies brought forth. Personalization of policies may bring to the fore unfair and discriminatory practices when dealing with the profiling of consumers and treating them differently if their risk is greater than the average. The granular assessment of premiums based on individual scoring as opposed to group scoring could bring a non-inclusiveness because the high risk individuals may not have the ability to pay the higher premium. Many of the cited risks due to use of digital and the roadblocks including regulatory oversee may stymie many of the innovations in pipeline. However, it must be argued that with innovation comes the freedom for the end consumer to choose a better product, and for the organization an opportunity to reduce frauds, increase channel efficiencies and reduce premiums for low risk groups or the good consumers.

Adjudging Market Readiness for New Product Innovation:

Innovation in Product Development is primarily done to defend market share and help a company meet its revenue targets over time. If there was no monetary gain from the new product, the need to innovate would hardly be there. It is therefore important to continually disrupt the business model and keep innovating. Fail fast is a term oft used for a new trial and error experiment. This applies to innovation also. If there is an idea that is feasible and achievable, following through with the idea is worthwhile.

However, it is imperative to judge and calculate the market size of the opportunity that the product innovation brings. This by itself is no easy task. Just a couple years back, a leading global reinsurance company was trying to underwrite a new kind of insurance – epidemic insurance. This cover was to indemnify the losses a company faced due to an epidemic. While so far traditional insurance had a cover available for business interruption due to damage, a non-damage business interruption due to an epidemic was something no one had envisaged. This was an innovative approach and product however there was no significant market for it, until of course Covid-19 happened. Similarly, many data companies were developing pandemic models or infectious disease models which could be used by insurers to provide cover against financial losses stemming from a contagion. These were innovative products but not needed because no one felt such a dire emergency would ever occur. However, the situation did occur. This pandemic is testimony to the fact that insurance innovation is required but the product does have a risk of a not so successful launch if the market is not judged or is not ready for the product.

Benefits of Innovation and the Digital Dividend:

New Digital technologies have brought analytics, cloud, smart wearables, artificial intelligence, Internet of Things, Telematics, and more to spur Innovation in Insurance. The Digital Dividend is a tailwind that has the propensity to lift the Insurance Innovation vehicle and transport it to a more profitable destination in a similar way as a tailwind works in aviation.

A study of European Insurers’ digital maturity by DXC technology conducted with IDC in July 2018 showed that only 36% of the surveyed insurers had implemented a digital strategy and only 22% were part of an ecosystem so that they could provide additional services to their consumers. In India, that statistic is even lower. This clearly shows that the adoption of digital technologies has been slow and needs to accelerate.

Wearables, AI enabled wearables, Robotic Adjusters, RPA (Robotic Process Automation), Drones, Block chain, IoT (Internet of Things), Advanced Analytical Algorithms and more are all digital technologies that are poised to power up innovation in insurance product development. Whereas earlier insurers were available only for limited times to the customer, today chatbots and NLP (Natural Language Processing) have brought insurers to the smartphones of customers. Queries can be answered round the clock and claim logging with pictures of the damage has become easy with the aid of technology enabled insurer platforms. Geospatial and location tracking through telematics has enabled insurers to roll out innovative products in car insurance. Block chain supports greater transparency and allows for faster claim settlement and policy surrender for instance in travel insurance where automated disintermediated claims processing is now possible. IoT enabled wearables have made tracking of customer habits easy helping reduce the cost of health insurance premiums.

Through the use of data from other “non-traditional” third party sources as well as the legacy system data combining the unstructured data with the structured data, insurers are better poised for the construct of advanced analytical algorithms that help in a myriad of consumer lifecycle elements. Faster underwriting, policy pricing, to seamless claims settlement, insurers are now able to tackle consumer requirements more effectively. Using social scoring, insurance companies are now gathering consumer data from forums like LinkedIn, Facebook, Instagram, and Twittercombining it with online transaction history to create winning propositions for customers who are giving their consent to share data.

An example of adjacent innovation in India is the use of Artificial Intelligence (AI) and image analytics to create a better customer experience. In India, automated claims settlement, AI is being used for image processing of damaged vehicles in auto insurance. The damage assessment, cost assessment, and claim settlement process now just takes minutes enhancing the customer experience. Similarly, annuity payment for older members by several insurers earlier required submission of Life Certificate in a branch. The use of AI to process photographs sent online to decide if the policyholder is alive has now obviated the need for such a branch visit thereby enhancing customer experience.

InsurTech is creating a number of innovative products leveraging the new-age technologies and analytics. The simplification of insurance products, creation of bite sized sachet insurance covers for the consumers who cannot afford large premiums, and consumer segmentation to ensure that good customers do not subsidize the insurance for bad or high risk customers lends to innovation at the intersection of technology and the need of the hour. With the proliferation of smartphones, protecting them is a cover that is not offered by many companies. Insurance start-upshave innovative covers for smartphones that not only covers the damage but also in many cases offers pickup and drop service for the phone repair at a nominal premium. This innovation is especially useful for millennials or Gen Y generation for whom a smartphone is an imperative must-have.

Insurance start-ups are also partnering with other service providers to provide cover for areas that lead providers often do not have coverage for. From bags, delayed flights, cyber fraud, malaria, dengue, cycle theft, gym injury, pet insurance to even the innovative home content only insurance, the new age insurers are covering all consumer needs big and small. The premiums charged are often very small. For example a leading taxicab company has partnered with an InsurTech on intra-city transfers for covering a missed flight due to traffic delays when consumers use the app-based taxi-cab service. In many cases the start-up insurer sells the insurance through its many partnership networks but eventually the insurance is underwritten by large players.

The bite-sized insurance premiums are nothing to be scoffed at. Many InsurTech companies have impressive Gross Written Premium (GWP) with a large number of customers on-board within just a few years of operation. The reason many of the innovative covers provided by these start-ups is succeeding is because these new age companies have leveraged technology to push products. Transparency, trust, simplified insurance, easy claim processing are some of the professed hallmarks of the new age companies which have helped change the perception of insurance among millennials. The perception that insurance was complicated and involved a lot of tedious paperwork is fast being replaced by the easy access and processes of these app-enabled technology InsurTech companies.

Insurance Product Innovation – the India example with IRDA as a Partner

In India, the insurance market is likely to reach the 280 billion USD thresholds by 2020 as per the Indian Brand Equity Foundation (IBEF).  Insurance Innovation is thriving due to IRDA (Insurance Regulatory and Development authority of India) partnering with the industry as a champion of Innovation. Significant measures taken by IRDA recently that have hastened innovation are:

  • The Regulatory Sandbox: In order to increase the pace of innovation in companies, on 26th July 2019, IRDA issued a regulatory sandbox approach. The motive for this approach was to create a conducive and safe environment within the framework of which insurance companies could introduce innovative products. IRDA also published guidelines for the innovative products that could be brought forth within the regulatory sandbox approach. About 173 proposals for innovative products encompassing different areas of insurance were received by IRDA and someof these were approved for introduction and testing. Significant innovative products among these are V-Pay Motor Insurance, Parametric Insurance among many others. Parametric Insurance is particularly innovative in that its coverage is for a pre-decided payment basis the triggering of a certain parameter as opposed to indemnifying against actual loss. It is a boon for crop insurance and the triggering of payment when a key parameter like deficient rainfall below a certain level takes place.
  • Allowing Life Insurance companies that have completed 10 years to launch Initial Public Offerings to raise capital which again brings in innovation due to availability of funds.
  • Insurance products are also covered under the exempt exempt exempt (EEE) method of taxation making them attractive. This is likely to foster a climate of innovation in insurance as newer products can be introduced and qualify for tax exempt status.
  • Helping to increase FDI (foreign direct investment) to 100% for insurance intermediaries like brokers, insurance companies etc. This liberalized FDI is expected to increase best practice sharing and investments in digital leading to a faster pace of innovation.

Launching of the Insurance Repository (2013) that allowed policyholders to buy and keep insurance policies in a dematerialized (electronic) form is another step that fosters innovation. This translates into all policies to be stored together in an electronic account (aka eIA). This allows policyholders a comprehensive oversee of their holding which in turn it is hypothesized will lead to more product innovation since policy management for the holder is now seamless and easy. Policyholders are therefore more likely to take up newer products basis their need.

Conclusion:

Innovation is crucial to all organizations in order to survive the multitude challenges of operating in a volatile and uncertain world. While roadblocks and risks are present in innovation, the pace of innovation needs to be accelerated in Insurance if it is to meet the needs of the consumer and be future-ready. At the centre of all innovation should be the quest to satisfy each consumer and improve consumer experience.

Today, insurance stands at the crossroads of the Fourth Industrial Revolution and can reap the digital dividend if insurers implement a digital strategy. Leveraging Insurance Platforms, Ecosystems and partner networks can bring a scale to all product innovation. Ensuring consumers are a partner by having many interaction touch points that bring not only the product but also increase the ways in which consumers can participate through telematics or connected apps to reduce their premiums is the need of the hour. InsurTech companies are using technology to disrupt the traditional approaches and this is encouraging innovation. Innovation flourishes when a conducive and safe environment that allows for experimentation is available. A strong champion like the regulator, IRDA, is also fostering an ecosystem making innovation the byword for all insurers today.

Despite the macro headwinds of trade wars, falling interest rate regime, and now the COVID-19 contagion, insurers are moving ahead to stay responsive, nimble and agile in bringing new offerings and innovative products that can bring policyholders the peace of mind and financial independence they desire. Arguably, the most important part of innovation is the ability to foresee the future, create and imagine what could bring the most value and then have the grit to implement the new change. The cycle of innovation usually brings all companies to the same place they started from,in the realization that at the core of their transformative journey is their customer – a satisfied policyholder. Improving customer experience is something that will, despite all future innovation and product development by insurers, always remain as the most important metric.

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