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By MATT BOLCH, an Atlanta-based writer who covers business, finance, technology and education for several national trade and general business publications

Don't blame the insurance industry if it is considered behind the times in terms of innovation.

The regulatory process forces companies to slow down and provide voluminous documentation to satisfy auditors. "The effect is that it makes companies ponderous and cautious in the way they do things."

In addition to being held back by regulation, the insurance industry generally is focused more on products than on the consumer, added Joe Reifel, a vice president at Chicago-based A.T. Kearney Inc., a global management consulting firm.

But that is beginning to change as the industry takes cues from the consumer products industry, which long has focused on customer needs to bring out innovative products. Think about Procter & Gamble's Swiffer, which opened up the disposable cleaning products category, and you get the idea of a product created to fill a perceived need.

But that doesn't mean the industry has been standing still in the meantime, said Richard Phillips, chair of the Risk Management and Insurance Department at Georgia State University's Robinson College of Business.

Health insurance companies such as Cigna are implementing employee wellness programs, taking a longer-term view of policyholders instead of merely reimbursing claims. Fleet insurers pioneered the use of data on how people drive to understand risks more fully and adjust premiums accordingly, he said. Companies are dressing up what he calls "plain vanilla annuity products" with such bells and whistles as guaranteed returns, floors on returns and minimum death benefits.

Another innovation Phillips has seen is the increased use of quantitative modeling using common metrics to evaluate risk-adjusted returns across product categories. This lets C-level executives make apples-to-apples comparisons of different business units.

Recognizing a lack of innovation in the industry, several companies, including Allstate Insurance Co. and AXA Equitable Life Insurance Co., have created new executive-level positions focused on innovation.

"Companies are looking more seriously around innovation because the insurance industry is flat," said Reifel. He noted that Progressive Casualty Insurance Co. is focusing more on consumer segments as opposed to particular products, and Geico has created innovative distribution models (not to mention some neat advertising to drive consumers to its Web site).

But overall, the insurance industry hasn't progressed as far as the financial services industry has in terms of innovation. Financial services also face the specter of regulation, but greater competition and the rise of ever-larger companies have forced the surviving players to get creative in a fight for market share.

Merrill pointed to Capital One Financial Corp. for daring to try different strategies, quickly ramping up those that prove successful and shutting down those that don't. Capital One Founder and CEO Richard Fairbank said the company motto is "change or die," a prescient nod to the whims of a fickle consumer and increased competition.

"The mindset always has been to develop new products and bring them to market," Merrill said, "but the focus should be on figuring out where the customer is having difficulty getting something done, then develop the idea and pilot it. By testing the idea in the marketplace on a limited basis, a company can figure out what works and iron out the glitches."

And if the banking industry ranks ahead of insurance when it comes to innovation, both industries have a lot of catching up to do with American industry overall, the experts agreed. Reifel called innovation the hallmark of American industry.

"Even in this global economy, American innovation remains a critical component of our success," he said.

Merrill agreed but adds that the post-Sept. 11 years, which have seen the United States roll up its borders, have allowed the rest of the world to gain ground.

"The (innovation) lead has shrunk somewhat in the last five years, but we're still ahead," Merrill said. "But the business community has recognized this and realizes the importance of innovation on the global business environment."

September 15, 2008

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