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By CYRIL TUOHY, managing editor of Risk & Insurance®

Scale is an innovation killer. There, I've said it, alienated nearly every reader of this magazine, which targets risk executives in large companies.

Don't get me wrong. Large companies are plenty innovative. In fact, many of the world's largest insurance and reinsurance companies are brimming with fresh and innovative ideas. Risk management departments for the Fortune 500 are constantly providing senior managers with more efficient ways of doing things, finding new ways to cut costs, offering different strategies of approaching the market. Many large companies in all industry sectors set up small research units within their research departments to allow them to tinker and experiment at their leisure, free--at least temporarily--of the commercial pressures of selling to the broadest audience.

Looking for examples? How about AT&T's Bell Labs, Lockheed's Skunk Works, or IBM's Watson Research Center? No one would dispute that genius oozes from behind those walls at every turn. The behemoths of the insurance space, the FM Globals, Zurichs, Chubbs, Travelers and Liberty Mutuals also pull their innovative weight, whether through product riders, process changes or research campuses. The preceding pages of this special innovation issue of Risk & Insurance® are packed with innovations developed by the nation's largest property-casualty insurance carriers and brokers.

Can those products be scaled? Yes, usually. But if so, are they still as innovative as they were when they first took flight from the minds of their creators? No, they aren't. The laws of large numbers will not allow it.

Sure, there's always an exception or two to the rule but by and large, the more scale a product or service acquires, the broader the reach. The broader the reach the wider the audience and the wider the audience, the higher the likelihood of losing an innovative edge.

Scaling up a product or service requires a little "nip and tuck," some rounding out of the edges, the customary dumbing-down of the features. That's the way it is when you want to reach a broader audience; that's the way it is when the focus turns from production to distribution. That is the way it will always be.

Talk to the old guard at Valley Oak Systems and RiskConsole and see what they think with those companies now subsumed into eSolutions, the risk management information systems offering of Aon, the world's largest broker.Or pull aside some of the industry's veteran technologists and ask them about Corporate Systems Inc. before it was bought by Marsh way back when.

Not that scaling up to reach a larger market is bad, mind you, it's just different; it plays by a very different set of rules. For sure, from an innovation standpoint, scaling up a product by orders of magnitude often means a dulling of the edges, so to speak, in exchange for access to a broader market.

How many times have we all heard, usually from the wistful purist, that a product or service isn't what it used to be. It's not and that is exactly the point.

Which brings us back to the dozens of small companies in the insurance sector that come up with new products every year--companies like Blue Wave, Cover-All and Vertafore, the latter an amalgam of several even smaller companies.

They do not have to worry about reaching a mass audience. Usually privately held, they have no institutional shareholders to answer to; they're free of the insidious, corrupting influence of Wall Street--at least for now.

Beyond technology, don't forget the small agency, the midsize underwriter, the third-party administrators. They're the ones who more often than not push the boundaries of industry; they're the ones who don't have the big in-house promotional staffs; they're the ones who are usually first to market; they're the ones who operate on a much smaller, more nimble scale.

And in the end, they're the ones who typically get bought.

(To read the Point to this by Senior Editor Dan Reynolds, click here.)

September 15, 2009

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