Insurance carriers have a habit of transforming, if not themselves, then the world around them. It's a history that dates back thousands of years. No one precisely knows when it began, but in the West at least, it can be traced to the ancient Greeks.
They had a habit of engaging in "bottomry." In the context of insurance coverage, it was not a reference to the carnal pleasures for which Greeks were known, of course, but the transfer of risk.
Bottomry, according to Rupp's Insurance & Risk Management Glossary, provided that any ship not returning to port be absolved of any debt on the ship itself or on its cargo.
Rupp's claims bottomry is the oldest known form of risk transfer.
Fast-forward from Greece to England and broker Edward Lloyd, who in the late 17th century gave birth to Lloyd's, by sitting with underwriters and ship captains to insure cargo sailing up and down the Thames River.
Moving to this side of the Atlantic, there was also Benjamin Franklin who, in the 18th century, established The Philadelphia Contributorship, an insurance company to insure policyholders from fire losses.
Moving forward a couple hundred years, to the last century, and there was the Metropolitan Life Insurance Co. of New York and the Prudential Insurance Co. who were the first institutions outside of the U.S. government to invest in mainframe computers. So much for the cliché that the industry is hidebound.
Lloyd, Franklin and those who came after them transformed the industry into a global powerhouse. Nor have the efforts stopped. On the product side true innovation continues still. Examples abound: Environmental insurance, for example, was unheard of before the '70s.
The environmental movement changed that. As pollution turned into a liability, the insurance industry developed products to protect corporations from exposure. Similarly, the growth of employment liability in the wake of the passage of the Civil Rights Act has spawned a raft of new products to meet the new source of demand, says consultant Mark Jablonowksi, assistant vice president of Conning Research & Consulting Inc.
Today these markets are each worth several billion dollars, says Kevin H. Kelley, CEO of Boston-based Lexington Insurance Co. Following Sept. 11, 2001, the industry launched new products to defray the losses from terrorism risk and other geo-political risk.
"The insurance business has been incredibly innovative," adds Kelley. "Just look at what happened with Sept. 11. We were challenged with responding to a totally new type of loss--a loss that was not even considered to be remotely possible."
Yet more innovations are transforming the industry in the field of predictive modeling, experts say. Powerful computer models, using decades worth of data held in carrier databases, are allowing for more accurate pricing of the risks carriers choose to cover.
"There seems to be a fair amount of change in those areas," says John Iten, a director with Standard & Poor's who follows commercial lines companies. He also notes that carriers have made some important improvements in the way they use models to allocate capital to reflect risk exposures.
On the managerial side, risk managers point to the birth of the discipline of enterprise risk management as a transformation in the way corporations think about themselves.
"ERM is absolutely top of that stack," says John Phelps, director of business risk solutions with Blue Cross Blue Shield of Florida in Jacksonville. "ERM is taking the risk management responsibility off the cost side of a company and putting it on the strategic or opportunity side."
In many large corporations, siloed mentalities are breaking down. This change, thanks in part to the ERM framework, has the power to transform how a company approaches risk. "It's pulling together the individual risk management components in the company and setting up the process more holistically," says Iten.
"Why is a business impact analysis conducted for business continuity management using one process and an IT availability assessment done with another and a security threats assessment with a third?" asks Phelps, a former underwriter and broker. "Isn't it all risk?"
Yes, it is, and that's exactly why proponents of ERM believe it can transform the insurance industry. Management can now evaluate a scope of work that includes the liquidity risks of dollar changes in Europe to reserving issues in China to supply chain risks in Brazil.
Innovation of this kind matters more than it did 30 years ago as carriers compete for clients, capital and resources. But whether these changes turn out to be more important than the slow, methodical approach offered by incremental strategies, is for the industry to decide.
"I don't think that this industry takes wholehearted transformation all that well," says Lance Ewing, vice president of risk management for Harrah's Entertainment Inc. "We take baby steps and we don't take quantum leaps. Some of that isn't a bad thing. People want insurance as a security blanket that they can cuddle up with at night."
And for a look at just how comfortable the industry is with taking baby steps, you need look no further than the latest risk management and insurance product announcements, traveling at warp speed through the nation's servers, flooding the in-boxes of trade media writers moments after they appear on the business wires.
At 2:47 p.m. EST on May 7, for example, Arch Insurance Group announced its "Arch Corporate Canopy" product to the world. The "multicover policy," according to the Arch press release, is designed to protect private companies from an array of risks.
Risks include discrimination and wrongful termination lawsuits, breach of fiduciary duty lawsuits, creditor suits, bankruptcy and computer fraud.
Consisting of four components, directors' and officers' liability, employment practices liability, fiduciary liability and crime insurance, these products, previously offered individually or on a stand-alone basis, are now available to buyers on a "stand-alone or on a shared-limit basis."
Risk managers, particularly in today's litigious environment, find shelter from exposures if they were to sign up for Arch's Canopy product.
With shareholder lawsuits clogging courtrooms and the billions of dollars lost to fraud every year, who would argue that Arch isn't providing the marketplace with a valuable service with its Canopy protection?
Arch, a highly rated and respected insurer, wouldn't have launched Canopy if it didn't think there was demand for it in the marketplace.
But do these kinds of products moves the industry forward? Or are they simply an example of repackaging, of repositioning off-the-shelf items? Does this kind of innovation really matter? Or is it just another incremental improvement over what's already in the marketplace?
True, Arch's Canopy is an innovation of sorts. And it's the kind of innovation buyers see all the time from carriers, broker and agents.
For Iten, this is the kind of innovation that doesn't really count. In fact, he thinks much of the product innovation in the industry is pretty barren. "I'm not really aware (of innovation) in terms of new products," he says.
New products like Arch's Canopy fall onto a class of innovation that Jablonowksi refers to as "enhancements" and "tweaks."
Tweaking products sometimes takes place because carriers have seen a demand for them. Other times new products closely related to offerings in the market are launched just to keep up with repackaged policies issued by the competing carriers.
Jablonowski, like Iten, says such "stick-ons," dwell in the province of marketing and don't qualify as true innovation. "Aside from all-risk, which is 40 years old, I don't know if there's that much new under the sun," he says.
And he's not alone in his assessment that there's not much innovation to talk about when it comes to new products in insurance and risk management, despite the fact that carriers devote entire departments just to find ways to enhance a product line.
"They think they are innovating when they are optimizing," says James Bisker, the global insurance industry leader for IBM's Institute for Business Value.
Critics say carriers and brokers should be spending less time concocting new spins on old stand-bys and more time on looking for ways to transform the industry's core competency, which is to provide an efficient risk transfer mechanism.
The industry, they also say, should be more concerned about grappling with its fundamentals, like flattening cycles to derive consistent profits from core competencies like underwriting.
But is this kind of innovation happening more often than it used to? Is the industry better or worse off because of it? Is the industry guilty of repackaging products to a greater degree than other industries?
It's hard to say, according to the industry's long-time practitioners. The world is a tougher place for carriers today than it used to be.
Insurers are competing more aggressively with other companies in the financial services sector than in the past. Product cycles have shrunk to days or weeks down from months or even years. Wall Street thirsts for profitable results on quarterly cycles. The regulatory atmosphere is more burdensome that it was 30 years ago.
It's hard to blame carriers for taking every opportunity to put their best foot forward, even if it means changing the shrink-wrap on a product line.
If clients see insurance policies as a security blanket with which to curl up at night, then carriers can hardly be blamed for preferring an incremental approach to innovation.
CYRIL TUOHY is managing editor of Risk & Insurance®.
ALSO: READ THE OTHER PARTS TO THE INNOVATION SHOWCASE ISSUE.
September 15, 2007
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