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By CYRIL TUOHY, managing editor of Risk & Insurance®

It's tempting to think of innovators as solitary geniuses, brilliant introverts, working quietly at home in their basements, or humming away in the bowels of the corporate research labs at all hours of the day or night.

In truth, though, the quest for the next big thing, or the new thing, or the tomorrow thing isn't nearly as romantic. Nor is it as solitary an exercise as popular myth would have you believe.

Grinding into motion the gears of innovation, in public or in private, in groups or as an individual, is usually frustrating, often messy, and frequently even dull.

Within the corporate setting, innovation is a collaborative process; one where aloof, surly, or rude individualists are rarely welcome.

"I've seen all sorts of personalities come to the table and want to build something," said Joseph Restoule, leader, risk management, at Nova Chemicals. "Typically the best builders are those who work in teams, not as individuals."

Whether teams or individuals are responsible for an innovation, it remains true that innovative ideas come from a multiplicity of sources. Ideas drift into innovators' minds as people stare at the mirror brushing their teeth in the morning, or while managers listen to presentations in product launch meetings.

They even come to people while they're pumping gas, as they did for Robert Fell, CEO of Pricelock Inc.

A few years ago, when Fell was in the middle of a project with former tennis champ Andre Agassi helping to provide healthy foods for school kids in blue collar areas in Los Angeles, he stopped to fill his tank at a gas station.

That's when Fell overheard a lively debate between two plumbers over just how high gas prices could go. Fell went over and asked the tradesmen if they had the option to buy 1,000 gallons of fuel at the day's price, would they do it?

Absolutely, they said. So Fell started asking other folks how they would mitigate fluctuations in the price of gasoline, which at the time was closing in on $4.00 a gallon.

Within a year, Fell had launched Pricelock to meet the need for price protection insurance.

Fell's story of the genesis of Pricelock is hardly unique. Companies from coast to coast spring up every year. Either they grow, or they are sold, or they reinvent themselves constantly to stay abreast of changes in the marketplace.

Read more about Fell and all of the other 2010 Risk Innovator^TM winners here.

Sometimes ideas come to individual freelance consultants on contract with the company. At other times they come to the chief risk officer and the CEO. "I've seen innovation come from all these groups," Restoule said, "novices, middle management and visionaries."

From the fast-paced big-city carriers, to nimble reinsurers based offshore, to the quiet intimacy of the claims field office, new ideas in risk management and insurance tumble forth every day.

Some ideas lend themselves to scale, others are more circumspect. All have moved their organizations forward in one way or another.

THE GREAT DEBATE

How innovative are risk and insurance managers? It depends on whom you ask, or where you choose to look. Many in the industry argue that it is plenty innovative. Even taking into account the ebb-and-flow of innovation over time, risk management doesn't lack for new ideas.

Take Steve Wilder, Disney's risk manager, for example. Not long ago, he briefed other risk managers about developing sign language for the workforce to overcome the multiplicity of languages spoken by Disney-employed workers around the world, said Terry Fleming, president of the Risk and Insurance Management Society Inc.

"He's a real leader in risk management, a quiet leader and very innovative with respect to what he does with his organization," said Fleming, who also serves as the director, Division of Risk Management for Montgomery County, in Rockville, Md.

On the product side in particular, it's not difficult to point to carriers and brokers which are constantly inventing new ways to mitigate risk, either by launching new policies or adapting old ones for newer uses.

Carriers, for example, have been relatively quick to market with data-breach protections. They also stepped up to help mitigate the exposures for redeveloping polluted tracts of land.

In response to the real estate bust, carriers have released a slew of products to cover partially occupied and vacant property.

"Lexovations," the branding campaign by the Lexington Insurance Co., would make Madison Avenue proud. The Boston-based excess and surplus powerhouse offers a plethora of coverage in response to a risk manager's every conceivable need.

Products even come coated with a savvy reminiscent of the marketing prowess of the pharmaceutical industry. To wit: CarbonCover Design & Confirm, Premier Excess II XS, CrisisResponse XS, LexPILOT, LexTransForm, LexNanoShield, LexFollowUP, Carbon Cover, LexWildfire Smoke, LexCap Overturn, Green Builders Risk, Lex Idle Asset Protector and OMNI Gold.

Travelers, the Hartford, Conn.-based property/casualty giant, offers an equally impressive array of branded products. From its Energy Pro suite for the oil-and-gas industry, to its IndustryEdge lineup for the construction trades, there's plenty of product innovation going on in the company's backyard.

Wayne Salen, risk manager for Labor Finders International, a Palm Beach Gardens, Fla.-based temporary staffing agency, said carriers do a good job launching new products to meet the evolving needs of buyers.

Broadening the scope, who could argue with an industry that invented captives more than 20 years ago as an alternative to traditional insurance markets.

Industry boosters point to the creation of Bermuda as a safe and efficient haven to reinsure risks, or to the creation of risk pooling arrangements, or even to the recent course correction by The Hartford to restructure itself--if a little belatedly--from a product-centric to a customer-centric model.

Brokers, working in conjunction with carriers, often hunt hard for new capacity, restructuring coverage layers and renegotiating terms and conditions.

With this kind of innovation taking place, how can anyone berate the industry for being tone deaf? Where do critics get off on blasting the industry as slow, unimaginative and resistant to change?

As it turns out industry critics come from all quarters, from the nation's capital down through its very own ranks.

"We're conservative and risk-averse," said Maddy Bowling, a long-time industry consultant and expert in the workers' compensation segment. As a rule, customers don't demand enough from carriers, brokers and vendors, Bowling said. "Look at how long it's taken us to reach the point where we use analytics, and outcome-oriented analytics."

The industry may be quick at launching new products or shrewd at inventing completely new classes of coverage like directors' and officers' (D&O), employment practices liability coverage, and environmental liability products.

But churning out new coverage permutations unaffordable in the short term--where's the innovation in that? What good does that do for a buyer?

"Historically, when the industry comes out with a new product they price it at a level that nobody wants to buy," said Salen, who's been in the industry for 33 years. "Then they are slow to move."

Carriers don't know the price points at which a product will be attractive, Restoule said, and so they prefer to follow their pricing models instead. "We saw that on weather products and finite risk products and the premium was so expensive that it was unattractive."

On the distribution side, buyers marvel at the entrenched inefficiency and the persistent secrecy of the industry's intermediaries.

Attempts last year by the New York Insurance Department to force the Independent Insurance Agents and Brokers of New York to disclose compensation arrangements was met by threats of litigation.

"Nobody wants to talk about where our money is coming from," Salen said. "They don't want to disclose and it just irritates the living daylights out of me."

Six years after the former New York Attorney General Eliot Spitzer sued the industry on bid-rigging charges, only one of the four big retail brokers--Willis Group--has promised not to take contingent commissions.

Contingents are paid annually on a broker's entire book of business in the previous year, so buyers don't know the real cost of product until long after it is purchased. Even then, teasing out the true cost requires some forensic accounting.

A MORE NUANCED VIEW

Critics blame the industry for being dull, slow and opaque, even as the industry believes it is meeting the needs of its customers.

In truth, the state of innovation in risk management is a far more nuanced proposition, with the answer lying somewhere in between those two poles.

In its defense, one might argue that risk management and insurance is starting with a handicap. An industry in the business of limiting loss can't move as fast as businesses designed to speed communications from one part of the country to another, nor is it expected to.

Regulators in 50 states and dozens of foreign jurisdictions form a unique hurdle toward the rapid adoption of new or innovative products, services or business models, hurdles with which many other industries are often exempt.

There is, in fact, plenty of innovation in risk management. Any cursory visit to the website of an insurance carrier or broker will tell you this is so.

"The biggest barrier in the insurance business is not ideas," said Jon Bidwell, chief innovation officer for Chubb Group of Insurance Cos., speaking to Risk & Insurance® last year. "The biggest barrier is the will and means to execute on those ideas."

In the next few months, buyers can expect the industry to come up with innovations spun off from the offshore drilling sector in the wake of the Deepwater Horizon disaster, Restoule said. "You're going to have to be creative to satisfy the requirements of the government and it will have to be at optimal costs to the company."

Restoule also expects new ideas in the product liability arena in the wake of the Toyota Motor Corp. brake fiasco.

Bowling maintains that the most innovative people in the industry tend to come from the entrepreneurial ranks. Fell, the Pricelock CEO, is a perfect example.

At the time Fell was looking to start his company, he reached out to Travelers CEO Jay Fishman as the carrier had been exploring a similar type of product, to no avail. "We couldn't make the numbers work," said Maria Olivo, executive vice president with Travelers.

Fell was able to hedge and package the product, in large part because of his sophisticated team of commodities and financial experts, Olivo said.

Bowling also points to the pharmacy benefits management segment as a hotbed for innovation. Many of these companies, she said, are aggressively changing the face of prescription drug industry models.

If the industry doesn't appear to be pushing hard enough for breakthrough innovations, the incrementalist approach is by design.

Ty Sagalow, chief innovation officer with Zurich North America, said that innovation officers, like investment portfolio managers, look to a mix of innovations within the corporate fold.

Some innovations are more far-reaching than others. "Some of it is incremental, some of it is transformational, and some of it is breakthrough," Sagalow said.

Where does that leave buyers? Innovation will thrive in pockets of the industry, whether on the production or distribution side; and buyers can count on much of the innovation coming from smaller, more entrepreneurial companies.

In short, buyers can for the moment look forward to a near future that resembles much that resembles the recent past.

(Editor's note: Read more about all of the 2010 Risk Innovator^TM winners here.)

September 15, 2010

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