Counterpoint: Insurance Remains an Innovation Laggard

One reason the insurance industry isn't very innovative is that it is ruled by incrementalism.

By Cyril Tuohy

When it comes to innovation, the risk and insurance industry ranks pretty low in terms of the innovation spectrum. I mean, you'd never mention AIG or Travelers in the same breath as Google or Apple, would you?

Point: Insurance and Risk Professionals Must Innovate (09/15/12)
Fueling Innovation (02/19/13)
Diving Deep (12/18/12)
Balancing 'Quants' with 'Qualts' (10/15/11)
A Range of Innovation Talent (09/15/12)

But it's too easy to poke fun at insurance companies, who typically don't rank near the top of industrial innovation.

There are very good reasons for that. Large commercial carriers don't compete in the same way that Procter & Gamble or even General Motors fight for the wallets of consumers, and the products sold by insurance companies are often distributed in a very different way.

Remember, insurance companies aren't selling you something you can touch or even feel. The industry is selling the power to make a buyer whole, which is a product like none other. Insurance companies are assuming a risk for a price buyers are paying them today. Yet those same companies don't know what the price of that product will eventually cost them tomorrow.

Change in insurance is often measured based on contractual nuances, on an agreement's ability to exclude rather than include a risk. Insurance products, even in the consumer arena, are not based on easily grasped new "features." Commercial coverage is never bought on a whim.

The industry remains transaction based, which means that a buyer agrees to a monthly or annual premium for specific coverage. That hasn't changed in more than 400 years ago, nor is it likely to change much in the future.

Few early adopters exist in the industry, and those that are typically viewed as forward-thinking, auto insurers Geico and Progressive, for example, are more likely to exist in the consumer space.

Before dismissing the industry as a hopeless laggard, it's worth remembering that the industry is heavily regulated. Even when an insurance carrier's skunk works is quite capable of developing a "killer app," the invention would still have to fit within the boundaries set by regulators.

It's part of the price the industry has to pay for the guaranty it offers risk managers when the claim is filed. In the end, buyers want their carriers to make them whole, even if carriers lag other industries.

Yes, the industry isn't particularly innovative but it's not the industry's job to be innovative. It is the industry's job to provide a safe haven so that buyers don't have to be sorry.

CYRIL TUOHY is managing editor of Risk & Insurance®. He can be reached at ctuohy@lrp.com.

September 15, 2012

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