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IBM Global Business Services
IBM Institute for Business Value
Insurance
Insurance 2020
Now what? Exploring
initiatives for innovationIBM Institute for Business Value
IBM Global Business Services, through the IBM Institute for Business Value,
develops fact-based strategic insights for senior executives around critical public
and private sector issues. This executive brief is based on an in-depth study by
the Institute’s research team. It is part of an ongoing commitment by IBM Global
Business Services to provide analysis and viewpoints that help companies realize
business value. You may contact the authors or send an e-mail to iibv@us.ibm.com
for more information.Insurance 2020
Now what? Exploring initiatives for innovation
By Jamie Bisker and Christian Bieck
The IBM Institute for Business Value recently explored the future of
insurance as seen through the eyes of global industry executives and
created a study entitled, “Insurance 2020: Innovating Beyond Old Models,”
which provided insight into the question of why insurance appears to a
lethargic industry in the use of innovation.1 This study shows that insurers
focus on the optimization of products and processes and accept it as
though it were innovation. However, the power of innovation does not
come simply from the use of a specific technology to overcome a problem,
but from the willingness to try something different. We believe insurers
should move to adopt a new approach or new technology to address
persistent operational challenges.
Introduction services. This activity often leveraged informa-
A recent study by the IBM Institute for Business tion technology (IT) advances over the course
Value, “Insurance 2020: Innovating Beyond Old of many decades. For many carriers the result
Models,” provided insight into the apparent was an organization that mistook optimization
lethargy of the insurance industry in terms of for innovation.
2
innovation. In summary, the study showed that
This approach has produced two outcomes.
while market forces demand real innovation in
First, although it is clear that there are some
business models, insurers consistently focus
insurance carriers, agencies and brokers that
on the optimization of products, processes and
Insurance 2020are exceptions, many have little to show for The second outcome from the industry’s focus
the many years of optimization they prac- on optimization is in opportunity costs. There
ticed. For example, from 1955 to 2006, the is an uncalculated cost from the insufficient, or
U.S property and casualty (P&C) insurance even absent, application of innovation, espe-
industry had a return on equity (ROE) below cially in business models. So, although making
the average for all U.S. industries more than 87 improvements in processes and operations via
3
percent of the time. Changes in value chain the use of increasingly advanced technology
automation, data management, and the use of felt like the right thing to do, those activities
online mechanisms made over the course of became a proxy for innovation and supplied a
the last several decades were at the tail end stream of revenue enhancements of sufficient
of larger technological or societal changes stability to please executives.
and were directed towards improving existing
processes and mechanisms. If they continue Presenting these two primary findings estab-
to follow this course, carriers will logically lished a straightforward tension among
see diminishing results. It is likely that either insurance stakeholders: if the insurance
an existing competitor or a new entrant from industry is reticent about the recognition and
outside of traditional insurance – such as a use of innovation, how should it go about
retailer, social computing purveyor or other implementing change that incorporates inno-
service industry constituent – will capture a vation. In short: “Now what?” What can the
portion of the market. insurance industry do to embrace the change
and innovation needed to succeed? What
form does “innovation that matters” take in the
insurance value chain as we approach the end
of the first decade of a new century?
IBM
IBMGlobal
GlobalBusiness
BusinessServices
ServicesInsurance 2020
Now what? Exploring initiatives for innovation
Recognize and react to disruptive via their stores. And since virtually all commer-
realities cial enterprises have access to the same
Two of the four megatrends developed in our technology and information systems, it can be
original study are the basis for our tactical expected that other types of businesses will
exploration of innovation. The first mega- begin to explore the adjacent spaces of insur-
trend focused on the disruptive potential ance protection products, in addition to being
that changing demographics will bring to points of distribution. These adjacent spaces
insurance industry stakeholders. These demo- are literally those areas of service or asset
graphic realities will impact not only insurance protection that are close (i.e., adjacent) in a
consumers, but also agents, brokers, poli- common-sense way to existing products and
cyholders and other industry professionals services. For example, in addition to selling
across various demographics. traditional comprehensive and collision cover-
ages, some automobile insurers have added
Instead of trying For instance, will the Generation Y demo- highway breakdown provisions to their poli-
to improve current graphic, those people in their early teens cies. Life insurers could consider adding adult
to mid-twenties, continue to expect service daycare riders to retirement income products
processes, we believe
industries to engage and reward them via to help customers deal with the burden of
the insurance industry the Internet? Will those working in insur- caring for elderly parents. Insurance compa-
would be well-served ance distribution need to make use of social nies working to develop a more strategic
by looking at the forces computing tools in their careers? Insurers view of their business should consider that
affecting various need to recognize that opportunities arising essential systems needed to run an insurance
demographic groups from understanding such demographics business today can be purchased.
realities extend beyond optimization of sales
and preparing for a In spite of the previous examples, the familiar
channels. They include customer service,
changing future. claims handling and fraud prevention – as well message still needs repeating: the insurance
as chances to engage consumers and clients industry does not have a technology problem
with more customized products. – it has problems in the use of technology due
to culture, internal politics and the engrained
The second megatrend that needs the tactical aspects of human nature that resist change.
attention of insurers is how technology – and Disruptive forces will come to the various
information technology in particular – acts to demographic groups in the form of cultural
level the playing fields of the insurance busi- change, technological advancements and
ness. One aspect of this is how technology will geopolitical realities, such as changes in the
empower an influx of new players in the tradi- environment, the globalization of commerce
tional insurance space. Already, retail grocery and world health issues. We believe that,
chains, such as Tesco in the United Kingdom instead of working hard to improve current
and Kroger in the United States, have imple- processes, insurers should be preparing for a
mented the distribution of insurance products changing future.
Insurance 2020Adjusting to changing customers with significant populations of consumers at
As insurance operations grew over the years both ends of the commodity pricing versus
and more and more lines of business (LOBs) premium quality spectrum. As a result, the
were introduced, the business side within classic mass market is diminished although
insurance companies developed a product- still pursued.
centric view of the industry. At the same
On one side, hunting for the cheapest offer
time, information systems grew in capability
has become a popular sport, rendering
and became an indispensable component
other product parameters irrelevant. On the
of the business. When systems areas were
other side, consumers are still willing to pay
created and funded, they necessarily formed
a premium for convenience and service. This
around the existing LOBs, and thus today’s
forces vendors in all markets, including those
silo approach to IT was born. Only gradually
in financial services, to be more precise in
are the terms “one face to the customer” and
what they offer. In insurance markets, carriers
“single view of the customer” gaining a hold in
won’t be able to rely on applicants consistently
insurance thinking.
buying the coverages and services they are
While insurers were maintaining their product offered. At the same time, carriers have to
centricity, consumers changed in other ways. contend with market bifurcation as seen in
Consumers were more or less a uniform consumer products, as well as the behavioral
group 20 years ago, with price sensitivity variance they will encounter among individ-
versus service orientation lying on a Gaussian uals. For example, a younger policyholder is
4
curve (see Figure 1). Today this bell curve likely to renew an automobile insurance policy
has completely flipped, leaving a market at regulatory minimum coverages to keep his
FIGURE 1.
Customer centricity.
Historical demand
Nationally known
Store brand
dogfood
dogfood
Growth
Premium coffee
White label coffee
shop coffee
Entry level car Emerging High performance
demand sports car
Commodity Premium
Price positioning
Source: IBM Institute for Business Value. The “well curve” concept was described in the following article: Pink, Daniel H. “The Shape of
Things to Come.” Wired. May 2003.
IBM Global Business Servicesor her cost low. However, as the same indi- Demographics factor not only into customer
vidual grows older and becomes more value behavior and portfolio setup, but also into
and time conscious, he or she will consider the impact of marketing and the design of
riders for roadside assistance and vehicle regional campaigns. In the United States, while
repair. The breakdowns for these market fertility is holding steady around the positive
segments can be complex when considering (i.e., growing) reproductive rate of 2.1 children
the dimensions of vehicle type, geographic per family, Europe is facing a faster aging
location, income, household makeup and and declining population with rates from 2.0
6
many other factors. (France) to 1.3 (Italy). For global insurers, this
means a constant focus on local data and
Why demographics matter marketing concepts, even assuming global
Insurers must understand An important point to remember when talking
networking will, over time, equalize cultural
the fundamental changes about customer centricity is the reality of
differences and behaviors.
changing demographics – not only for their
in demographics and
impact on current or potential policyholders, Now what?
arm themselves with
clients and claimants, but also because of Insurers can no longer take a back seat to
knowledge – not only of their workforce considerations. As much as all their underwriting peers or their financial
policyholders, applicants industries and businesses need to understand service competition in understanding funda-
and claimants, but also of workforce demographics, insurance is particu- mental changes to demographics that are
their own employee and larly impacted due to the long learning curve, turning their world upside down. In short order,
specialization and licensing required by the carriers not satisfied merely with keeping up
service populations.
industry and its regulators. need to arm themselves with knowledge, the
only proven weapon against change.
For example, in the P&C business, the profes-
sion of claims adjuster is facing its own We believe insurance executives need to
circumstances. These individuals already face invest in and execute on collecting and
enormous workloads and stressful employ- preening data to include existing policy-
ment conditions. The expertise that insurers holders, applicants and claimants. They also
require comes from experience – and that need to turn their sights inward to better
quality is rapidly being depleted and not understand their own employee and service
replaced. Approximately 70 percent of claims populations. For those companies that have
adjusters in the United States are now over already invested in data warehouses, data
40 years of age and similar numbers apply mining and business intelligence solutions
5
in Europe. Keeping up with the realities of a and tools, an evaluation of current uses of
demanding job description, combined with an these tools is needed to separate out those
increasing pool of retiring expertise, means projects that are optimization-focused and
that the industry should take action soon. those that have innovation potential. Piecing
together knowledge from internal sources, as
Insurance 2020well as from third parties and industry associa- insurance premiums. We believe helping youth
tions, can empower strategic action in regard understand more about this important aspect
to emerging phenomena such as social of financial management would be of signifi-
computing, globalization and micro finance cant benefit to the insurance industry.
(banking and insurance).
Another suggestion, prompted by our study,
Connect to policyholder demographics for what carriers can do to deal with the
Suggestions for dealing with ongoing demo- imminent impact of demographic change is
graphics change run the gamut, depending to actively investigate the opinions, attitudes
on many factors for each carrier. However, and expectations of policyholders. Although
personal lines insurers in both life and non-life it is a relatively safe assumption that older
could take a page from the banking playbook groups can be approached with well-under-
to energize their marketing campaigns. Rather stood mechanisms such as surveys and
than utilizing the historical practice of relying promotional campaigns, younger groups will
on industry-specified “life events,” such as require a more modern approach. Carriers
acquiring a driver license, getting married need to leverage social computing tools,
or having children, an insurer could prepare including blogs (Web-based logs or diaries of
younger children (10-15) for their eventual activity made available to specific groups or
interactions with the insurance industry. the public), social computing sites, such as
Facebook or MySpace, and online commu-
Banks have long established programs and
nications push devices, such as audio and
accounts for “young savers,” and have made
video (broad)casting. These tools allow a
available courses on handling credit for
carrier to integrate marketing outreach and
teenagers. In the insurance arena, a similar
provide near-realtime demographics research
program might involve school presentations
that can become a vital component in dealing
on the mechanics of risk, or, rather than the
with younger consumers.
typical sponsorships of sports, taking a logical
next step with youth organizations. That New operational plateaus
step could include activities such as insur- The persistent substitution of optimization for
ance-sponsored clubs that tune kids into the innovation within insurance companies has
concepts of risk management and practicing created a point-solution mentality. This way of
safety in the environments where children looking at the world tends to cause insurers
interact the most, such as home, school and to treat the symptoms of persistent problems
public events. It is important to remember that while ignoring primary causes. The challenge
the first exposure of most young people to to be profitable – or at least efficient – while
insurance comes in a negative way when they maintaining compliance with a plethora of
are expected to contribute to the cost of their regulations and simply reacting to market reali-
ties typically does not help this situation.
IBM Global Business ServicesSeeing the forest is a first step This observation and similar ones are well
In fact, these circumstances are often the known in the industry today, and yet too many
reason for carriers focusing on a given insurers appear to be reluctant to act on this
problem (i.e., application system) to the exclu- knowledge. What needs to happen now is the
sion of the broader context of information evaluation of business and IT processes to
systems. It is clear that the automation of the determine what aspects of their operations
insurance business has created a densely could or should be insourced, outsourced or
interconnected collection of manual and IT cosourced in ways that provide not only cost
system processes. Ironically, the existing depth reductions, but value enhancements as well.
of complexity found in insurance systems often This is possible today through the modeling
prevents carriers from working holistically – the of business processes into industry stan-
trees do indeed obscure the forest. dard sets that can be further broken down
into functional units called services. Once
To prepare for competition The focus that a large number of carriers
a company has developed a component-
with both traditional place on modernizing their core processing
based model of its business, it has, in fact, a
capabilities and infrastructure provides a great
carriers and emerging common framework for discussing and acting
start to achieving the flexibility needed to
players, carriers need to on these issues.
correct operational problems. These modern
examine and confront long- approaches have at their center architectures Driving toward collaboration as a key
held industry beliefs and that prevent the creation of systems that source of innovation
determine how the various are no better than the legacy ones that they One of the key findings from the IBM 2006
replace. The use of industry standards and Global CEO Study, which was based on inter-
aspects of their businesses
maturing IT concepts such as service-oriented views IBM conducted with 765 corporate and
should be sourced to architecture (SOA) are essential to breaking public sector leaders worldwide, was that
provide cost reductions and from the past and enabling support for busi- collaboration is a key source of innovation.
7
value enhancement. ness and technological innovation. In the insurance context, collaboration could
come from suppliers, peers, competitors,
Carriers must model business processes employees or other stakeholders. Observation
Technology is leveling the playing field for and engagement with other industries can also
traditional carriers, as well as the other players supply a much-needed fresh perspective on
emerging today. To prepare for competition problems and techniques facing the industry.
from these sources, carriers need to confront
long-held industry beliefs. One of the most For example, the automotive industry has
persistent beliefs of the industry is that its faced a broad series of challenges and
processes are so specialized that they cannot continues to deal with them in innovative
be handled by third-party software. And, even ways. Although it may not have been the first
if third-party applications are purchased, they industry to outsource, it has certainly lever-
are often modified to such an extent that they aged the concept to a very large extent. In the
became home-grown solutions. not-too-distant past, it was not unusual for an
Insurance 2020automaker to produce upwards of 80 percent time ago. In the insurance industry, modifi-
of the components that went into the manufac- cations of existing products advertised as
8
ture of its products. Today that figure is much “new” were deemed sufficient. As long as the
lower and fluctuates around 35 percent of markets were regulated and customers had to
9
the parts it uses in manufacturing. What can buy what they got, this was true enough. But
insurance learn from this seemingly entirely as we move forward in time toward 2020, this
different industry ? situation will no longer be the case. Customers
will know what they want and do not want
Once you look beyond the nature of the prod- – the insurer that does not innovate soon will
ucts delivered to the consumer, both industries not be ready in time for inevitable change.
have existing legacy systems (whether in
machinery, process or software), burgeoning Modeling marketing to behavior
regulations and a somewhat fickle consumer Today’s behavioral patterns are different than
base driven by some of the same external the traditional ones, but still predictable. The
forces (cost of money, price of gas, the need concept of predictive analytics as applied
to comply with regulations, etc.). The primary to customer behavior follows reaction to
difference is that the automotive industry controlled triggers (like marketing campaigns)
has reacted more quickly to its challenges and thus allows companies to “manage” their
than insurance. For example, the largest auto customer portfolio into an optimal spread on a
firms banded together to reduce the cost of value/loyalty matrix.
parts and to make their supply chain more
It is worth mentioning again that we can learn
efficient by collaborating on the creation of an
a great deal about how to apply technology
electronic parts network. They also agreed to
such as predictive analytics by looking at how
adopt the metric system to, in part, reduce the
it is applied outside of insurance. The airline
cost of supporting different size standards and
industry leveraged such a tool to help it better
allow for greater flexibility in global markets.
understand loyalty programs – allowing a huge
Now what? Practicing innovation step forward from the simple miles programs
It is worth repeating over and over: we believe to programs focused on marketing real value.
innovation is the key to future success for Translated to insurance, customer equity
insurance. This statement is more evident in management would mean redefining and
other industries. Without its continuous innova- maybe even re-creation of customer distribu-
tive spirit in product design, Apple’s products tion channels more in tune with reality.
likely would have been off the market a long
IBM Global Business ServicesThe idea for The next generation The use of telematics and remote sensing
Customer experience today is interactive. within the insurance industry is broadening
insurance carriers
The Worldwide Web, starting with what is now in scope. Risk services that offer prevention
is not necessarily
referred to as Web 2.0, is no longer a simple – something already happening in industrial
be the first to use a mechanism that pushes marketing content. It (commercial) insurance – become viable
new technology or is now a conglomeration of views, discussions, in private lines P&C. This allows for new
invent a product, trends and offerings that reach self-targeted business models on one hand and gives
but to encourage the audiences. It has become the infrastructure insurance the opportunity to overcome its
for what is now called social computing negative image as expensive and reticent
thinking and actions
– and with continued maturation will include when a claim actually occurs.
that allow innovation innovations such as the semantic Web. Think
to take place. of this as a network of interconnected Web The life insurance business has innovated in
sites that, by design, publish or make known less obvious ways by combining coverages
the meaning of the content they manage and adding flexibility to standard coverages.
and more specifically, the data they contain. Life companies need to attack the oft-quoted
This will allow for more efficient machine-to- maxim that “life insurance is sold, not bought”
machine exchange of data and information and overcome the negative perceptions that
in support of collaboration among all users plague this profession. The opportunity to
including insurance stakeholders. leverage new technologies will only be fulfilled
when internal impediments to progress receive
In the P&C industry, operational innovation the same attention that optimization of existing
is still best seen in the well-known efforts of processes receive. Younger generations
Progressive Casualty Insurance Company. need to be won over with a new approach to
It innovated in pricing and underwriting by dealing with the realities of complex lives and
creating and developing the concept of the new aspects of culture that arise from a
usage-based pricing that leverages tele- world that continues to grow smaller as tech-
matics. It was the first to sell auto insurance nology evolves.
on the Web and is seen as a leader in the
direct market as well. Progressive continues Now what?
to innovate with its high level of claims In review, based on our study, we believe that
servicing and dedication to policyholders.
10 carriers from all lines of business need to chal-
GEICO has broadened its offering to include lenge themselves to push innovation to the top
what we have referred to in the IBM Insurance of the agenda. The idea is not to always be
2020 study as adjacent spaces by offering the first to use a new technology, or to invent
automobile mechanical breakdown coverage, a new product or even to establish a new
which acts like an extended warranty for a collaboration; the idea is to encourage thinking
vehicle if purchased within the mileage limits and actions that allow innovation to take place
of the plan.
11 intentionally.
Insurance 2020Following are a few ideas to begin the Conclusion
process: As highlighted in the IBM Global Innovation
• Establish an internal patent mechanism Outlook 2.0, “innovation is a culture, not a
that goes beyond a simple suggestion box; department.”12 This means a culture of experi-
reward idea generation and implementation. mentation, of allowing for mistakes and of
everybody with a stake or an interest in the
• Assign management and staff to be internal
organization participating in idea generation
change agents on a rotating basis. Develop
for innovation. IBM itself expressed this with
an internal school for innovative thinking.
the Innovation Jam 2006 – a worldwide online
Leverage social computing mechanisms for
collaboration and idea collection effort with
internal and external research.
participation from employees, customers and
• Understand your own processes thoroughly business partners.
by modeling the components of your
business – what are you good at, what are Innovating means taking controlled risks
you not, where are your investments? Why? – something insurance is supposed to be
good at. Still, projects or activities such as the
• Seek to understand when and what you are
Innovation Jam are seldom seen in the insur-
optimizing – there’s nothing wrong with opti-
ance industry – surprising, as the risk involved
mization, but you need to understand there
is very low and the insights gained quite high.
are likely to be diminishing returns from such
Insurance will have to overcome its sluggish-
activity.
ness, if there is to be a culture of innovation
• Collaborate – look to all your partners, peers within the industry.
and competitors to, at the very least, learn
from them and, at best, work with them on
achieving something new – or learn how
to approach opportunities from a different
perspective.
10 IBM Global Business ServicesAbout the authors References
1
Jamie Bisker is the Global Leader for the “Insurance 2020: Innovating Beyond Old
Insurance practice of the IBM Institute for Models.” IBM Institute for Business Value.
Business Value within IBM Global Business May 2006.
Services. Jamie has over 21 years of expe- 2
Ibid.
rience in the insurance industry and is a 3
frequent contributor to publications such “Property/Casualty Insurance Update.”
as Best’s Review, Insurance & Technology, Insurance Information Institute. January 2007.
4
and Insurance Networking News. He can be “Deeper customer insight: Understanding
reached at jbisker@us.ibm.com. today’s complex shoppers.” IBM Institute for
Business Value. December 2004.
Christian Bieck is the Leader in Europe, the 5
Middle East and Africa for the IBM Institute “Generational talent management for
for Business Value Insurance practice of IBM insurers.” Deloitte & Touche USA LLP. March
Global Business Services. Christian is an 2007.
6
economist by training, he worked in various “International Data Base (IDB) Country
roles in the insurance industry in Europe Summaries.” U.S. Census Bureau, Population
before joining IBM as a process consul- Division. July 2007.
tant and researcher. He can be reached at 7
“The Global Innovation Outlook 2.0.” IBM
chbieck@de.ibm.com. Global Business Services. March 2006.
http://www.ibm.com/gio.
About IBM Global Business Services
8
With business experts in more than 160 “Complementarities in Automobile
countries, IBM Global Business Services Production.” National Bureau of Economic
provides clients with deep business process Research – Working Paper 12131. March
and industry expertise across 17 industries, 2006.
using innovation to identify, create and deliver 9
Ibid.
value faster. We draw on the full breadth of IBM 10
“The Progressive Corporation 2006 Annual
capabilities, standing behind our advice to
Report.” Progressive Corporation. 2007.
help clients implement solutions designed to
11
deliver business outcomes with far-reaching “Insurance 2020: Innovating Beyond Old
impact and sustainable results. Models.” IBM Institute for Business Value.
May 2006.
12
“Expanding the Innovation Horizon: The
Global CEO Study 2006.” IBM Global
Business Services. March 2006. http://www.
ibm.com/bcs/ceostudy; In this study, IBM
interviewed 765 CEOs, business execu-
tives and public sector leaders worldwide to
understand the innovation challenges that
companies are facing globally.
11 Insurance 2020© Copyright IBM Corporation 2007 IBM Global Services Route 100 Somers, NY 10589 U.S.A. Produced in the United States of America 09-07 All Rights Reserved IBM and the IBM logo are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. Other company, product and service names may be trademarks or service marks of others. References in this publication to IBM products and services do not imply that IBM intends to make them available in all countries in which IBM operates. G510-7857-00
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