Is incremental innovation enough to make insurance great again?

Jul 04, 2017

IMG_20170405_184236.jpg 

I recently attended the ‘Future Leaders Debate: Make insurance great again!’ event, sponsored by Market Minds.

    The event comprised two panel discussions: ‘How to beat the legacy and make things happen…’ and ‘What does the best model for insurance innovation look like?’ On each panel were a range of insurance experts, some from Lloyd’s syndicates, some from Company Market insurers and brokers.

    Out of all the discussions, the one that really caught my attention was the one around whether an incremental, rather than radical approach to innovation is right for the London Market.

 

    What’s the difference between incremental and radical innovation[1]?

Incremental innovation is typically defined as small improvements or upgrades to a company's existing products, services, processes or methods in order to create efficiency, productivity and/or competitive differentiation. ‘Quote and bind’ portals are a relatively recent example of incremental innovation in insurance: these facilitate the ‘no touch’ sale of insurance products, thereby improving efficiency, saving costs - and for first movers - providing a competitive advantage. Portals are incremental because they are doing the same thing just via a piece of software.

    Radical or disruptive innovation is when a completely new product, service, process or strategy is introduced to a market, designed to make a massive impact by completely replacing existing commercial approaches. Lemonade (https://www.lemonade.com/) is an example of a start-up that has some facets of the way it operates that ‘disrupt’ the traditional insurance model, namely being transparent by donating surpluses to good causes and so increasing the trust of consumers. In the product world, Amazon might be the best example of a business which totally changed the way the world shops.

 

    So, why is incremental innovation the right approach for the London Market?

The Panel cited a number of challenges facing the London Market in terms of it innovating. These included: inertia, a ‘reactive’ business model, and a risk-averse culture. And, of course, no discussion about the London Market would be complete with bemoaning ‘the soft market’ and rising costs. The cost issue is both a ‘push-and-pull’ force for innovation: innovative approaches may lower costs eventually, but it also requires an initial investment and entails risk, something that is counter-cultural for ‘cautious’ institutional insurers.

    All of these factors tend to favour insurers taking an incremental approach to innovation, which is, in fact, what established companies and industries tend to gravitate toward for all the reasons the panel cited. The Panel perhaps unsurprisingly also favoured this approach.

 

    Right approach, wrong attitude?

Despite the Panel’s confident assertions that the incremental model would prevail, on the night a number of audience members (some from start-up disrupters themselves), challenged both the efficacy of an incremental approach and ‘too-slow’ pace of any innovation in the London Market. The panellists pushed back, arguing that commercial insurance is ‘far too big to be disrupted’ due to the scale of the barriers to entry i.e., the capital requirements and the ‘unattractive’ and hugely costly regulatory environment.

    This was an interesting debate, surprising to me considering that earlier in the evening we had heard that investment in InsurTech had more than tripled in 2016 and was set to continue; was this all aimed at incremental change?

    Even when a seemingly exasperated audience member pointed out that Tesla’s shares recently became more valuable that Ford’s[2] (the car manufacturing industry has at least as many ‘barriers to entry’ as the insurance industry, he argued), the Panel was not to be convinced that there were any parallels. One panellist suggested that it was naïve to think that his CEO would be supportive of anything more than ‘cost-effective’, bite-size technological changes, with others echoing the sentiment.

 

    Sometimes being risk-averse is the riskiest strategy of all…

I get the reasons for pursuing a strategy of incremental innovation in the London Market: it is easier, cheaper, and less risky for individual organisations in the short-term. However, the question I was left with was how can London be so confident that it will be incremental, not radical change, that will define its future? With the likes of AXA, Aviva, and others investing millions in InsurTech innovation globally, I couldn’t help thinking that incremental innovation may just be too slow to cut it against global competitors who want to eat London’s breakfast, dinner and lunch.

 

Penelope Mantzaris, Director at Gracechurch Consulting