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7 Steps for Inventing the Future

Alan Kay is widely known for the credo, “The best way to predict the future is to invent it.” For him, the phrase is not just a witty quip; it is a guiding principle that has yielded a long list of accomplishments and continues to shape his work.

Kay was a ringleader of the exceptional group of ARPA-inspired scientists and engineers that created an entire genre of personal computing and pervasive world-wide networking. Four decades later, most of the information-technology industry and much of global commerce depends on this community’s inventions. Technology companies and many others in downstream industries have collectively realized trillions of dollars in revenues and tens of trillions in market value because of them.

Alan Kay made several fundamental contributions, including personal computers, object-oriented programming and graphical user interfaces. He was also a leading member of the Xerox PARC community that actualized those concepts and integrated them with other seminal developments, including the Ethernet, laser printing, modern word processing, client-servers and peer-peer networking. For these contributions, both the National Academy of Engineering and the Association of Computing Machinery have awarded him their highest honors.

I’ve worked with Alan to help bring his insights into the business realm for more than three decades. I also serve on the board of Viewpoints Research Institute, the nonprofit research organization that he founded and directs. Drawing on these vantage points and numerous conversations, I’ll try capture his approach to invention. He calls it a method for “escaping the present to invent the future,” and describes it in seven steps:

  1. Smell out a need
  2. Apply favorable exponentials
  3. Project the need 30 years out, imagining what might be possible in the context of the exponential curves
  4. Create a 30-year vision
  5. Pull the 30-year vision back into a more concrete 10- to 15-year vision
  6. Compute in the future
  7. Crawl your way there

Here’s a summary of each step:

1. Smell out a need

“Everybody loves change, except for the change part,” Kay observes. Because the present is so vivid and people have heavy incentives to optimize it, we tend to fixate on future scenarios that deliver incremental solutions to existing problems. To reach beyond the incremental, the first step to inventing the future is deep “problem finding,” rather than short-term problem solving. Smell out a need that is trapped by incremental thinking.

In Alan’s case, the need that he sensed in the late ’60s was the potential for computers to redefine the context of how children learn. Prompted by conversations with Seymour Papert at MIT and inspired by the work of Ivan Sutherland, J.C.R. Licklider, Doug Engelbart and others in the early ARPA community, Kay realized that every child should have a computer that helps him or her learn. Here’s how he described the insight:

It was like a magnet on the horizon. I had a lot of ideas but no really cosmic ones until that point.

This led Kay to wonder how computers could form a new kind of reading and writing medium that enabled important and powerful ideas to be discussed, played with and learned. But, the hottest computers at the time were IBM 360 mainframes costing millions. The use of computers in educating children was almost nonexistent. And, there were no such things as personal computers.

2. Apply favorable exponentials

To break the tyranny of current assumptions, identify exponential improvements in technological capabilities that could radically alter the range of possible approaches.

In 1965, Gordon Moore made his observation that computing would dramatically increase in power, and decrease in relative cost, at an exponential pace. Moore’s prediction, which would become known as Moore’s Law, was the “favorable exponential” that Kay applied.

Today, the fruits of Moore’s Law such as mobile devices, social media, cloud computing, big data, artificial intelligence and the Internet of Things continue to offer exponential advances favorable for invention. As I’ve previously written, these are make-or-break technologies for all information-intensive companies. But, don’t limit yourself to those.

Kay is especially optimistic about the favorable exponential at the intersection of computer-facilitated design, simulation and fabrication. This is the process of developing concepts and ideas using computer design tools and then testing and evolving them using computer-based simulation tools. Only after extensive testing and validation are physical components ever built, and, when they are, it can be done through computer-mediated fabrication, including 3D printing.

This approach applies to a wide range of domains, including mechanical, electrical and biological systems. It is becoming the standard method for developing everything, including car parts and whole cars, computer algorithms and chips, and even beating nature at its own game. Scientists and engineers realize tremendous benefits in terms of the number of designs that can be considered and the speed and rigor with which they can do so. These allow, Kay told me, “unbelievable leverage on the universe.”

See also: To Shape the Future, Write Its History  

3. Project the need 30 years out and imagine what might be possible in the context of the exponential curves

30 years is so far in the future that you don’t have to worry about how to get out there. Focus instead on what is important to have. There’s no possibility of being forced to demonstrate or prove how to get there incrementally.

Asking “How is this incremental to the present?” is the “biggest idea killer of all time,” Kay says. The answer to the “incremental” question is, he says, is “Forget it. The present is the least interesting time to live in.”

Instead, by projecting 30 years into the future, the question becomes, “Wouldn’t it be ridiculous if we didn’t have this?”

Projecting out what would be “ridiculous not to have” in 30 years led to many visionary concepts that earned Kay wide recognition as “the father of the personal computer.” He was sure, for example, that children would have ready access to laptop and tablets by the late 1990s — even though personal computers did not yet exist. As he saw it, there was a technological reason for it, there were user reasons for it and there were educational reasons for it. All those factors contributed to his misty vision, and he didn’t have to prove it because 30 years was so far in the future.

How might the world look relative to the needs that you smell out? What will you have ready access to in a world with a million times greater computing power, cheap 3D fabrication, boundless energy and so on? Remember, projecting to 2050 is intended as a mind-stretching exercise, not a precise forecasting one. This is where romance lives, albeit romance underpinned by deep science rather than pure fantasy.

4. Create a 30-year vision

A vision is different from a mission or a goal. If the previous step was about romance, a 30-year vision is more like a dream. It is a vague picture of a desirable future state of affairs in that 30-year future. This is the step where Kay’s recognition that computers would be widely available by the late 1990s turned into a vision of what form those computers might take.

That vision included the Dynabook, a powerful and portable electronic device the size of a three-ring notebook with a touch-sensitive liquid crystal screen and a keyboard for entering information. Here’s one of Kay’s early sketches of the Dynabook from that time.

DynaBook Concept Drawing

The next illustration is Kay’s sketch of the Dynabook in use. He describes the scenario as two 12-year-olds learning about orbital dynamics from a version of “Space Wars” that they wrote themselves. They are using two personal Dynabooks connected over a wireless network.

Children Using Dynabooks

Kay’s peers in the ARPA community had already envisioned some of the key building blocks for the Dynabook, such as LCD panels and an Internet-like, worldwide, self-healing network. (For a fascinating history of the early ARPA community, see Mitchell Waldrop’s brilliant book, “The Dream Machine.“)

For Kay, these earlier works crystallized into the Dynabook once he thought about them in the context of children’s education. As he described it,

The Dynabook was born when it had that cosmic purpose.

Laptops, notebook computers and tablets have roots in the early concepts of the Dynabook.

5. Pull the 30-year vision back into a 10- to 15-year lesser vision

Kay points out that one of the powerful aspects of computing is that, if you want to live 10 to 15 years in the future, you can do it. You just have to pay 10 to 20 times as much. That’s because tomorrow’s everyday computers can be simulated using today’s supercomputers. Instead of suffering the limitations of today’s commodity computers (which will be long obsolete before you get to the future you are inventing), inventors should use customized supercomputers to prototype, test and evolve aspects of their 30-year vision. Pulling back into the 10- to 15-year window brings inventors back from the “pie in the sky” to something more concrete.

Jumping into that “more concrete” future is exactly what Alan Kay did in 1971 when he joined the Xerox Palo Alto Research Center (PARC) effort to build “the office of the future.”

It started with Butler Lampson and Chuck Thacker, two of PARC’s leading engineers, asking Kay, “How would you like us to build your little machine?” The resulting computer was an “interim Dynabook,” as Kay thought of it, but better known as the Xerox Alto.

Xerox Alto

The Alto was the hardware equivalent of the Apple Macintosh of 1988, but running in 1973. Instead of costing a couple of thousand dollars each, the Alto cost about $70,000 (in today’s dollars). PARC built 2,000 of them — thereby providing Kay and his team with the environment to develop the software for a 15-year, lesser-but-running version of his 30-year vision.

6. Compute in the future

Now, having created the computing environment of the future, you can invent the software. This approach is critical because the hardest thing about software is getting from requirements and specification to properly running code.

Much of the time spent in developing software is spent optimizing code for the limitations of the hardware environment—i.e., making it run fast enough and robust enough. Providing a more powerful, unconstrained futuristic computing environment frees developers to focus on invention rather than optimization. (This was the impetus for another Kay principle, popularized by Steve Jobs, that “People who are really serious about software should make their own hardware.”)

The Alto essentially allowed PARC researchers to simulate the laptop of the future. Armed with it, Kay was a visionary force at PARC.

Kay led the Learning Research Group at PARC, and, though PARC’s mission was focused on the office environment, Kay rightly decided that the best path toward that mission was to focus on children in educational settings. He and his team studied how children could use personal computers in different subject areas. They studied how to help children learn to use computers and how children could use computers to learn. And, they studied how the computers needed to be redesigned to facilitate such learning.

Children With Xerox Alto

The power of the Alto gave Kay and his team, which included Adele Goldberg, Dan Ingalls, Ted Kaehler and Larry Tesler, the ability to do thousands of experiments with children in the process of understanding these questions and working toward better software to address them.

We could have a couple of pitchers of beer at lunch, come back, and play all afternoon trying out different user interface ideas. Often, we didn’t even save the code.

For another example of the “compute in the future” approach, take Google’s driverless car. Rather than using off-the-shelf or incrementally better car components, Google researchers used state of the art LIDAR, cameras, sensors and processors in its experimental vehicles. Google also built prototype vehicles from scratch, in addition to retrofitting current cars models. The research vehicles and test environments cost many times as much as standard production cars and facilities. But, they were not meant for production. Google’s researchers know that Moore’s Law and other favorable exponentials will soon make their research platforms practical.

Its “computing in the future” platforms allow Google to invent and test driving algorithms on car platforms of the future today. Google greatly accelerated the state of the art of driverless cars and ignited a global race to perfect the technology. Google recently spun off a separate company, Waymo, to commercialize the fruits of this research.

Waymo’s scientists and engineers are learning from a fleet of test vehicles driving 10,000 to 15,000 miles a week on public roads and interacting with real infrastructure, weather and traffic (including other drivers). The developers are also taking advantage of Google’s powerful cloud-based data and computing environment to do extensive simulation-based testing. Waymo reports that it is running its driving algorithms through more than three million miles of simulated driving each day (using data collected by its experimental fleet).

See also: How to Master the ABCs of Innovation  

7. Crawl your way there

Invention requires both inspiration and perspiration. Inspired by this alternative perspective of thinking about their work, researchers can much more effectively channel their perspiration. As Kay is known for saying, “Point of view is worth 80 IQ points.”

PARC’s success demonstrates that even if one pursues a 15-year vision — or, more accurately, because one pursues such a long-term vision — many interim benefits might well come of the effort. And, while the idea of giving researchers 2,000 supercomputers and building custom software environments might seem extravagant and expensive, it is actually quite cheap when you consider how much you can learn and invent.

Over five glorious years in the early 1970s, the work at PARC drove the evolution of much of future computing. The software environment advanced to become more user-friendly and supportive of communications and different kinds of media. This led to many capabilities that are de rigueur today, including graphical interfaces, high quality bit-mapped displays, what-you-see-is-what-you-get (WYSISYG) word processing and page layout applications. The hardware system builders learned more about what it would take to support future applications and also evolved accordingly. This led to hardware designs that better supported the display of information, network communications and connecting to peripherals, rather than being optimized for number crunching. Major advancements included Ethernet, laser printing, peer-to-peer and client server computing and internetworking.

Kay estimates that the total budget for the parts of Xerox PARC that contributed to these inventions was about $50 million in today’s dollars. Compare that number to the hundreds of billions of dollars that Xerox directly earned from the laser printer.

Xerox 9700 Printers

Although the exact number is hard to calculate, the work at PARC also unlocked trillions reaped by other technology-related businesses.

One of the most vivid illustrations of the central role that Xerox played was a years-later interchange between Steve Jobs and Bill Gates. In response to Jobs’ accusation that Microsoft was stealing ideas from the Mac, Gates tells him:

Well, Steve, I think there’s more than one way of looking at it. I think it’s more like we both had this rich neighbor named Xerox, and I broke into his house to steal the TV set and found out that you had already stolen it.

Kay cautions that his method is not a cookbook for invention. It is more like a power tool that needs to be wielded by skilled hands.

It is also a method that has been greatly enabled by Kay and his colleagues’ inventions. Beyond the technology industry that they helped spawned, their inventions also underscore discovery and innovation in every field of science and technology, including chemistry, biology, engineering, health and agriculture. Information technology is not only a great invention; it has reinvented invention. It powers the favorable exponential curves upon which other inventors can escape the present and invent the future.

See also: How We’re Wired to Make Bad Decisions

For his part, Kay continues to lead research at the frontiers of computing, with a continued emphasis on human advancement. In addition to his Viewpoints Research Institute, he recently helped to formulate the Human Advance Research Community (HARC) at YC Research, the non-profit research arm of Y Combinator. HARC’s mission is “to ensure human wisdom exceeds human power, by inventing technology that allows all humans to see further and understand more deeply.”

That is a future worth inventing.

6 Tech Rules That Will Govern the Future

Technology is advancing so rapidly that we will experience radical changes in society not only in our lifetimes but in the coming years. We have already begun to see ways in which computing, sensors, artificial intelligence and genomics are reshaping entire industries and our daily lives.

As we undergo this rapid change, many of the old assumptions that we have relied will no longer apply. Technology is creating a new set of rules that will change our very existence. Here are six:

1. Anything that can be digitized will be.

Digitization began with words and numbers. Then we moved into games and later into rich media, such as movies, images and music. We also moved complex business functions, medical tools, industrial processes and transportation systems into the digital realm. Now, we are digitizing everything about our daily lives: our actions, words and thoughts. Inexpensive DNA sequencing and machine learning are unlocking the keys to the systems of life. Cheap, ubiquitous sensors are documenting everything we do and creating rich digital records of our entire lives.

2. Your job has a significant chance of being eliminated.

In every field, machines and robots are beginning to do the work of humans. We saw this first happen in the Industrial Revolution, when manual production moved into factories and many millions lost their livelihoods. Jobs were created, but it was a terrifying time, and there was a significant societal dislocation (from which the Luddite movement emerged).

See also: 4 Rules for Digital Transformation  

The movement to digitize jobs is well underway in low-salary service industries. Amazon relies on robots to do a significant chunk of its warehouse work. Safeway and Home Depot are rapidly increasing their use of self-service checkouts. Soon, self-driving cars will eliminate millions of driving jobs. We are also seeing law jobs disappear as computer programs specializing in discovery eliminate the needs for legions of associates to sift through paper and digital documents. Soon, automated medical diagnosis will replace doctors in fields such as radiology, dermatology and pathology. The only refuge will be in fields that are creative in some way, such as marketing, entrepreneurship, strategy and advanced technical fields. New jobs we cannot imagine today will emerge, but they will not replace all the lost jobs. We must be ready for a world of perennially high unemployment rates. But don’t worry, because …

3. Life will be so affordable that survival won’t necessitate having a job.

Note how cellphone minutes are practically free and our computers have gotten cheaper and more powerful over the past decades. As technologies such as computing, sensors and solar energy advance, their costs drop. Life as we know it will become radically cheaper. We are already seeing the early signs of this: Because of the improvements in the shared-car and car-service market that apps such as Uber enable, a whole generation is growing up without the need or even the desire to own a car. Healthcare, food, telecommunications, electricity and computation will all grow cheaper very quickly as technology reinvents the corresponding industries.

4. Your fate and destiny will be in your own hands as never before.

The benefit of the plummet in the costs of living will be that the technology and tools to keep us healthy, happy, well-educated and well-informed will be cheap or free. Online learning in virtually any field is already free. Costs also are falling with mobile-based medical devices. We will be able to execute sophisticated self-diagnoses and treat a significant percentage of health problems using only a smartphone and smart distributed software.

Modular and open-source kits are making DIY manufacture easier, so you can make your own products. DIYDrones.com, for example, lets anyone wanting to build a drone mix and match components and follow relatively simple instructions for building an unmanned flying device. With 3-D printers, you can create your own toys. Soon these will allow you to “print” common household goods — and even electronics. The technology driving these massive improvements in efficiency will also make mass personalization and distributed production a reality. Yes, you may have a small factory in your garage, and your neighbors may have one, too.

5. Abundance will become a far bigger problem than poverty.

With technology making everything cheaper and more abundant, our problems will arise from consuming too much rather than too little. This is already in evidence in some areas, especially in the developed world, where diseases of affluence — obesity, diabetes, cardiac arrest — are the biggest killers. These plagues have quickly jumped, along with the Western diet, to the developing world, as well. Human genes adapted to conditions of scarcity are woefully unprepared for conditions of a caloric cornucopia. We can expect this process only to accelerate as the falling prices of Big Macs and other products our bodies don’t need make them available to all.

The rise of social media, the internet and the era of constant connection are other sources of excess. Human beings have evolved to manage tasks serially rather than simultaneously. The significant degradation of our attention spans and precipitous increase in attention-deficit problems that we have already experienced are partly attributable to spreading our attention too thin. As the number of data inputs and options for mental activity continues to grow, we will only spread it further. So even as we have the tools to do what we need to, forcing our brains to behave well enough to get things done will become more and more of a chore.

6. Distinction between man and machine will become increasingly unclear.

The controversy over Google Glass showed that society remains uneasy over melding man and machine. Remember those strange-looking glasses that people would wear, that were recording everything around them? Google discontinued these because of the uproar, but miniaturized versions of these will soon be everywhere. Implanted retinas already use silicon to replace neurons. Custom prosthetics that operate with the help of software are personalized, highly specific extensions of our bodies. Computer-guided exoskeletons are going into use in the military in the next few years and are expected to become a common mobility tool for the disabled and the elderly.

See also: Blockchain Technology and Insurance  

We will tattoo sensors into our bodies to track key health indicators and transmit those data wirelessly to our phones, adding to the numerous devices that interface directly with our bodies and form informational and biological feedback loops. As a result, the very idea of what it means to be human will change. It will become increasingly difficult to draw a line between human and machine.

This column is based on Wadhwa’s coming book, “Driver in the Driverless Car: How Our Technology Choices Will Create the Future,” which will be released this winter.

The Insurance Model in 2035?

On June 1, there was a high-level conference organized by the alumni of the three most prestigious business schools in France, HEC, ESSEC and ESCP Europe, whose title was “How to run an insurance company in the context of digital, societal and regulatory transformation?” The most burning issues were addressed with depth and perspective, including issues relating to the impact of digital revolution, the clash of generations and the new playground imposed by Solvency 2 on insurance.

The three major French insurers, AXA, Allianz and Generali, compete to operate as quickly as possible while the digital transformation of their business lines and organizations face an environment of increased uncertainty and threats from the emergence of new competitors—GAFA (Google, Apple, Facebook and Amazon) or startups—which have mastered the art of customer relationship.

Should we fear Google or an insurtech?

According to many insurers, GAFA may be strong competitors for insurance companies. Indeed, they have undeniably strong assets: a market capitalization among the highest, expertise not only in customer experience but also in algorithms and data and a very high level of agility. What would be similar to Google – the first advertising agency of the Internet – in a rich yet complex industry like insurance, which is highly regulated and whose confidence is only acquired after many years and millions of dollars of investment?

See also: 8 Exemplars of Insurtech Innovation  

The insurtech? Besides Oscar and Lemonade, which are true insurers, the vast majority of insurtechs are brokers that cannot work without an insurer’s support. And even if some startups succeeded, it would take time, and they would not be independent for quite some time.

Where is the real threat? In 2035, we might see a world with little risk

As we know, the heart of the insurer’s business is risk management. However, technological innovations will likely reduce risk levels significantly.

According to a KPMG report on autonomous cars, there could be as much as an 80% reduction in car accident frequency by 2040 if auto and safety trends continue. Another example suggests a scenario where the personal auto insurance sector could shrink to 40% of its current size.

According to Ray Kurzweil, director of engineering at Google and futurist, we will reach a point around 2029 when medical technologies will add a year to people’s life expectancies. Some believe that the adoption of these innovations will be hindered by people’s refusal to allow invasion of privacy. However, another could argue that, who would hesitate to provide more personal data, such as DNA, if that person was guaranteed, in exchange, an additional 20 years of life?

Connected homes that are bristling with sensors inside and out and that also populate smart cities of tomorrow, could contribute to a decline in claims by 43% by the year 2025, according to McKinsey.

Whether for life or P&C, over the next 20 years the risk level will significantly decrease, which will result in a drastic reduction in the value of the insurance market.

The twilight of insurers?

Can we therefore announce the end of the insurance industry? Certainly not. However, the share of insurance and the income of insurers could drop significantly. To maintain the same level of business will require finding new sources of profit.

From insurers to “preventers”

Indeed, the insurer of tomorrow will be one that will transform its business model around prevention and become a prevention specialist. The decrease in risk will become a major challenge that will require considerable investments in people, infrastructure and technology. New prevention services charged on a subscription basis will likely be the new source of margin for insurers. One can imagine that the new standard of performance for the new model of “Prevention as a Service” will be the ratio of prevention fees to insurance premiums. Then, we will see the complete reversal of the traditional business model.

See also: Insurtech: One More Sign of Renaissance

The question that then arises is: Should a manager of an insurance company not make the leap and skip the step of digital processing in an insurance context to strive for refocusing its business model around prevention?

Will Connected World Make Us Sloths?

The possibilities of a fully connected world are unfolding before us. Technological progress has always been about making our lives easier and providing us with more options to enjoy life – to travel, be entertained, buy stuff and communicate with others. But, the connected world promises to shift progress into overdrive. Many of the smart home, connected car and sharing economy capabilities already allow us to sit back and control the world with our mobile apps or via voice commands. Even today, a person can adjust a thermometer, launch a music playlist, check flight schedules and order a box of Twinkies – practically without lifting a finger or moving a muscle. Will this ultimately result in a populace that doesn’t think, exercise or know how to do anything except control the world through devices? Will we all end up as unthinking, lethargic, good-for-nothing sloths?

I suppose some would argue that we are already there. The YouTube-Netflix-Facebook culture spends enormous amounts of time entertaining themselves, and it conjures up images of people with eyes fixed on screens, ranging in size from tiny handheld devices to enormous, wall-mounted TVs to those giant screens on buildings in places like Times Square. Those at home are in danger of becoming couch potatoes. Others in more public places are just as mesmerized and are so attached to their devices that some fall into fountains in shopping malls or risk walking into traffic on busy streets.

See also: How to Think About the Rise of the Machines

But the developments in the emerging tech arena are made for more than just entertainment purposes, and the resulting changes in society demand a deeper exploration. The full truth is always a bit more complex. Consider the following connected world possibilities and the positive effects they can have on individuals and society:

  • Fitness Wearables: Sales of wearables for fitness and health monitoring continue to climb rapidly. Athletes and non-athletes alike are tracking a variety of biometrics and being given incentives to improve their health.
  • Smart Homes: In addition to entertainment and convenience capabilities, smart homes offer considerable opportunities to improve security and safety, reduce accidents and enable the elderly or disabled to have more options for independent living.
  • Robotic Exoskeletons: Workers in warehouses, airports and other locations are being outfitted with exoskeletons that allow them to lift heavy weights while reducing injuries.
  • Connected and Driverless Vehicles: Developments in advanced driver assistance systems (ADAS) and progress toward autonomous vehicles hold the promise of dramatically reducing vehicle accidents and the related injuries and deaths.

These are just a few of the hundreds of examples of the emerging, connected-world opportunities that may improve our health, promote wellness and enrich our quality of life. In addition, the entrepreneurial spirit and venture capital related to emerging tech and the connected world are engaging legions of individuals, both young and old. There may be one group of individuals that is looking forward to binge-watching Netflix while interacting with their world from the comforts of their living room couch. But there are many others that are actively engaging in the connected world to better themselves and the world around them.

See also: How Connected Will Connected World Be?

You may be wondering what this has to do with insurance. The answer is – a lot. Just as mobile and social media technologies have changed expectations, patterns of communication and the business environment, so will the connected world. Positive and negative implications of the connected world will affect human health, traffic patterns, accidents, population distribution, employment opportunities and many other areas of life and society. In short, virtually everything that the insurance industry covers will be affected in some way. There may be some who will sit on the couch as their health deteriorates and their societal contributions decrease, but there will also be many more who thrive on the opportunities of the connected world. Either way, the needs and risks of customers will change.

6 Key Ways to Drive Innovation

Insurers and intermediaries know that innovation has the potential to disrupt their current business and operating models. And they know that they need to innovate faster than their competitors to defend and grow their business. Yet few have found a winning formula for embedding innovation into their people, products or processes.

Feeling the disruption

The fact that new technologies, innovations and business models are changing the dynamics of the insurance market is clear. More than eight in 10 insurance executives responding to our recent survey, Innovation in Insurance, said that they believe their organization’s future success to be tied closely to their ability to innovate ahead of their competitors.

But with new entrants, new technologies and new business models emerging at an increasingly rapid pace, many insurers are also concerned that innovation will bring more disruption than value. Many are already feeling the heat. In fact, almost half of our survey respondents said that their business models were already being disrupted by new, more nimble competitors.

For some, the risk of disruption and the opportunity for competitive advantage is driving a renewed focus on innovation. In a recent interview with John Geyer, senior vice president of MetLife’s innovation program, for the report, A New World of Opportunity: The innovation imperative, he said: “If somebody’s going to disrupt our industry, it might as well be us.”

Indeed, new technologies are reducing losses and costs while saving lives and increasing customer satisfaction, reducing risks and driving new business models and consolidation within the industry. New advances such as driverless cars, machine learning, home sensors and “robo-agents” empowered with artificial intelligence and mobile payments offer a world of opportunity for insurers.

Screen Shot 2016-04-14 at 12.59.34 PM

The capacity and capability to innovate

While many insurers recognize the vast possibilities that innovation brings, many seem reluctant to be first out of the gate. This is not entirely surprising; most organizations responding to our survey reported that they lack the hallmarks of an innovative organization, such as dedicated budgets, formal strategies, executive-level support and measurement processes.

Even those that want to take first- mover advantage (as almost a third of our respondents’ claim they wanted) face significant challenges catalyzing innovation. In part, this comes down
to capacity: 79% of respondents across the globe told us that they were already running at full tilt just keeping up with their core requirements.

Capability is also a key concern. Lack of skills and capability was ranked by 74% of respondents as a top three barrier to innovation, particularly for smaller and mid-sized organizations and those based in Europe. Simply put, insurers know what they need to do to drive innovation but recognize they lack certain skills to achieve it.

Screen Shot 2016-04-14 at 1.00.28 PM

To be fair, most insurers have certainly been working hard to improve their innovation strategy and capabilities. Many have already implemented cultural change programs focused on fostering innovation and training programs to develop idea generation and innovation skills. Others have put their sights on widening their innovation ecosystem by engaging in partnerships with academics, FinTechs and other third parties to drive innovation. Some have even changed their business models or created innovation “hubs” or “labs.”

Lessons from leaders

Our experience suggests that while all of these previous initiatives are valuable, few organizations have been bold enough in their objectives or their execution to truly drive change. Based on our research, our interviews and our experience, we have identified six key ways that leading insurers are becoming more innovative.

  1. They are focusing on creating a customer-centric culture. While more than half of respondents say they have conducted a cultural change program in the past five years, our experience suggests that they may have focused their efforts in the wrong area. Rather than trying to become more innovative, insurers may instead want to become more customer-centric, which, in turn, will drive innovation.
  2. They are willing to disrupt their existing business models. Doing more of the same, only faster, is not a recipe for long-term growth. Leading insurance players recognize the need to innovate not only product and service development, but also how they approach innovation itself. Insurers and intermediaries need to be willing to try new models and partner with new stakeholders to truly compete in an innovation-led competitive marketplace.

Screen Shot 2016-04-14 at 1.01.55 PM

  1. They apply agile and dedicated leadership. Innovation requires leadership, strong executive support and clear vision. There’s no secret engine behind a door that creates innovative energy for an organization. It’s not about having the best game plan; it’s about having a coach who knows which players to put in the field to execute on the game plan. That’s how goals are scored.
  2. They mitigate risk by investing and experimenting. The best companies have discovered ways to link their investments to the expected frequency and severity of risks to ensure they are appropriately matching investment to risk. They have started to experiment with new business models. Looking at the viability of their current business model and the role of technology in their competitive strategy, they are also exploring new business models and businesses as the profile of risk changes.
  3. They understand why they are investing. While most organizations report that they measure their return on their innovation investments in some way or another, the leading insurers are working to ensure that they have the right alignment with business objectives and are broadening their metrics beyond simple financial ROI calculations to include more subjective measures such as public reputation or customer engagement.
  4. They learn from others. We believe partnerships will be key to future success, but we need the right structures, models and infrastructure to create value. Large organizations need to learn to partner, and all organizations need to learn to partner effectively. Consider alliances with partners outside of insurance to accelerate customer benefits and expand the value chain.

The road ahead

Our research and discussions with established and start-up players suggest that — to make the most of this new world of opportunity — the insurance industry needs to pivot from a traditionally risk-averse culture to one that encourages experimentation while mitigating financial risk.

To achieve this, insurers will need to tap into new sources of innovation, accessing fresh ideas from employees, customers, investors and partners, which, in turn, will require progressive leadership at the top of the organization.

The innovation imperative is clear for insurers. Now it’s time to make the most of the world of opportunities that exists for those bold and innovative enough to seize these opportunities to create competitive advantage.

Reprinted from (Regulatory Challenges Facing the Insurance Industry in 2016,) Copyright: 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name and logo are registered trademarks or trademarks of KPMG International.

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