2018 was the year that insurance embraced open innovation. From medium-sized insurers to Fortune 50 incumbents, everyone seemed to be launching a challenge, accelerator or incubator — to the point where we now have too much of a good thing. This has led to a certain ennui in the startup and VC ecosystem. Every insurtech startup, the good, the bad and the ugly, seems to have been part of one or more programs. It is hardly surprising that new programs are greeted with a collective shrug. In such a context, how can you create a compelling and differentiated program?
Simply put, a compelling program creates immediate business value for both the program sponsor and the program participant. The keyword is “immediate” — which means the program focus should be on core business processes and customer experience. In other words, ROI should mean return on investment, not reservoir of ideas!
Programs to scout for new business models (like accelerators and incubators) have their place in an innovation portfolio but do not add immediate value — certainly not to the sponsor (and rarely to the participant). In general, it is better to have a narrower focus on digitization and differentiation, before trying to tackle disruption.
For the program to be more than PR spin, it should fulfill the following conditions:
The program should tackle well-defined, real business problems. As a rule of thumb, the problem should be costing the incumbent north of $1 million per year. This size of problem ensures that there is scope for a long-term relationship and a significant opportunity for the startup partner. The problem should also be well-defined — the improvement metric should be clear. The Netflix prize, which required a 10% improvement to Netflix’s own recommendation engine, is a good example.
The pilot should be with real data and real customers. The end stage of the program has to be more than a demo day, with abstract promises of next steps. A differentiated program will guarantee a pilot that interfaces with the business and is implemented in a live environment. By definition, this will require certain maturity on the startup partner side, which is a good thing.
The pilot should have a real budget. No more “toy prizes” of $20,000 to $50,000. A pilot should have a budget of at least $100,000 to create meaningingful skin in the game, so that both sides are serious about making the pilot a success.
Finally, we need a new brand for programs that meet these conditions. I suggest “implementation challenges” to make clear that the program is about creating value in the here and now.
When you add it all up, the insurance industry has many characteristics that make it an attractive target for aggressive investments in innovation. First, it is enormous; it is estimated to be a global market of premiums written of more than $4.7 trillion. Second, it faces multiple challenges that offer opportunities for exploitation by nimble, efficient and innovative competitors, including:
Low-interest-rate environment: Together, forcing a focus on the core business of insurance, creating enhanced customer experiences and value and rethinking operations to manage expenses are driving the innovation of business models underpinned by an efficient, flexible and variable-cost-based infrastructure.
New customer attitudes and behaviors: From a move toward owning to renting, looking for niche solutions such as short-term, on-demand insurance or seeking solutions that help to manage risk, there is a growing need for new products and services that may be offered through new business models.
Changing customer expectations: Fueled by digital technology, data and experiences from other digital companies (Amazon, Google, Facebook, etc.), expectations are radically shifting and driving increased dissatisfaction levels with how insurers engage and interact with customers.
Traditional insurance is stale and complex: Insurance is seen as an intangible, low-engagement product that customers do not enjoy buying. They are seeking alternatives that make the process simple, quick and painless, with engagement that meets their needs.
Yet insurance is still needed by individuals and businesses to protect them and help them manage an increasingly changing risk environment. As a result, there is a gap between what traditional insurers are providing and what is needed in today’s rapidly changing marketplace.
Enter the greenfields, start-ups and incubators that are aiming to innovate insurance. They are seeking to define new business models and processes that create a better way to “do insurance,” capture new market opportunities, create products and services and be at the forefront of the changing market. The nature of this new pressure is characterized by technology, data and very active investment activity as reflected in the new term, InsurTech. The research firm CB Insights is tracking more than 130 start-ups and private companies in the InsurTech space that have raised more than $3.5 billion in aggregate funding.
Many insurance companies recognize the importance of not standing idly by while others are reinventing insurance and creating new models, products, services and value propositions. Indeed, a survey conducted by Celent among its insurance panel found that 86% felt that innovating over the next three to five years was critically important (InsureTech Has Arrived: A Primer, May 2016). And, as highlighted in Majesco’s recent thought leadership report, Greenfields, Start-ups and Incubators … Innovation in Insurance Products, Channels, Services and Business Models, a small but growing number of companies are becoming active in this space by establishing venture capital units/divisions; creating start-ups and greenfields; and incubating new products, services or channels.
Still, most insurance companies have been hampered by the prospect of needing to do multiple monumental tasks simultaneously: First, continuing to run the current business with existing (and in many cases) outdated legacy systems; second, modernizing those systems to bring the current business into the modern era; and third, innovating/re-inventing the business in the race with InsurTech competitors to respond to the rapidly changing needs, expectations and risk profiles of the customer.
This dilemma is not new. The tension between the current state and the vision of the future state is always there; it is just more pronounced today, given the pace and complexity of change. The companies that are exemplars at innovation are the ones that embrace these tensions and manage them strategically.
Consultant and Dartmouth professor Vijay Govindarajan adapted an ancient Hindu philosophy to characterize the required components of this capability in his new book, A Three-Box Solution to Managing Innovation (Harvard Business Review Press, April 26, 2016).
Box 1 (with Hindu god Vishnu, the preserver, as the metaphor) is about managing the present and keeping the current success of the company going.
Box 2 (based on Shiva, the destroyer) is about selectively forgetting about and letting go of the past. This includes some of the things that led to the company’s current success, which may not be relevant in the future; they are today’s strengths but may very well be tomorrow’s weaknesses.
Box 3 (based on Brahma, the creator) is about inventing the future — the game-changing innovations that are going to transform the business for tomorrow.
Govindarajan explains that many companies stay stuck in Box 1 and are afraid of Box 2. In an interview with the Huffington Post, he noted, “Once companies become large and successful, the tendency is to preserve success. The tendency is to focus on Box 1. Box 1 is about managing the present, Box 2 is about selectively forgetting the past and Box 3 is about creating the future. For large companies, success becomes a trap because they tend to focus on Box 1/present.”
Successful companies balance activity and focus across all three boxes. For example, a healthy Box 1 is critical to fund the activities in Boxes 2 and 3, which will determine the future of the company. As he said, “Just as the three Hindu gods work in concert to keep the universe humming, a company manager must keep the present business strong and at the same time get rid of outdated enterprises and develop new lines.”
A Three-Box framework is helpful for structuring strategy for innovation and reinvention, but putting it into action isn’t necessarily easy. In our experience working with numerous carriers on their transformation journeys, we have found the following three tools to be helpful in moving from thinking to action.
First, develop a target operating model that defines how to efficiently and effectively operationalize your company’s vision and business strategy for both the existing business and the future business model. The right combination of business processes (process strategy), organizational structure and staffing (people strategy) and technology and data assets (technology strategy) will likely be different for the existing and future models, so ask these key questions: What is your minimum viable product? New operational model? New business model? What areas of the existing business are most critical to keep it funded today and the future? A target operating model can help you define your existing and future business so that you rapidly get results and value.
Second, create and execute a well-documented, detailed business transformation plan that makes it explicitly clear how the transition from current to future state will occur. The plan should include details on your current state to help drive new efficiencies — including all of the connections, data flows and work flows — and the inevitable bottlenecks and inefficiencies that are costing you money and reducing quality. It should also include details that define your new business model and what you need for the future business, which is likely very different from your current model. To create confidence in how and when you will arrive at the future state defined by your target operating model, the plan must identify and document an appropriate number of transition states that define what the process, people and technology components will look like — and for how long.
Third, leverage cloudplatforms and partner ecosystems across all boxes to eliminate the need for new infrastructure and reduce the uncertainty around the veracity of future state business model ideas through “fail fast” experimentation and rapid scalability.
These three steps combined with the Three-Box framework create the 3 X 3 approach for ensuring your company’s current and future success.
3 X 3 Approach to Reinvent Your Business
Reinvention and Transformation: The New Normal
The wave of change to a digitally and data-empowered world driven by ever-increasing customer demands is inevitable. And it is a given that there will be constant pressure from both start-ups and established companies to outdo each other in the race to better meet those needs and capture more share of the enormous value presented by the insurance market.
For insurance companies, the need to reinvent and transform the business is no longer a matter of if, but when. Together, the Three-Box framework and three-step approach provide a formula to use to develop your reinvention and transformation strategy. But the bigger challenge insurance leaders face is the pace of transformation — because the pace of change is not slowing down.
Insurance leaders should ask themselves: Do we have a strategy that considers both transforming the legacy business and creating a new business for the future? Who are our future customers and what will they demand? Who are our emerging new competitors? Where are we focusing our resources… on the business or on the infrastructure? What can we do to demonstrate to all employees that we must be — and that we are — committed to working in balance across all three boxes?
If insurance were a map, we would be surveying a whole new world. The fences and boundaries of tradition have fallen. The snow-capped mountains of certainty are melting away. The rivers of market share are changing course, and streams of data are coming directly to our doors. We know there are still products to plant and fields to harvest, but how will our planting change in the months and years to come?
Many insurers will be looking at greenfields for the answer.
Greenfields, start-ups and incubators are different ways of looking at the same essential concept — starting from scratch. Each is a new beginning. Greenfields are new initiatives often aimed at developing new markets. Start-ups are most often new initiatives that will reach existing markets. Incubators are designed to test new products within new or existing markets. For our purposes, we will lump them all together under the title of greenfields, because from an organizational perspective the need for them and preparation for them are similar.
Think about how insurance has grown, just based on the questions we have asked ourselves over time. Insurers used to ask, “How do we do what we do better?” They were thinking of underwriting, selling and meeting market demand.
As the internet and the digital realm arose, they began asking themselves, “How do we do what we do differently?” They needed to know how to reach the same people with better channel management and improved customer service.
Now, they are asking, “How do we do what we don’t currently do at all?” They want to know how to identify, build and capitalize on new risk needs, new markets and social networks, how to use technology to its fullest, how to become a trusted resource for services outside of insurance and how to reinvent the organization and brand so that it is prepared to be profitable no matter what initiatives lie on the horizon.
It is the preparation that is an important first step. A great idea can’t take root in an organization that won’t support it. How can insurers prepare for greenfield development?
Greenfield insurance companies that are starting outside of a traditional insurance organization and those that are starting under the umbrella of traditional insurance companies both value “fresh air” and an environment that is unclouded by tradition.
Starting from scratch allows them to think without constraint, test without constraint and operate without constraint. They do have barriers. Most are operating within a window of opportunity, and all are operating under the assumption that investments need to pay off. But for the most part, greenfields take advantage of the fact that organizational politics, processes, traditional technologies and time-honored ideals are all open to reassessment, replacement or removal.
Organizational silos need to be bridged, if not completely abandoned. The new opportunities where greenfields will work best will be created by cross-functional teams that understand how to integrate new technologies with the best ideas. This is one reason hackathons have recently grown in popularity. They are simply borrowing a common concept from ad agencies, TedX events and jazz musicians…the idea that walls and ideas aren’t compatible. The best fertilizer for ideas is a diverse set of perspectives on how the idea will be constructed and how it will work in practice. Teams need functional area experts, but they also need general leadership with a holistic perspective as well as input from technology partners who grasp what is technologically possible.
Investing in seeds
Seeds are investments, and most investments have phases. The greenfields in insurance are ripe for these investments, and they are bearing fruit. But those that will be most successful will pay close attention to planting methods.
For example, farmers don’t take the newest seeds and plant 1,000 acres. They test them in plots. In insurance, our ideas need to be cultivated quickly, first in small pots, in our incubators and centers of excellence — we can call these our insurance greenhouses. If they appear to be working, we test them in small geographies, then roll them out to larger segments. Seed planting is speed planting. The idea works, or it doesn’t. We scale up quickly or toss the idea out. We invest wisely by investing small, until the investment proves itself and then we invest more.
As we watch seed money flowing into InsurTech, we know that some of these investments won’t pay off. Many venture firms will have invested more in a proof of concept than they should have. Some will attempt a rollout before the concept is mature. The best growth will happen through organizations that know how to phase greenfield investment.
Greenfields will be capitalizing on technology to save investment funding. This includes reusing technologies and sharing systems. Cloud platforms with a “pay as you go” pricing model are perfect for greenfield development because they answer the demand for agility, innovation and speed (low implementation time, quick speed to market, light or no customization) with lower investment and maintenance costs … allowing the investment to focus on the business, not the infrastructure. Greenfields are creative pursuits to new opportunities. Their back-end solutions will require just as much creativity as their front-end marketing, but they will want solutions that don’t require massive customization.
Greenfields will therefore capitalize on what they don’t need to build from scratch. Modern core platforms will allow them to use pre-built, integrated content and data sources, pre-built best practices and products and pre-built channel options. They will use their creativity to build new business models around pre-built infrastructures, instead of building new systems from the ground up.
The passion for planting
In the coming weeks, we will take a more in-depth look at greenfields, start-ups and incubators. We’ll look at the surprising growth of insurance innovation investment and what it means to existing businesses. We will discuss how deeply the choice of platform can affect insurer preparation, and we’ll also look at the greenfield spectrum that includes new value-chain technologies, new aggregator channels and completely new types of insurance.
Our goal is not to gawk at the high number of entrants into the market, but to glean a whole new perspective on opportunities. You may find that your unique position will allow you to have market-capturing ideas ahead of others. And you may develop a passion for planting your own seeds in the greenfields of opportunity. Is your organization ready for your team’s next great idea?