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How to Enable the Next-Gen Insurer

Innovation continues to be a key topic within the industry, attracting greater attention in the last few years because companies like Google, Walmart, Apple and others have raised the bar with strong innovation cultures that are challenging existing companies and industries, including insurance, in a multitude of ways. Their commitment to create, nurture and inspire a culture that mobilizes their creativity and resources is breathtaking and is also backed by the commitment of top leadership to ensure innovation is seen, heard and acted upon each and every day.

In this rapidly changing marketplace, innovation is no longer a nice-to-have initiative. It is a must-have, strategic business capability and core mandate that is defining a new era of market leaders across all industries, including insurance. The change and disruption are not from any one influencer, but rather a combination of influencers that together are creating a seismic shift in business models, customer expectations, products and services and infrastructure. As result, companies are increasingly embracing innovation to address the challenges and opportunities of this disruption … and insurers must, too.

Many insurers are on the journey to becoming a Next-Gen Insurer by reinventing the business of insurance. Unfortunately, too many are only retooling their traditional business elements such as products, services and processes. These varied approaches expose a wide and dangerous gap in the levels of innovation maturity. Based on our research results, only 13% have a strong innovation culture, 35% have a formal innovation team, 26% have formal innovation processes and 36% are using collaboration tools. The diversity and small amount of engagement in these four critical areas suggests that only about a quarter of insurers would likely have the necessary foundation in place to achieve mover or market leader status, leaving the majority of insurers at the laggard or “mainstreamer” level.

What does this reveal? Insurers appear to be significantly behind — especially when compared with new challengers that are moving at a high pace and level, with innovations and capabilities emerging regularly through their own development, acquisitions or partnerships. The new challengers are transforming other industries, and the insurance industry is being threatened, both directly and indirectly. Retail with Amazon, taxi service with Uber, banking with Lending Club, venture capital funding with Kickstarter, automotive with Google and insurance with Google all illustrate ways that innovative capabilities are being introduced and that industry boundaries are being eliminated. A commitment to innovation is at the heart of growth and success.

The implications for insurance are vast. If insurers fail to achieve a robust level of innovation maturity, they will increasingly fall behind and risk becoming irrelevant in a changing marketplace, just like Kodak, RadioShack, Borders and others. But those that embrace the inevitable nature of the seismic shifts that will affect almost every line of business and every product within the insurance industry’s portfolio will be well-positioned to lead their organizations’ innovation initiatives beyond traditional comfort zones.

This report provides a framework to help insurers assess their current innovation maturity level compared with where they want to be. By doing so, they can best determine strategies to establish innovation as a core business capability to help win in today’s world.

In a world of rapid change, new competitors, emerging technologies, advancing innovation and fading industry boundaries are intensifying the challenge to traditional insurance business assumptions. How insurers respond to these changes – with a fresh set of views that combine both inside-the-industry and outside-the-industry perspectives within a robust innovation process – will very likely influence their future.

So how should insurers respond?

  • Insurers must assess their current innovation maturity level, define the desired maturity and formulate a plan to move the organization forward on their journey as a Next-Gen Insurer. Evaluate your current state across key elements and provide executives a baseline from which to define and develop mature innovation capabilities necessary to compete today and in the future.
  • Insurers should establish an innovation mandate and business capability by leveraging best-practice methodologies, like the SMA innovation framework, to guide and implement the desired innovation maturity level within the organization. Ensure that innovation becomes a sustainable and robust capability similar to other core capabilities like program management, financial management or product management.
  • An organization must focus on the level of strategic and organizational commitment, on tracking and assessing inside and outside industry trends, on being willing to embrace open innovation and an ecosystem, on the ability to develop long-term scenarios and on investment of resources. They will define the level of innovation maturity and determine future success.
  • Insurers must create and participate in robust ecosystems of internal and external resources to gain insights.
  • The commitment to innovation should be viewed no differently than the organizational and financial commitments needed for any strategic initiative, new market entry or new business. Market leaders are embracing innovation as a requirement for fueling the organizations’ potential and securing their market leadership.

Innovation is a must, and time is of the essence. Leading futurists, including David Smith and Erik Qualman, suggest that 40% of the Fortune 500 companies won’t exist in 10 years. It is reasonable to expect a similar ripple effect through all companies. It is imperative that insurers assess their current state of innovation maturity and commit to a future state that is fully capable of fulfilling their vision for a viable future. Those that embrace innovation and capitalize on the disruption and influencers stand to make the biggest gains and remain relevant in the future. But those that hesitate will fall short in both competitive position and financial stability. What is your next move?

Click here to learn more about SMA’s research.

Is Uber Already in the Crosshairs?

The CEO of a large insurance company once confided to me that the toughest innovation challenge he faced was that, “Every time we try to innovate, the agents turn around and kick us in the nuts.”

The dance between Uber and Google around drone taxis reminds me of that conversation. Google invested in Uber in 2013 but has recently distanced itself from Uber amid indications that it is considering offering its own ride-hailing service using driverless cars. While such a service might make sense for Google and might be the way of the future, imagine how Uber’s drivers will react if Uber attempts the transition to driverless cars.

Both the insurance CEO and his agents knew that the most innovative thing his company could do was to eliminate the agents as middlemen between him and his customers. This insurer was paying about 15% of its premiums to agents in commissions and bonuses. Eliminating agents would have translated into lower expenses for the insurer and lower premiums for customers. GEICO, for example, pays no agent commissions. It takes advantage of its structural cost advantage to out-market and out-price its agent-based competitors.

The problem was that this insurer depended on its agents. Going from agent-mediated sales to no agents was fraught with danger.

Sometime in the future, whether five, 10 or 15 years from now, Uber will confront a similar predicament as it confronts the adoption of drone taxis.

Fully autonomous cars will enable Uber-quality service at much lower prices — and at a fraction of the cost of car ownership. The only difference is that there will be no human drivers.

Drone taxis are an opportunity that Uber has long foreseen. It was likely a part of the calculation for accepting Google’s $258 million investment in 2013Travis Kalanick, Uber’s CEO, was clear about the opportunity when he told a technology conference in 2014 that:
“The Uber experience is expensive because it’s not just the car but the other dude in the car. When there’s no other dude in the car, the cost [of taking an Uber] gets cheaper than owning a vehicle.”

And, as I discussed I a recent column, Uber just put a lot of money behind that vision. So, by the time driverless cars become viable, Uber will have had a hand in its development for a long time.

But here’s the rub. By that time, Uber will no longer be a feisty startup with nothing to protect. It will most likely be a highly profitable and richly valued public company. It will be servicing millions of customers in thousands of cities across hundreds of countries all around the world. And its success will depend on the allegiance of hundreds of thousands of independent human drivers.

As with insurance agents’ power over the aforementioned CEO, drivers will have tremendous leverage over Uber. Will Uber drivers accept a drone option on the Uber app? No.

It is easy to imagine work stoppages and mass defections to competitors that promise not to offer drones. It is also easy to imagine intense campaigns by drivers and third parties to save drivers’ jobs and livelihoods. Uber will find itself at the very uncomfortable heart of the technology vs. jobs debate.

Will Uber management have the audacity to risk changing Uber’s business model? Could Uber weather the bad publicity and potential disruption to its revenue and profits? Would its board and investors allow management to put the company at risk?

Uber will be in much the same position that Kodak found itself with digital photography. Kodak had the foresight to invest in research that yielded many of the core inventions enabling digital photography. Yet it struggled for decades to capitalize on those inventions — even as digital photography inexorably replaced film-based photography.

Kodak failed even though it had immense resources, technical expertise and management talent. It failed because it could never negotiate the business model transition to digital photography. If you had a very profitable and dominant film, chemical and paper business, when would you choose to accelerate its demise? Kodak management stuck with film until the company’s early advantages in digital photography no longer mattered.

The iconic “Kodak moment” used to conjure up images of heart-warming pictures. It now symbolizes companies grappling with complete and utter technology disruption.

Uber will no doubt have all the prerequisite resources, technical expertise and management talent to fully comprehend the strategic implications of driverless cars. Like Kodak, it will have a very long time to prepare.

Do you think it will survive its Kodak moment?

9 Technologies That Will Change Insurance

“We’re at maybe 1% of what is possible. Despite the faster change, we’re still moving slow relative to the opportunities we have.”

This compelling statement from Larry Page, CEO and co-founder of Google epitomizes the power and potential of emerging technologies. Yet most insurers have difficult comprehending how fast emerging technologies are being introduced. And the pace is gathering speed, having a profound impact on our lives, our businesses and our industry. Moore’s Law tells us that computing power doubles every 18 – 24 months, but even that seems to be irrelevant compared with the power of emerging technologies, because they are coming faster, and they are more formidable than ever before.

This rapidly accelerating pace comes at a time when the convergence of advancing technologies, increasing customer expectations and access to capital for new technology start-ups are magnifying the extremes, and the impact to the insurance industry is more game-changing than ever before. Never before has technology advancement had as much influence as what we are experiencing now.

Technologies promise breakthroughs that will challenge long-held business assumptions and shift the boundaries between business and industry – creating completely new businesses and industries. SMA is actively tracking nine emerging technologies: 3D printing, the Internet of Things (IoT), drones/aerial imagery, driverless vehicles, wearable devices, “gamification,” artificial intelligence, semantic technologies and biotechnology. We are following them from a perspective inside the industry as well as taking an “outside-the-industry” view. 

Not surprisingly, adoption is being led by the Internet of Things (IoT). The IoT is followed by artificial intelligence (AI), drones/aerial imagery and then gamification. The insurance industry’s rapid adoption is impressive. Five of the nine technologies are projected to arrive at or go well beyond the tipping point within three years. All nine are projected to surpass the tipping point within five years.

Adding to the momentum, individuals and companies that are a part of SMA’s Innovation Ecosystem and represent outside-the-industry perspectives see an even faster rate of adoption and greater potential for the transformation of insurance. This underscores that the insurance industry is on the crest of a massive wave of change.

Over the next five years, these emerging technologies, just like the Internet, smartphones and social media before them, are expected to drive new business models and foster the formation of companies from unexpected combinations of companies and industries — capturing the customer relationship and revenue. The astounding influence of these technologies — over a relatively short period — will begin to delineate a new generation of market leaders within and outside the insurance industry. Who will be the next Facebook, Uber or eBay?

So how should insurers respond to this rapid adoption? Insurers must quickly begin to develop strategies and experiment with and invest in these technologies today. If not, many insurers will be placed at significant risk, because there is typically a minimum two-year lag time between leaders and the mainstream and a minimum four- to five-year lag time between leaders and laggards. And given the pace of adoption of these technologies by insurance customers, the lag time carries more potential for damage than it did in the past. Consider that Apple introduced the iPhone just seven years ago, in June 2007. The result has been massive destruction and transformation that has created new leaders while forcing others into increasing irrelevance.

While it may be difficult to grasp the sheer magnitude of the change coming from the emerging technologies, remember that Larry Page of Google says we are only seeing 1% of the potential. Insurers must aggressively find a way to engage these technologies and uncover the potential, first to stay in the game, and then to win it. To do so, insurers must have modern core systems as a foundation to integrate the use of these technologies.

Consider these questions: How will product liability need to be redefined for driverless vehicles? If individuals or businesses no longer need auto insurance, what is the impact on other products? Multi-policy discounts? Will the driverless car encourage shopping for alternative options? Will it drive commoditization into other products? How will insurers assess the value and risk of a 3D-printed structure, body organs or vehicle parts? How will biotechnology-based agriculture change risk factors? How will drones help underwriting and claims? Can drones also provide resources needed during catastrophes, creating new services and value? Could gamification be a new channel to help drive increased market penetration through engagement and education about life insurance, health, medical, liability, home, umbrella and more?

These are but a few of the implications for insurance. They are inter-related and complex. They stress the significant disruption that is coming, and coming fast, as represented by the five out of nine emerging technologies that will reach the tipping point within three years … and some much sooner. Insurers that have not begun to pilot these technologies are already lagging behind and will struggle to keep up with this accelerated pace of adoption, not just from today’s competitors, but also from tomorrow’s competitors, as well as their customers. That poses a question: Will you remain relevant, or become the next Kodak, Blockbuster Video, Borders or CNN of insurance – the iconic brand that dies?

The coming years hold unparalleled opportunities for innovation and matchless potential for becoming market leaders that leverage emerging technologies to increase customer value, engagement and loyalty to insurers. As Steve Jobs stated, “Everyone here has the sense that right now is one of those moments when we are influencing the future.” The question to you is: Will you influence the future or be a remnant of the past?

This article is adapted from a new research report, Emerging Technologies: Reshaping the Next-Gen Insurer.

What the Apple Watch Says About Innovation

Now that the dust has settled on the long-anticipated unveiling of the Apple Watch, a major obstacle to its success is coming into view: the iPhone.

The Apple Watch has been the subject of breathless anticipation for years because, as Tim Cook said at its introduction, it represents “the next chapter in Apple’s story.” Conceived three years ago, shortly after Steve Jobs’ passing, the Watch is the embodiment of multiple dramatic arcs and aspirations.

It is the first major product developed under Tim Cook and Jony Ive outside of Jobs’ shadow—and thus has huge personal and legacy implications for both men.

The Watch is also Apple’s attempt to catalyze and dominate the wearables category. Given the intense competition in the smartphone market and the widespread view that new killer products, platforms and ecosystems will emerge somewhere at the intersection of the Internet of Things and wearable computing, the Watch is central to Apple’s post-iPhone strategy.

It might seem that the iPhone should be the Apple Watch’s greatest asset. Apple is positioning the Watch as a jaw-dropping, must-have peripheral to the iPhone. Millions of iPhone-toting Apple fans are sure to queue up upon the Watch’s 2015 launch to buy it. But do not mistake early adopters for market validation. For billions of other potential customers, the Watch’s close linkage and tethering to the iPhone could be a fundamental weakness.

In the short term, Apple must convince existing customers that they need a Watch in addition to their iPhone. Apple, however, has yet to offer a convincing case for this.

Long-rumored groundbreaking health apps built on Watch-mounted sensors have not materialized—disappointing many healthcare watchers (including me). That leaves Apple competing against more narrowly focused wearable devices like the Fitbit and Pebble—but at multiple times the price and fractions of the battery life.

Apple is also touting Apple Pay as a killer app that will attract consumers to the Watch. But, while Apple Pay is an intriguing service-oriented strategy for Apple, there is no need for consumers to buy an Apple Watch to use it. Apple Pay will work fine with just the iPhone.

For now, it seems that Apple has higher hopes for the Watch as a fashion accessory than as a category-defining killer app. But even that highbrow aspiration has ample skeptics who question the Watch’s fashion chops and business potential.

In the long term, when and if compelling apps emerge for the Watch, Apple will have to convince Watch enthusiasts that they need an iPhone in addition to the Watch.

This might not seem like a limiting factor given that there are more than 300 million active iPhone users. But imagine if the iPhone were just a peripheral to the Mac, thereby limiting its addressable market to Mac owners. Or imagine if the iPhone had to be tethered to the iPod. Do not such scenarios, in retrospect, sound implausibly shortsighted?

Both the Mac and the iPod were great products with loyal followings at the iPhone’s introduction. Apple, however, did not limit the iPhone to its predecessors’ market niches. As shown in Figure 1, the result was a blockbuster that lifted Apple far beyond those earlier products. The iPhone has grown to represent more than half of Apple’s revenues and perhaps even more of its profits.

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Figure 1 — Apple Device Sales

Now the iPhone has a loyal following but a small share of the smartphone market. Will Tim Cook limit the Apple Watch’s success to iPhone owners, or will Cook free it to dominate the potentially larger wearable devices space?

Freeing the Watch is a strategic imperative.

History tells us that market-leading technology products like the iPhone inevitably fade. The companies that depend on them must innovate into the succeeding categories or fade as well. Kodak, Polaroid, IBM, DEC, Nokia, Motorola, Blackberry, Intel, Sony, Dell and Microsoft are among those fading or faded companies.

All of those other companies underutilized disruptive advances in information technology for (at best) incremental enhancements to their dominant products. By doing so, they missed out on new killer products, business models and industries that coalesced around the new platforms enabled by those technology advances.

Thus, Kodak wasted decades trying to deploy digital photography (which it invented) as an enhancer to its dominant film-driven businesses. Microsoft was slow to the web and the cloud and killed its early e-reader and tablet devices because of internecine struggles over how those new categories related to its Windows and Office businesses. The list goes on: IBM did not lead in minicomputers. DEC and every other leading minicomputer maker missed out on personal computers. Motorola and Nokia were killed by smartphones, and Blackberry is near death.

Limiting the Watch to a peripheral role in the iPhone-centric ecosystem would repeat the same mistake made by those earlier market-leading technology companies.

That’s not to say there is not a lot of money to be made in the defend-the-cash-cow approach. Just look at the more than $650 billion in revenue and nearly $250 billion in earnings that Steve Ballmer delivered in his tenure as Microsoft CEO. Ballmer achieved those impressive numbers by defending and milking Microsoft’s dominant Office and Windows products. Ballmer, Microsoft and its investors missed out, however, on the market value created by Google, Apple, Facebook, Twitter and others that capitalized on search, big data, cloud computing, mobile devices and social media. Ballmer’s inability to grow beyond the core products that he inherited stagnated Microsoft’s market value for a decade.

Likewise, Tim Cook could nurse Apple’s iPhone-driven revenue stream for a long time. I doubt, however, that Tim Cook would be satisfied with a value-creation legacy comparable to Steve Ballmer’s.

It is too early to dismiss the Apple Watch’s potential to transcend the iPhone. We’ll get a measure of Apple’s foresight when it releases the software development kit (SDK) for the Watch. That will show how fundamentally tethered the Watch is to the iPhone and whether Apple has laid the groundwork for the Watch to be standalone at some point.

The real gut check for Tim Cook is further out in time, when technology and creativity enables wearable devices like the Watch to not only stand alone from the iPhone but also to replace it.

Will Tim Cook allow the Watch to cannibalize iPhone sales—as Apple previously allowed the iPhone to eat away at the iPod and risked the iPad’s doing the same to the Mac? Or will Apple stagnate as competitors and new entrants out-innovate it? Will Apple fade away as the riches from new killer apps, devices, ecosystems and business models that coalesce around emerging wearables-centric platforms flow to others?

The 4 Major Sources of Change for Insurance

The insurance industry faces disruption from a host of new technological and social phenomena. To plan for these, it is helpful to first examine how other industries have either successfully navigated large-scale changes and prospered, or have failed to do so and disappeared.

This article will examine past and future market disruptors. It provides case studies of businesses that have failed or succeeded to navigate large-scale changes. By reviewing these cases, business leaders in the insurance industry will get a sense of how to prepare for inevitable disruptions.

Four Major Sources of Change and How to Deal with Them

Many of the recent and impending market disruptions fall into the following categories:

Source#1: Disruptive Innovations

Some innovations completely displace old markets or create new ones. This can be devastating for businesses if they fail to adapt quickly.

The best example of this is the Kodak/Fuji Film rivalry that took place during the advent of digital media. Both companies were in the same dire straights: Inexpensive digital photos would soon replace the lucrative camera film, decreasing profits by more than a quarter.

However, when digital media eventually took over, Fuji Film was able to thrive, while Kodak nearly faded out.

As Fuji clearly demonstrated, the best way to handle disruptive innovation is through radical flexibility. In a 2012 article, The Economist summarized the rivalry outcome as follows: “Kodak acted like a stereotypical change-resistant Japanese firm, while Fujifilm acted like a flexible American one.”

While Kodak was complacent, Fuji developed new products, sold intellectual property such as chemical compounds and sought new markets for film. By the time Kodak had gone into bankruptcy proceedings, Fuji had diversified enough to remain competitive, at one point growing to some $12.6 billion in market value while Kodak’s shrank to less than $220m.

Source #2: Technological Upheaval

Some new technologies change the way businesses operate from within. The best example of this is analytics software. Analytics refers to the use of sophisticated mathematical techniques to produce new value from data.

The adoption of analytics will become virtually universal. According to technology-research firm IDC, big-data technology and services will grow at a 27% compounded annual rate through 2017 to more than $32 billion worldwide. A study conducted by MIT Sloan Management Review and IBM found that organizations that excel in analytics usually outperform new adopters of analytics by three to one.

To manage technological upheaval, businesses are thinking creatively about new possibilities presented by new technology. For example, Sky Italia, a satellite TV provider, uses analytics to predict what kind of content its customers want to see, based not only on their watching habits but on their social media activity. Casinos use analytics to gauge customer behavior based on such fine points as when patrons order drinks, where they play the most and even when they smile.

Source #3: Consumer-Culture Shifts

Digital technology has a widespread impact on culture that affects customer/vendor relationships. One prominent outcome of this is that buyers are moving much further down the sales funnel before interacting with salespeople.

For example, in 2012, Ernst & Young completed a global survey of 30,000 banking customers and found that those who were unhappy with their banks were twice as likely to switch to a competitor as they were in 2011. Because accounts can be transferred with just a few clicks of the mouse, banks now have to work harder to keep their customers from leaving. Further, banking clients are increasingly performing their own research without input from bankers.

The same is true for B2B customers, as one CEO of a B2B company described in an interview with Forbes:

“My sales team has called on every possible client, and they don’t know where to go next.”

According to member-based business advisory company CEB, buyers now go through about 57% of the purchasing process before ever talking to sales.

To react to changes in consumer culture, marketers must replace the old sales models with “facilitated buying” strategies. Vendors are increasingly interacting with prospects right where they are and provide more value on the front-end. By acting as buyers’ guides rather than salespeople, sales teams will grow relationships through trust. This is why content marketing strategies are displacing traditional advertising in many marketing budgets.

Source #4: Price-Determination Fluctuations

In the present consumer culture, price determination has become more elastic and complex. As such, many businesses are re-inventing their pricing structures.

The health insurance and health benefits industries are examples where large-scale pricing shifts are taking place. Because of the Affordable Care Act, health benefits brokers will now have to disclose their commissions, which will give clients more negotiating leverage. Those brokers who have the most technical skill and who can flexibly price products and services are having the most success.

Another contributing factor to pricing shifts is in the spending habits of “millennials.” These people, ages 13 to 30, are increasing in purchasing power by about 3% per year. Their spending is unpredictable, is mostly digital and will account for nearly one-third of total spending by 2020.

To meet consumer demands for pricing options, businesses are becoming more inventive. For example, the Silicon Valley start-up Uber offers a crowd-sourced taxi-like service that employs “surge pricing.” Under this model, Uber services cost more when demand is high and the supply of cars low.

“Sympathetic” pricing is another new pricing trend with humanistic intentions. According to business trend firm Trendwatching.com, waning consumer loyalty brought on by digital empowerment has made businesses eager to show consumers that they care. This has led to a series of warmer and fuzzier relationship-building strategies.

For instance, “painkiller” pricing is an emerging strategy meant to provide relief. An example of painkiller pricing is where bars give discounts to patrons who have been served a ticket that day. Another example is “compassionate” pricing, which typically involves sliding scales for lower-income customers. Finally, “purposeful” pricing is meant to effect social change – such as through offering free public transport to alleviate inner city traffic.

Conclusion

For most industries, disruption is inevitable. Oftentimes, those businesses that are most accustomed to success will have the most trouble adapting.

The first essential step in planning for disruptions is to gain a basic understanding of what the incoming challenges will look like. Once this is accomplished, insurance businesses can begin applying lateral and creative planning strategies to successfully navigate the change.

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