Tag Archives: myths

Where Silicon Valley Is Wrong on Innovation

Silicon Valley exemplifies the saying, “The more things change, the more they stay the same.” Very little has changed over the past decade, with the Valley still mired in myth and stale stereotype. Ask any older entrepreneurs or women who have tried to get financing; they will tell you of the walls they keep hitting. Speak to VCs, and you will realize they still consider themselves kings and kingmakers.

With China’s innovation centers nipping at the Valley’s heels, and with the innovation centers that Steve Case calls “the rest” on the rise, it is time to dispel some of Silicon Valley’s myths.

Myth 1: Only the young can innovate

The words of one Silicon Valley VC will stay with me always. He said: “People under 35 are the people who make change happen, and those over 45 basically die in terms of new ideas.” VCs are still looking for the next Mark Zuckerberg.

The bias persists despite clear evidence that the stereotype is wrong. My research in 2008 documented that the average and median age of successful technology company founders in the U.S. is 40. And several subsequent studies have made the same findings. Twice as many of these founders are older than 50 as are younger than 25; twice as many are over 60 as are under 20. The older, experienced entrepreneurs have the greatest chances of success.

Don’t forget that Marc Benioff was 35 when he founded Salesforce.com; Reid Hoffman 36 when he founded LinkedIn. Steve Jobs’s most significant innovations at Apple — the iMac, iTunes, iPod, iPhone and iPad — came after he was 45. Qualcomm was founded by Irwin Jacobs when he was 52 and by Andrew Viterbi when he was 50. The greatest entrepreneur today, transforming industries including transportation, energy and space, is Elon Musk; he is 47.

See also: Innovation: ‘Where Do We Start?’  

Myth 2: Entrepreneurs are born, not made

There is a perennial debate about who can be an entrepreneur. Jason Calacanis proudly proclaimed that successful entrepreneurs come from entrepreneurial families and start off running lemonade stands as kids. Fred Wilson blogged about being shocked when a professor told him you could teach people to be entrepreneurs. “I’ve been working with entrepreneurs for almost 25 years now,” he wrote, “and it is ingrained in my mind that someone is either born an entrepreneur or is not.”

Yet my teams at Duke and Harvard had documented that the majority, 52%, of Silicon Valley entrepreneurs were the first in their immediate families to start a business. Only a quarter of the sample we surveyed had caught the entrepreneurial bug when in college. Half hadn’t even thought about entrepreneurship even then.

Mark Zuckerberg, Steve Jobs, Bill Gates, Jeff Bezos, Larry Page, Sergey Brin and Jan Koum didn’t come from entrepreneurial families. Their parents were dentists, academics, lawyers, factory workers or priests.

Anyone can be an entrepreneur, especially in this era of exponentially advancing technologies, in which a knowledge of diverse technologies is the greatest asset.

Myth 3: Higher education provides no advantage

Thiel made headlines in 2011 with his announcement that he would pay teenagers $100,000 to quit college and start businesses. He made big claims about how these dropouts would solve the problems of the world. Yet his foundation failed in that mission and quietly refocused its efforts and objectives to providing education and networking. As Wired reported, “Most (Thiel fellows) are now older than 20, and some have even graduated college. Instead of supplying bright young minds with the space and tools to think for themselves, as Thiel had originally envisioned, the fellowship ended up providing something potentially more valuable. It has given its recipients the one thing they most lacked at their tender ages: a network.”

This came as no surprise. Education and connections are essential to success. As our research at Duke and Harvard had shown, companies founded by college graduates have twice the sales and twice the employment of companies founded by others. What matters is that the entrepreneur complete a baseline of education; the field of education and ranking of the college don’t play a significant role in entrepreneurial success. Founder education reduces business-failure rates and increases profits, sales and employment.

Myth 4: Women can’t succeed in tech

Women-founded firms receive hardly any venture-capital investments, and women still face blatant discrimination in the technology field. Tech companies have promised to narrow the gap, but there has been insignificant progress.

This is despite the fact that, according to 2017 Census Bureau data, women earn more than two-thirds of all master’s degrees, three-quarters of professional degrees and 80% of doctoral degrees. Not only do girls surpass boys on reading and writing in almost every U.S. school district, they often outdo boys in math — particularly in racially diverse districts.

Earlier research by my team revealed there are also no real differences in success factors between men and women company founders: both sexes have exactly the same motivations, are of the same age when founding their startups, have similar levels of experience and equally enjoy the startup culture.

Other research has shown that women actually have the advantage: that women-led companies are more capital-efficient, and venture-backed companies run by a woman have 12% higher revenues, than others. First Round Capital found that companies in its portfolio with a woman founder performed 63% better than did companies with entirely male founding teams.

See also: Innovation — or Just Innovative Thinking?  

Myth 5: Venture capital is a prerequisite for innovation

Many would-be entrepreneurs believe they can’t start a company without VC funding. That reflected reality a few years ago, when capital costs for technology were in the millions of dollars. But it is no longer the case.

A $500 laptop has more computing power today than a Cray 2 supercomputer, costing $17.5 million, did in 1985. For storage, back then, you needed server farms and racks of hard disks, which cost hundreds of thousands of dollars and required air-conditioned data centers. Today, one can use cloud computing and cloud storage, costing practically nothing.

With the advances in robotics, artificial intelligence and 3D printing, the technologies are becoming cheaper, no longer requiring major capital outlays for their development. And if entrepreneurs develop new technologies that customers need or love, money will come to them, because venture capital always follows innovation.

Venture capital has become less relevant than ever to startup founders.

Debunking 5 Myths About Cyber

Research firm Forrester’s “Global Business Technographics Security Survey, 2016” found that 49% of decision-makers interviewed had experienced at least one cyber breach during the past 12 months. Of these respondents, 55% had suffered an internal incident involving an employee or a third-party business partner.

The survey also ranked top external cyber attack methods: software vulnerabilities, user interaction (phishing, malicious link or email attachment) and use of stolen credentials (logins, encryption keys). These statistics – and countless others – demonstrate the need for businesses and consumers to address the fundamentals of cybersecurity.

Without an effective combination of people, processes and governance implemented alongside technology solutions, organizations are at an increased risk of sustaining significant financial damage. Other areas of the business – such as brand, human resources, operations and regulatory compliance, among others – could also take a hit.

While leading companies operate more mature cyber risk programs, organizations that lag behind often subscribe to a number of commonly held myths about where to focus their security efforts. These myths prevent the accurate assessment of risk and exposures and hamper the implementation of measures that can protect critical assets and successfully manage a breach when it occurs.

Myth 1: Cyber Is Merely an IT issue

The information technology (IT) department works full-time to implement, update and maintain technology for the company. However, the same department is often expected to manage the risks associated with that technology, as well. As cyber threats continue to increase, IT departments can easily become overwhelmed. The responsibility for managing cyber risk should lie principally with information security practitioners, regardless of whether the organization has a full-time chief information security officer (CISO).

Reality: Cyber Preparedness Starts at the Top and Affects the Entire Organization

Taking a comprehensive view of how cyber risk affects the business across various functions is the responsibility of the entire organization—with the C-suite playing an important role. Executives, inclusive of the board of directors, must be familiar with the specific risk issues that affect their organization’s security posture, especially regarding its most critical assets, or “crown jewels,” and then ensure the right departments are involved in devising a comprehensive strategy. This way, security is not only aligned with IT but also tied to the business and the executive leadership team.

Many companies conduct cyber-threat “tabletop” exercises to simulate specific scenarios that would play out in a real-life cyber attack or breach – and are increasingly involving the executive team and board of directors. More mature companies with effective governance and risk management processes believe it is imperative to include these senior business executives in these situations. In fact, these exercises are most successful when concentrated on scenarios involving a company’s crown jewels, which enables them to prioritize their efforts toward their most critical assets.

Setting the tone at the top helps create buy-in at the highest levels to assess the company’s exposure to cyber risk. This perspective also helps teams implement the necessary remediation and proactive cyber security programs to guard against worst-case scenarios in the event of an attack. Further, information security teams will have the backing to enforce better training and awareness programs, policies and procedures across the organization.

See also: Global Trend Map No. 12: Cybersecurity  

Myth 2: Technology Solutions Are a “Silver Bullet”

While technology is clearly an integral part of effective cyber risk management, investments in technology alone will not fix the problem. If a company focuses its efforts purely on technology designed to detect external threats and perpetrators, it may overlook the impact of human behavior – malicious or otherwise – on cyber security. Research shows that of the businesses that experienced data breaches in 2016, insiders (that is, people with access to the organization’s systems and information) were responsible for 43% of data loss. Whether it is simply employee curiosity or carelessness, these blind spots are often the weakest links in a company’s armor. Increasingly, malicious tactics are designed to bypass sophisticated security technologies and exploit simple human error.

Reality: Technology Can Be a Part of the Solution – But It’s Not the Entire Solution

Companies need to not only verify that their technology profile is up to date but also implement and maintain their technology effectively. To minimize “insider risk,” for example, organizations should steer clear of allowing everyone to gain access to the most critical and sensitive information and systems. Any access to the company’s critical assets must be governed by strict processes and procedures based on the principle of granting privileged access.

Prioritizing programs geared to employee awareness, education and training is also an important step to address common, human-related vulnerabilities, such as malicious attachments in emails, phishing and social engineering tactics and weak passwords. Ensuring the entire organization exercises good “cyber hygiene,” such as better password management practices, should be a priority.

Security technologies are a critical part of any program, but they can be potentially circumvented without the appropriate expertise and processes to implement, run, monitor and maintain them. This effort includes installing relevant antivirus software and regularly updating hardware. With cyber security tools – often seen as a silver bullet in a security program – configuration and maintenance should focus on minimizing false positives on security alerts and ensure the appropriate resources are in place to analyze them.

From IT to legal, compliance, human resources, business innovation and other departments, it’s critical to create a multidisciplinary team that can assess, manage and respond to risks within different departments and functions. Ultimately, even with the most sophisticated and advanced technology, a culture of security must penetrate the organization.

Myth 3: Regulatory Compliance Equals Security

As seen most recently with the European Union’s General Data Protection Regulation (GDPR), regulators are stepping in to address consumer privacy and data concerns. While compliance with these regulations is necessary to avoid fines, class action lawsuits and other issues, compliance alone will not address cyber attacks or security compromises. For example, a company may be compliant with the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the Payment Card Industry Data Security Standard (PCI DSS) and other regulatory measures or requirements and still experience a breach. Compliance provides a mere snapshot into a company’s security profile at a certain point in time, whereas effective security is a continuous process of improvement.

Reality: Regulatory Compliance Is the Bare Minimum

While regulators design regulations with effective security in mind, compliance requirements should be viewed as a baseline to support due diligence in cyber security. However, compliance should not be seen as the end goal in cyber security but as an opportunity to improve overall data hygiene on a continuing basis. Investing in compliance with cyber security regulations is also a chance to create additional security wins. For example, companies can identify – or reclassify – critical assets and prioritize protections against them. Compliance is also a chance to work with key stakeholders across the organization to define the organization’s tolerance toward risk, which helps the security team navigate cyber security decisions.

Myth 4: Only Industries That House Sensitive Data Are Under Direct Threat

Companies that hold sensitive data, including personally identifiable information (PII), healthcare data, credit card data and personal health information, are obvious targets for cyber attacks. As such, certain industries, such as financial services or healthcare, have traditionally been more heavily regulated. However, many industries must protect trade secrets, intellectual property and sensitive data. For example, the convergence of the physical and digital worlds through the Internet of Things (IoT) means companies face risks beyond data breaches. For example, in the manufacturing, oil and gas and automotive sectors, cyber attacks can result in severe business disruption. Far-reaching regulations can also affect sectors such as education.

Reality: Companies of All Sizes Across All Industries Have Vulnerabilities

Gartner predicts that, by the end of 2018, there will be twice as many employee-owned devices as company-owned devices used for work. Last year, businesses alone had more than three billion connections with IoT – introducing myriad risks. Aside from the sheer growth of technology and increased entry points for breaches, malicious cyber actors have also shifted their focus. Increasingly, as recent ransomware attacks have demonstrated, attackers are exploiting vulnerabilities with the specific aim of disruption – as well as financial gain. For example, ransomware demanding a few hundred dollars from users is designed to wreak havoc, not necessarily extract the highest payments possible. Every organization – regardless of size or industry – should be thinking about their specific exposures to cyber risk and putting a plan in place to improve their overall resilience.

See also: Insurance Industry Can Solve Cyber  

Myth 5: Companies Can Outsource a Function Along With the Responsibility and Risk

Companies of all sizes outsource regulated processes, such as their handling of payment card industry (PCI) transactions. The rationale is that the process of evaluating and verifying compliance is expensive and does not make economic sense, especially if the company is not handling a vast amount of transactions. When an organization outsources a function in this way, it often has the misperception that the responsibility for compliance is also outsourced to the third party.

Reality: Companies Ultimately Own the Risk

Even when outsourcing transactions and management of any regulated data, a company is still responsible for that data in the event of a cyber attack. In the case of PCI, the company that processed the credit card will be responsible for ensuring proper practices are in place to protect the data collected in the transaction. This ownership is true even if the responsibility for the breach lies with someone in the call center of the third party that processes all of the company’s credit card transactions. In many cases, that third party may also be outsourcing part or all of a function to a “fourth party.” This scenario is just one example that demonstrates the need for organizations that outsource any functions to implement effective third-party risk due diligence processes to ensure that all their vendors are compliant.

Cyber is evolving rapidly, so identifying where the risk lies can be a moving target. That’s why companies must remain vigilant. By separating the myths from the realities, companies can be in a better position to mount an effective defense against cyber threats.

You can find this article originally published here.

3 Myths That Inhibit Innovation (Part 3)

As explored in two prior posts, there are a number of classes of myths surrounding insurance innovation. In Part I , we looked at how a lack of urgency caused by multiple factors leads to strategic complacency. Part II discussed how that lack of urgency combined with concerns about the financial impacts of innovation efforts make it easy to postpone those initiatives until a “better time.”

Process Myths

In this final installment, we will touch on a a number of the myths that inhibit a company from starting an innovation project or, worse, stall a project that is in flight.

The post on financial myths explored the conflict between current IT and new efforts. The waters are further muddied by the uncertainty surrounding what constitutes innovation.

  • Does innovation only represents those game-changing efforts that revolutionize an industry?
  • Conversely, are all those projects that are on the IT road map innovation?

Game-Changing Innovation

Often when innovation is discussed, the focus turns to the biggest, most successful projects, which had multibillion-dollar impacts. Most folks will have heard of the successes and have opinions one way or another.

Too frequently, the belief that innovation is only these big successes turns executive teams off to the possibility of leading their organization to innovate. The concept of the lighting-strike idea is ingrained in modern lore. Although this big bang process does happen, it is the exception rather than the rule.

More often, disruptive innovation is the process of hard work and iteration rather than a single “Aha!” moment. In fact, the initial form of products that disrupt markets is generally less capable than current solutions and addresses the least desirable segments of the customer base. Over time, those products are refined and move up into more desirable customer segments.

Innovation concepts are also seen as unicorns: only discovered by unique individuals.

Organized innovation efforts should cast a wide net for ideas. Creative solutions to existing problems exist today in your organization. The challenge is to align the organization appropriately, focus efforts and develop a culture that embraces the challenge.

We will explore the organization-based myths in a bit, but first a look at another form of innovation will add color to the picture.

Sustaining Innovation

At the other end of the innovation continuum, away from the lightning strike, is the concept that any development or product improvement efforts are innovation.

Unfortunately, not all projects are innovation. Organizations that believe that any improvement efforts are innovative are likely on a dead end road.

Maintenance is not innovation, no matter how urgent. A project to upgrade versions of AIX on your policy admin system is decidedly not innovation. A similarly sized effort to investigate and deploy a new claims-focused chatbot probably is. While not unique or novel, it could be classified as incremental or sustaining innovation.

Sustaining innovations are those that are undertaken to improve products to existing markets, rather than to address new markets or value chains. Harvard Professor Clayton Christensen describes it this way:

“A sustaining innovation targets demanding, high-end customers with better performance than was previously available. Some sustaining innovations are incremental, year-by-year improvements that all good companies grind out. Other sustaining innovations are breakthrough , leap-beyond-the-competition products.”

Most organizations have a significant portion of their efforts and budgets targeted at sustaining innovations. The CB Insights State of Innovation survey results determined that 78% of innovation portfolios are focused on this type of innovation effort.

Therein lies the challenge. You’re doing it; so, too, are your competitors. Any improvements provide competitive advantage only for a short period until others catch up, and the cycle repeats.

See also: How ‘Not Invented Here’ Limits Innovation  

An organization should commit to a range of innovation efforts, both sustaining, breakthrough and game-changing, sometimes called “ambidextrous innovation.” A good rule of thumb is that the corresponding ratio of investment would be 70%, 30% and 10%. This breakout allows for continuous efforts at sustaining innovation while encouraging investigating “moon shots.”

If innovation runs the gamut from incremental to industry-changing, how does an organization create a culture that embraces and pursues it on a regular basis?

Innovation Culture

While large, well-funded innovation labs get a lot of press, most innovation starts with small teams. But even getting the culture right for those small teams is critical to their success.

Most organizations recognize that effective and successful innovation efforts must be led from the C-suite. Often, after a decision to initiate an innovation effort, the CEO announces that she will personally will take charge. The implementation may need more finesse.

Although the buck generally stops on the CEO’s desk, having her lead the day-to-day may actually impede progress. One of the reasons is that open communication can be inhibited if there are too many organization layers between the participants. A second reason is more nuanced.

As a project moves through the various stages of the innovation process, close coordination with legal and finance may be required. Having the project report into a senior executive in one of those disciplines often helps. Regular updates into one or both of these areas, along with those business units having a vested interest in success, can fast track a project.

Another myth is that once a team is set on task, the hard organizational work is done.

“Innovation will drive the culture” is an oft-heard mantra. Unfortunately, in many instances the reverse is more accurate: Culture drives the innovation.

Some cultural issues need to be addressed up front. Insurance is inherently a conservative business, and saying “No” is rightly part of the culture. Individuals build careers around never making a mistake. Thus, no can be an ingrained habit.

Innovation on the other hand is all about saying “YES.” That shift can be difficult for some conservative organizations. Encourage participants to first find the value in every concept. Positivity is contagious and will lead to increased participation.

One major myth is that there are too few good ideas. On the contrary, there are lots of good ideas. A key to success is rigorously soliciting, collecting, evaluating and filtering them.

In the early stages of the innovation process, many ideas should be explored. So, solicit participation from your entire organization. Often, innovation and creativity are seen as someone else’s responsibility. But by extending participation to the entire organization, you may find that insights may come from unlikely departments and individuals.

With many valuable ideas and opportunities, prompt evaluation and selection must be a core principle. This is where constraints come into play. Both time- and expense-based constraints focus mind and project.

The last myth that should be addressed is the notion that the goal of innovation efforts is to launch. In some instances, the launch is immediately successful, but, in most cases, further modifications are required to perfect the new product and processes.

Pilots are worthwhile and often necessary. However, the final goal is widespread adoption across multiple relevant business units. Frequently, pilots reveal how the process can be improved. To encourage widespread adoption, implementation must be streamlined, benefits clearly articulated and internal support built.

The ultimate measure of success should be returns on investment of 5X to 10X in two to three years. This level of success will obviate financial concerns of cannibalization and build support for follow-on projects.

See also: Digital Innovation in Life Insurance

Long Story Short

Consumer behavior has changed dramatically in the past 10 years. While traditional insurance practices sufficed to allow continued success, both incumbents and new entrants are working hard to change to meet new expectations. Even though the industry has weathered many storms, and successfully repelled outsiders in the past, this time is different.

Twenty-years ago, the auto line was revolutionized with the introduction of credit-based underwriting. Today, there are pioneering efforts in a dozen areas with the potential to have effects of the same magnitude.

Couple those industry changes to the changing expectations of insurance buyers, and the potential for one or more industry revolutionizing innovations grows every quarter. This is not the time for complacency.

Financial performance rightly concerns senior executives and must be part of any decision-making process. The problem to avoid is allowing financial considerations to be a primary gating factor.

Financial analysis can be a valuable addition to the project definitions by providing guidelines as to the magnitude of the returns given the potential impacts of the innovation project.

Success depends on an organizational commitment to change. This requires culture shift, buy in and support from middle management, and widespread participation.

Although there are any number of moving parts to an integrated innovation strategy, implementation is fairly straightforward, and well within the capabilities of any well-managed insurance organization.

3 Myths That Inhibit Innovation (Part 1)

As the pace of change accelerates, the chances that incumbent businesses will be affected or displaced grows. According to a recent CB Insights report, insurance is one of the top five industries facing disruption risk; 85% of surveyed corporate strategists believe that innovation is critical for their organizations. Yet the vast majority are focused on incremental changes.

In other words, while the insurance industry is in the business of mitigating risk, too many insurance companies aren’t taking advantage of innovation to address disruption.

A number of innovation myths foster complacency among market leaders. While the myths aren’t unique to the insurance vertical, our industry may have embraced them more fully than others. These myths can be grouped into three main areas: strategic complacency, financial concerns and misperceptions of the innovation process.

Over the course of three articles, we will explore each of these areas in detail, starting with strategic complacency.

Strategic Complacency

Great Changes

The insurance industry is at a crossroads. A number of significant trends are converging to change our customers:

  • Their behavior,
  • The risks they experience,
  • The technologies they use,
  • And, most importantly, their expectations.

Add to those challenges the changes in underwriting, pricing and service delivery allowed by new technologies and analytic capabilities. Both the opportunities and the challenges presented by the intersection of these trends are significant for senior leadership in all segments of our industry. Yet, too often, the insurance industry hides behind our perception that “insurance is different,” or that “we’re regulated” or that “it’s complicated.”

Other industries have faced similar situations, and things haven’t always gone well for the established companies, even in a complicated industry computers and software or a heavily regulated one like automotive manufacturing.

Some market leaders such as IBM are often written off as roadkill, but they reinvent themselves time and again. Others like Blockbuster mistakenly believe that their position provides them with unassailable advantages and end up either dramatically changed or out of business. In Blockbuster’s case, the high water mark in their valuation was in 1996, the year before Netflix was launched. In 1998, their valuation was 50% of what it had been two years prior. They mistakenly believed that breadth of location and depth of inventory were walls that couldn’t be scaled by the competitive hordes.

One thing is certain:

The client views his or her needs and wants as primary. That client neither understands nor cares how difficult transformation is, what the backroom challenges are or whether we’re addressing the issues as fast as we can.

See also: Innovation Imperatives in the Digital Age   

Clients just want to solve their problems now. If the incumbent can’t or won’t provide what the client requests, then the client goes elsewhere.

In times of great change, strategic complacency kills.

Customer Intimacy

Ask any insurer about its strengths, and one knee-jerk response will be, “We take great care of our customers.” If that is the case, why does such a significant portion of our customers respond negatively to the industry and our efforts?

Explore customer experience with insurance industry leaders a bit further, and the responses will be more nuanced, perhaps to the point of admitting the poor job the industry actually does. The good news is that some of the problem isn’t our fault.

Our industry provides irreplaceable products and services of which we can be rightly proud. We regularly step into the breach in some of the most trying times our customers will ever face. But, thankfully, those events are rare or even nonexistent for the average customer, and many insureds don’t recognize that a valuable service was provided by risk transfer even during a period when they experienced no losses.

Insurers’ job is to see the big picture, and to connect disparate facts. We have increasing amounts of data about those customers, which provide insights into behaviors and opportunities.

These factors lead many organizations to profess that they deeply understand their customers, and that, when the customer is looking for additional products or services, the insurer will immediately know and develop the appropriate response. Dig a bit deeper, and another story emerges. Perhaps we don’t have the intimate relationship that would inspire those insights.

Unfortunately, in many corporate cultures, it is hard to be a dissenting voice on customer intimacy and experience when others are professing the “common wisdom,” no matter how misguided. Finally, both improved customer experience and more intimate customer relationships are difficult, multifaceted problems and easy to put off.

Carriers rightly see the relationship as one insurer to many insureds. On the other hand, customers see the relationship as one to one. While insurers think in terms of spread of risk across a pool of clients, customers are only interested in what’s in it for them.

In many instances, because of these differing perspectives, the carrier-customer bond is weak. A recent Bain & Co. report said that, worldwide, only half of insureds have been in contact with their insurer for any reason in the past 12 months.

The result is that customers don’t have any real relationship with their carrier and are likely to focus on price. Rarely will they share their needs and wants with a services provider with whom they have a tenuous relationship.

Strategic complacency can appear when shorthand expressions of customer intimacy and experience prohibit open dialogue on customer priorities, or efforts designed to address problems are short-circuited because of their complexity. Even though insurers have gigabytes of data on their insureds, the data doesn’t translate into information and insight.

Lack of Urgency

Another myth among insurers is that there is no great urgency to change. Organizations survey the competitive landscape and don’t see any discernible threats on the horizon.

There are two primary reasons. First, most innovation efforts are quiet, so insurers don’t necessarily see what potential competitors are doing until a product or service hits the market. Second, many lauded innovation efforts are taking place in lines or niches that don’t appear to be a threat to incumbents.

So what if one new insurer is writing usage-based insurance for the gig economy, or another specializes in coverage for renters? Either those aren’t lines of business that “real” insurance companies want to write, or they aren’t a key component of the carrier’s book.

See also: Digital Innovation: Down to Business  

The insurance innovation landscape is large and convoluted. Most early innovation efforts are small, and the “signal” is easily mis-categorized as noise. Because of this, potential competitors and collaborators are easy to miss. But the lack of urgency is a key factor in Harvard Professor Clayton Christensen’s seminal work on industry disruption.

His model states that innovators find a segment of unserved or underserved consumers that represent low profit potential. These startups then offer an inferior product or service to these consumers. It doesn’t have to be perfect because these consumers aren’t being appropriately served prior to the innovator’s arrival.

The crude nature of the solution is derided by incumbents, because their customers “wouldn’t want to purchase something that limited.” Because the unserved or underserved segment is low-profit, and may have other undesirable characteristics, the market leaders have no urgency to respond.

But while the existing players ignore or disparage the newcomers, the disruptors refine their offerings. Once innovators win the low-profit segment, they move upstream by repeating the process with more profitable and desirable customers.

Often, by the time established industry players figure out that they are under threat, it is too late to reverse their fortunes.

Guy Fraker, chief innovation officer at Innovator’s Edge, says, “Ignore this innovation activity, whether from incumbents or new entities, at your peril.”

This lack of urgency, and the willingness to either accept as fact, or blithely repeat, mistaken beliefs and put off difficult, needed changes to address customer problems contribute to strategic complacency. Recognizing these problems and opening dialog within your organization is a key to formulating a strategic response to the onslaught of changes affecting the insurance industry.

The next post will further explore common myths with a focus on financial concerns surrounding innovation.

Debunking ‘Opt-Out’ Myths (Part 4)

I’m aware of no logic, facts or data to support the assertion that options increase workers’ compensation premiums. The exact opposite can be easily demonstrated.

Ask yourself, are prices higher or lower when employers have only one product to choose from vs. when they are able to choose among competing products? Texas went from the 10th most expensive workers’ compensation system in the U.S. in 2003 to the 38th most expensive state in 2013 through a combination of workers’ compensation system reforms and competitive pressures from employers electing the Texas “nonsubscriber” option – choosing not to be part of the state’s workers’ compensation system. One-third of all Texas employers have elected the option. Employers representing hundreds of thousands of Texas workers evaluated the impact each system would have on their claim costs, compared insurance premiums and exited the state system between 2003 and 2013.

Likewise, Oklahoma simultaneously enacted workers’ compensation reform and option legislation in 2013. Workers’ compensation premiums have since dropped more than 20%, and Oklahoma option programs are saving even more.

Further debunking the myth option program raise workers’ compensation costs, a 2015 report from the Workers’ Compensation Research Institute studied workers’ compensation claims in 17 states and found that the total average cost per claim for injured workers in Texas was among the lowest. Costs per claim grew in Texas only 2.5% per year from 2008 to 2013, as measured in 2014. In contrast, for National Council on Compliance Insurance (NCCI) states, the average indemnity cost per lost-time claim increased by 4% in 2014, and the average medical cost per lost-time claim increased by 4% in 2014.

Texas workers’ compensation is outperforming national averages because Texas employers have a choice. The option creates a greater sense of urgency among regulators and workers’ compensation insurance carriers to manage claims better so they can reduce premium rates and compete with the alternative system. The option also makes implementation of workers’ compensation reforms more manageable, because they happen across a smaller base of claims.

Further, consider that most employers that implement option programs have some frequency of injury claims. Very few employers with no injury claims are willing to go to the time, effort and expense of adopting and communicating a special injury benefit plan, buying special insurance coverage, contracting a claims handling specialist and satisfying newly applicable state and federal compliance requirements (which may include a state qualification process and filing fee). Because options take many companies that have injury claim losses out of the workers’ compensation system, workers’ compensation insurance carriers suffer fewer losses and can reduce workers’ compensation premiums. The carriers must compete harder for business, and they have no justification for charging higher premiums when their total loss experience improves.

Associations that represent workers’ compensation insurance companies have labeled options an “external threat” to the industry at a time when premium volume and carrier profits are up and losses are at a 17-year low.  Calendar-year 2014 underwriting results, combined with investment gains on insurance transactions, produced a workers’ compensation pretax operating gain of 14%. These insurance companies urge state legislators to protect their monopolistic, one-size-fits-all product and its profits. They also fight to maintain an anti-competitive web of price-setting collaborations that would violate antitrust laws in other industries.

As David DePaolo recently noted on WorkCompCentral, in “the business of workers’ compensation insurance… investors (the business side) want to know whether they are going to make money, and how much, by financing the system; not whether the system is working ‘correctly’ or not.” This is an important insight in the context of workers’ compensation insurance lobbyist objections to an option. The lobbyists promote the idea that workers’ compensation systems are superior and working fine, but that is not their primary motivation in trying to shut down competitive alternatives.

Some insurance association members have defected and embrace free-market competition. More than $150 million in the Texas nonsubscriber option insurance premium was written last year alone. The Oklahoma option insurance market is just starting up. Many “A-rated” insurance companies now oversee the successful resolution of approximately 50,000 injury claims per year under option programs.

An option can be authorized by a state legislature before, after or at the same time as workers’ compensation reforms are adopted. Legislators suffering from “workers’ comp fatigue” find option legislation to be dramatically less voluminous, time-consuming, confusing and contentious than major workers’ compensation reform.  And, as proven in Texas and Oklahoma, the option can slash employer claims costs by 40% or more. A single state (like Tennessee or South Carolina) can see lower government regulatory expense and more than $100 million in annual public and private employer savings. That impact grows exponentially through economic development multipliers. Those are dollars that can be used to create private-sector jobs and invest in education, safety, transportation and other legislative priorities.

In contrast, when standing alone, workers’ compensation system reforms are typically returning single-digit premium rate reductions that do not move the needle on injured employee medical outcomes or economic development. Even the widely referenced Oregon premium ranking study (like many others) questions the ability of traditional workers’ comp reforms to create significant movement in employer costs or employee satisfaction.

Options to workers’ compensation have particularly worked to the advantage of small employers, which pay most of the workers’ compensation industry premiums. Small companies that experience few, if any, on-the-job injuries typically purchase workers’ compensation insurance coverage on a guaranteed-cost (zero-deductible) basis. They get competitive quotes on both workers’ compensation and option insurance products, then typically choose to write the workers’ compensation premium check and be done. However, both big and small businesses can benefit from option programs. There are several Texas nonsubscriber insurance carriers that write policies for hundreds, even thousands, of small employers. In fact, the vast majority of Texas and Oklahoma employers that have elected the option are small, local businesses.

Many reputable insurance providers sell “bundled” programs for small business that supply all option program components, including the insurance policy, injury benefit plan, employee communications, claims administration and legal compliance. It is a simple, turnkey service for insurance agents and employers, delivering better medical outcomes and higher employee satisfaction when the rare injury occurs.

If an employer that has elected the option does not like it (for whatever reason), it can go back into the workers’ compensation system at any time. These facts are all reflected in the migration of small employers back and forth between workers’ compensation and option programs in Texas, choosing the best route for their companies and employees as workers’ compensation premium rates have moved up and down over the past quarter century.

Even if (as seen in Texas) a significant percentage of a state’s employers elect an option, the “pool” of workers’ compensation premiums can still be hundreds of millions of dollars, a figure large enough to spread the risk and absorb catastrophic claims.

Those who say that workers’ compensation premium rates will go up when a state legislature authorizes an option need to back up their fear mongering with similar logic, facts and data or admit their true, anti-competitive motivations.