Insurers have adopted
technology to improve processing functions, but many are failing to
get to grips with the impact technology is having in the sphere of
innovation. IBM warns that by being laggards in the innovation
space insurers risk losing ground to entrants from other
industries. Charles Davis reports.


A new study from US
technology giant IBM portrays the insurance industry as laggards
when it comes to the new world of social networking and mobile
technologies, and urges the industry to shake its “lethargy” and
get on the innovation bandwagon.

The study, by the IBM
Institute for Business Value,
Insurance 2020: Innovating Beyond Old Models
, showed that
while market forces demand real innovation in business models,
insurers consistently focus on the optimisation of products,
processes and services. For many carriers the result was an
organisation that mistook optimisation for innovation.

The study blames a misplaced
emphasis on optimisation for two negative outcomes that continue to
plague the industry. Changes in value chain automation, data
management, and the use of online mechanisms made over the course
of the last several decades were at the tail end of larger
technological or societal changes and were directed towards
improving existing processes and mechanisms.


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The second outcome from the
industry’s focus on optimisation is in opportunity costs. There is
an uncalculated cost from the insufficient, or even absent,
application of innovation, especially in business

So, although making
improvements in processes and operations via the use of
increasingly advanced technology felt like the right thing to do,
those activities became a proxy for innovation and supplied a
stream of revenue enhancements of sufficient stability to please

The emphasis on optimisation
rather than engagement runs head-on into one of the study’s major
findings: the disruptive potential that changing demographics will
bring to insurance industry stakeholders.

These demographic realities
will impact not only insurance consumers, but also agents, brokers,
policyholders and other industry professionals across various

Insurers need to recognise
that opportunities arising from understanding such demographics
realities extend beyond optimisation of sales channels. They
include customer service, claims handling and fraud prevention – as
well as chances to engage consumers and clients with more
customised products.

Another major trend
identified in the study is how technology – and information
technology in particular – acts to level the playing fields of the
insurance business. One aspect of this is how technology will
empower an influx of new players in the traditional insurance

Already, retail grocery
chains, such as Tesco in the UK and Kroger in the US, have
implemented the distribution of insurance products. And since
virtually all commercial enterprises have access to the same
technology and information systems, it can be expected that other
types of businesses will begin to explore the “adjacent spaces” of
insurance protection products, in addition to being points of

These adjacent spaces are
literally those areas of service or asset protection that are
closely related to existing products and services. Life insurers,
for example, could consider adding adult day care riders to
retirement income products to help customers deal with the burden
of caring for elderly parents.

Insurance companies working
to develop a more strategic view of their business should consider
that essential systems needed to run an insurance business today
could be purchased.

“If they continue to follow
this course, carriers will logically see diminishing results,” IBM
noted. “It is likely that either an existing competitor or a new
entrant from outside of traditional insurance – such as a retailer,
social computing purveyor or other service industry constituent –
will capture a portion of the market. We believe that instead of
working hard to improve current processes, insurers should be
preparing for a changing future.”


Start them

To move beyond the focus on
optimisation and towards innovation, IBM suggests that instead of
their long-time focus on “life events”, insurers could prepare
younger children (aged 10-15) for their eventual interactions with
the insurance industry.

Although it is a relatively
safe assumption that older groups can be approached with
well-understood mechanisms such as surveys and promotional
campaigns, younger groups will require a more modern approach.
Carriers need to leverage social computing tools, including blogs,
social networking sites and online communications push devices such
as audio and video podcasting. These tools allow a carrier to
integrate marketing outreach and provide near-real-time
demographics research that can become a vital component in dealing
with younger consumers.

The IBM study also highlights
the opportunities for industry collaboration. In the insurance
context, collaboration could come from suppliers, peers,
competitors, employees or other stakeholders. Observation and
engagement with other industries can also supply a much-needed
fresh perspective on problems and techniques facing the

“The opportunity to leverage
new technologies will only be fulfilled when internal impediments
to progress receive the same attention that optimisation of
existing processes receive,” the study said. “Younger generations
need to be won over with a new approach to dealing with the
realities of complex lives and the new aspects of culture that
arise from a world that continues to grow smaller as technology

Finally, the report finds
that technology is levelling the playing field for traditional
carriers, as well as the other players emerging today.

To prepare for competition
from these sources, carriers need to confront long-held industry
beliefs, chief among them the belief that its processes are so
specialised that they cannot be handled by third-party software.
And, even if third-party applications are purchased, they are often
modified to such an extent that they became home-grown

“What needs to happen now is the evaluation of business
and IT processes to determine what aspects of their operations
could or should be in-sourced, outsourced or co-sourced in ways
that provide not only cost reductions, but value enhancements as
well,” IBM emphasised.