The Innovation Imperative for Insurance
When you add it all up, the insurance industry has many characteristics that make it an attractive target for aggressive investments in innovation. First, its size is enormous – based on industry data it is estimated to be a global market of premiums written over $4.7 trillion. Second, it faces multiple challenges that offer opportunities for exploitation by nimble, efficient and innovative competitors including:
- Low interest rate environment – Forcing a focus on the core business of insurance, creating enhanced customer experiences and value, and rethinking operations to manage expenses. Together these are driving the innovation of new 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 new 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 and others), 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 and creates value in their lives.
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, startups and incubators who 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 new 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 over 130 startups and private companies in the InsurTech space that have raised more than $3.5B 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 3-5 years was critically important (InsureTech Has Arrived: A Primer, May 2016). And as highlighted in Majesco’s recent thought leadership report, Greenfields, Startups 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 startups and greenfields and incubating new products, services or channels.
Yet, 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 changing 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, 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. “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 these 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 both for 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 both 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. But it should also include details that define your new business model and what you need for the future business, which is likely very different than 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 Cloud platforms 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 startups and established companies to out-do 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. The Three-Box framework and three-step approach together provide a formula to use to develop your reinvention and transformation strategy. But the larger 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 transformation of both 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?