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Just as energy is the basis of life itself, and ideas the source of
innovation, so is innovation the vital spark of all human change,
improvement and progress. - Theodore Levitt
An old clich goes: innovation and insurance are found together only in the
dictionary. In reality, the (re)insurance industry is required to be innovative by
the very nature of its purpose. Our fundamental obligation is to understand, even
anticipate, the needs of our customers and effectively respond to those needs. 1It
can be argued that the conservative reputation the industry enjoys has served to
camouflage a tremendous track record of innovation, from the first written
insurance contract inscribed on Babylonian columns by King Hammurabi's men
to the industry's current use of big data and telematics to lower costs and
improve results. Innovation in (re)insurance has long been rightly married to a
certain conservatism that ensures that companies do not get carried away by the
latest fads, but preserve their capital for its intended purpose. This conservatism
served most carriers well during the 2008 financial crisis, but may also hinder
the flexibility needed to survive and thrive in a post-crisis environment, as the
rate of change appears to be accelerating. 2
Our industry is, in many ways, a prisoner of the past. It relies on data to assess
and manage risks and to create new products. We are very good at expanding
the boundaries of the current business model; tweaking and optimizing the
product to meet the needs of our customers. 2 A quick look at some of the new
products made available over the past few decades shows numerous examples
of incremental innovation. Where we do lag are the market-creating innovations,
the third category of innovation outlined in the article-"The Capitalist's Dilemma"
by Harvard professors Clay Christensen and Derek Bever. They categorised
innovation into the following:
average. That is all the more inadequate given that governments have no plans
to develop public safety nets. Instead, they are opening up their insurance
markets to help shoulder the growing cost of healthcare and retirement. The
convergence of three key trends will further compound the problem. The first
trend is demographic change. Asia's population is growing rapidly. Over the next
5 years, the UN expects Asia's population to increase by a further 5%, or 200
million more people. This population is also ageing rapidly. The number of people
over 65 in the region is estimated to increase threefold to almost 1.3 billion by
2050. The second key trend is rising affluence. The spending power of the Asian
consumer is increasing. In fact, ADB (Asian Development Bank) expects average
household expenditure in developing Asia to almost triple over the next two
decades. The third trend is rapid urbanization. Asia will account for 54% of all
growth in the world's urban population over the next four decades. Risk
mitigation measures will need to keep pace with economic growth. Despite
growing by an average of about 15% per year over the last decade, insurance
penetration rates in emerging Asia still hover at 1-3%, or less than half the global
average. Asia's experience in 2011 was evidence of the consequences of underinsurance. Only about 50% of Thai flood losses and 15% of Japanese tsunami
losses were insured. Self-insurance by the Government was the key mode of risk
mitigation. As a result, national economies were burdened with hefty recovery
costs.5
However, as its economy grows, Asia's risk landscape is also increasing in size,
complexity and interconnectedness. More than 70% of Asia's GDP is derived from
cities, and two-thirds of the region's population is expected to live in cities by
2050. Many of these cities are situated in locations prone to natural hazards.
Rapid urbanization will give rise to more complex underlying risks. Asia, and the
world as a whole is only getting more interconnected. This has resulted in loss
events having unexpected domino effects. For example, the Thai floods and the
Japanese tsunami disrupted global supply chains. 5 Many reinsurers instinctually
look for ways to cope with these developments using practices and technology
already at their disposal. Catastrophe models, economic capital models and
enterprise risk management are few of the advances made by reinsurers in
addressing this ever-evolving risk environment. The emergent risk will eventually
outpace the capabilities of these tools as risk and capital management will only
grow in complexity, a trajectory that is likely to continue and probably
accelerate.6 It is in Asia that the lag in innovation of reinsurers will be most
visible. While it is important for the industry to have a better understanding of
the current risks we are facing, it is equally crucial to have a forward-looking
mindset, technical vision and commitment to master emerging risks and come
up with innovative solutions for turning these risks into business opportunities.
Innovation is not only needed for staying competitive, but also necessary for
survival.6
Reinsurers, it seems then, are on the brink of a major opportunity. The question
to ask now is, "Where can i add value? How can i grow my potential market?"
The challenge in writing more business is now about reaching and educating
potential insurance customers in regions where financial education has never
existed. This opens up vistas for the reinsurance industry to grow by adding a
broad array of value-added services that could transform how primary insurers
perceive their reinsurers. It would require attracting new talent and developing
new capabilities- investments that would have the potential to drive long-term
opportunities around the world. The key is for reinsurers to start thinking
differently about the business they're in. 5 Radical adjacency- the move to
redefine core competency and to create a platform for extreme market
adaptability, should be part of the playbook. . Apple is the classic case (from
computers to music players to smartphones, advertising and TV). Consider
McLaren, one of the leading Formula One teams, which is using its skills in real
time data analytics learned on the race-track to address remote health data
management.7 Reinsurers must be at the fore-front of developing risk mitigation
strategies for the following risks: 8
Increased volatility in asset prices and commodity markets that could cause
fluctuations in cost structures that cannot be readily passed onto the
consumer or otherwise absorbed
Pandemics and other health crises which could jeopardize the supply chain,
consumers, employees and others
Changes in Laws and Regulations that could cause an overhaul in the manner
by which businesses are run or affect the source of their profits
been overused to the point that the discussion has become circular, "to be
innovative, we have to encourage innovation." 9 Innovation may be among the
most desired but least understood of all corporate goals. For a successful
business, a commitment to innovation represents a gamble as to whether the
innovation, if successful, will adversely affect the existing business, or represent
a substantial increase or improvement in the business. And the gamble does not
always pay off. But in today's world of big data and rapid economic and
technology changes, can reinsurers risk not being innovative? 2 So the key
question then becomes how? Let's take a look at three major opportunities in
front of reinsurers:
All the above efforts must be supported by reinsurers and in fact, they should be
the ones leading them. AXA has created a separate VC fund to fuel far-reaching
innovation.12 It is bringing its expertise to help these companies grow by
connecting them to their portfolio companies. MetLife has set up a first-of-itskind disruptive innovation centre- LumenLab staffed with dedicated innovation
experts to develop new business models in the areas of wellness, wealth and
retirement.13 By leveraging tried-and-tested innovation processes, LumenLab
aims to build businesses that help Asian consumers achieve richer and more
fulfilling lives. Reinsurers must bring about what Entrepreneur Frans Johansson
calls the "Medici-effect" referring to the creative explosion in Florence when the
Medici family brought together people from a wide range of disciplines
sculptors, scientists, poets, philosophers, painters, and architects. As these
individuals connected, new ideas blossomed at the intersections of their
respective fields, thereby spawning the Renaissance, one of the most inventive
eras in history.14
The existence of innovation and its potential to build and serve a thriving
reinsurance marketplace depends on the industry's willingness to understand its
nature, the necessary investment, and the inherent risks- as well as rewards.
This is the double-edged sword of innovation, one which the reinsurers must
tread.6
References:
1. Innovation in the insurance industry: Risk & Compliance Magazine, AprilJune 2014 Issue
2. Innovation in insurance: The path to progress- Deloitte University Press
3. The Capitalists Dilemma- Clay Christensen & Derek Bever, Harvard
Business Review
4. http://www.verisk.com/blog/capital-markets-2/reinsurance-industrysgreatest-challenge-emerging-market-distribution/
5. http://www.mas.gov.sg/news-and-publications/speeches-and-monetarypolicy-statements/speeches/2013/opening-keynote-address-by-amd-ngnam-sin-at-the-asia-ins-and-reins-conf-17-april-2013.aspx
6. https://mmc.dppl.com/knowledgecenter/viewpoint/Reinsurance_Innovation
_Committing_to_the_Leading_Edge.php
7. http://www.forbes.com/sites/haydnshaughnessy/2011/07/14/the-rise-ofradical-adjacency/
8. http://www.zep-re.com/index.php/component/content/article/13-media/35publication-emerging-risks
9. http://www.wired.com/insights/2013/11/innovation-the-most-importantand-overused-word-in-america/
10.http://www.globalsurance.com/news/2012/07/04/insurance-innovation-andinvestment-to-play-major-role-in-renewable-energy-future/
11.http://www.cisl.cam.ac.uk/news/blog/rethinking-insurance-sustainabledevelopment
12.http://iireporter.com/category/features
13.http://www.financialexpress.com/article/companies/metlife-launcheslumenlab-the-first-of-its-kind-innovation-centre-in-singapore-for-the-lifeinsurance-industry-in-asia/102522/
14.Create the Medici Effect- HBS Working Knowledge