RiskGenius Blog

Insights into our world of Insurance & Technology.

The Insurance Innovation Dilemma

by Chris Cheatham | Jan 15, 2016 | Technology
Last week I wrote an Insurance post over on LinkedIn that touched off quite a conversation. I made the point that the insurance industry is not doing enough to create and implement new technology solutions. I pointed to hackathons as one example of "talking" but not "doing" innovation. 
But I missed two big things: 
The insurance industry has no incentive to create or implement "disruptive" technology.
The insurance industry is facing the innovator's dilemma. 

The problem with hackathons aren't the hackathons themselves. 

In my Linkedin post, I took aim at hackathons being hosted by insurance companies.  
I am fine with hackathons. I personally don't attend them because it drives me crazy to hear really smart people talking about ideas without an intention to follow through. But putting my personal feelings aside, there is a place for these events. A corporate hackathon isn't meant to create the next Uber; corporate hackathons are meant to stimulate thought and innovation.  
For an insurance company, there are some valid reasons to host a hackathon:
Get your team thinking creatively.  There is something empowering about talking with your colleagues about big problems. It's fun to ignore your daily routine and focus on a business pain. This creative thinking can benefit employees when they return to their daily routines. 
Retain and recruit new talent.  The insurance industry has a recruiting problem. Insurance is not sexy. Finance experts can go to Wall Street; technology experts can go to Silicon Valley. Conversations about the future of insurance technology and business models can empower younger insurance employees and prospects. 
Find sustaining technologies.  It's possible that a hackathon will result in good ideas that improve existing business processes. An insurance hackathon solution that can be executed will likely be incremental and require minimal resources. These types of technology solutions will improve upon an existing pain point
However, it's highly unlikely that hackathons will result in disruptive technologies. 

The problem for insurance innovation is the innovator's dilemma.

Hackathons hosted by insurance companies are unlikely to result in disruptive ideas.  Anyone who has read The Innovators Dilemma should recognize the problem. Profitable insurance companies (and their employees) have no interest in "disrupting" themselves with new technology or business models.   
If you read too much insurance technology news (I'm guilty of this), you might forget that insurance companies make a lot of money.  As a result, insurance companies are not interested in disruptive technologies.  This is the classic innovator's dilemma, as described by Clay Christensen:  
Christensen describes two types of technologies: sustaining technologies and disruptive technologies. Sustaining technologies are technologies that improve product performance. These are technologies that most large companies are familiar with; technologies that involve improving a product that has an established role in the market.  Most large companies are adept at turning sustaining technology challenges into achievements. 
Christensen claims that large companies have problems dealing with disruptive technologies. Disruptive technologies are "innovations that result in worse product performance, at least in the near term." They are generally "cheaper, simpler, smaller, and, frequently, more convenient to use." Disruptive technologies occur less frequently, but when they do, they can cause the failure of highly successful companies who are only prepared for sustaining technologies.
Why would an executive or employee want to create insurance innovation that blows up a profit generating business?  There might be long term interests to invest in disruption. But insurance companies aren't focused on long term; insurance companies are focused on the next quarter.  

Insurance big data is an example of the innovator's dilemma. 

As I was writing this, I came across this article:  Insurance Missing Out On Big Data's Value
The article hits on a point that I have been making to insurance carriers and agencies.  The insurance industry has an opportunity to leverage "Big Data" in a way that will totally change underwriting.  But insurance professionals must think beyond existing actuarial tables.  Insurance professionals must not fall into the trap of taking Big Data and using it to incrementally improve actuarial tables.  That is not enough.  Entirely new models of measuring risk must be created from "Big Data."  
If existing insurance companies don't leverage "Big Data" beyond actuarial tables, someone else will.  These will be the insurance companies of the future.  
And that is the insurance innovator's dilemma.  

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