All iconic brands—past, present and future—share one thing in common: innovation.

When done right, innovation is one of the characteristics that sets long-term, successful firms apart from the competition.

Whether it is Henry Ford’s assembly line, BirdsEye’s frozen vegetables or more recent examples like Google, Amazon, Uber,or even Peter Drucker’s landmark concept of “management thinking,” these innovations did not incrementally improve existing products, services or processes. Instead, they fundamentally changed how things were done or created entirely new market segments.

Paraphrasing business professor and author Oren Harari, complex systems thinker Dr. Warren Black illustrates this point with the statement, “Electricity wasn’t invented to improve the performance of the candle.”

In the insurance space, Lemonade could possibly be included on this list because it created a new market segment. As explored below, although technically licensed as an insurance company, Lemonade is really a technology company that happens to sell insurance. It is one thing to recognize the need for technology in the insurance selling process. However, it is something completely different (or revolutionary) to say you are a technology company that happens to sell insurance, especially when compared to insurers that have been around for 150 years.

With the growth of AI and other digital-age technologies some dub as the Fourth Industrial Revolution, innovation is a recurring buzzword regardless of the industry in question. Many companies today even have a C-suite officer dedicated to innovation—something that was unheard of 20-30 years ago.

While a list of examples of innovation in the insurance industry could keep on going beyond Lemonade, let’s focus our attention on how carriers can pursue innovation responsibly, resulting in increased chances of long-term success.

Responsibly. This is extremely relevant considering how the insurance industry is currently a hot bed for innovative uses of AI, Internet of Things (IoT) and other technologies. Simply browsing recent issues of Carrier Management or listening to discussions among leaders of carriers and companies supporting the industry will confirm this fact.

Regardless of the context, we all have FOMO, or fear of missing out. When hearing about something intriguing, it is our natural tendency to want to check it out and potentially adopt it. Many companies, especially in the consumer space, have seen tremendous growth by doing this.

However, this FOMO urge can be troublesome. The type of reactive decision-making that FOMO triggers can derail plans already underway. Management teams become distracted with “shiny objects,” fascinated by the idea of following the latest trend without conducting proper research and vetting.

Contrary to the image that is often portrayed, innovation all on its own will not lead a company to the iconic status. Jumping in without the proper due diligence can end up doing more harm than good to a company’s long-term prospects.

This is not to dissuade innovation but rather to ensure that any decisions are informed.

It is common in the insurance industry for companies to talk or gossip about what others are doing and make the decision that if it is good for their company, then it must be good for ours. Better jump on the bandwagon or miss out!

But without any due diligence or follow-up, this reactive adoption based on FOMO can be more dangerous than doing nothing at all. While a particular solution may sound fantastic on the surface, hasty implementation can lead to extremely inefficient processes, overwhelmed staff, and dissatisfied agents and policyholders, ultimately ending in damaged reputation and loss of revenue, among other consequences.

To understand this concept in action, consider the example of State Farm featured in Carrier Management‘s fourth-quarter 2023 edition.The mutual P/C insurer has been pioneering the use of IoT technology to enhance its customers’ experience and optimize core insurance processes.

One of these innovations involves partnering with a company that invented what is known as the Ting smart plug. This device monitors a home’s electrical system to detect issues that could lead to a fire. When the smart plug detects a potential problem, the company will notify the customer, help them locate the problem and if necessary, coordinate with a licensed electrician to resolve the issue.

What an exciting innovation that many are hailing as a seismic shift from a recovery-focused mission to one based in predicting and preventing losses.

But what if a competitor who hears about this jumps in without at least considering upstream dependencies and downstream consequences?

Every company is different, including its clientele.

Would a smaller insurer be able to handle this type of partnership?

How would this type of data be handled by the insurer?

What processes need to be in place when a potential hazard is detected?

Similar to using drones for inspecting roofs and the perceived invasion of privacy, what will an insurer do if a policyholder does not want this kind of monitoring in their home?

Beyond the benefits, there are a number of potential consequences an unprepared insurer could face in this scenario. To avoid a calamity, the first and foremost step carriers should take with innovations is to be proactive to fully understand the opportunity instead of being reactive in its decision-making.

It is true that innovation on its own is not sufficient, but it is equally true that every company needs to be innovative or possess a certain level of disruptive capability. Decision-making processes supported by robust risk management practices enable a company to seek out areas of innovative disruption or business development in a deliberate and systematic way.

“The actions and decisions applied for doing disruptions or disrupting your industry may not be seen as risk management as such, and so be it. However, it is all the tools and processes of risk management that enables an organization to do it successfully,” wrote former strategic risk manager of LEGO Hans Læssøe in his book “Prepare to Dare.”

Applying this principle to insurance carriers should involve, at an absolute minimum, understanding upstream dependencies and downstream consequences of pursuing a particular innovation. Answering the following questions is a good place to start:

• What must go right for any implementation to be successful?
• What, if any, new risks will be created by this action?
• Are these risks acceptable? At which point will they not be acceptable?
• Who are the stakeholders and impacted parties, both positive and negative? This should also include any external parties like regulators, agents, TPAs and more.
• How will we need to communicate with these individuals and groups?

Take the case of Lemonade…

As mentioned earlier, this carrier is completely different from more traditional insurers in so many ways. There is no need for a call center because claims reporting is handled through their smartphone app, and being direct-to-consumer (D2C) means there are no agents.

If a more traditional carrier were to adopt this model, even for a portion of their business, there are all sorts of factors to consider. What type of technology infrastructure would need to be in place? What type of expertise would be needed? Do employees need different skills? How will adopting this model impact legacy systems and processes? How will agents react to lost income with this D2C offer?

It is through this process that you as the company will realize the effort and cost that would go into an innovation like this.

However, this type of screening process is not just about risks and drawbacks but the benefits as well. It is entirely possible that adopting a certain course of action could end up helping other (struggling) areas of the company. For example, consider a company that decides to clean up its book of business while also growing in policy count. The Underwriting department is busy, but rather than simply waiting for calls from agents and policyholders, Customer Service can be proactive in reaching out to policyholders to help ensure that payment is received or the agent submits the documents, avoiding the cancellations and helping meet the policy count growth goal.

Developing this business case takes effort when done properly—but recognize it is only the first step. Just because a new product, technology or other initiative sounds good on paper does not mean that it is ready to roll out to the entire company (and its policyholders).

The next step that often gets missed is conducting a pilot to see how well it works, what needs to be tweaked and so on.

These steps really only cover the short term.

To better understand long-term prospects of a particular innovation, a different kind of scenario analysis is needed—more specifically, a strategic scenario analysis. After all, the longer the time frame, the more uncertainty exists. Strategic scenario analysis provides a better understanding of the drivers of uncertainty over the long term.

Now let’s take the earlier example of having Customer Service making proactive calls to agents and policyholders and apply it to a strategic scenario analysis. This activity works over the next year, even two. Now the company needs to understand if this is an activity that can be feasible in the long term.

With policy counts growing, the number of calls coming into Customer Service from agents and policyholders will continually increase. (After all, even with digital support options, there will always be those who prefer to talk through a problem with a live person.) What are the assumptions being made regarding:

• The percentage of calls received per 1,000 policies. How many people are needed to handle those calls?
• Will this percentage change (increase or decrease) as the generational demographics of agents and policyholders change?
• X number of cancellation notices are sent out monthly for non-payment. How many people are needed to make those calls?
• What is the acceptable rate of carrier-initiated cancellation?

Project these questions and assumptions 10 years into the future. What type of investment is the company willing to make into this activity? Are there other options that are effective at an acceptable rate?

Along with quantitative methods like Monte Carlo simulation to understand the probability of success for the different scenarios, it is steps like these that focus on optimizing performance and ensuring success that represent an advanced form of risk management beyond buying reinsurance, understanding the book of business or satisfying regulators.

Risk management, or whatever name it is called at your company, has a reputation of being a total naysayer to innovations like AI or Lemonade’s novel approach to offering insurance coverage. The approach outlined above is not meant to be a naysayer but rather a methodical way to avoid shiny-object syndrome and ensure decisions around technology or innovation are truly informed.

It is well understood that grabbing at straws is not a recipe for success. Companies that have done this in the past typically did not fare too well. This fact will be especially true when it comes to innovations like AI and others. By not understanding the particular way or niche your company can fit into, innovations can end up causing more problems than they solve.

Are you ready to make informed decisions around innovation and the role it will play in the future of your company?

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This article is featured in Carrier Management’s second-quarter 2024 magazine, “AI and Social Inflation.”

Related articles include:

• Avoid Employee Turnover by Asking 5 Simple Questions
• Put Motivation Back Into Performance Reviews
• Reimagine Talent Practices to Unlock Human Potential

All of the articles in the magazine are available on the magazine page of our website.

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