It has never been more important for insurers to be adaptable to changing business conditions and competitive environments, and to be able to innovate new products and service offerings for a market in flux.

As with most things in this information-based industry, improvements in IT capabilities are critical to enhancing agility. More agile IT groups make more agile business practices possible. IT plays a critical role in fostering innovation by scouting new technology capabilities and enabling pilot projects, although properly structured organizational incentives are the limiting factor for most insurers when it comes to driving innovation.

Agility has been a buzzword in insurance IT for close to a decade, and many insurers have made significant strides toward enabling more agile business operations supported by a more agile technology organization, especially in the last few years.

Agility is a measurement of an insurer's ability to react and adapt to rapidly changing conditions. In the current marketplace, agility is an absolute must-have.

Insurer IT groups are fostering the creation of more agile enterprises in three primary areas: applications, infrastructure and practices.

Legacy systems still, in many cases, lock insurers into legacy business practices. But recent investments in more flexible and configurable applications have had significant impact. Many insurers have invested in more flexible rating engines, policy administration systems and product configuration tools. In addition, the deployment of agent-facing systems have enabled more agile business practices, since product, rate and form changes can be made instantly accessible to agents. Web 2.0 applications such as Wikis also are making it easier for teams to collaborate internally and react faster to changing market conditions.

Investments in services-oriented architectures (SOA), business process management systems and business rules engines have made it easier for insurers to manage and orchestrate change in their technology infrastructures outside of individual applications.

Technology management practices such as agile/iterative development methodologies (which breaks new systems development down into smaller, faster sub-projects so errors can be identified quickly and changes in requirements can be more easily addressed) and ITIL (which formalizes and organizes systems development) are making insurers' IT organizations more agile. Insurers also are taking more of a process-oriented view of their business operations, and streamlining processes through business process re-engineering.

RIPE FOR INNOVATION

Innovation is vital in order to be able to avoid fighting yesterday's battles in one's approach to markets and internal operations. From both a technology and a business viewpoint, the insurance industry is ripe for innovation in many areas:

Products. While there are some truly new products emerging, such as telematics-driven, pay-as-you-drive auto insurance or simplified annuities, many insurers are innovating relative to their own legacy practices by consolidating unwieldy, class-code-driven product sets into a smaller number of products with more variable attributes.

Business practices. Whether it's new channels for customer service or streamlined workflows, many insurers are looking for the benefits to be gained by doing things differently.

Emerging technology. Insurers are looking to newer technologies (Web 2.0, mobile, telematics, cloud computing, grid) to help them create tighter relationships with customers and distributors, design better products and serve customers more efficiently.

BARRIERS AND CHALLENGES

Insurers have different methods of fostering innovation inside the company. In a recent Novarica survey, only 13% of respondents had a dedicated innovation team, while 26% reported that innovation was the responsibility of the CIO or IT architects. However, more than 70% felt that innovation should be handled either by a dedicated group, or as a top priority of senior company executives.

Despite the attention that many insurers are devoting to fostering innovation, even insurers with a mature innovation center find it difficult to translate ideas or pilot projects into tangible results. Novarica has spoken confidentially with several members of our research council who reported successful pilot projects or proof-of-concept initiatives performed by innovation groups that were never put into broader practice.

The two biggest challenges in putting innovation into practice for insurers are the lack of incentives for organizational risk-taking and the fear of change by business staff, each of which was ranked the biggest challenge by more than 30% of the participants in our recent survey.

These barriers to innovation - the lack of incentives for risk-taking and fear of change by the business staff - highlight the critical importance of senior company executives putting innovation into their management strategies if they really want the company to innovate. These two elements, of course, are linked. The reason that business staff is likely to fear change is because the risks generally outweigh the rewards on a personal level. Innovation, as Clayton Christensen pointed out in "The Innovator's Dilemma," is disruptive. Leaders may find their departments upended, and staff members may find their positions and responsibilities radically changed or even eliminated. At the same time, most organizations penalize failures of attempts at innovation far more than they reward successful innovations.

Since most innovations fail, pushing for - or even actively supporting - innovation is rarely a good bet for business staff at most insurers.

FOSTERING INNOVATION

Senior executives who want to foster innovation must make sure that the incentives for innovators are real, and that disincentives are minimized.

Failure must be able to be tolerated, and success must be rewarded. At the same time, senior executives should actively communicate the value and urgency of innovation to all levels of the organization.

Agility and innovation are top goals for most insurers, which makes them top goals for most insurance IT groups. Making IT more flexible and responsive helps the company adjust to rapidly changing market conditions and provides the ability to put innovative ideas into practice more efficiently.

Matthew Josefowicz is the director of the insurance practice at Novarica, New York. He can be reached at mj@novarica.com.

(c) 2009 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.

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