P/C Insurance Isn’t Innovative? Don’t Believe It

There’s more innovation in property/casualty insurance than people think.

A new Swiss Re report explores why the industry is not known for its innovation and concludes it’s because much of the innovation is incremental or new to the insurer but not to the market.

“[A]lthough a changing environment continuously forces the industry to rethink its covers, insurers are often perceived as slow to embrace product innovation. This is because the nature of innovation in insurance is usually incremental and transaction-led. Insurers are constantly trying to discover new classes of risk protection, but they always need to be cautious not to overstep the boundaries of insurability.”

Darren Pain, Swiss Re economist and author of the study, defines innovation as the “introduction of something new that improves on the status quo.” It doesn’t have to involve anything especially novel or inventive.

“Core to innovation is that it creates value. Innovations vary according to how far they change the existing product or service or the way it is delivered. At one extreme, incremental innovations involve modest improvements. At the other, transformational innovations may radically alter the product or competitive landscape,” he writes.

The report “Product Innovation in Non-Life Insurance,” describes product innovation in insurance as tending to be “more little ‘I’ than big ‘I.'”

The report cites surveys showing that many insurers report the introduction of new or improved products. However, it adds, most innovations tend to be new to the firm rather than genuinely new to the market.

“Insurance has a poor image of being not innovative, but often people don’t appreciate the range and degree of risks that insurers routinely take on,” reports Swiss Re.

Pain cites new risk classes such as cyber insurance and supply chain disruption cover, as well as alternative risk transfer techniques as important insurance innovations.

But most product innovation in traditional insurance markets tends be of the incremental or evolutionary type, building on existing knowledge and infrastructure, says the report. It identifies some of the most prominent incremental innovations in insurance as amendments to terms and conditions of the cover, bundling or unbundling of risk protections, and policies based on parametric triggers.

In many cases insurance people might describe this transaction-led innovation as product flexibility rather than innovation per se. But it is easy to undersell its significance.

“On the client side, such policy refinements — sometimes called ‘deal-by-deal innovations’ — can be extremely important for shaping existing risks to make them or keep them insurable. Innovations also help by saving on unnecessary cover and by using re/insurers’ risk-absorbing capacity to reduce the overall costs of insurance,” says Pain.

The report notes that technical, organizational and market factors constrain how expansive insurers are in developing new products. For one, missing information can give rise to adverse selection or moral hazards and lead to bigger losses.

“So caution always needs to be exercised when taking on new or changing risk exposures. Additionally, there is sometimes limited demand for highly innovative products, even if insurers are prepared to offer them. Instead, ‘big’ innovations tend to occur only when an exogenous driving force, such as new legislation or tax changes, stimulates demand,” according to the report.

Governments and insurers can cooperate to spur innovation, for example by designing new insurance vehicles or by partaking in risk sharing. Micro-insurance is an example of collaboration amongst insurers, governments, and non-profit organizations to give access to insurance to millions of otherwise unprotected people. Natural catastrophes are also more insurable than ever, especially because risk can be transferred in part to capital markets, according to the report.

“Cooperation with governments or between companies can however, lead to unintended consequences. Subsidized insurance, for example, can distort incentives and collaboration can potentially lead to reduced competition,” the report says, adding that the key is a balanced innovation portfolio.