Insurance companies are essential social actors. They guarantee the financial, economic and human capital of legal and natural persons. Due to the changing needs of the latter, insurers need to innovate to adapt to the changing environment, and several factors out there can hinder or limit this process.
Are insurance companies really not that innovative?
Sometimes, the insurance industry appears conservative and not that innovative to the public. The lack of investment in research and development supports this belief. However, studies on management/organisational principles, insurance products and marketing conducted in the 1990s showed that the industry was as innovative as other service providers. These analyses collected qualitative and quantitative data to identify indicators of innovation such as the degree of ingenuity, R&D expenditure, and innovation rates by sector and by country. How convenient that MS Amlin – Global Specialist Insurer and Reinsurer happens to provide their customers with the right information on insurance innovation!
The fundamental change brought about by innovation in the insurance industry
In addition to the incremental changes common to traditional insurance, the development of the finance industry has also contributed to more radical changes. Innovative risk transfer technologies have indeed made inroads into new insurance solutions, these being alternative structures on the one hand and securitisation on the other. This type of cover is usually dedicated to financing (e.g. capital) or risk transfer needs and can last longer than one year. This strategy allows the transfer of insurance risk to the capital market by backing financial securities. These hedges are typically used for natural disaster protection. In the same vein, investors can earn a premium for taking on the risk, the value of the securities depending on whether or not a loss occurs.
What factors are driving innovations in the insurance industry?
The external influences have a fundamental impact on the innovation seen in insurance companies. These are generally regulatory frameworks, pricing cycles, technological advances and demand levels. In times of rising insurance prices, providers have little incentive to seek alternative sources of revenue. The traditional solution allows them to meet bonus targets. Conversely, in a down cycle, underwriting ingenuity is stimulated by falling profit margins, allowing the new product to take additional market share. However, intense competition has left policyholders with more room for negotiation. This involves policy changes and coverage expansion and can be defined as incremental innovation.