Innovation has become a business imperative for allorganizations participating in today's super competitive, globaleconomy.

Companies slow to adopt a culture of innovation supported byflawless project execution quickly find themselves susceptible todisruption and competitive challenges. The threat lies not just inforward-thinking competitors, but perhaps more importantly fromnew, unexpected problem-solvers. As the old adage goes: "Adapt ordie."

Both insurance organizations and related risk management serviceorganizations are challenged by innovation. These types oforganizations have historically focused on effective data analysis,excelling in their ability to quantify and manage risk. However,they now experience significant hurdles and opportunities inembracing all aspects of innovation.

Significant challenges for insurers

As with any established business, insurers develop a host oforthodoxies in how they view their market and conduct business.Orthodoxies reflect legacy thinking, the process whereby new ideasare filtered out in favor of existing beliefs, accepted conceptsand widely known generalizations. This way of thinking can preventcompany progress and obstruct innovation.

For example, the need to price insurance products based solelyon insurance claims experience was an orthodoxy successfullydispelled with the advent of catastrophe models, homeownersunderwriting predictive models, and insurance-based credit modelsfor auto insurance in the 1990s. And the marketing of insurancethrough direct channels and through captive and independent agentsnow seems quaint compared to the prevalence of online sales.

Insurers are challenged to critically review and uncover otherorthodoxies embedded in their approach to product development,marketing, technology, financial management and other operations.The insurance industry has often been accused of lagging ininvestment and development of cutting-edge technologies, relyinginstead on an antiquated patchwork of systems originally createdfor a very different business environment. This shortcoming makesit difficult to understand changing customer needs and results insignificant delay for developing relevant products andservices.

Additionally, insurers may be missing opportunities to takeadvantage of developments such as big data, data visualization, theInternet of Things, as well as predictive and prescriptiveanalytics. Insurers must invest in the necessary tools to compileand ensure the integrity of data to support these endeavors.

As a heavily regulated industry, insurance also faces specialchallenges in embracing innovation. For example, consider thesignificant controversy associated with the use of credit andinsurance demand information in the pricing process. Regulatorshave generally taken a conservative view in limiting the waycustomer behavior information can influence the price charged forinsurance products. While insurers that remain blind to therelevance of this data in their marketing and pricing structuressubject themselves to significant competitive disadvantages, theyhave to contend with regulatory limitations. The key is to educateregulators in how relevant information produces prices that arefair and promote a healthy insurance market.

Meanwhile, insurance customers are dealing with quickly evolvingrisks, and they expect insurers to help mitigate them. While insome cases traditional insurance products may be slightly modifiedto accommodate new risks, other situations call for entirely newways to define, underwrite and price risks. In such situations, newcompetitors and disrupters can often introduce creative solutionsbecause they are less invested in traditional methods of handlingemerging risk.

Often, sophisticated customers can manage the risk transfer andfinancing issues on their own, but want experts to deliver detailedrisk information for guiding their decisions. This environmentclearly favors providers who have embraced the key principles ofinnovation.

Lastly, perhaps the most significant challenge facing insurersseeking to innovate is adopting an urgency mindset. Insurancecontracts and regulations have been around for a long time. If thetrends noted above are addressed without a high level of urgency,it is probable that new market participants and insurers that haveembraced innovation will experience increases in the risk economy'smarket share.

Capitalizing on insurer expertise

While insurers face significant challenges, they also are wellpositioned to take advantage of these new opportunities. Insurershave extensive experience in analyzing risk, creating a market totransfer risk, and servicing various aspects of the risk transferprocess, including claims handling and facilitating the feedbackloop on risk mitigation.

Insurers understand risk because it's their business. They housea blend of risk professionals, including underwriters, actuariesand claims experts, who work together to evaluate exposures anddesign coverage terms and conditions under which risk can betransferred, or provide advice on other alternatives to manage therisk. Each professional brings an important perspective in dealingwith both the quantitative and qualitative aspects of risk.

With years of experience solving risk transfer problems acrossproperty and casualty lines, many insights from traditionalinsurance can be extended to tackle new challenges. For example,terrorism products were created in 2001, and more recently, demandfor cyber coverage has increased. Innovation is currently beingharnessed by insurers to deal with the introduction of smarttechnology in automobiles and the advent of driverless cars. Whilethere are not extensive data sets to support traditional actuarialanalyses around these emerging risks, insurers are well positionedto bring the right blend of talent together to innovatively addressthem.

Extensive experience with financial risk has also enabledforward-thinking insurers and reinsurers to take advantage ofalternative forms of capital, such as insurance-linked securities.This additional capital, coupled with several years of lowcatastrophe activity, has strengthened the financial position ofinsurers. Benign claims inflation has also contributed torelatively strong balance sheets across the industry, which in turnprovides a solid foundation for adding new risks that furtherdiversify existing portfolios. Building diversified underwritingportfolios is one of the core strategies that insurers can leverageto manage the changing risk landscape.

Finally, insurers have the infrastructure and experience toservice the risk transfer process. With the ability to navigate theregulatory framework, the network to adjust claims, and therelationships with insureds through existing product offerings,insurers are able to provide the service that is required by manyrisk transfer products.

The industry does need to be careful not to fall into the falsebelief that this level of service will always be required for everyrisk transfer product, but there is no doubt that the knowledgeamassed by the industry in understanding risk and translating thatinto tangible risk mitigation advice for insureds will continue tobe of value.

Companies must invest in the tools needed to compile andmanage data. (Photo: Shutterstock)

Overcoming institutional inertia

For an organization to incorporate a culture of innovationthroughout its operations, supply chains, networks and ecosystems,it must begin by anchoring that concept deeply within the toplevels of organizational leadership — the C-suite and the board ofdirectors. If innovation does not have the commitment and fullsupport of the organization's leadership, it cannot possiblyflourish.

Successful leaders understand the importance of culture andsetting the right tone for an organization. Innovation, when trulypart of that culture, should be seen as a seamless and impactfulcontributor to the business, not an afterthought. Stakeholders suchas investors, analysts, media, customers and supply chain partnersare perceptive and will see through insincere efforts, soinnovation must permeate thoroughly in order to be mosteffective.

Integrating innovation into the intangibles of theorganization's culture can be difficult. It's far easier to buildan innovation process and structure into more tangible areas likeresearch & development, product development, and even marketingand sales. It is far more difficult to strategically bind it to theorganization's belief system, its core values and reason forbeing.

"For innovation to become fully embraced and strategicallyapplied, it must become a part of the organization's culture andsupported by leadership," said Kevin Bingham, co-chairman of theArlington, Virginia-based Casualty Actuarial Society's Innovation Counsel."Everyone must believe and engage in the cause to apply innovativethinking to their work."

In fact, given the complexities of conducting insurance businessglobally today, the pressures to differentiate and get ahead of thechaotic intersection of technological, regulatory, demographic,economic, societal and competitive forces to be a sector leader aretremendous. A culture of innovation is a powerful tool to helporganizations become leaders in their fields. In fact, Apple'sSteve Jobs once said, "Innovation distinguishes between a leaderand a follower." It's the strategic approach that helps setorganizations apart.

Operationalizing innovation — moving it from theory to practice— is replete with challenges. After all, it's one thing to talkabout how innovation may help the organization; it's something elseto actually live it and reap the rewards.

Innovation is a structured process that works best when teams ofpeople, drawing upon their multiple experiences, collaborate tosolve challenges and find new solutions. Traditional silo modelswith functional divisions that do not share information, ideas orresources to solve problems still plague insurance and otherbusinesses today. Without a collaborative culture, an organizationcannot effectively build an infrastructure around the process ofinnovation and expect it to function seamlessly and produce goodresults.

Insurers can take advantage of their network of riskprofessionals, including underwriters, actuaries and claimsexperts. Imagine the innovation capability that emerges when theseprofessionals seamlessly collaborate as a team with marketing, datascientists, technology and finance.

American author Steven Johnson wrote, "If you look at history,innovation doesn't come just from giving people incentives; itcomes from creating environments where their ideas can connect."This is an essential requirement for innovation to work.

While a collaborative culture may be less tangible, innovationcan also be made concrete through an innovation laboratory orsimilar structure within the organization to support and driveinnovation along a development life cycle.

A lab could be structured to be nimble — failing early and faston ideas, and running quickly through rapid prototyping to developand launch ideas that work. Teams of people would be tasked to takeideas submitted by employees, customers or other stakeholders forconsideration by the lab through a structured process to quicklydetermine viability and potential for success. This process willinclude failures, and that's okay. Truly innovative organizationsembrace failure as simply a step along the path to success,learning from those failures and applying lessons on successiveefforts.

Another myth about innovation is that it is always aboutsomething new or totally disruptive. While these kinds of solutionshave strong track records of success in product and serviceinnovation (remember books and music before Apple and Amazon?),disruption is not a requirement for innovation to work. Finding aninnovative approach to how an insurance company internally handlesclaims or prices risk has the potential to bring success to thecompany as much as an innovative new consumer-facing product.Innovation can be incremental as well as disruptive, but it must bepart of the culture before it can bring success.

There are huge incentives for insurers to embrace innovationfrom both a cultural and strategic perspective. Insurers willing totry something new can leverage existing resources to unlock theircompetitive advantage. But first they must fully understand theinnovation mindset and see the opportunities from thatperspective.

Challenges to insurance innovation

1. Critically review and uncover orthodoxies that are embedded intheir approach to product development, marketing, technology,financial management and other operations.

2. Invest in the tools necessary to optimally compile data andinformation needed to support cutting-edge analyticalapproaches.

3. Be open to new ways to define, underwrite and price risks.

4. Educate regulators while you innovate.

Innovation strategies

1. Integrate innovation into the organization's culture.

2. Innovation is a structured process, working best with diverseteams brought together to solve challenges and find newsolutions.

3. An innovation laboratory can support and drive innovation andideas along a development life cycle.

4. Disruption is not a requirement for innovation to work,particularly if that innovation is benefitting internal process andoperations.

Susan Cross is a fellow of the Arlington, Virginia-basedCasualty ActuarialSociety and the executive vice president and group chiefactuary at XL Catlin. Aaron Halpert is anassociate of the Casualty Actuarial Society and principal atAMHAdvisory LLC, an actuarial consulting practice. BradMonterio is a managing director for Colcomgroup Inc. and serves onthe board of directors of the Casualty Actuarial Society.

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