Insurers need to establish meaningful incentive plans if they want to encourage innovation, especially in tough times.
Crisis is always the time for innovation, according to Matt Josefowicz, director of insurance for Novarica and co-author (with Steven Kaye) of the research firm's report on innovation and agility in insurance IT.
"You can't keep doing what you've been doing if you haven't been getting good results or if the situation is totally changed underneath you," says Josefowicz. "If you look at some of the wealth management firms that were projecting 30 percent less revenue this year due to a combination of weaker markets and weaker demand, it's time [for them] to do something new and different."
But is there enough incentive for staff members to present innovative plans? Josefowicz doesn't believe so. "If you look at the way most insurance companies are managed, for most there isn't a lot of differential in incentives between really strong performers and midlevel performers," he says. "When the upside is so comparatively modest, the risk of doing something that doesn't work out and being blamed for it is comparatively high."
Josefowicz maintains insurers need a dedicated innovation group, or senior company executives should be in charge of driving innovation. "These [groups] are best positioned to ensure IT innovation can be leveraged to drive business innovation," he says.
In researching who drives innovation in the insurance industry, nearly one third (32 percent) of all respondents said it is senior company executives, and 29 percent responded it is the job of the lines of business. Only 13 percent indicated their company has an innovation team, although twice as many (26 percent) believed an innovation team should be driving innovation in the company.
Part of the fear of innovation comes from a lack of agility. Josefowicz asserts insurers that are entrenched in a certain cost structure or a certain set of business practices have a difficult time reacting to market shifts, new competitors, or new business models.
Insurers have begun to understand the importance of agility, though, both from a business and an IT perspective, thanks to a renewed focus on speed to market and what he calls "the rapid evolution of agent/customer service demands."
Agility is an important issue for insurers in terms of modernizing systems to be more configurable and also in business practices, Josefowicz contends. Insurers, he points out, are adapting agile development methodology over traditional waterfall methodologies as a way of performing iterative development, which allows them to stay closer to business requirements during the course of projects.
"In any of these 18- to 24-month technology projects, business requirements are going to evolve," says Josefowicz. "If you set a course and come back in 18 to 24 months, business conditions may have changed entirely. By checking in every month or two months to see whether you still are going in the right direction, all that iterative project management as well as software development offers a lot of value for insurers."
While service-oriented architecture has earned much of the credit for making carriers more agile, Josefowicz suggests there is more than one part to the equation. "The widespread tactical deployment of XML-based integration has made systems integration much more efficient for a lot of insurers," he says. "That's starting to be a less-inhibiting cost [for insurers] than it has been in the past."
Business and IT agility need to become tightly linked, stresses Josefowicz. Measuring that agility can be difficult, and he believes good tracking methodology is a key to success. For the majority of insurers, speed to market is considered the number-one measurement of agility. "Getting products out the door faster and making changes to their system faster" are the defining qualities, says Josefowicz.
Other forms of tracking agility are measured through operational efficiency and growth. Surprisingly, Josefowicz learned through his research a significant portion of the insurance market doesn't track agility at all. "We encourage people to use metrics primarily because when communicating with the business side, it can understand [those metrics]," he advises.
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