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Insurers caught in innovator’s dilemma

By Susan Yellin | February 03 2016 07:00AM

Mary Trussell

Canadian life insurance companies are caught in a technological “innovative dilemma” that they must reconcile by hiring the right people to implement new and ongoing strategies, a KPMG conference was told in late November.

Currently, the insurance industry is facing immense challenges – everything from climate change, the significant growth in emerging markets and the ever-growing middle classes and the funds needed to provide their health care as they get older, said Gary Reader, KPMG’s global head of insurance.

But with these challenges also come opportunities, said Reader, and the answer lies in innovation and leadership that will drive that strategy on an ongoing basis.

The way forward

“The way forward for the industry is a need to innovate – to find new ways of working, new products, new ways to sell and new markets and how to attract those markets,” he said.

The good news is that none of the nearly 300 respondents to a global KPMG survey on innovation doubts the importance of this subject, said Mary Trussell, a KPMG partner in the insurance sector.

About half of the Canadian respondents to the survey said they were most concerned about enhancing their current products and services – in line with the 60% globally who rated this as their top priority. On an international scale, 52% said integrating digital into their business was the most important issue, while 48% said they wanted to improve their underwriting, marketing or pricing.

“[The problem is] the insurance industry as a whole – and Canada is no different – is deeply caught in what is often referred to as ‘the innovator’s dilemma’,” said Trussell. Named after a book by Clayton Christensen, this situation develops when successful market players overlook the opportunity for innovation because they’re not needed immediately. In the meantime, astute competitors rise up and take over the market.

The issue here is that not everyone sees enhancing current products and services as being truly innovative. A report on the study by KPMG noted that only 26% of respondents globally said their main growth strategy revolved around developing new products and services, even though they were related to current services.

Trussell said the answer may lie with getting the skills in place to bring about change. Some 78% of respondents said they lacked the internal skills needed to drive innovation. Less than half had a formal strategy around innovation and the other half said it is something they just hope will happen. “[But] you get what you manage and you get what you measure. So without putting some of those strategies and techniques into place, you are much less likely to bring about change.”

Following one-on-one interviews, KPMG also determined that 93% believe they would spend more on innovation in the next two years and of those who already have an innovation budget, one-third started to partner with organizations outside their own to harness new skills. Another one-third opened innovation hubs or labs to act as a catalyst for new ideas.

“We are optimistic that forward-thinking players can look at those strategies and harness them to meet those challenges,” said Trussell.

Reader said bold and ongoing action will be required for companies to take advantage of innovation, including: agile and dedicated leadership, a change in business culture, leveraging new technologies and experimentation.

When it comes to innovation, digital and data are leading virtually every industry, said Louis Regimbal, a partner in KPMG’s advisory division.

Understanding the customer is key, he said. Insurers, as well as other industries, have to make it easier for clients to get to them, segment their customer base and then educate them about products and risks.

Clients also want professionals in the industry to provide them with guidance and advice in real time, said Regimbal, adding that the industry will benefit from more educated clients.

Reader said regulation has often been cited as inhibiting innovation and suggested the industry work more closely with regulators to remove that barrier.

No silver bullet

Reader added that there is no silver bullet or one-answer solutions to successfully integrating innovation in a company, but highlighted that innovation is not a fad. “Doing nothing is not an option,” he said.

In the meantime, mergers and acquisitions continue in the insurance industry worldwide as established firms try to stop newcomers entering their turf or take on other defensive manoeuvres to bolster their books, said Tim Prince, a partner in KPMG’s deal advisory group.

More capital is being spent in the insurance market in Canada – the world’s 10th largest insurance market – in areas like pension funds, sovereign wealth funds and private businesses as they start to build specialist financial teams within their insurance businesses.

Divestments and separations

Prince told a seminar that his group has been busy in the past five years in divestments and separations either as companies sell off non-core assets or whole divisions. Firms are increasingly returning to their roots and areas of core competency to get back to where they excel. Any division or product line that isn’t core to that is being divested, he said.

The market initially questions the rationale when a parent divests a division, but after about a year, there is material uptick in the parent business, as well as the division that has been sold off, he said.

About 40% of insurers are wary of increased competition and the challenges they could face over the next two years, according to the KPMG survey. North American companies were particularly concerned about new entrants and were twice as likely to cite new competitors as a major challenge than their European counterparts.

Canada has had a “sustained level” of transactions over the past two years leading to further consolidation in the insurance industry, said George Pigeon, a partner in KPMG’s dealer advisory division.

New capital providers have entered into the picture, like the Canada Pension Plan Investment Board (CPPIB) which bought Wilton Re in the U.S. towards the end of 2014 and then funded the acquisition of Transamerica Life operations in Canada. Transamerica Life Canada has since become ivari.

Some transactions involved players acquiring new competencies – like Sun Life, which purchased a number of asset management businesses. Meanwhile, some foreign operators divested their Canadian operations to fund new ventures or provide a distribution to shareholders.

Other insights from the KPMG global survey:

  •  Innovation cannot be viewed in a vacuum. As your organization is fighting to innovate, so are your competitors. Your strategies must be flexible to respond quickly to shifts in the competitive landscape.
  • While larger organizations may have more money that they can put into innovation, they also have old-time legacy systems that can slow down innovation.
  • Rather than pushing back on every new competitor, think instead of how you can work with or acquire them to improve competitive positioning.
  • Partnerships will be key to future success, but they need the right structures to create value.
  • Having cultural change programs may not lead to your desired results. Instead, programs need to be ongoing and built into the fabric of the organization. At the same time, make sure your executive team and the board understand the real reason and potential impact of innovation.
  • Continuously scan the horizon and be proactive in meeting new customer demands or potential competitive threats.
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