R&D and innovation part one: The risks of sliding into irrelevance
Does the commercial P&C industry have an innovation and R&D problem?
Privately, the heads of innovation at global (re)insurers have acknowledged to this publication that en masse, the industry can certainly move faster.
That probably sounds like an understatement. But it reflects a belief that lessons have been learned in the past five years, not least during the pandemic, about emerging risks and the extent to which global insureds’ fast-evolving risk requirements are (or aren’t) being met.
Against this backdrop is a more fundamental problem – that the industry has to adapt faster and more comprehensively to meet evolving client needs.
Sources argued to this publication that the existing P&C product set has remained too narrow to keep pace with a world where new risks – climate and pandemic to name but two – have rapidly emerged.
As companies’ balance sheets increasingly tilt towards intangibles, sources argued that the industry must find answers to the associated risk, and that exclusions could not continue to be carriers’ collective response to new issues.
These are existential questions, but this article hones in on the related innovation problem, specifically.
That problem flows from many underlying causes, old and new.
Some sources said that underwriters aren’t incentivised in the right way, or that a lengthy list of checkpoints to pass en route to a product launch are too burdensome to overcome.
Others claimed that the P&C and specialty markets could source more ideas from companies outside the sector – particularly banks that undertook digital transformation and automation programmes in the past decade.
Some pointed out that because P&C insurers typically have to trawl back through historic data to model losses and generate pricing, they miss opportunities to deploy the technology that shows real-time risk data.
These were just some of the hindrances raised most frequently, but the broader issue is at least being recognised.
Tom Van den Brulle, global head of innovation at Munich Re, acknowledged that many risk transfer needs among insureds remain unmet.
He said: “When I talk to risk managers in the energy industry, or chemistry, or whichever other vertical, they reproach the industry for not being active enough, and only covering 15% to 20% of their risks. They have to bear all the other risks themselves, or the government has to step in.
“From my point of view that’s an important data point to say, yes, as insurers we need to do more.”
Aon president Eric Andersen stressed the importance of innovation in a wider context – the critical need to remain relevant for clients.
He explained: “When we are interacting with clients, they’re asking us about supply chain risks, about pandemic risk, about climate and about ESG. These are major issues our clients are facing.
“It is a significant opportunity for us to be relevant to them in their efforts to manage these types of risks. The drive to be relevant to clients is essentially what drives everything we do. There is nothing worse for a risk adviser than being in front of a client, and not being able to help them.”
This article explores the hurdles raised most frequently by innovation leaders, including:
A diagnosis and prescription
In the first of a two-part series, Insurance Insider examines below the structural inhibitors that often supress innovation across the P&C market, after canvassing views across the London and European markets.
Looking at underwriter incentivisation, technology adoption and mounting concerns over entrepreneurialism, this initial article includes statistics that provide a somewhat incriminating view on insurance R&D spend compared with other industries. It also asks who should bear the lion’s share of responsibility on innovation – the broker or carrier – and if any ambiguity hampers its acceleration.
Part two will look at tangible signs of progress on innovation, but also the untapped opportunities that could spawn a proliferation of new products.
A question permeating both articles is: when more business lines do soften, what innovative new products will carriers deploy to sustain growth?
Put more simply: what happens when the hard market music stops?
In any industry, innovation is hard. In insurance, it’s a street fight every day
Some first-hand experience from an innovation leader at a listed London carrier reveals how difficult it can be.
George Beattie, head of incubation underwriting at Beazley, said: “In any industry, innovation is hard. In insurance, it’s a street fight every day. You've got a lot of things in your way to try to make things happen.”
He explained that the old premise of “you don’t do what you don’t understand” can be one big hurdle, and that generally, the industry doesn’t incentivise people to “put their heads up and risk gaining new knowledge”.
He added: “Another challenge is around bureaucracy. There is the old famous quote, ‘culture eats strategy for breakfast’. The way I think about this topic is that bureaucracy eats innovation for breakfast. This could in effect be the number one challenge.”
You need people resilient enough to stay at the coalface and make this stuff happen
The sheer resilience required among innovators was another common thread in this publication’s conversations, including with Beattie.
He described the toll such a role can take. “If every time you launch a product, it takes two years to get to market, there’s only so many years in someone's life that you're willing to commit to doing that, so there’s a human aspect to this.
“And it’s not just enough to have sufficient financial resources for an innovation unit. You need people resilient enough to stay at the coalface and make this stuff happen.”
Other sources remarked on the perseverance that’s needed through the product development phase, when innovators encounter the legal considerations and advice needed for different territories and the expertise and mindset that’s needed, as well as managing implications for reinsurance, IT issues and the regulator’s view.
As well as the persuasion skills needed to convince their boss and ex-co-members that a project should be supported and funded, innovators are working within tight internal governance frameworks. There could also be queries to answer from the Prudential Regulation Authority (PRA), which is not known for rapid responses.
Whose job is innovation anyway?
Another potential rabbit hole for a debate on the innovation topic is the question of whether brokers or carriers should take the lead on innovation.
Aon’s Andersen provided a plain answer: “I’ve always seen it as the advisors’ role. That is, of course, if they're doing their job, spending time with their client, and seeing the risks to the client’s business that need to be addressed.
“I don't think the carrier is going to displace the broker in that role, because they're just not as close to the client. They are, however, a critical partner in the process.”
Precise figures for R&D investment in the London specialty market are impossible to come by, but the more general statistics available show how global insurers can be frugal in this area.
Comparable data collected by the European Union from disclosures in GAAP-compliant financial statements shows that of the top 2,500 global firms for R&D spend in 2020, only one insurer (RSA) made it into the top 1,000. Scor was next, placed at 1,262.
2020 was not an outlier year either. The EU’s data show that year upon year, few non-life insurers make it into the top 2,500 for R&D investment, (though there may be omissions due to some carriers not disclosing R&D in GAAP statements).
It is even harder to track a precise benchmark from which to compare insurance R&D spend with other sectors, but data from the UK Office for National Statistics provides a more general barometer for financial services and insurance.
Technology: Adoption and legacy
Some individuals this publication spoke to believe that first and foremost, the industry needs to adopt new technology faster and at greater scale in the P&C space, a trend that would itself spur product innovation.
One expert added: “It’s actually more of an eco-system play, rather than a pure product play, where the product actually needs to become more of a service.”
The expert highlighted the potential for greater use of sensor technologies in the commercial P&C space, as they can be used in properties to detect water leaks, and subsequently for automated payments and to call a plumber.
“The commercial P&C space remains very far away from using this at scale,” the individual added.
Another source emphasised that collaboration on the use of this technology is key, adding: “There's no point in one carrier putting sensors in a building when there are seven followers on the slip.”
Limited investment, fragmented technology environments, and outdated systems stifle innovation
Aside from the adoption point, legacy systems can also plague the process, a point touched on in EY’s NextWave report, from 2020, that looks at hindrances to innovation among commercial (re)insurers.
It unravels the problems of “limited investment, fragmented technology environments, and outdated systems that stifle innovation”, as well as “operational agility and data sharing”.
EY’s report acknowledges, however, that many believe core technology upgrades produce “only limited return on investment” but stresses that they are critical to new product offerings.
Incentivisation and talent
While canvassing views for this article, Insurance Insider found several cases where product launches never materialised because the underwriter was not incentivised to see it through.
One source argued that bonuses in underwriters’ remuneration packages are structured on an annual basis, not over five years, meaning the structure doesn’t align with the longer period on which a new product typically starts to become profitable.
As the source explained, when underwriters are managing their own mini P&L, why would they decide to persevere through a loss in year one and two?
“They don’t want to have to wait for their bonus to pay out in three years. The compensation structure does not incentivise them to take a risk at all,” the source said.
As well as a structural issue on remuneration, some sources pointed to a broader (arguable) claim that the London market in particular has been affected by a gradual dwindling of entrepreneurialism, with one executive arguing that few business leaders “need to continually create something new just to survive”.
Risk of irrelevance?
The case made above should not paint an overly ominous picture. There are evident signs of where innovation can, and is already, emerging from. These include the Lloyd’s Product Launchpad programme, the proliferation of parametric and telematics-powered products, algorithmic underwriting and the emergence of an eco-system for intellectual property policies.
The amount of data available, especially from sensor-based technology, is breathtaking
There are also mounting examples from the innovation units at group level across Munich Re and Swiss Re, which we’ll explore further in part two.
Munich Re’s Van den Brulle even sounded a note of optimism. “The amount of data available, especially from sensor-based technology, is breathtaking. In the last three to five years, we have educated and recruited data analysts from a starting point that felt like zero to more than 600 people in the organization.
“We’ve got people who can do this, even if we’re not the only ones.”
The second of our two articles will explore solutions to issues raised throughout this piece, presenting a mirror image to the diagnosis.
It will look at internal structures across London and European insurers that help to expedite the delivery of their innovation mandates. In practical terms, this means putting in place the streamlined decision-making for product development and the resilience needed across innovation teams. Innovation leaders will explain how they’re empowered through both their reporting line structures and their influence on different underwriting teams.
It will also examine carriers’ appetites to capitalise on the potential of new sensor-based technology, as well as fresh data sources.
Most notably, we’ll look at the tangible results of product launches, and firms’ willingness to incur losses along the way.