A global future: research shows the need to break away from old operational models for many aspects of insurance.

The IBM Institute for Business Value recently completed a global, qualitative study, Insurance 2020: Innovating Beyond Old Models, that looks 15 years into the future of the insurance industry. The research investigated the impact of many disruptive factors on existing industry trends and integrated the thoughts and opinions of global insurance executives. One conclusion that resonates among global insurance leaders is the need to break away from old operational models for many aspects of insurance.

In the context of this research, a model is a set of business processes, workflows and assumptions that drive business behaviors. These elements are usually coupled with external factors such as regulatory compliance, market dynamics and consumer attitudes to instantiate a given model.

Operational models became the overall theme of the study for good reason. They focus the discussion of current process frameworks that must be carried out to provide for the management and delivery of protection, risk and financial investment services. Furthermore, models allow executives to consider alternative high-level constructs without being distracted by tactical issues that are important in the near term, but are essentially minutia when considering strategic change.

The potential of new insurance paradigms is often obscured by the ongoing intensity with which carriers and their stakeholders work to maximize the outcomes of current models. Today, the industry is moving ahead to reduce costs, streamline processes and otherwise improve the efficiency of their operations. These activities are viewed as essential to prepare for the inevitable competition from financial services players and Industry peers, as well as from other, less familiar marketers. Facilitating these actions is an ever increasing array of information and communication technology. These tools seem to deepen a carrier's commitment to the existing model and expose a fundamental challenge for insurers.

The study highlights the basic fact that the insurance industry's current model is preoccupied with the optimization of existing processes. This observation is somewhat confusing because of all the effort and technology that is dedicated to improving product development, underwriting, policy administration and claims handling. These efforts have garnered payoffs over the years, but the reality of diminishing return is looming in the not-too-distant future. The insurance industry has to decide if steadfast adherence to the optimization path will indeed produce optimal results, or if it will ultimately need to invest and explore new models.

Consider the automotive industry's challenge of improving fuel efficiency. Its old model approach was to make petroleum-fueled engines more efficient and vehicles more aerodynamically streamlined. The new model innovation considered alternate energy sources and hybrid engines that use energy derived from something other than fossil fuels. The industry not only improved fuel efficiency but also reduced air pollution and lessened dependence on foreign sources of petroleum.

Similarly, computer servers moved from creatIng more powerful and complex individual machines to leveraging collections of efficient, simpler server "blades" that can work together to achieve higher performance levels. Consumer audio and video manufacturers did not stay focused on simply improving analog recording and playback devices, but embarked down a path of digital media that has itself undergone several improvements.

The insurance industry has focused so much attention on an optimization model that there are few examples of significant innovation to be seen. This is not to say there is no room for a continuation of improved results that the existing model might deliver, but the question becomes one of time. Since this industry has been pursuing improvements (optimization) via technology, and to some extent process, for at least a couple of decades, we have to ask when will this strategy pay off, and when will it reach an end point? And at what cost in terms of time, effort and money?

The industry must start with examining problems from a different perspective: working to prevent or mitigate a homeowner loss instead of handling a claim faster. A new model would provide a standard rate for life insurance combined with a supervised health management program for someone underwritten with a sub-standard health profile. New product classes that don't just mix and match existIng policy elements would provide the foundation for new models across lines of busIness. Finally, it's clear that technology will be a major component of making new insurance models work, but the models won't be created for the sake of technology or as a proxy for innovation.

Jamie Bisker is global insurance industry leader for the IBM Institute for Business Value. He can be reached at [e-mail].