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Continuous Performance Improvement

Insurance Innovation—An Oxymoron?

John Pryor | November 1, 2013

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This article is based on an address by John Pryor to the All-Industry Day of the Golden Empire Chapter, Society of CPCU, held November 7, 2013. It provides specific, real-world examples in an insurance context—based on underlying principles that can be applied in any insurance environment.

Some may say "insurance innovation" is an oxymoron; however, insurance professionals know much better. The results of insurance innovation are all around us. The topic of innovation is critical in insurance today—regardless of the size of the company, division, or department in which you may be working. There's nothing confusing about the definition of innovation. It's simply something new or different in the products, processes, and systems we use to continuously improve all that we do. What's tough is the application of this definition to day-to-day situations:

  • to make operating or production costs lower,
  • to make cycle time shorter, and
  • to make customers not just happy but delighted with our services.

Past Insurance Industry Innovations

There are many examples of innovation throughout the history of our industry, including:

  • In the 1700s in England, fire marks were placed on the front of buildings an insurance company covered. This was because each British insurer had its own fire department to put out the fire of any building it insured. With the fire mark in place, a neighbor would know which insurer's fire department to notify. In America, Benjamin Franklin turned that concept into the famous "hand-in-hand" image that was applied to the front of each building Franklin's insurer protected.
  • In the 1950s, when I began my career, I began as a personal automobile insurance rater for Kemper Insurance in San Francisco. We did everything by hand. However, each of us did have a big Monroe calculator that had all kinds of numbered buttons on its face. We'd punch in the series of numbers we needed to add, pull the crank on the side, and—voila!—the total premium would magically appear at the top of the machine! At that time, this was truly innovative!
  • As a fire underwriter, I used Sanborn Maps. They were big leather-bound books of cities with all of their streets, alleys, and structures graphically illustrated—almost like comic books of that time (seemingly hand drawn). They let us know if we were already covering residential or commercial buildings nearby. When a building was either demolished or constructed, we'd receive from Sanborn a little revision of a page to paste over what was there originally. Now, of course, we have GPS technology, which is automatically updated, to help in mapping, both for underwriting and claims work.
  • Working for a workers compensation specialty insurer, I encountered a different type of innovation—an owner controlled insurance program. To my knowledge, this was the first "wrap-up" project ever conducted. Innovation was created when the work of subcontractors for this project was "carved out" of their own firm's policy and included in the owner's policy. Premiums were based on the owner's own rates and experience modifications—usually much lower than those of any subcontractor. Work conditions were subject to the safety and risk control capabilities of the owner that were also superior to most, if not all, of the subcontractors'.
  • This year, I worked on a similar, but different, wrap-up, a contractor controlled insurance program for a home building contractor. This innovation is also prevalent today—usually with win-win outcomes for all participants, including insurers.

I mention all of this because—just in the course of my single lifetime—amazing innovations have magically appeared for continuous improvement of what we do in insurance every day and, very importantly, how we do what we do every day. Some of these innovations came to us from outside our industry, of course. Yet, innovation was still needed to determine how these externally created tools could be applied to what we do every day.

Your Own Business Innovations

It's important to develop innovations in your own business organizations. Think outside the box. When our brokerage attempted to break into personal lines, we took off one weekend for the high Sierras to do some serious brainstorming. This was in the mid-1980s when video cameras were very new. We used video images to differentiate the traditional system for marketing personal lines from the way we thought they should be marketed and processed. We performed different roles in the videos to demonstrate both processes. The video was perfect for showing the advantages and continuous improvement—as well as customer focus—of our new system.

Each process had a timeline. This was one of the major "continuous process improvement" elements. At that time, the traditional cycle time for quoting, submitting an application to underwriters, and ultimately receiving the actual policy for delivery to our new client typically required about 6 weeks—sometimes faster, sometimes longer. Our new and innovative system had a cycle time—beginning with a premium quotation and concluding with policy delivery—of about 1 hour. Not 1 week. Not 1 month. One hour—60 minutes! Moreover, accuracy of the proposal data was very high as there was no opportunity for miscommunication between the agent and the underwriter—they were both the same person!

We did this by applying an authorization frequently used in commercial and industrial insurance—but rarely seen in personal insurance. We could accomplish this outcome only if we "had the pen"—only if we had underwriting authority at the point of sale. To our knowledge, this was an unprecedented innovation within personal insurance production and marketing—at least within the independent agency and brokerage system. (I can't speak for direct writers on this point.)

Another important and innovative element was for our agency to be online with the insurer—as primitive as information technology (IT) systems were in the mid-1980s. Our agency was coded in the insurer's system as though we were one of the insurer's branch offices. This capability enabled us to communicate online in real time so all underwriting processes would be addressed and completed immediately!

Something we didn't expect was our ability to monitor the quality as well as the quantity of a customer service representative's (CSR's) production. This was because each CSR was coded with an agency/producer number as though he or she was an agency. So we had data to tell us not only premium volume produced by each CSR but also the loss ratio for his or her book!

Next, we took our story to major national insurers, but with little luck, at first. Finally, we decided on another route—an innovation—and made a presentation to a regional insurer headquartered in Monterey that had operated in California since 1896—and with a consistent A+ financial rating from Best's. That insurer was willing to experiment with us as a partnership ... and the fun began! We found a storefront in a shopping center—with lots of foot and car traffic. This kind of location for an insurance agency was unheard of at that time! Offices should be in office buildings, right? So here was another innovation for us!

Once we had a physical location nailed down, we began looking for an advertising agency. None wanted to work with an insurance agency because the typical behavior of insurance agencies was to go in and out of their advertising program—never providing the advertising agency any sustained income. We finally convinced one agency that we would be different. And we were different. We approached our ads in a very unique way. Each ad was totally customer-focused with one or more actual customers telling their story of buying their auto and homeowners insurance from us. For local insurance agents, it was innovative at that time—and it worked!

With a unique location, an innovative TV, radio, and print advertising campaign, and our really different—to us—IT system with our insurer, all we needed next was staff—staff trained on the new system. Then we'd be ready to launch this new and innovative personal lines agency—and take on all of the national direct writers in our market!

However, there was one obstacle included from the very outset that I haven't mentioned yet. I'm not sure if this decision comes under the heading of innovation—or financial stupidity! When Chief Executive Officer Charlie Bancroft said he was willing to create a partnership on an experimental basis, his definition of "partnership" was in the classic sense of that word. What he meant was that we would share with his company both profits and losses! Agents are accustomed to sharing profits with their insurers—but never (to our knowledge) to share losses also.

Here's how Charlie saw it: His company had a reinsurance treaty with State Farm. It had a net retention of $25,000 per occurrence. For this "experiment" to move forward, our agreement would need to include a 50-50 sharing of that retention! Remember.... This was 1985. $25,000 was a lot more money than it is today. Yet, because of our belief in this innovative approach to personal lines processing and marketing, we collectively "gulped" and agreed to accept that particular contractual risk transfer (from California Mutual) as a legitimate part of our partnership agreement. We signed the agreement and launched our new personal lines agency. Fortunately, we were never called upon for a contribution to any reinsurance retention.

Now that we've examined lots of different examples within our insurance industry—at least within my personal experience—we need to consider the literally thousands of opportunities for innovation in insurance. Yet, to be effective, we need a "leadership tool" to help successful execution and funding of the innovation become a reality. See the continuation of this article next month for a tool that is used throughout the world with organizations of all sizes and types—and works!

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