Innovation - Key to Growth in Insurance
Somnath is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Innovation in marketing and product packaging is important for any industry.
The insurance industry has managed to plod along without the major upheavals seen in many other sectors, but that is about to end. The direct result is that companies that seize the opportunity to innovate first will have a distinct advantage to survive and lead as the industry goes through the predicted upheaval. Insurance industry should learn a few tricks in innovation of products from Mr. Neil Armstrong.
When Neil Armstrong and the rest of the crew of Apollo 11 piled atop that huge rocket packed full of fuel in 1969 they were under no illusions that it may have been the last thing they ever did. Unfortunately, a federal salary wasn't enough for Apollo 11 astronauts to purchase life insurance. After all the danger, glory, and fame it's easy to forget that at the end of the day astronauts are federal employees subject to the same General Schedule (GS) pay scale as everyone. Back then astronaut captains made about $17,000 a year, NPR reports and a life insurance policy for Neil Armstrong would have run about $50,000 a year, or more than $300,000 in 2012 dollars.
Because some guys from the prior Apollo missions had gotten colds and mild bouts of queasiness on their trips, NASA had implemented a quarantine procedure before liftoffs. So about a month before they were set to go to the moon, Neil Armstrong, Michael Collins, and Buzz Aldrin were locked into a Plexiglas room together and got busy providing for their families the only way they could — they signed hundreds of autographs. In what would become a common practice, the guys signed their names on envelopes emblazoned with various space-related images. The 'covers' would; of course, become intensely valuable should the trio perish on the mission. And to ensure the covers would hold maximum value, the crew put stamps on them, and sent them in a package to a friend, who dumped them all in the mail so they would be postmarked July 20, 1969 — the day of the mission's success — or its failure.
Fortunately, the trip went off without a hitch and all three men went on to live long, healthy lives and all remained alive until Neil Armstrong's death a few days ago. The covers prepared are still around, and not too hard to find and in 2011, pegged their average value at around $5,000.
Since long, the life insurance business has innovated in less obvious ways by combining coverage and adding flexibility to standard coverage. Life companies need to attack the oft-quoted maxim that “life insurance is sold, not bought” and overcome the negative perceptions that plague this profession. The most successful companies take extra steps beyond regulatory requirements to ensure that their products and services meet the highest quality standards and to reduce the risk of a catastrophe.
Progressive Corporation (NYSE: PGR) leads the pack offering an array of innovative products and services. The firm uses telematics to offer customers a novel concept— a car insurance policy based on how well and how much you drive. Progressive’s MyRate pay-as-you-drive product is a behavior-based car insurance policy that lets drivers lower their premiums based on how they drive. Drivers receive a small wireless device that plugs into a port in their car and measures how, how much and when the car is being driven. Cars driven less often, in less risky ways and at less risky times of day can receive a lower premium. The company recorded net premiums of $1.28 billion in August 2012, up 7% from $1.21 billion in August 2011. Net premiums earned were $1.25 billion, up 8% from $1.15 billion in the year-ago period. Progressive reported book value per share of $10.63, up from $9.65 as of August 31, 2011 and $10.49 as of July 31, 2012. During August, policies in force remained healthy, with the Personal Auto segment increasing 6% year over year but skidding 0.2% sequentially. Special Lines also elevated 4% year over year and 0.1% from the preceding month. Return on equity on a trailing 12-month basis was 16.7%, marginally down from 16.8% in August 2011 and up from 13.5% in July 2012. The debt-to-total-capital ratio was 24.3% as of August 2012, down from 28.7% as of August 2011 and 24.5% as of July 2012.
Ace Casualty Insurance (NYSE: ACE), Excess Casualty products can provide worldwide lead umbrella and excess liability insurance for U.S.-based multinational companies. ACE products are backed by substantial, financially secure capacity and are designed to address global catastrophic exposures including corporate reputational, security and compliance risks. The innovation of products made the quarterly operating profit trumped analysts' expectations, bolstered by lower catastrophe losses, prompting the company to raise its full-year operating profit forecast. The company now expects an operating profit of between $7.20 and $7.60 per share, up from its previous estimate of between $7.03 and $7.43 per share.
On the other hand the largest publicly traded home and auto insurer in the United States, All State Corporation (NYSE: ALL) highlighted its innovation center during an investor day.
"It's a center that we have available to do quick research, prototyping, incubation and then market launch of customer product and service ideas," Mark LaNeve, Allstate marketing chief, told investors at the time. The center was launched in February 2010, and its space opened in March. It has become a testing ground for more than 30 projects at any given time, though only 10 to 20 percent might come to fruition.
The first product Allstate's Insight, Design & Innovation Center is credited with launching is Drive Wise, an auto insurance product that includes a device embedded in a vehicle that tracks certain motoring habits and makes consumers eligible for discounts if they engage in low-risk behaviors. Progressive and State Farm are among the insurers with a similar product. The concept that Allstate is working on most actively now is an automated claims process. It's testing multiple systems that use a combination of cameras, lasers and scanners to assess a vehicle's damage and enable the vehicle owner to submit a claim without help from a claims center representative or agent. The company reported a net profit of $423 million, or 86 cents per share, compared to a year-earlier loss of $624 million or $1.19 per share. On an operating basis, the company earned 87 cents per share. Analysts polled by Thomson Reuters I/B/E/S had expected on average, earnings of 51 per share.
Carriers from all lines of business need to challenge themselves to push innovation to the top of the agenda. The idea is not to always be the first to use a new technology, or to invent a new product or even to establish a new collaboration; the idea is to encourage thinking and actions that allow innovation to take place intentionally.
The innovative ideas can be really helpful for insurance companies in formulating new products for the masses. We look forward to genuine and great products from the insurance companies with the basic instinct of risk coverage in all spheres of life which will directly lead to increase in their stocks substantially.
The good news is that we now know quite a lot about innovation and how to combine it with process. Once the insurance sector attaches as much importance to imagination as it does to experience; and once it actually measures itself on innovation; we’ll see changes for the better.
SomnathGuha has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.