Insurance product innovation often involves new types of insurance benefits or new approaches to defining insurance benefits. The nature of innovation is that it looks outside or way beyond "the box". The following addresses a question on this from one of our readers.

Answer: Generally, an insurance benefit is a financial benefit paid to reimburse a policyholder for the financial consequences associated with a "contingent event". A contingent event is an event that is uncertain with respect to its occurrence, timing, or severity. The insurance benefit removes, to some extent, the financial uncertainty.

Patent Futures

Alternate Risk Transfer - Finite Risk Hits the Boundaries of Insurance

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By: Mark Clare, President, Knowledge Dynamics and Director, Parkview Health - mark.clare@verizon.net

Searching the United States Patent and Trademark Office (USPTO) website for insurance patents (class 705/4) reveals 224 grants and 490 published applications. Miserable numbers when you consider that we as an industry have known about patents for over six years. There are hundreds of individual firms in other industries that have patent portfolios larger than our entire industry’s portfolio.

Many factors contribute to this slow uptake but I believe the root cause (and one that is about to go away) is that patents cannot directly protect the inventive features of insurance products themselves. Instead patents are issued on how insurance is designed, priced, sold and serviced. We get patents on actuarial, underwriting, administrative, claims and support systems and processes but not the features, options and structure of insurance products, policies and contracts. For example, if you had been first to develop the "living benefits" rider for life products, you could have patented the process to price or sell it but not have patented a product that includes it as a feature.

Since one is unable to directly protect products, there is less incentive to make R&D investments because competitors can copy successful innovations at little cost. Getting a key patent requires disclosing details about pricing/underwriting practices – something few want to do. Finally, the patents that can be gotten are hard to enforce because insurance processes work behind closed doors. Small wonder we have seen little patent action in the industry.

But this is changing and will trigger a boom that could transform the nature of innovation and competition in the industry. Direct product patents will protect deeper investments in R&D and start-ups. Everybody will file to protect the economics of their business from infringement risk. First-movers will block competitors to capture more revenue or collect licensing fees. This is how it works in other industries to the tune of billions of dollars annually.

Currently, there are about 20 patent applications that attempt to directly claim inventive insurance policies or contracts. Others exist that make at least one direct product claim. The USPTO is currently rejecting "insurance product" claims, but the inventors, including major insurers, who filed these applications are appealing the USPTO’s decisions. These appeals could be a tipping point for insurance patents.

To understand this shift we can review what is patentable, the issues with insurance products and how to overcome them.

The USPTO grants patents for inventions that are innovative, non-obvious, useful and fall into a statutory class of machine, article of manufacture, process, or composition of matter. Patents are not granted on inventions that are deemed to be a law of nature, an abstract idea, printed-matter or are against public policy.

Issues with directly patenting insurance products include:

1. Determining an appropriate statutory class for claims about insurance policies and contracts.
2. Overcoming the abstract idea and printed matter objections, since insurance is less tangible than other patentable products and is based on contractual agreements and printed materials.

Most insurance patents are process patents which is not the appropriate category for products. Clearly, innovative insurance is not found in improved compositions of matter (e.g. better plastics). This leaves two related classes – articles of manufacture (or manufactures) and machines.

Machines are objects used to achieve some task. They are complex mechanical or virtual (i.e. software) devices with many moving parts. Insurance products can involve machine claims (e.g. controlling a kiosk to sell insurance) but these patents do not make claims about contacts or policies. This leaves manufactures. Manufactures may be simple with few or no moving parts (e.g. floppy discs).

The USPTO states manufactures are a category for man-made items that are not machines or compositions of matter. Insurance products are man-made, but it is not clear if they are "items". The Supreme Court gives more insight into manufactures:

"…the production of articles for use from raw materials prepared by giving these materials new forms, qualities, properties, or combinations…" [4477 US 303, 206 USPQ 193 (Diamond vs. Chakrabarty 1980), http://digital-law-online.info/cases/206PQ193.htm]

To show insurance products are "articles for use" we must trace them to "raw materials" that are given new properties. But what are these raw materials and new properties?

At its core, insurance is a cash-flow exchange contract (premium for benefit) for the purposes of managing risk. Additional aspects include:

• A policy, computer accounts for administration and customer communications. These are part of what a product is and demonstrate its tangible multi-component nature. Further, it suggests how contract features (e.g. automatic payroll deduction of premiums) can manifest in non-printed material. Insurance is an offering or bundle of software, services and contract features, which can be patented in part or whole as a product.
• Coverage is established and the insured object is now replaceable, repairable or otherwise recoverable. For example, with an auto policy the policy holder can repair their car when they might not otherwise be able to afford to. Recoverability is the core value of life, health, property and other forms of insurance from a consumer’s perspective. In effect, coverage changes the function of insured items by adding the property of recoverability to them. Therefore the insured items are the "raw materials" that make insurance products articles of manufacture. In the auto example, the car (through the addition of the property of recoverability) is part of the raw material of the insurance product.

Insurance products are multi-component offerings composed of bundles of contract featur es, software and services. Prod uct features modify the properties of the objects they cover. They make physical objects (the raw materials) recoverable, extending the range and nature of their use (the new properties) and therefore fit the statutory class for a manufacture. They are not just abstract ideas. Further, printed matter is patentable if it provides instrumentality that modifies the functionality of an object (e.g. mattress tag with use instructions). This is exactly what insurance products, as defined above, do by enabling new uses of the objects they cover.

This is one way to make an argument for direct product patents. It forces us to think about insurance products in strange new ways but is far from academic. Having a patent-granted monopoly over a feature of an insurance contract or financial instrument is big economics. The threat of loss for established companies, and the size of the opportunity for new entrants, is too large to ignore. We are headed for a patent and innovation boom.