A recent Best’s Review article concluded with the sentence: "There are relatively few insurance companies that are product innovators – most are content to go along copying those few companies." Is this harsh judgment justified?

From time to time, I’m asked to speak about reinsurance to a non-insurance audience. In the course of the lecture I often provocatively ask the audience whether or not they consider insurance to be an innovative industry. Invariably the answer is a stupefied "No!" How could it occur to me to ask such a dumb question? Indeed, it appears that the public perceives our industry as one of the most traditional, dull trades.

Is the public to blame? Are the advancements in other sciences or technologies flashier than those in our field? Or, is it that no truly substantial (re)insurance innovation has seen the light of day since the Renaissance?

We all know bright and imaginative colleagues in our firms. Actually, many of us are even proud of the severe recruitment criteria applied by our companies or of the tough examinations required by some of our professional organizations. But does this technical excellence of personnel suffice to guarantee innovation? I rather believe (re)insurance doesn’t live up to its innovative potential … not by a long shot!

From the statistics I’ve seen and from my personal experience with various reinsurers, I estimate that about 20% of a typical reinsurer’s staff are natural scientists. Their specializations are diverse and range from engineering and computer science to medicine, biology and geology with an increasing population of physicists. Probably, some direct insurers can claim similar figures. In any other industry, the innovative output of such a group of scientists or quants* would be invention which their companies would not hesitate to file patents on. But when an insurer hires these technicians it seems to place no value on their innovative talent. Is this because it assumes they are no longer capable of inventing?

As a nuclear physicist turned actuary I have this story to tell. What struck me first when I changed fields was that, although the inputs (risk) and outputs (premium) of my calculations where very different from what I was used to, all the calculations leading from risk to premium were very familiar. There was no difference in my use of the scientific method and of mathematical tools. But no one ever seriously considered patenting the new methods I designed to compute risk premiums, despite their value being confirmed by extensive use by my colleagues.

The number of patents is often used as a measure of the rate of innovation in an industry or an industrial field. According to this gauge the emerging realms of creativity are bio- and nanotechnologies and also, software and services. As a matter of fact, an increasing number of traditional mechanical or chemical companies file patents in the area of business methods. The rationale is that the way they differentiate themselves from their competitors has shifted to the way they service their clients.

Now, if we use the patent gauge to compare insurance with other trades, we probably rank among the least innovative industries. So, is it true that we don’t patent because we don’t innovate?

To answer this question, let’s return to the Best’s Review statement cited at the beginning. It is probably correct to say that in the insurance industry it is not the first movers but the second movers who have the advantage. How often have each of us lived through a situation where an idea is recognized by senior management to be bright, but is nevertheless rejected? It is rejected because experience has taught that it’s cheaper to wait and let a competitor develop the product, let the competitor introduce the concept in the market, let the competitor make its mistakes, and only then offer the same finished product at a cheaper price without the R&D expenses. That is not a particularly fertile ground for pioneering.

This is the immobility curse on front-office creativity in the (re)insurance industry. Other industries don’t know this curse, because they patent their new products.

We don’t have that problem with our back-office innovations. Indeed, it is easy enough to ensure that our competitors cannot copy the inventions we use behind the scene, such as our pricing or reserving techniques, our natural catastrophe or epidemics simulation methods or our electronic accounting systems. But it turns out that we’re so good at hiding these R&D achievements, that others must reinvent the wheel. More than often even within the same company! That is also not a particularly fertile ground for pioneering.

This is the trade secrecy plague on back-office creativity in the (re)insurance industry. Other industries don’t know this plague, because they patent their new achievements.

How can patents encourage innovation in the insurance industry? Just the same way they fostered and still foster innovation in other industries! In essence a patent is a contract between an inventor and society, a contract that yields protection to the inventor in return for the disclosure of her or his invention. It is this element of contractual obligation that makes patents so valuable both to innovators and to society at large: The protection associated with patents encourages exploration and discovery, while the resulting contributions to the state of the art are widely disseminated.

Insurance, a mechanism for sharing the risks of economic failure and catastrophic loss, made the development of new ideas less risky and was one of the historic enablers of innovation in science and engineering. Isn’t it ironic that the very industry that through its risk sharing products enabled innovative risk takers to make their discoveries never itself embraced innovation?

Perhaps the issue is not that we don’t patent because we don’t innovate, but rather that we don’t innovate because we don’t patent.