First Of Two Parts
The current new product development model for most insurance companies is simple. It is optimized to be profitable in an operating environment where ideas and product concepts are freely shared.
For example, Universal Life was a unique, new product concept that ultimately found an exciting and successful application in the high interest rate environment of the early 1980s. Unbundling the inner workings of a life insurance policy was inventivethat is, unique, useful and not all that obvious. Now UL is widely sold.
Even the sales methods or illustration techniques routinely used by agents and brokers today to market insurance products had, in the beginning, a spark of originality. But, in the spirit of sharing, the successes of the trial and error approaches used to make life insurance attractive to the consumer were quickly gobbled up and used by everyone. What company did not have a “vanishing premium” or “premium offset” illustration? How about “split-dollar” in its many variations?
While the business methods used by insurers and incorporated into their products and marketing strategies have been freely exchanged public property in the past, that is beginning to change.
In July 1998, the Federal Circuit Court of Appeals set this in motion in its State Street Bank vs. Signature Financial decision. This ruling, upheld by the U.S. Supreme Court, affirmed that “business methods” were proper subject matter for patents.
Prior to 1998, there were 47 patents issued in the insurance “business method” category. None were issued prior to 1985. In 1998 and the four years following, 128 insurance patents have been issued. And, currently, there are over 200 insurance patent applications pending.
In the overall scheme of things, of course, this is small potatoes. The United States Patent and Trademark Office currently issues over 180,000 patents a year and gets about 350,000 new applications each year. Life insurance patents are part of this increase and everyone trying to make money through the sale of insurance should take notice.
More and more of the insurance industrys most inventive people are deciding to protect their intellectual property, or, in other words, their insurance product inventions with a patent. What a patent allows them to do, specifically, is to exclude others from making, using or selling their invention.
Clearly, in an environment in which people are doing that, the current insurance company new product development model wont work. Your competitor may not allow you to copy their successful new product. To be successful, youll have to find your own new product innovation, different from theirs, or pay them a royalty.
You may think that this is not much of a challenge and you may be right for a while. After all, if you or your company are traditionally focused, the product concepts you need have already been developed and theyre freeparticipating whole life, universal life, variable universal life, equity indexed whole life, annuities of all sorts, structured settlements, life settlements, accelerated death benefits, long term care and the list goes on.
It appears there are more than enough ways to make money the old fashioned way.
But, whatever happened to nonparticipating whole life? Maybe its made a comeback of sorts in the form of long-term secondary guarantees. And, arent indeterminate premium products dead? Remember deposit term?
Products do lose their edge over the years–sometimes months. Thats exactly why companies have new product development areas. Old products are either abandoned in favor of the new or, they are tweaked, enhanced or modified to make them better and achieve a competitive advantage.
It is important to note that most successful patents do not spring from entirely new ideas. They are enhancements or improvements on old ideas. How will your company or agency compete when a competitor has patented a killer improvement to one of those old policy forms your business relies on and can prevent you from using the improvement?
Ask yourself also how the old, free policy types are being marketed, underwritten and issued. Underwriting, in particular, is demanding attention as companies try to find new approaches that will minimize the chilling effect that risk selection can have on an insurance sale. A new business method that allows effective risk classification at lower costs and which would allow an insurance policy to be issued in a shorter period of time would make your traditional participating whole life policy very unattractive.
Insurers already recognize the value of intellectual property when they seek trademark protection, a fairly common practice. Insurance agencies and companies create value by building a reputation associated with their agency or corporate identity. The value in a trademarked product over the generic variety is, of course, this reputation, hopefully outstanding, that is associated with the trademark identity.
The insurance industry, in general, has never placed much value on ingenuity or invention. Most in the industry dont even seem to expect it. Contrast this with the electronics industry. Innovation is part of the culture. Product development specialists are expected to produce patentable inventions on a regular basis. They get training on what patents are, how to recognize when theyve made patentable inventions and what compensation they can expect for their successes.
Product development specialists sign “employment agreements” that state quite clearly that all patentable inventions they produce are the property of their employers. As a consequence, electronics companies from the largest to the smallest produce patents at a rate of one for every 100 employees per year.
This may seem irrelevant to the insurance industry, but consider this: The most prolific insurance inventor is IBM. (Examples of recent IBM insurance patents and patent applications include US 5,970,464 “Data mining based underwriting profitability analysis” and US20010023404A1, “Technique for generating insurance premium quotes by multiple insurance vendors in response to a single user request.”)
In contrast, how many insurance industry employers expect their employees to sign employment contracts requiring them to assign ownership of their inventions to the company or requiring nondisclosure of proprietary material? An employment contract of any kind is rare in the insurance business. It is more likely that a software vendor serving the insurance industry would have anticipated the possible inventive efforts of their employees and made provisions for it.
And, while insurance agents have contracts, those contracts deal primarily with the compensation the agent will receive for their sales efforts and may set sales performance standards that must be met. In any event, insurance agents are, typically, not employees of the insurance companies they represent. Therefore, one presumes, they are not obligated in any way to share their inventiveness with anyone. Clearly, agent contracts spell out that insurance agents are being paid to sell insurance–period.
The innovators in the insurance industry who will force companies to modify their product development business model come from everywhere. Some are agents who devise new illustration concepts. Some are advanced marketing specialists who perceive an unfilled product niche. Some are attorneys whose skills allow them to fit insurance products into unique tax-planning scenarios. Some are risk specialists who devise interesting new ways to evaluate and underwrite risk. Some are actuaries whose skills and training allow them to adapt technical processes to new and useful ends.
The bottom line is that insurers and their agents must be prepared to succeed and be profitable in a new environment in which intellectual property will be protected by more than just a trademark or a copyright.
Next week: Part 2: Competing in a patent-rich environment.
Tom Bakos, FSA, MAAA, is a consulting actuary with Tom Bakos Consulting Inc., Ridgway, Colo. He can be reached via e-mail at tbakos@BakosEnterprises.com. Mark Nowotarski is with Markets, Patents & Alliances, Stamford, Conn. He can be reached at mnowotarski@markets&patents.com.
Reproduced from National Underwriter Edition, March 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.