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Second of Two Parts

Patents are starting to grab up the new, inventive insurance products, marketing methods or techniques, and risk selection mechanisms.

For example, patent #5,754,980, essentially patents a Reversionary Annuity, a product that pays a benefit to a beneficiary for as long as she lives following the death of the insured. Its unique because its issue is conditioned on the life expectancies of both an insured and a beneficiary.

Patent #5,974,390 creates a system in which policy owners can pool their polices. If the pool is large enough, this method allows policyowners to receive lower but predictable regular payments (resulting from deaths on policies in the pool) in exchange for the higher but unpredictable death benefit otherwise available if they did not assign their individual policy to the pool. This invention probably would be used as part of a life settlement or viatical marketing plan.

There are also a number of pending applications that propose systems for underwriting insurance in real time using the Internet, or other means, in order to eliminate the delays in regular underwriting. And, there are patents issued and pending for sales methods, illustration processes, and tax-advantaged marketing programs.

On the surface, it may seem that this is just a problem affecting big companies. But, competing in a patent-rich environment starts with the little guy. Inventors cant be companies. Only a natural person can patent an invention. So, a new product development model begins with a companys relationship to its employees or agents. A company cannot patent an invention but it can own an invention through an assignment by the inventor. So, the employee, employer, agent relationship needs to be clear.

The next thing for a company to do is recognize new limitations on how it conducts its business. Before a lot of time, effort and money is spent, developing a new product companies will need to determine if there are existing patents that they might be infringing if they introduced a product. This is especially true if they still have a “follow the leader” product development approach.

“Ignorance is no excuse” when it comes to patents. An infringer is liable for damages to a patent owner, even if the infringer was totally unaware of the existence of the patent he is infringing. If he is aware, its even worse. Intentionally infringing a patent can result in a liability equal to three times the damages inflicted on the patent owner.

In essence, damages are measured as the patent owners lost profits. It is essential that insurance companies and even agencies active in developing new products institute “patent watches” now to make sure that their new products do not infringe any existing or new patents that issue.

There also needs to be some concern about patent applications still pending. Clearly, if your product development cycle takes a year or longer (and many do), a pending patent could be issued before you get to market or shortly after. If you are infringing, you may have to pull your product from the market, and all your development costs would have been wasted. Your agents who wanted or expected the product may have to go to another company, perhaps the patent owner, to get it.

So, even if your company is not harnessing the intellectual property of its employees and aggressively seeking patents, you still have a problem that has to be dealt with if other companies are doing that. And, if your company decides to aggressively participate in a patent-rich environment, you may have internal problems. You must be on good terms with your inventive employees. You will need to recognize inventiveness in employee-job descriptions. You will, probably, need to introduce employment contracts that clearly spell out rights, privileges and expectations with respect to inventiveness. It will have to factor in, somehow, compensation.

Certainly, imposing all this on an existing employment relationship that doesnt currently recognize, expect or reward inventiveness is fraught with difficulties far beyond the scope of this article to contemplate. And, working with inventive agents or brokers presents even more challenges.

Patents cost money. The visible expenses of a typical patent are $7,000 to $20,000 in legal fees and filing costs. Hidden costs are two to three times this figure. The hidden costs include inventor time associated with the patent application and licensing efforts. In addition, executive time and effort to exploit the patent should be included. Add another $5,000 to $10,000 in processing costs for each foreign country in which the patent is filed. Consider that protecting the patent may generate additional legal expenses, and its not hard to see how total patent costs of $100,000 or more are not uncommon.

Patents require patience. The time between a patent application and ultimate issue is, typically, two to five years in the U.S. Delays of 10 years or more are not unheard of. Extensive delays are often due to the belated discovery of relevant prior art which require repeated amendment of the patent application in order to try to get a patent that can issue. A thorough prior art search done before a patent application is filed can help keep these delays to a minimum.

Despite the expense and delays, however, a patent on a product can be worth a lot. A patent, specifically, gives its owner the right to prevent anyone else from making, using or selling the invention (within the framework of antitrust laws and regulation). The owner can be the exclusive provider of the product, sharing nothing with competitors. By controlling a market you can prevent others from saturating a limited market and take the profit of your idea away from you.

And this track may be advantageous for other than just a pure profit motivation. You also can prevent others from abusing your idea such that regulatory controls are brought to bear which impact adversely on the value of your invention.

A patent owner can generate additional revenue by licensing the patent to others. In fact, the acceptance of insurance patents might lead to the emergence of insurance “development labs” that do nothing but invent new insurance gizmos. If they are good, or lucky, they can license or sell their ideas to product manufacturers.

Straight licensing of patents can be very profitable. Universities in the U.S., for example, collectively generate over a billion dollars a year by licensing the inventions of their faculties. Their combined patent, licensing and inventor costs are only about $300 million per year.

With the availability of insurance development labs, an insurance company might become a pure product manufacturer by getting rid of its product development function and costs and buying or licensing products from others. This already has happened in the pharmaceutical industry where pure product development companies are performing an increasing share of the drug discovery process.

The effect that patents can have on the insurance industrys product development model is going to force everyone to change and adapt one way or another. The options above or some others will have to be considered because standing pat does not seem like a successful strategy. As much as we were impressed with our first computer, we have all upgraded.

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 24, 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.