Close Close

Life Health > Health Insurance

Independent Inventors Get Lions Share Of Insurance Industry Patents

Your article was successfully shared with the contacts you provided.

Independent Inventors Get Lions Share Of Insurance Industry Patents


Part of a Series

Independent inventors are getting 75% of all newly issued patents in the insurance industry. Creative actuaries, underwriters, programmers and marketing people are forming start-up companies–what we call “insurance development labs”–so they can make their inventions commercial realities.

Patents have enabled this movement by transforming basic ideas into “intellectual property” that can be sold or licensed to third parties for subsequent commercialization.

Protecting and using patents, however, is a challenge both for the inventors who obtain them and the insurance companies that wish to license them. Accordingly, its important to remember these guidelines for successful licensing:

Build value into the invention.

Build credibility into the patent application.

Keep expectations modest.

Be prepared to sue a third party if they insist upon infringing a patent.

An inventor builds value into an invention by developing as commercially attractive a product as possible. Licensees want to buy solutions to a problem, preferably “turnkey” solutions. They are much less interested in buying rights to an undeveloped idea, no matter how promising.

A fully functioning prototype should be available for demonstration of a software invention. An independent market study should be done to validate the sales potential of a ground-breaking new product. A fully developed business plan will be required for a revolutionary new product that needs a new company to bring it to market.

Often license deals need to be struck after a patent application has been filed but before the corresponding patent issues. In this case, a patent application that is “credible” can have almost as much value as an issued patent.

A credible patent application is one that an independent patent attorney or agent would say is likely to issue with the proposed claims (i.e. formal one sentence descriptions of the invention) reasonably intact.

The U.S. patent laws have recently been changed. Patent applications are now published before the corresponding patents issue. This gives patent owners “provisional rights” to their inventions starting from the date of publication. If a patent issues on a published application with essentially the same claims as what are found in the application, then the patent owner can demand reasonable royalties from anyone using his invention back to the publication date of the patent application.

An infringer who has launched a product based on what an inventor disclosed in his patent application will be at the mercy of the inventor when and if the patent issues. The questions that the infringer must ask are: “How likely is the patent to issue?” and “What are the consequences if it does?”

Never underestimate the determination of inventors to get their patent to issue. Inventors have spent decades to get their patents to issue and to then go on and collect tens and even hundreds of millions of dollars in royalties from infringers who had no choice but to pay up.

Credibility in a patent application is helped by a thorough prior art search. Thoroughly researched prior art helps insure that an invention is well developed at the time the application is filed. At the very least, an inventor needs to search all of the databases that the patent office will search and then some.

There are over 31 data bases that the patent office searches for insurance-related inventions. These include U.S., European and Japanese patents, newspapers (for instance, The New York Times or Financial Times), newswires, business magazines, insurance periodicals, and even a Web site that is archiving the Internet (

In addition, the inventor should search the Internet, contact experts and academics, and track down sales literature and early journal articles that would not normally be electronically indexed. The thorough prior art search will highlight the novel and nonobvious features of the claimed invention and demonstrate the depth of the inventors knowledge.

Credibility in a patent application is also enhanced by careful drafting of the “Background” section of the patent application. The Background section describes the state of the art and its limitations at the time the invention was made. The Background section should demonstrate careful research on the history and the then current limitations of the state of the art in the field of the invention. It should also outline the technical challenges that needed to be overcome to make the invention work.

Unfortunately, many inventors and even their patent attorneys do not appreciate the fact that only inventions in the “technical arts” can be patented. A new insurance product hasnt been invented in a patent sense until a technical problem has been solved. Technical problems can include pricing, underwriting, distribution and sales technologies.

It is also not enough to merely automate a formerly manual process with a computer. The automation is only patentable if it leads to a new effect, such as the creation of a new market for insurance that didnt exist before, or the ability to insure against a risk that previously had been considered uninsurable.

Each patent application also contains a “Summary of the Invention” section and a “Detailed Description of the Invention” section. The “Summary” describes the invention in its broadest terms. Since the broadest claims are derived from this material, it is important for this section to be as complete as possible.

The “Detailed Description” describes particular examples of the invention. This section is important since it is used to satisfy the requirement that an inventor completely describe how the “best mode” of his invention works in terms understandable and reproducible by another person “skilled in the art.” It also provides fallback positions for narrower claims in case prior art is discovered after the application is filed which covers the broad description of the invention found in the “Summary.” A credible application will have a very broad summary and a very explicit “detailed description.”

No matter how much value is built into an inventive idea or how credible the patent application is, however, the inventor must realize that a lot of additional work will be required to develop a commercially attractive product. To a potential licensee, the risk of failure is still a big concern. Hence inventors with innovations in the early stages of commercial development must temper their enthusiasm and keep their license fee expectations modest.

Insurance inventors today have found that a small percentage of premium is an acceptable license fee for a promising patented product. Fees that do not adversely affect the marketability or profitability of a new product and fit within the normal compensation ranges paid on insurance products will, generally, be acceptable. A reasonable fee also means that the potential licensee is less likely to challenge the patent.

After a patent issues, the inventor must be watchful for possible intentional or unintentional infringement. If the infringer will not take a license or will not cease and desist after notice, then an inventor must be prepared to sue. Suing for patent infringement, however, is a very serious step. According to the American Intellectual Property Law Association, the legal costs of a patent infringement suit typically run about $1 million to $2 million for each side. Collecting damage awards can take years, even when all of the decisions are in favor of the inventor. Meanwhile, time and effort is taken away from more productive activities. Nonetheless, if potential damages are several million dollars or more, a lawsuit may be the most prudent action available.

In the end, the value of a patent and the invention on which it is based depends upon how much care is put in upfront. The invention must be carefully researched and completely expressed in a well-written, credible patent application. Commercial appeal and ultimate success is dependent on how well developed the invention is before licensing is attempted.

Independent inventors through “Insurance Development Labs” are finding creative new ways commercially to exploit their innovative ideas and companies in the industry are beginning to notice.

Editors Note: Previous articles in this series appeared in the following issues in 2003: March 17 and 24, May 26, June 2.

Tom Bakos, FSA, MAAA, is a consulting actuary with Tom Bakos Consulting Inc., Ridgway, Colo. He can be reached via e-mail at [email protected]com.

Mark Nowotarski is with Markets, Patents & Alliances, Stamford, Conn. He can be reached at [email protected]

Reproduced from National Underwriter Life & Health/Financial Services Edition, October 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.