Anticipating A Patent-Rich Environment
In The Industry
By Tom Bakos and Mark Nowotarski, National Underwriter,
March 17, 2003
Part
One of a Series
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 inventive–that 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 industry’s 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 won’t work. Your competitor may
not allow you to copy their successful new product. To be successful, you’ll
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 they’re free–participating
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 it’s made
a comeback of sorts in the form of long-term secondary guarantees. And, aren’t
indeterminate premium products dead? Remember deposit term?
Products do lose their edge over the years--sometimes months. That’s
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 don’t 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
they’ve 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.
Reproduced
from National Underwriter Life & Health/Financial Services 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.
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