March 7, 2005 Edition   |    Back to Table of Contents   |   View Previous Issues

Insurance Patents Invite Disruption

By Linda Koco

Some innovations can so disturb existing systems that vested interests will go to the mat to try to stop them. We see this a lot in technology, but it’s happening in insurance, too.

For instance, right now, there is much interest in how new telecommunications technologies, such as VoIP (Voice over Internet Protocol), are disturbing the established land line phone systems. In the 19th century, railroads and telegraphs were disruptive, bypassing horse and wagons with their speed and efficiency.

Insurance also has had its share of disruptions. Think back to the debut of universal life insurance in the 1970s. Separating out the interest-building and cost-of-insurance components was a huge departure from traditional whole life. It met with enormous opposition from entrenched interests but wound up a top seller during much of the 1980s.

In the 2000s, UL once again became the product du jour, thanks to its use of yet another disruption—the secondary guarantees that keep the UL death benefit in force despite policy performance. Another disrupter, equity index annuities, born in the mid-1990s to the tune of various interest-crediting "methodologies," have been racking up sales gains quarter after quarter in the past several years.

Without quantum advances in computing power and programming, none of the disruptions mentioned here would have been possible. Tech is, was and probably always will be the driver.

Today, some insurance developers worry that not much innovation—or disruption—is going on. Most work entails the combining, embellishing and refreshing of past innovations, not new, they say.

While that seems to be the case, one trend does seem to qualify for the "D" word. That is the patenting of insurance product processes (or business methods, in the parlance of the U.S. Patent Office). NU has covered the trend, so you can research it easily in our online archives (www.nationalunderwriter.com).

A recent search of existing patents and patent applications at the U.S. Patent Office Web site (at www.uspto.gov/patft/index.html) showed 225 patents issued in "Class 705, subclass 4"—for insurance (1790 to present). This class includes patents for financial accounting, calculating earned income, interest, insurance premium, taxes and risk analysis. Another search, using "insurance" as the search term, brought much bigger numbers—8,267 patents issued (since 1976) and 7,295 patent applications. A search on "life and health and insurance" returned 760 patents (since 1976) and 1,128 applications.

Many of those filings are somehow related to insurance but not insurance contracts themselves. Still, some do involve contracts, and most experts agree insurance patents are on the rise. In fact, calls about insurance patents to NU’s new products desk have increased during the past 18 months. This is what spurred me to start thinking about the potential disruptive impact patents might have at companies and agencies.

Developers claim that insurers having patents in their products will "own" the affected part of the business. During the 20-year patent period, the firm can go after infringers, securing a sizeable licensing fee or, failing that, taking infringement matters to court. Meantime, the company can milk the differentiation that comes with having a unique product and/or collect fees from selling usage rights. (The calls I’ve been receiving indicate that a lot of consulting firms are seeking to do the latter.)

Naturally, this entails risk—for instance, that the patent will be infringed or challenged, or that it won’t hold up in other countries.

Still, most advocates believe the enhanced intellectual property protection will juice the industry’s innovation gears, due to less fear of having ideas stolen with impunity. The more innovation, the greater the chance that a really big innovation will come along that truly revolutionizes the product landscape. Whole product lines could rise and fall as a result—a disruptive end of status quo.

As for the impact on the field, this subject is rarely discussed. That is unfortunate, since advisors will be directly affected.

For example, if advisors have a patented policy in their toolbox, achieving differentiation in the local market should be greatly enhanced.

And, if a high-powered marketing, advertising and agent-education campaign accompanies rollout of a patented product that is truly "better, faster and cheaper" (as are most disruptive technologies), then sales will surely follow.

If some advisors don’t have that product, their fortunes could suffer—unless and until they prevail upon their companies to "get a license, so we can sell it, too."

Some realignment of contractual relationships with carriers may result. It’s disruptive good for the haves, and disruptive bad for the have-nots.

It’s too soon to say where on the disruption scale the patenting-and-insurance trend will end up. But industry professionals already are taking sides. Opponents argue that it forces re-learning products and skills, re-selling of old accounts, and continual tweaking and adjusting—all with uncertain outcome. Proponents embrace it like a long-awaited savior, claiming it will open up new opportunities and make things "better for all."

Sounds like the earmarks of disruption to me.