The Theory and Practice of Innovation in the Private Insurance Industry: Comment

Abstract

Murray's article on innovation in the private insurance industry is interesting and provocative.1 One interesting aspect of the article is the combination, for analytical purposes, of the life and non-life insurance industries. Such a macro-approach is a good approach for presenting broad outlines, but this telescopic view did not draw attention to the important details that a micro-analytical approach might have provided. One purpose of this comment, therefore, is to provide some microscopic detail about the innovative practices of the life insurance industry. Specifically I wish to focus attention on a section of Murray's article entitled Inhibitors of Innovation in Insurance. Murray emphasizes the retarding aspects of regulatory activities. In addition to this inhibitor, he also mentions distrust as another factor which inhibits innovation in insurance. Neither of these problems, in this writer's opinion, is nearly as serious as the problem of consumer ignorance about life insurance including the rights and duties created by life insurance contracts. (I suspect this observation holds true in non-life insurance as well.) The problem with consumer ignorance is well recognized in economic literature. In essence, the consumer who is uninformed about insurance (uninformed is perhaps a more polite and less inflamatory designation than ignorant) cannot distinguish between an improved product and one which is changed but unimproved. Given the generally accepted notion that the typical consumer of life insurance is uninformed about the product/ service being purchased, an insurer (assuming little or no social responsibility motivation) has little or no incentive to produce an improved product (from the consumer's standpoint) since it likely would not be distinguished from an unimproved product with a new name, or even from the unimproved product of a competitor. Because of the serious economic problems caused by consumer ignorance of life insurance, problems which go far beyond the area of product innovation, this author has long felt that a genuine consumer education program would be one of the most essential new innovations the life insurance industry could produce.