A few months ago, Dr. Anand Rao of PwC published an article in Carrier Management that explored a few of the psychological barriers to innovation. It was an article that stood out because it’s not really insurance-focused, but entirely relevant to insurance and its laggard approach to innovation thus far (right, Mr. Wilson from Aviva?).

Dr. Rao identifies three biases that sand the skids of change. Here they are, quoting his article:

• Status Quo Bias: Over the past couple of decades, behavioral economics has documented human bias toward the status quo. This individual bias manifests itself at the organizational level, as well—very seldom do organizations willingly want to change—and change usually occurs because of external factors.
• Risk Aversion: Evolution has programmed us to avoid risks. The amygdala, the integrative center for emotions in the brain, inclines us to avoid risks. This individual trait carries over to most institutions, except for the few that deliberately have been designed to be risk-seeking. By their very nature, most insurers are very careful about which risks to take.
• Self-Serving Bias: People often conflate what is fair with what benefits oneself. Similarly, we are open to making by gut instinct decisions that favor ourselves.

I’d like to add a few additional biases that are also relevant:

• Loss Aversion Bias: People are generally much more willing to do stuff to avoid (or regain) a loss than to achieve a gain. Innovation is all about gaining, and this bias hinders investment in technology or improvements that will deliver long-term gains.
• Hyberbolic Discounting: The value resulting from our choices diminishes over time, with immediate gains over-valued and future gains under-valued. For insurance innovation, this is a real problem because the value from improved risk rating or accumulation is definitely a long-term gain. This bias can be debilitating because the short-term results (i.e. the over-emphasized results) might seem negative, with less policies being written or more dire accumulation results, even though the long-term effects will be beneficial. These may include fewer claims, better-performing portfolios, and more effective risk diversification.

Collectively, these biases need to be overcome before innovation can enter and help an organization. Dr. Rao outlines a few approaches to do that, including “10x thinking” and data-driven decisions. These are cognitive approaches that aim to shake the decision process out of our normal decision-making channels and away from the biases outlined above. The 10x approach broadens perspective, and data-driven decision increases objectivity over subjectivity. Both are absolutely appropriate.

Innovation has so much to offer insurance; it is hard to fully grasp the possibilities. Insurance executives and thought leaders who can see the possibilities, and act boldly to pursue them, are the ones who are more likely to welcome 2016 and the coming changes to the insurance industry. Carrier Management has perfectly framed the core issues of innovation by linking to an article about how 2016 will be a shake-up year from an article about the biases that aim to deny that shake-up from happening.