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Failure’s Parachute: behind the scenes of innovation

As many entrepreneurs will attest, failure is an inherent aspect of success and innovation. At scale, when really big things are on the line, failure is costly. Some failures cost millions – if not billions of dollars; others cost time, jobs, heart ache, and even lives. The worst failures aggregate it all. Remember the financial crisis? But, from failure emerges innovation. With it, behind the scenes, are the enablers of innovation – the quiet unknowns in the insurance industry.

Before tossing insurance aside as boring, bureaucratic and a goose egg on the innovation scale, let’s reflect on it’s importance from a business and entrepreneur’s perspective. Insurance is failure’s parachute (tweet this). In simplest terms, insurance allows the financial risk of failure to be shared among a pool of willing risk takers.

The role of insurance is to offer a financial backstop and asset protection to ensure innovation continues. Innovators need to protect their companies and assets; their ideas, patents and copyrights; their products and their products’  promises; their executives and boards of directors; and more. Without that protection – without insurance – innovation stops.

Investing in Innovation

Insurance is everywhere and a vital element of every industry. The technology industry alone invests billions of dollars annually in risk-transfer mechanisms and insurance to continue its course of innovation. It’s understandable if you’re having trouble wrapping your head around the concept of insurance enabling innovation. Especially, following the most significant financial failure in modern times. But, this might just prove it.

The failure of the financial crisis required the insurance industry to orchestrate its own turnaround. Beyond bailouts, the insurance industry enabled its own innovation, by necessity, while creating the means for other industries to emerge from widespread, systemic failure. If any positive emerged from the financial crisis, it was the realization of how deeply embedded the insurance and financial service sector is in every industry.

At the end of 2007 before the financial crisis, insurers’ surplus (assets in excess of liabilities) was at a then record high of nearly $800 billion. Fast forward to year-end 2012 and reported insurers’ surplus has grown to over $925 billion.[1] Following a significant decline between 2008 and 2010, insurers’ surplus has grown to historic highs.

To watch the process of innovation is to understand the flow of capital. Alone, a ground-breaking idea is not innovative. But, with investment and capital to bring that idea to market, with the mechanisms in place to transfer the risk of failure, that ground-breaking idea becomes an economic reality. The flow of capital to the insurance industry is astounding. Dare to guess how much total capital from the insurance industry directly or indirectly enables innovation? Hundreds of millions; billions? Not even close. Try $1.1 trillion – 7% of the US GDP (2012)[2].

The Impulse of Innovation

A tangible example of insurance enabling innovation is the Solar Impulse project.  It is truly a revolutionary, technological innovation that demonstrates an airplane can fly day and night on solar power alone, without any fossil fuel on board.  Solar Impulse is a demonstration of innovative thinking, pioneering spirit and confidence in risk taking. It is not meant to change the aviation industry; it is meant to ignite revolutionary thinking and inspire future leaders to innovate.

In 2013, the first Solar Impulse plane, HB-SIA, completed its mission across America from California to New York. In 2015, the second generation, HB-SIB, will embark on its circumnavigation of the globe, powered again only by solar energy. Behind the scenes of this revolutionary project is the insurance industry and the professionals who are enabling this innovation.

[1] See Annual Report on the Insurance Industry, Federal Insurance Office, U.S. Department of the Treasury, http://www.treasury.gov/initiatandives/fio/reports-and-notices/Documents/FIO%20Annual%20Report%202013.pdf

[2] See Department of Commerce, Bureau of Economic Analysis, http://www.bea.gov/national/indexhtm#gdp

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