Embracing an innovative mindset can be a challenge, and there are telling signs that many insurers simply do not have this capability built into their organization's DNA. Known issues like risk aversity, lack of transparency, and feeling insulated by regulatory and capital hurdles keep real transformation at bay.

In order for carriers to enter this new era for insurance unscathed, they must recognize these shortcomings and correct them.

Related: 5 top insurance tech trends for 2017

Risk aversion and innovation are polar opposites

The fundamental rule of insurance has always been to mitigate risk. While insurers should still seek to reduce risk, that mentality cannot remain so black-and-white. Today's insurers must mesh their attitudes with an innovation culture that thrives on taking risks. Leading tech companies, like Google, depend on a "test and learn" approach in order to continue disrupting themselves. Failing fast to find success at a quicker rate than the competition is their status quo. Insurers must adopt this mindset, finding ways to dispel a natural risk-aversion and take risks if they want to retain and build their customer base.

This can be done through careful strategy, which will help keep everyone in the organization feeling comfortable during this process. Analytics and big data initiatives don't have be "black box" projects. In fact, they only work to their maximum potential if insurers take control of these initiatives and merge them with existing business strategy.

There is always risk involved when investing in something that isn't proven within an organization, but calculated risks done correctly have shown to be effective by market leaders like Travelers and Berkshire Hathaway who are known to leverage analytics to gain market share in Workers' Compensation and other lines. The first step of a strategy is to set goals for each new analytics initiative. Decide which business challenge to address first and build on that success.

Once a goal has been set, insurers should decide which metrics will be measured throughout implementation in order to monitor and adapt the project as necessary. Finally, it cannot be underestimated how important it is to remain in sync during this transition, from the C-suite to the front line employees. A data-first strategy often means everyone is affected and they should be aware of the changes in order to adapt appropriately.

Regardless of how insurers go about achieving innovation, they must first learn how to think about it. (Photo: iStock)

Insurers must be transparent at both ends

Another common behavior of the insurance industry that counters an innovative culture is a historically omissive approach to sharing information with customers. On the front end, a customer typically enters their information and receives a quote with little to no explanation of what went into the quote. New generations of consumers are savvy and demand a degree of simplicity and transparency that they've come to expect from their non-insurance related purchases. P2P insurance start-up Lemonade has become a great example of the type of company created to appeal to a younger consumer base with video claims, an altruistic business model and a simple interface.

It isn't just about overhauling the front end either, which currently receives the lionshare of InsurTech funding. The reason transparency is most important is its relationship to the claims process, which is the single most common consumer issue in insurance.  According to NAIC in 2008, 51 percent of consumer complaints relate to claims and only 4.7 percent relate to premiums. This isn't surprising, since making a claim is one of the few times the insurance experience is visible to consumers. If this isn't fixed, the consumer or small business owner won't ever have a better experience with their insurance provider. The majority of consumers do not understand the limitations and nuances of their coverage, and that lack of knowledge benefits no one, because the insurer will receive the blame every time for a misunderstanding. In short, an informed consumer is better for both ends of the transaction.

Related: Technology is changing the insurance industry, driven by outside influencers, competition

Insurance can't rely on complexity as a crutch

The final barrier is linked to why insurance is one of the last remaining industries to become overtaken by the technological revolution. The stringent regulations and complexity of operating in the insurance industry have long created a bubble, insulating insurance from outside competition.Now with advances in technology, competitors don't need to underwrite risk to enter the insurance market, and they are able to bring their more customer-centric business model that has worked well in other areas.As a result, customer expectations of insurance are beginning to mirror companies like Amazon, known for their superior customer service and simplicity.

This puts traditional insurance companies at a disadvantage because they don't often think holistically about how consumers research and make purchases in the way tech-based companies do.  Since many insurers view their agents as the primary customer, the customer experience for the policyholder doesn't receive the attention it deserves. In contrast, tech companies see the world in terms of platforms, operating systems, and devices that create an engaging and interactive experience for the end user. Then they add new vertical offerings to further serve a loyal consumer base. Insurers must get on board with a fresh ideology around the customer experience if they want to improve and avoid being blindsided by the competition.

Insurance providers can replicate many of the same approaches that have made companies like Google and Amazon so successful, leading to improved customer relations, satisfaction and retention. However, the industry must shift its mindset to better support innovation. This means encouraging an appetite for controlled risk, increasing transparency and limiting complexity from interactions, as well as making calculated investments in the tools that support faster, more meaningful business decisions.

Dax Craig is CEO of Valen Analytics. He can be reached via email at [email protected]. These opinions are his own.

See also:

8 online tech tools that boost insurance agency and carrier collaboration

InsurTech's pay-as-you-go promise