Innovation in Life Insurance: The Economic Landscape and the Insurance Distribution Directive

Abstract

Innovation, which is defined as the “beating heart of the economy of the twenty-first century”, is one of the key elements of economic policy and competitiveness. Together with entrepreneurship creates a set of factors conducive to the economic development. Innovations are also challenging for the insurance sector. On the one hand, sector itself can be innovative, with the latter supporting innovative activities of other entities by reducing the degree of risk aversion of these entities. The aim of the paper is to discuss whether life insurance sector is innovative and what is the impact of regulation on that phenomenon.

The paper consists two main parts. First part focuses on the idea of innovation within financial sectors starting from definition of innovation activity then moves to an analysis of innovation within financial markets which describes the research conducted by Silber and Barras. In general the authors assume that insurance markets are now in the first phase of revers Barra’s cycle (improved efficiency phase—it means that the markets innovate within new technology). This part aims at evaluating if the life insurance market is innovative in terms of Pearson’s secondary product innovation rather than on primary product innovations (innovates within distribution channels, etc.).

The second part focuses on an analysis of regulation that posted the innovation on life insurance within the scope of product design and distribution. Product design and distribution is now regulated in the European Union under the Insurance Distribution Directive, which introduced a set of rules known as product oversight and governance (POG). Thus, the paper investigates if the changes of the design of life products, which are expected from the implementation of the POG, may lead to Pearson’s primary product innovation, or they are a mere adaptation to the new regulatory framework.