President Barack Obama's focus on innovative technologies and business models is necessary as the country emerges from the grips of the financial crisis, says Matthew F. Power, executive vp of Boston-based Lexington Insurance Co. As technology advances and fresh risks emerge, innovative insurers will stand out, while those that remain content with old business models ultimately may pay the heavy dividend of irrelevance, he says.

Many observers characterized President Barack Obama's State of the Union address this year as a call to reinvigorate America's spirit of innovation.

The importance—for today and tomorrow—that the president placed on innovation was unmistakable, likening it to the nation's early space program. Promising to “fund the Apollo projects of our time,” he appealed for new investments in various emerging technologies. “This is our generation's Sputnik moment,” he said.

The insurance industry would be remiss in failing to recognize its critical role in energizing that spirit.

Innovation was a cornerstone of the U.S. economy for most of the past century. American advances in communications, transportation, health care, science and technology have been the basis of new economic engines and improved standards of living in much of the world.

Those who study the issue, however, understand that American innovation declined in almost every sector of our economy during the past 10 years. Information technology and agriculture might be the only two exceptions, according to a recent Washington Post article.

So a renewed focus on innovative technologies and business models is not only timely but also necessary as the country emerges from the grips of the financial crisis.

At the same time, the notion that the property/casualty insurance industry is a mature business with little room for innovation beyond its core product offerings fails to recognize the rapid change around us. Further belying that perception is the industry's response during the past decade to emerging risks in areas such as employment practices liability, cyber risk, terrorism protection and pandemic risk. For many insurers, these once nascent areas of our industry generate hundreds of millions of dollars in annual revenue.

Innovation in financial services, particularly within the property/casualty insurance sector, can help drive meaningful growth in the near term as emergent business liability risks create additional demand for commercial insurance. These risks are changing rapidly, given the advances in genomics, information technology and bioscience.

Advances in nanotechnology have been incorporated in manufacturing in a wide array of areas, including textiles, cosmetics, energy and pharmaceuticals. But some researchers worry that nanotechnology applications may represent the next asbestos in potential future litigation, if plaintiffs succeed in linking these processes to diseases such as mesothelioma and issues such as environmental degradation. Once again, a direct and specific response and solution from the property/casualty insurance industry would be welcomed by corporate America.

The National Science Foundation estimates that global revenue associated with nanotechnology manufacturing will reach $1 trillion by 2015. Toxicology experts continue to express concerns as to potential long-term health and environmental impacts of nanomaterials as their introduction into mainstream products continues to expand.

Some insurers have begun to exclude the exposures associated with nanoparticles, while others have begun to develop specifically tailored coverage to meet the demands of these emergent risks. Recent innovations in this area include specific coverage grants for nano-related products liability under general liability policies. A handful of insurers and reinsurers have taken the lead in bringing public discussion of the issue to the forefront. Still, many insurers remain silent on the issue, potentially setting the stage for future coverage litigation. The basis of this future litigation scenario may emerge if carriers classify nano-particles as excluded pollutants.

Market-based solutions to environmental management, such as cap-and-trade schemes, have created multibillion-dollar industries that demand forward-thinking insurance instruments that protect investors against potential carbon credit clawbacks. Only a few property/casualty insurers have signaled a willingness to insure tax credit recessions, often called clawbacks, despite the fact that the proximate cause of loss often resides with perils as basic as wind and fire.

Historians likely will look back on today as the Golden Age of Globalization. Many industries have developed complex global sourcing strategies that aggressively manage idle inventory levels to maximize efficiency. These just-in-time manufacturing standards increase dependency on global supply chains. The recent disaster in Japan illustrates the dependency of multiple industries on global supply chains. Some insurers have begun developing broad-based solutions for supply chain interruption, which can be triggered through myriad perils ranging from terrorism and natural catastrophes to political risks and strikes. However, this segment of the market is in its infancy.

Facebook was not much more than a concept in 2004. Today, more than 600 million people use the social network. To put that into perspective, only two countries—China and India—have greater populations. The emergence of social networking platforms creates new areas of risk involving cyber liability, identity theft, copyright piracy and network bullying.

“It's long overdue for the insurance industry to step up and become more creative in product development, technological solutions and distribution concepts,” said Richard Kerr, president and CEO of Dallas-based electronic insurance exchange MarketScout. The exchange hosts an annual industry conference on innovation for its 35,000 members, mostly independent retail insurance agents.

“Clearly, the old-line insurance world is changing, and those companies focusing on innovation will gain market share,” Mr. Kerr said.

President Obama's call to focus on innovation is not without precedent. A stellar example is the economic impact that innovation had on the South Korean economy during the past several decades of the 20th century, according to Juan Enriquez, founding director of the Life Sciences Project at Harvard Business School.

“In 1985, the U.S. Patent Office granted Argentines 12 patents. Venezuelans got 15; Brazilians, 30; and Mexicans, 35. South Korea got 50 patents. In 1998, the same office granted Venezuelans 29 patents; Argentines, 46; Mexicans, 77; and Brazilians, 88. South Korea received 3,362 patents,” Mr. Enriquez noted.

The average annual wage in South Korea multiplied ninefold from 1960 to 1990, while the minimum wage in Mexico essentially remained unchanged. The impact of South Korea's focus on and investment in innovation became a sustainable competitive advantage for that country's economic development, while countries that simply relied on older established industries became uncompetitive over time.

Insurers that drive the process of innovation will emerge as leaders during the next decade, while those that remain content with the continued optimization of yesterday's business models may ultimately pay the heavy dividend of irrelevance.

Matthew F. Power is executive vp of Boston-based Lexington Insurance Co. Mr. Power serves on the board of directors of The New England Council, Greater Boston Chamber of Commerce and the Dean's Advisory Board at the University of Massachusetts Boston's College of Management.