The Importance of Intellectual capital and innovation in agricultural insurance sector in Iran.

1. Importance of Intellectual Capital and Innovation in
Agricultural Insurance Sector
Mohammad Rahmani Karchegani
International Conference on Economics, Energy, Environment and
Agricultural Sciences
1/11//2014

2. Section Content No.
of Slid
1
2
3
4
5
6
7
8
Overview
Importance of Insurance Services in Agricultural Sector
Importance of IC and Innovation in Insurance Sector
Definitions and Importance of Intellectual Capital
Definitions and Importance of Innovation
Relationship between Intellectual Capital and Innovation
Intellectual Capital and Innovation in Insurance Companies
Conclusion
4
5
9
10
11
14
22
26
Outline

3. 1.Overview
There are many factors that influence performance of insurance companies.
In order to sustain competitive advantage an insurance company needs to
offer high-quality services at low cost.
Scholars assert that intellectual capital (IC) is one of the crucial assets which
helps organizations to create value and enables organizations to be innovative.
Many authors found that IC can boost organizational performance through
knowledge, experiences, skills of employees and also by defining new methods
of task performance and being innovative in their processes.

4. 2. Importance of Insurance in Agricultural Sector
In many developing and developed countries, the agricultural sector is a critical
economic sector of livelihood (Mahul, 2011).
Normally, agricultural producers are often vulnerable to the effects of adverse natural
events, such as pest's attacks, various natural disasters, and unfavorable weather
conditions (drought, hail, flood, heat, storm, hot wind, sparrow attack). In fact, these
conditions have significant negative impacts of agricultural production.
Therefore, governments through agricultural insurance companies, provide assistance
to agricultural producers who successfully develop risk management and adaptation
strategies to survive these unfavorable events. Actually, these conditions have significant
negative impacts of agricultural production.
Utilization of insurance service in agricultural activities can psychologically,
economically, and socially improve the lives of farmers. Undoubtedly, farmers lacking
security cannot actively participate in programs for boosting production. Even
attractions of investments in agricultural production activities would face difficulties in
the absence of security (Rahmani Karchegani, 2002).

5. 2. Continued
-Although, in the some industrial countries, agricultural insurance services have been
offered for more than a century, this kind of insurance services remains under serviced
in middle- and low-income countries.
However, since the late 1990s, reduced government funding for agricultural
producers in emerging markets have heralded renewed interest in agricultural
insurance. A recent study conducted by the World Bank has revealed that various
agricultural insurance schemes are in place in more than 100 countries, either as well-developed
programs or pilots (Mahul and Stutley, 2010).
In a similar vein, and as part of an overall agricultural risk management framework,
the global financial network supports the development of agricultural insurance
schemes. In these schemes, middle- and low-income countries are also assisted with
institutional and capacity-building support needed to design and implement traditional
and innovative agricultural crops and livestock insurance products. The World Bank
also plays a role in forming agricultural insurance pools. In a generalist sense, these
projects are usually linked to supportive efforts in agricultural extension and financing
(Mahul and Stutley, 2010).

6. 2. Continued
Mahul (2011) argues that the potential role of agriculture insurance in emerging
economy is being revisited due to the notable expansion of agricultural risk modeling
techniques and the materialization of a number of insurance corporations and index-based
insurance. It was thus suggested that innovativeness to insurance of agricultural
products may lessen economic returns to farmers, herders, agricultural financing
institutions, and governments as the case of unfavorable natural events. This may be
particularly true for developing countries, which rely heavily on their agricultural
sectors.
However, Roberts (2013) posited that the management of insurance companies, as well
as business firms, has several developmental stages. These include market
identification; service's development; marketing; setting indemnity and premium
levels; collecting premiums; and handling claims. However, the extent of involvement of
the public sector varies from country to country. Roberts (2013), furthers that it always
has a role, even if this is exercised mainly through setting supportive and regulatory
policies. It may be particularly important in the early stages to developing of
agricultural insurance sector, and in situations where financial support is considered
both desirable and possible.

7. 2. Continued
Agricultural insurance is an area of insurance that is technically demanding. One of
the many challenges in the insurance industry are maintaining the skills and expertise
at the underwriter, loss adjuster, and reinsure levels, not only to provide adequate levels
of insurance, but also to assist the agriculture industry improve its risk-management
practices to enhance production.
In fact, in insurance companies, employees as human resources play an important
role in building competitive advantage to sustainable of the their firms. For instance,
the insured trend is constantly dynamic, changing as lifestyle changes. Once changes in
insurance patterns are identified, the onus lies on employees to develop new services
that match the expectation of consumers.
In such situations, knowledgeable employees rise to the occasion with creative and
innovative ideas to meet the desires of consumers. As a result, the introduction of
technical, customized insurance services in the market may see to a firm gaining
competitive advantage over its contemporaries and competitors. Agreeably, such
company tends to eventually occupy a greater market share in the insurance industry..

8. 3. IC and Innovation in Insurance Sector
Skandia a Swedish insurance company, was the first company that provided a complete report
on IC in insurance industry.
In Skandia’s annual report, IC has been defined as the possession of knowledge, applied
experiences, organizational technology, customer relationships and professional skills. This
insurance company divided IC into two components of human and structural capital. Human
capital is not a form of property that can be owned by an enterprise. Its value is attributed to
employee training, know-how, and competencies.
On the other hand, structural capital is broken down into customer capital and organizational
capital and remains in the possession of enterprise, even after employees have gone home at the
end of the day (Edvinsson, 1997). Based on Skandia’s experience, the scholars categorized IC
into three basic insights used in further implementation of IC term as follows:
The IC report of Skandia in 1997 was the first empirical analysis on the relationship between IC
and firm performance in insurance industry. This type of report provided a more systematic
description of the company’s ability and potential to transform IC into financial capital.

9. 4.Definition and Importance of Intellectual Capital
IC
Component
Table 1: Definition of IC Components
Definition
Human
Capital
-Is the knowledge, skills, experiences and abilities that employees take with them when they leave
their firm. Some of this knowledge is unique to individual, some may be generic. Examples are
innovation capacity, creativity, know-how and previous experience, teamwork capacity, employee
flexibility, tolerance for ambiguity motivation, satisfaction, learning capacity, loyalty, formal training
and education (Meritum, 2002).
Structural
Capital
-Is the knowledge that stays within the firm at the end of the working day. It comprises the
organizational routines, procedures, systems, cultures, databases, etc. Examples are organizational
flexibility, a documentation service, the existence of a knowledge centre, the general use of
Information Technologies, organizational learning capacity, etc. Some of them may be legally
protected and become Intellectual Property Rights, legally owned by the firm under separate title
(Meritum, 2002).
Relational
Capital
-Is all resources linked to the external relationships of the firm, with customer, suppliers or R&D and
partners. It comprises that part of Human and Structural Capital involved with the companies
relations with stakeholders investors, creditors, customers, suppliers, etc., plus the perceptions that
they hold about the company. Examples of this component are image, customers loyalty, customer
satisfaction, links with suppliers, commercial power, negotiating capacity with financial entities,
environmental activities (Meritum, 2002).
Spiritual
Capital
-Is tacit knowledge, faith, belief and emotion embedded in the minds and hearts of individuals
within organizational employees that to the overall impact on performance of the firms (Ismail,
2005b).

10. 5. Definition and Importance of Innovation
Innovation
Dimensions
Table 2: Definition of Innovation Dimensions
Definition
Process
Innovation
- Is the introduction of a new or significantly improved production.
Service
Innovation,
- Is the introduction of a goods or service that is new or substantially
improved.
Marketing
Innovation,
- Is the implementation of new marketing methods and introducing
significant changes in product design, packaging, product promotion and
pricing.
Organizational
Innovation
- Is the creation or alteration of business practices, workplace organization
and external relations.
Source: OECD (2010)

11. 5. Definition and Importance of Innovation
According to Edvinsson et al. (2004), the stage where “Knowledge” has been
known as assets already has interred to next stage, which is called
“Innovation” stage (Figure 1).
Nowadays, innovation has emerged as the newest generation of assets in
organizations, which recognized as vital driver of economic growth and
normally enables the organizations to offer better quality products and
services at lower prices as competitive advantage of firms (Edvinsson et al.,
2004) .

12. Figure 1: Six Generation Emerged of Asset (Edvinsson et al., 2004)
VI Future as the Asset
V Knowledge as the Asset
A
IV Customer as the Asset
III B Enterprise as the Asset
II Project as the Asset
I Product as the Asset

13. 6. Relationship between IC and Innovation
-Knowledge often defined in terms of IC is the source of new economic wealth.
Innovation is the process by which that wealth is converted into action, products, services, or
initiatives. Although activities can be based at the level of the group, function, enterprise, or nation,
ultimately real value is in what flows between the borders, creating collaborative advantage (Amidon,
2003b).
Roos et al. (1997), Edvinsson et al. (2004), and Zerenler et al. (2008), stated that the importance of
innovation and renewal in their IC framework.
Amidon (2003b), in her book “The Innovation Superhighway”, presented a revolutionary view of
innovation as nothing more than developing good ideas and implementing them to realize their value.
The author forwarded this vision to define the global imperatives contributing to a new world order
based on IC.
Based on the literature above, numerous studies have been reported on the relationship between
innovation and firm performance, and today, most innovation scholars seem to agree that innovation is
a powerful explanatory factor behind differences in performance among firms (Fagerberg et al., 2012).
Nevertheless, research on the relationship between innovation and firms’ financial performance has
traditionally focused primarily on innovations related to the development production and marketing
of goods, while the effects of innovations related to services have been given less attention (Aas and
Pedersen, 2011).

14. 6. Continued
The research literature argues that the firm-level effects of service innovation are different from
those of other types of innovation. For example, service innovation effects have a more qualitative
nature, and for this reason, are less tangible than the effects of other innovation efforts (Aas and
Pedersen, 2011).
For example, the scholars suggested that service innovation typically transforms the state of the
customers and results in customer satisfaction and loyalty, rather than short term financial
performance. It has also been argued that due to the nature of services (intangibility, heterogeneity),
the impact of service innovations is harder to trace than in manufacturing.
In this order, Brown (2009) focused upon the characteristics of IC that foster and develop innovation
in both manufacturing and service sectors. The study covered the presence of organizational and
individual HC and the availability of organizational networking systems (Table 3).
The results indicate that there are different impacts of IC on innovation in the contexts of
manufacturing and service sectors

15. Table 3: Matrix of IC Components and Innovation in Service Sectors
Driver of
Performance
IC
Component
Observed
Variables
Latent
Variables
Intellectual
Capital
Human
Capital
Knowledge that stays with employees,
Skills, Experience, Ability
- Cross functional
or team working
-Human Capital
Structural
Capital
Knowledge that stays with the firm
Routines, Processes, Culture, Datasets,
R&D
-Management
control of process
-Innovation process
Relational
Capital
Knowledge derived from networks
Resources linked to external
relationships customers, Suppliers,
Partners
-Extent of
networking
Innovation
Physical
Services
Tangible products and networks (e.g.
telecommunications and energy)
-Efficiency of
the innovation
process
-Effectiveness
(%revenue from
new products)
Human
Services
Social and individual wellbeing
(supported by technology)
Information
Services
Mass communications, Infomediaries,
(specialized knowledge providers)
Source: Brown (2009)

16. 6. Continued
Based on the results of Brown’s model (Figure 2) in the service sector, processes
(SC) have no impact on innovation efficiency despite the strong link with effective
revenue share. Team working (HC) has a strong direct relationship to innovation
efficiency and a weak relationship in the innovation process.
- Besides, HC is a key “individual” factor, which mediates innovation efficiency
through team work. While, direct influences of networking (RC) on performance
is negligible, networking does have a strong link to the innovation process in new
service development (Brown, 2009).
- Effective team work is associated with better organizational performance,
especially with creative and innovative ideas (Tidd et al., 2005). Arguably, two
different types of attitude can be linked to the different skills and knowledge types

17. Figure 2: Relationship between IC and Innovation in Service Sector (Brown, 2009)
Innovation Performance
Innovation
Efficiency
Relational Capital
Human Capital
Structural Capital
Team
Working
Management
Control
Innovation
Process Innovation
Effective
Human
Capital
Strong Link
Weak Link
Networking

18. 6. Continued
Consequently, firms need to think of organization in terms of a series of
collaborative networks, not just a pyramid-shaped organization chart. In other word,
companies need to take a fundamentally different approach to strategic management.
They also need to build in a way to leverage the knowledge of organization’s IC
such as human, structural relationship and SpC, to find new opportunities, explore
new courses and stimulate innovation for their businesses (Adams and Oleksak,
2010).
By realizing and understanding the importance of IC and innovation, companies
can improve their competitive advantage. It shows the importance of relationships
between IC components and innovation and the importance of investment and
management of these capitals in organizations.
Therefore, top managers of the firm should sustain, protect, develop and manage IC
to increase organizational innovation as a creator of competitive advantage for the
company.

19. 7. IC and Innovation in Insurance Companies
Ul-Rehman et al. (2011) stated that in insurance companies, knowledge is in
abundance. Insurance companies are known for being good in creating knowledge and
as knowledge-based acquisition. Although IC is extensively researched in large
organizations, it is yet to be explored in depth in insurance companies. Given the fact
that competitive advantage is becoming critical in knowledge-based economy, an
approach that uses KM and performance to effectively achieve this purpose is
increasingly popular.
More and more companies are trying to explore optimal methods of managing
knowledge-based assets, usually referred to IC as a propose to evaluating their
performance in this regard (Subramaniam and Youndt, 2005).
Customers of these firms, as well as insured, regulators, shareholders, and brokers
are eager to see insurers offer more and new services (or products) that extend
coverage to the economic activities, expand their efforts to improve disaster resilience
and are otherwise proactive about the climate-change threat (Mills, 2009).

20. 7. Continued
The first empirical analysis on the relationship between IC and firm performance,
was in the Skandia report compiled by a Sweden insurance company by Edvinson and
Maleon (1997).
Although their report developed IC term for the first time, but a review of the
available literature shows the lack of studies that mainly focus on the IC among
insurance companies. In the literature review process of this study, it was observed that
just few studies have been undertaken on the evaluation of IC and its comparison
within insurance companies although available studies (Edvinsson, 1997).
These previous studies confirmed that IC influences performance of the insurance
companies (Table 4). According to Amidon (2003b), Edvinsson (2004), and Kong (2010), based
on emerging economic conditions, more recent concerns about the concept of IC have
shifted to analyze what and how various innovative attributes influence firm
performance through IC components, such as human, structural, and relational capital.

21. Author/s
Year/
Country
Table 4: Previous Researches on IC in Insurance Industry
Title Findings
Skandia
(1996)
Sweden
-Visualizing IC in Skandia - IC is as hidden assets in the company
Iswati & Anshori
(2007)
Indonesia
-The Influence of Intellectual
Capital to Financial
Performance at Insurance
Companies in Jakarta Stock
Exchange
-IC rests on a potential link between IC on one
hand and corporate performance on the other
hand. Companies will grow up if a growing
number of physical capitals in the same line
with a growing number of IC.
Ak & Öztayşi
(2007)
Turkey
-Performance Measurement of
Insurance Companies By Using
Balance Scorecard and
Analytical Network Process
-Financial perspective is not enough to explain
an insurance company’s performance
Appuhami
(2007)
Thailand
-The Impact of Intellectual
Capital on Investors’ Capital
Gains on Shares: An Empirical
Investigation of Thai Banking,
Finance & Insurance Sector
-IC has a significant positive relationship with
its investors’ capital gains on shares. His
finding indicated enhance the knowledge base
of IC and develop a concept of IC in achieving
competitive advantages in emerging economies
such as Thailand’s.
(continued)

22. Author/s
Year/
Country
Table 4: continued
Title Findings
Pardede
(2010)
Indonesia
-An Investigate on Effect of
Intellectual Capital on Financial
Performance in the Insurance
Companies listed on the Jakarta
Stock Exchange
-IC influence on Financial Performance in the insurance
companies.
Ul-Rehman
(2011)
Pakistan
Intellectual capital performance
and its impact on financial returns
of companies: An empirical study
from insurance sector of Pakistan
-The results have shown that human capital efficiency
plays a significant role in IC performance of both life
and non life insurance sector. The firm having more
efficient people means having better performance of IC.
Where as a significant and positive relationship was
measured between value added creation and financial
performance.
Alipour
(2012)
Iran
-The effect of intellectual capital on
firm performance: an investigation
of Iran insurance companies
- The findings confirmed that value added intellectual
capital and its components have a significant positive
relationship with companies' profitability. Insurance
companies better to benchmark themselves according to
the IC efficiencies and develop strategies to enhance
their company's performance.

23. 7. Continued
An acknowledgement and a critical understanding of IC in insurance companies can
enhance their organizational innovation. This offers them the competitive advantage as
they achieve sustainable economic growth by focusing on IC (or intangible assets) unlike
the traditional approach of merely managing tangible assets.
This is so because IC and innovativeness are perceived and have known as sources of
competitive advantage for insurance companies. Therefore, this study has examined the
influence of IC not only on financial and/or non-financial of the firm performance, but
also on overall firm performance through mediating role of innovation.
On the other hand, Edvinsson et al. (2004), Roos et al. (2010), and Zerenler et al. (2008)
stressed the importance of innovation, renewal or development in their IC framework.
Further, according to resource-based view, determining the relationship between IC
and innovation activities among managers and employees can be one of the steps to
reveal the importance of HRM (Jinchveladze et al., 2009), strategic management (Marr and
Roos, 2005), knowledge management (Wiig, 1997), and accounting management
(Mouritsen et al., 2001) in enterprises.

24. 7. Continued
Zerenler et al. (2008) investigated the impact of IC on innovation and confirmed that three
components of IC, human, structural, and customer capital have a significant positive
relationship with performance of innovation.
Moreover, they noticed that among these IC components, RC (or customer capital) has
the greatest impact on innovation in Turkish automotive supplier industry.
By realizing and understanding the importance of IC and innovation, insurance
companies can improve their competitive advantage. It shows the potential importance of
relationship between IC and innovation, and the importance of investment and
management of this capital, specifically in the insurance industry.
Therefore, the top management within the firm should protect, develop and manage IC to
increase organizational innovation as a creator of competitive advantage to the company
(Amidon, 2003b).

25. 8. Conclusion
Firm performance is an obvious indicator of a firm’s success within insurance industry.
It is influenced by many factors such as diversity of insurance services, policies and
strategic planning, and human resource management practices, structure of
organizational resources and size of insurance companies.
Therefore, management of insurance companies should carefully monitor, measure,
report and manage firm performance based on quality of insurance services as their
nature of business (Houthoofd et al., 2010).
Karanja (2011) suggested that in order to improve the firm’s profit, it must be capable
of offering products and services with high quality at low cost in competitive
environment.
Many companies have responded to these competitive demands by implementing
advanced manufacturing technologies, innovative managerial practices, and emphasizing
quality, service delivery and being flexible to meet the stakeholder needs (Iazzolino et al.,
2013).
In this perspective, the structures of organizational resources have shifted from
material to intangible assets during the last two decades(Olalla, 1999; O'Regan,
2000;Moeller, 2009 ;Kaplan, 2010;Marr, 2005).

26. 8. Continued
 Accordingly, many proponents assert that the “Product-based Economy” and “Retail
Economy” have been converted to the “Knowledge-based Economy” (Alcaniz et al., 2011;
Cambra-Fierro et al., 2011; Canibano et al., 2000; Fagerberg et al., 2012; Huang and Kung,
2011; Jalali et al., 2013; Nonaka et al., 1996).
The authors claimed that “Knowledge” and IC are two vital intangible assets that help
organizations create value and wealth in this “Knowledge-based Economy” (Augier and
Teece, 2005; Marr, 2005a) and recently, have stated that IC is more and more recognized
as a cause of firm performance, which stand for “value creation” potential of Human
Capital, Relational Capital and Structural Capital and their interactions (Abhayawansa
and Guthrie, 2014).
Thus, with knowledge critical to the network society, information technology and
innovation and creativity, IC has become a vital source of value creation for
organizations and economics situations.
Besides, IC is a highly discussed topic within the field of knowledge management.
Edvinsson and Sullivan (1996) stated that knowledge firms derive their profits from
innovation and knowledge-intensive services, and such firms are called high IC firms.

27. 8. Continued
Rosenbusch et al. (2011) believed that insurance companies same as software companies,
banking, and hotels, is an example of high IC firms. In comparison, low IC firms do not
invest highly in IC and do not apply knowledge properly, knowledge, structures and
relationships could not be used, in such firms as drivers to create value added (Sofian et
al., 2004).
In line with its importance, Usoff et al. (2002) suggested that firms with high IC are
more likely to use performance measures for the determination of a manager’s
compensation. Thus, insurance companies must develop services that capture IC and
change their traditional performance measurement system in order to achieve long-term
success.
In addition, IC scholars emphasized that IC is an important factors for knowledge
creation and innovation (Edvinsson et al., 2004). Knowledge and innovation have been
known as two drivers of competitive advantage for increasing organizational
performance (Aas and Pedersen, 2011; Amidon, 1997, 2003a; Andriessen, 2004; Bontis,
2002; Brown, 2009; Chan, 2009; Ismail, 2005; Kramer et al., 2011; Marr, 2005a; Tayles et al.,
2007). Human resource scholars also noted that IC leads to innovative creation, which in
turns plays a significant role in influencing firm performance (Santoso, 2012; Sharabati et
al., 2010; Spahić and Huruz, 2012; Wang and Wang, 2012; Wiig, 1997).

28. 8. Continued
Furthere, at the beginning of the third Millennium, innovation is not only the source
of competitive advantage, but will also play a significant role in the next wave of
influence which is known as “collaborative advantage” (Amidon, 2003b). Furtheremor,
Rose et al. (2009) noted that innovation has been recognized as an important driver of
economic growth, and it enables firms to offer new products and services with better-quality
at a lower price. Edvinsson (2004), Kramer (2011) and Vincent et al. (2005)
emphasized that being innovative is necessary for a firm to create a sustainable
competitive advantage in today’s turbulent environment.
Therefore, organizations which do not have any plans to discover and manage their
IC will face unwanted consequences (Augier and Teece, 2005) .
Based on the multidisciplinary literature review of IC, Alcaniz et al. (2011) and Marr
(2005b) concluded that IC concept has emerged from the work of various scholars
with different perspectives such as Economic, Strategic, Accounting, Finance,
Reporting, Marketing, Human Resources, Information System, and Legal. Thus, as IC
and innovation are two crucial and vital resources to increase firm performance
(Brown, 2009; Zschockelt, 2009), companies must disclose and manage them well.

29. 8. Continued
In light of the above discussion, this paper highlighted the IC components which
include Human Capital, Structural Capital, and Relational Capital, that foster four
dimensions of innovation include; Process Innovation, Service Innovation, Marketing
Innovation, and Organizational Innovation in insurance companies in order to improve
firm performance.
This is a pioneer paper focusing on the influence of innovation and IC on firm
performance among agricultural insurance sector.

30. The End of Presentation
Terima Kasih
Thank You Very Much
1.11.2014