1 International Conference on Economics, Energy, Environment and Agricultural Sciences 1-2 November, 2014, Pearl International Hotel, Kuala Lumpur, Malaysia ISBN : 978-969-9952-08-1 Importance of Intellectual Capital and Innovation in Agricultural Insurance Sector Mohammad Rahmani Karchegani1, Saudah Sofian2, Salmiah Mod. Amin3 1,2 Faculty of Management, University Technology Malaysia (UTM) 3International Business School, University Technology Malaysia (UTM) Abstract: There are many factors that influence performance of insurance companies. In order to sustain competitive advantage and increase satisfaction of customer and stakeholders, an insurance company needs to offer high-quality services at low cost. Economists assert that intellectual capital (IC) is a vital asset that helps organizations to create value in present economic syndrome and enables organizations to be innovative. Many authors have examined the relationship between IC and “Innovation” to influence firm performance. Their findings have shown that IC can boost the organizational performance through knowledge, experiences, skills of employees and also by defining new methods of task performance and being innovative in their processes. Further, prior studies concluded that IC of an insurance company indicates the value of ideas and capability of being innovative for a longer period. Therefore, this paper presents the importance of innovation and IC in insurance companies by focusing on agricultural insurance sector. Keywords: Intellectual Capital, Innovation, Firm Performance, Insurance Industry, Agricultural Insurance Sector 1- Corresponding Author: rahmanimohamad@yahoo.com 1. Overview There are different perspectives of identifying and recognizing IC in organizations. For example, from the economics perspective, Augier and Teece (2005) provided a historical overview of the growing significance of knowledge and IC as a driver for innovation and Research and Development (R&D) activities (Abhayawansa and Guthrie, 2014). Also, Johanson (2005) elucidated the role of IC from the Human Resource Management (HRM) perspective. The authors have defined IC in these contexts and then discussed various tools developed to manage IC. Marr and Roos (2005) stated the strategic importance of IC resources and differentiated between the static and dynamic nature of assets. These IC proponents argued that the development of strategy from a market-based to a resource-based paradigm is based on IC. Stewart (1994, 1997) stated that IC is everything that has been known by individuals and what they have given individuals to their organizations. It is supposed to be the source of organizational competitive advantage. IC incorporates intellectual material such as knowledge, information, expertise, intellectual property, copyrights and experiences that create wealth in companies. Thus, for corporations and in the macro view of societies, IC is essential for a smooth transition from the industrial era to the information and knowledge era (Iswatia and Anshoria, 2007a). Additionally, a number of scholars have recognized the relationship between IC as unobservable assets and firm performance as a key factor for the success of a knowledge-intensive business (Bontis, 1999; Bontis et al., 2000; Edvinsson, 1997; Ismail, 2005; Kianto et al., 2010; Komnenic and Pokrajcic, 2012; Ling, 2012; Maditinos et al., 2011; Roos et al., 2004; Sullivan, 1999). Further, Brown (2009), Bontis and Serenko (2009), Laforet (2011) and Yitmen (2011) focused on the characteristics of IC (or intangible assets) as focal points that foster and develop innovation and creativity in organizations. Therefore, visually the concept of IC has been as a large and growing body of theoretical and empirical research with a multidisciplinary term in knowledge management. Augier and Teece (2005) believed that growing recognition of the importance of knowledge and intangible assets, their tacit nature, and the desire to understand what creates a competitive advantage for a firm have stimulated many diverse streams of research on technological innovation and knowledge management. Besides, scholars have stated that organizational knowledge plays the crucial role through a creation of innovative activities that influence firm performance (Amidon, 1997, 2003b; Andriessen, 2004; Brockmann and Anthony, 1998; Egbu, 2004; Hormiga et al., 2011; Jinchveladze et al., 2009; Nonaka et al., 1996). Similarly, several studies have been conducted on the direct effect of innovation on firm performance (Aas and Pedersen, 2011; Bowen et al., 2010; Cambra-Fierro et al., 2011; Chen and Wang, 2010; Gopalakrishnan, 2000; Gunday et al., 2011; JiménezJiménez and Sanz-Valle, 2011; Laursen and Salter, 2006). Many innovation specialists view innovation as a powerful explanatory factor behind current differences in organizations performance, and they assert that it must be known and managed (Fagerberg et al., 2012; Luecke and Katz, 2003; Vincent et al., 2005; Weiser, 2003). In this order, researchers have mainly focused on the relationship between different dimensions of innovation such as radical, incremental, process, product, horizontal, vertical and firm performance (Cainelli et al., 2004; Kemp et al., 2003; Rosenbusch et al., 2011; Wang and Wang, 2012). Asa and Pedersen (2011) discovered that firm performance in the service sector is influenced more by innovation than firms in the manufacturing sector. However, service sector has received less attention from scholars in field of innovation (Amidon, 2003b; Bowen et al., 2010; Gonin et al., 2011; Walker et al., 2011; Zschockelt, 2009). In this order, Aas and Pedersen (2011) investigated whether firms which are focusing on service innovation perform better financially than firms not focusing service innovation, because the researcher find that innovation directly have positive impact on financial performance of service companies In recent years, a major shift has been witnessed on the innovation field of how various innovative tactics boost firm performance through human, structural and relational capital, as three components of IC (Edvinsson et al., 2004; García-Álvarez et al., 2011; Ismail, 2005; Zschockelt, 2009). While, from resource-based view of the firm theory (RBV), any effort exerted to determine the relationship between IC and innovation among both managers and employees within an organization can be one step forward to disclose the important effects of intangible assets (or IC) on HRM practices (Jinchveladze et al., 2009) to growing profitability and performance of firms. An in-depth review of the literature shows that only a few empirical studies have focused on the influence of innovation in the relationship between IC and financial business performance (Brown, 2009; Kamukama et al., 2010), particularly in insurance industry. The main mission of insurance industry is to provide exceptionally secure investment opportunities to investors (Alipour, 2012; Mahul, 2011). Thus, the management tries its level best to offer secure and innovative products to their customers (Mills, 2009). Economists believe that in order for insurance companies to successfully accomplish their goals to boost their firm performance, they must manage their IC such as human capital (HC) and structural capital (SC) (Mahul, 2011; Mahul and Stutley, 2010; Mills, 2009). Researchers have shown that in insurance industry, which is a subset of the financial sector, IC components have significant positive relationship with firm profitability. Some insurance companies like Skandia in Sweden (Edvinsson, 1997), Panin in India (Ordoñez de Pablos, 2005), Insurance Association in Pakistan (Ul Rehman et al., 2011), Indonesian insurance companies in Jakarta Stock Exchange (Iswatia and Anshoria, 2007b), and Malaysian insurance companies (Nik Muhammad and Ismail, 2009) have improved their performance by realizing and understanding the importance of IC and reporting it in their business. Additionally, scholars believe that financial companies like insurance and banks which have been known as knowledge-intensive firms, must focus on innovation to increase their performance (Ul Rehman et al., 2011). Harvesting from the above discussion, this paper has focused on the IC components that encourage innovation to influence performance of insurance companies, particularly, in agricultural insurance sector. The findings of this paper revealed the extent to which the identification of internal (human and structural), and external component (relational capital) of IC which are important in the performance of agricultural insurance companies. The discussions of this paper also paved the ways for top managers of insurance companies to improve overall service quality thereby making their companies more profitable. 2. Importance of Insurance Services 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. Thus, governments through agricultural insurance companies, provide assistance to agricultural producers who successfully develop risk management and adaptation strategies to survive these unfavorable events. Agreeably, this makes agricultural insurance an important financial service that is needed for a comprehensive agricultural risk management strategy (Mahul, 2011). 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). 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). 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. 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. There is no single universal insurance product that meets all the demands of producers. Each agricultural insurance product is suitable for a certain set of conditions. The assessment of the suitability of any agricultural insurance product has to consider the production system, the type of asset to be covered, the key peril to which the insured is exposed, the risk location, data availability, farmer size, distribution channels, and delivery and loss adjustment needs. 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. 3. Definitions of Intellectual Capital and Innovation in Service Sector Skandia a Swedish insurance company, was the first company that provided a complete report on IC in insurance industry. Lief Edvinsson, who was the OEC of the company promoted IC concept through the illustration of the “Skandia Navigator Model”. Edvinsson believed that this model insurance industry needed a new logic accounting for the development of knowledge-intensive services. 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, Edvinsson (1997) categorized IC into three basic insights used in further implementation of IC term as follows: IC is supplementary to financial information; it is not subordinate information. IC is a non-financial capital; it depicts a non-visible difference between book value and market value. IC is a debt issue, not an asset issue. The above IC report of Skandia in 1997 was not only novel, but 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 (Table 1). Table 1: Intellectual Capital Indicators in the Report of Skandia Focus Area Financial Focus Customer Focus Human Focus Innovation And Development Focus Process Focus Intellectual Capital Indicators -Return on Invested Funds -Operating Margin -Value Added/Employee -Number of Contracts -Savings/Contract -Redemption Ratio -Points of Sale -Number of Full-time Employees -Number of Managers -Female Managers -Training Expenses/Employee -Increase in Net Premiums -Development Expenses / Admin Expenses -Staff Under -Number of Contracts/Employee -Administrative Expenses/Gross Premiums -IT Expenses/Administrative Expenses -Time Spent Processing New Contracts days Source: Skandia Report (Edvinsson, 1997) IC or intangible assets that create profit for insurance firms normally is tacit and cannot define it clearly. Based on the definision of IC components by European Union in Meritum Guidelines for managing and reporting on intangibles or IC (Meritum, 2002), three main components of IC, which human, structural, and relational capital are defined as follows: Human Capital (HC): 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. Structural Capital (SC): 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. RelationalCapital (RC): 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. On the other hand, according to “Organization for Economic Co-operation and Development” (OECD) in newest perspective to measurement agenda for innovation (OECD, 2010), measurement of innovation is crucial to managing organizations. It helps decision-makers to assess the efficiency of their policies and the contribution of innovation in achieving social and financial objectives of organizations. Rose et al. (2009) suggested that the main purpose of this measurement is to improve the understanding of the growth of firm performance. In addition to the enormous measures that can be used for measuring and collecting data on innovation, Milbergs and Vonortas (2004) classified innovation metrics in four main generations (Table 2). Table 2: Four Stages of Evolution of Innovation Metrics First Generation Input Indicators (1950s–60s) • R&D expenditures • S&T personnel • Capital • Tech intensity Second Generation Output Indicators (1970s–80s) • Patents • Publications • Products • Quality change Third Generation Innovation Indicators (1990s) • Innovation surveys • Indexing • Benchmarking innovation capacity Fourth Generation Process Indicators (2000s plus emerging focus) • Knowledge • Intangibles • Networks • Demand • Clusters • Management techniques • Risk/return • System dynamics Source: Milbergs and Vonortas (2004) Based on the table above, first generation metrics simply portrayed a linear conception of innovation with a focus on inputs such as R&D investment. While, second generation metrics played supportive roles for input indicators by accounting for the intermediate outputs of science and technology activities. Third generation metrics dwelled more on the robust array of innovation indicators, and indices are reliant on surveys and publicly available data. The last, fourth-generation metrics is founded in a knowledge-based networked economy, and are the subject of measurement. Agreeably, it is realizing that innovation as an essential factor for firm competitive advantage. However, currently available innovation measurements do not adequately take in order to account on the complete role of innovation in today’s economy (OECD, 2010). Based on the different attributes of innovation, a number of metrics have developed by experts to measure innovation (Guidelines for Collecting and Interpreting Innovation Data, 2005; Milbergs et al., 2007) in different ways. Innovation encompasses the full spectrum of creative idea generation through full profitable commercialization. Successful innovation depends on converting knowledge stocks and flows into marketable goods and services. Based on the Oslo-Manual as international guidance for innovation measurement (OECD, 2010), there are four dimension of innovation which have applied in insurance industry as below: Process Innovation, which is the introduction of a new or significantly improved production. Srvice Innovation, which is the introduction of a goods or service that is new or substantially improved. Marketing Innovation, which is the implementation of new marketing methods and introducing significant changes in product design, packaging, product promotion and pricing. Organizational Innovation, which is the creation or alteration of business practices, workplace organization and external relations. 4. Relationship between Intellectual Capital and Innovation Knowledge often defined in terms of intellectual capital 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. Edvinsson et al. (2004) contributed to the Dvir et al. (2002) model, which is called “Innovation Cube” (Figure 1), by introducing the six dimensions for organizational innovation. Their results indicated some direct cause and effect relations between “knowledge reuse” and “invention”. Reuse of Assets -Knowledge assets reuse -Reuse process -Reuse organization -Reuse library use Stakeholder Contribution -Customer -Supplier -Senior management -Production/Delivery Exploitation -Market information -Customer orientation -Realization capability Performance -Customer -Supplier -Senior management -Production/Delivery -Marketing -Marketing Invention of Assets -Creation of new assets -Source of new assets -Invention portfolio -Invention organization and tools Operating Context -Human resource management -IT infrastructure -Organizational structures -Competitive context Figure 1: Six Dimensions of Innovation Adopted (Edvinsson et al., 2004) 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. Amidon argues that innovation is not only a “competitive advantage”, in this Millennium, it is also the next wave of influence, tagged “collaborative advantage”. 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). 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. Table 3: Matrix of IC Components and Innovation in Service Sectors Driver of Performance IC Component Human Capital IC Structural Capital Relational Capital (Network) Physical Services Innovation Human Services Information Services Source: Brown (2009) Observed Variables Knowledge that stays with employees, Skills, Experience, Ability Knowledge that stays with the firm Routines, Processes, Culture, Datasets, R&D Knowledge derived from networks Resources linked to external relationships customers, Suppliers, Partners Tangible products and networks (e.g. telecommunications and energy) Social and individual wellbeing (supported by technology) Mass communications, Infomediaries, (specialized knowledge providers) Latent Variables - Cross functional or team working -Human Capital -Management control of process -Innovation process -Extent of networking -Efficiency of the innovation process -Effectiveness (%revenue from new products) 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: Structural Capital Innovation Performance Management Control Innovation Efficiency Innovation Process Strong Link Innovation Effective Team Working Networking Weak Link Human Capital Relational Capital Human Capital Figure 2: Relationship IC and Innovation in Service Sector (Brown, 2009) In relation to the above, Wu et al. (2008) explored how a firm’s operational mode can reinforce the advantages of IC on innovation. Their results supported the mediating role of IC and the moderating roles of entrepreneurial orientation and social capital on innovation. In addition, Zschockelt (2009) explored the influence of IC on the linkage between human-resource management (HRM) and organizational innovation. The results indicate positive relationships between different single subcomponents of IC and innovation. Based on three case studies, Lindgren et al. (2009) presented ideas about how to attract and apply IC capabilities to innovate network-level business models. The results of the study indicated that there is a potential to develop a unique IC when companies understand the innovation projects' value proposition. It was also observed that the ability to understand and integrate the other partner's value proposition is significant for the attractiveness of an innovation project. It is vital to attract IC as it can greatly improve the results. Jafari et al. (2011) stated that companies invest in innovations with a greater level of IC development and in industries that have rapid knowledge growth. Additionally, scholars have emphasized on the importance of organizational climate. Much emphasis was placed on fostering facilities that support creativity and innovation as critical for competitive advantages in order to ensure the strength and success of firms. For example, Parker et al. (2003) employed meta-analytic review, showed that the organizational atmosphere is characterized by the frequent patterns of behaviors, attitudes and feelings, which are displayed in the daily environment within the organization and the organizational employees directly experience and understand it. The scholars also noted that organizational climate is a multidimensional construct with four dimensions consisting of Autonomy and Control, Degree of Structure, Rewards and Consideration, and Warmth and Support. Furthermore, Imran et al. (2010) found that organizational climate fosters innovative work behavior. In addition, Patterson et al., (2005) recommended to develop and test theories related to the relationship between specific climate dimensions in or across model quadrants over a broad range of outcomes. Later, the authors confirmed the importance of the impact of organizational climate on innovation work behavior. However, their results do not support the significant role of organizational size on innovative behavior. Their sample consisted of 320 managers from organizations countrywide. In contrast, the results of the study by Zschockelt (2009) indicated that there is no clear-cut picture as to which of components of IC are related to organizational innovation. Following the above discussion, it is important to highlight that the different forms of IC will not be characterized as “strong” or “weak”. Instead, the term “appropriateness” of the different capital forms is more applicable. For example, Leana and Van Buren (1999) posited that a certain form of HC could include highly educated, skilled and knowledgeable people but this might not have an impact on certain types of innovation due to some other reasons. This does not mean that this particular form of HC is weak. It should rather be said that it is inappropriate with respect to achieving certain types of innovation. While, HC of an organization might develop single creative ideas, the actual implementation of new products, processes or services is most of the time dependent on more than one person. Zschockelt (2009), on a more institutional level of analysis, argued that different skill profiles are related to different kinds of innovations. They said that domain-specific knowledge, and skills can be related to the more effective acquisition and assimilation of new, in-depth knowledge within a narrow range of parameters. While Justarius (Justarius, 2007) believed that, this can be connected to exploitation and incremental types of innovation. On the other hand, HC with its multiple knowledge domains tends to have more various mental models and less cognitive conflict, which makes possible a varied interpretation of problems and situations. Therefore, based on discussion above, nature of a business built on knowledge requires new management that can do more than execute strategy; it must also stimulate innovation. Therefore, managers should attend to their hierarchical organization structure that is ideal for the industrial era limits the potential of their business in the knowledge era. When the success of business relies on the knowledge of people, companies’ customers and partners of all kinds, need knowledge to flow from the bottom up and outside in. 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, because managers cannot just rely on setting a course and executing single-mindedly. 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. 5. Intellectual Capital 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). 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. Table 4: Previous Researches on Intellectual Capital in Insurance Industry Author/s Year/ Country Skandia (1996) Sweden Iswati & Anshori (2007) Indonesia Ak & Öztayşi (2007) Turkey Appuhami (2007) Thailand Chen and Chen (2010) Taiwan Pardede (2010) Indonesia Ul Rehman (2011) Pakistan Alipour (2012) Iran Title Findings -Visualizing IC in Skandia IC is as hidden assets in the company -The Influence of Intellectual Capital to Financial Performance at Insurance Companies in Jakarta Stock Exchange -Performance Measurement of Insurance Companies By Using Balance Scorecard and Analytical Network Process -The Impact of Intellectual Capital on Investors’ Capital Gains on Shares: An Empirical Investigation of Thai Banking, Finance & Insurance Sector -How to manage knowledge well? Evidence from the life insurance industry -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. -Financial perspective is not enough to explain an insurance company’s performance -An Investigate on Effect of Intellectual Capital on Financial Performance in the Insurance Companies listed on the Jakarta Stock Exchange Intellectual capital performance and its impact on financial returns of companies: An empirical study from insurance sector of Pakistan -The effect of intellectual capital on firm performance: an investigation of Iran insurance companies -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. -Companies in the life insurance industry are encouraged to successfully evaluate and improve knowledge management performance to bring about radical change in the existing state of affairs and to develop future strategies efficiently and solidly. -IC influence on Financial Performance in the insurance companies. -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. - 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. Investigation on employees’ innovation in insurance companies is particularly interesting. This is because, in the previous study, researchers already have analyzed the relationship between IC and innovation (Pardede, 2010) and also, the relationship between innovation and firm performance (e.g. Bowen et al., 2010; Cambra-Fierro et al., 2011; Cassia et al., 2007; Freel and Robson, 2004; Gopalakrishnan, 2000; Medina and Rufín, 2009; Ogbonna and Harris, 2003; Vincent et al., 2005). But, complex investigation into the relationship between IC, innovation, and firm performance, in insurance companies has not been conducted yet. Based on the research findings by Chen and Chen (2005) evaluation and improvement of KM performance is often promoted particularly in companies within the life insurance industry. Widén-Wulff and Suomi (2007) explored how Finnish insurance companies share organizational knowledge. Their analysis shows that effective knowledge sharing positively correlates with business success in the considered insurance companies. Appuhami (2007) investigated the impact of IC on investor's capital in Banking, Finance and Insurance Sector of Thailand and found that IC had a significant positive relationship with its investors’ capital gains on shares. The finding indicates that an enhancement of the knowledge base of IC and development of its concept enhances the achievement of competitive advantage in emerging economy. However, Chen and Chen (2005) noted two main observations in life insurance industry in Taiwan. First, it is one of the main mechanisms that could significantly exert its effect on the Taiwanese economic growth; and second, knowledge needed for high performance itself. Furthermore, the results of study by Pardede (2010) has shown that IC influences financial performance in insurance companies in Indonesia. In a subsequent step, we determine with Eq. (2) the firms IC evolvement over a given time period by applying the calculated accumulation rate and the amortization rated. The profitability of the firm is defined as its return on asset. Although, a number of studies have focused on IC concept, particularly in the IT and financial sector in various countries, but Alipour (2012) believed that there is a lake of both theoretical and empirical study on IC in Iranian insurance sector. However, the researcher stated that in Iran, IC studies on the other sectors are still weak and limited. While, at the same time hypothesis that Iranian insurance industry does or does not focus on IC remain ambiguous. Based on the above discussions, the major concern of this study is to investigate the effect of IC and innovation activities on performance of insurance companies in Iran. 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. 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). 6. 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. Accordingly, many proponents assert that the “Product-based Economy” and “Retail Economy” have been converted to the “Knowledge-based Economy” (Alcaniz et al., 2011; CambraFierro 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. 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). 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. On the other hand, Augier and Teece (2005) believed that organizations which do not have any plans to discover and manage their IC will face unwanted consequences. 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. 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