Achieving Innovation in a Regulated Industry

Pathways for insurance companies to realize innovation Ailen Okharedia


Achieving innovation in an industry that is heavily regulated can be challenging, and there are numerous reasons why. First of all, regulation by definition imposes restrictions on what is allowed—and for good reason in many cases. These restrictions place a limit on what is possible. Additionally, there are direct costs to comply with regulation. This includes the resources and tools needed to make sure company practices do not fall foul of existing regulation. In a world of limited resources, spending more assets on achieving compliance may mean fewer resources are available to invest in innovation.

Furthermore, a potential indirect cost of regulation is that it is likely to foster a mindset, way of thinking and culture that are counterproductive to truly revolutionary innovation. This article will explore this topic in more detail.

The Impetus for Change

The COVID-19 pandemic has accelerated the digitization agenda for insurance companies. There are real challenges with applying traditional means for executing a sale, performing initial underwriting or assessing a claim in an era of social distancing. As individuals and companies have done their best to adhere to necessary precautions at this time, the need for insurers to accelerate their digitization journey has emerged.

The long-term impacts of the COVID-19 pandemic on customer expectations going forward are still unknown, but an important trend to date is an uptick in e-commerce. This upward trend is unlikely to dissipate—at least in the short term—so insurers need to find ways to respond to changing customer behaviors and expectations. This is a good time for insurers to take a step back and think about how best to set themselves up for success when it comes to achieving their innovation goals.

Insurance regulation is broad and addresses many aspects of how an insurer does business. For example, insurance regulation mandates that companies that seek to conduct the business of insurance are appropriately set up and licensed. Insurance regulation affirms that the products sold are appropriate and do not conflict with existing regulations. It also requires insurers to maintain an appropriate level of financial health.

Regulation is important, as it builds public confidence in the insurance industry. Public confidence is critical for an industry that essentially sells a promise to fulfill a future obligation. Without public confidence, we simply don’t have an industry. In fact, public confidence in the industry creates a platform for new entrants that are disrupting the industry.

Some argue that insurers have fallen behind most other industries when it comes to achieving digital transformation. Even compared to other financial services that have accelerated their digitization transformation—such as banking, personal savings and investments—the insurance industry has lagged behind. The banking and investment sectors have sought to rethink how they do business and how they engage with their customers, and they have implemented end-to-end integrated solutions that ensure a seamless customer experience.

For the most part, insurance companies’ digitization agenda has been limited to moving what they currently do to a digital platform, as opposed to rethinking what they currently do and how they do it to make it more impactful by taking advantage of new capabilities unlocked by advances in technology. It should be noted, however, that there are unique challenges for insurers given the personal and emotional nature of buying insurance, particularly life insurance.

Types of Innovation

Before delving further into details on how insurers can set themselves up for success to achieve their innovation objectives, it is worthwhile to establish a baseline on what innovation is and the different types of innovation. Broadly speaking, innovation can be divided into two categories:

  • Incremental innovation. As the name suggests, incremental innovation is a slight improvement on a current approach. It is a gradual build-up of little improvements that result in better, faster and cheaper performance than in the past.
  • Breakthrough innovation. This category is innovation that is revolutionary and often has disruptive consequences for the industry. Breakthrough innovation involves a complete reimagining of what is possible.

As mentioned, an industry that is heavily regulated may make reimagining what is possible extremely difficult. Insurers should consider taking different approaches to achieve their objectives for incremental innovation and breakthrough innovation.

For both types of innovation, it’s important to create an innovation strategy that is aligned to the broader company strategy and risk appetite. A company’s strategy outlines its vision or plan to be successful in the market. It lays out its approach to create and maintain its competitive advantage over its peers. This provides the compass to inform the innovation strategy and the focus areas or priorities for innovation.

Companies that consistently outperform the market over the long run know they can’t be good at everything. Such companies are laser-focused on their competitive advantages and what they do well. As an example, to the extent that an insurer’s competitive advantage is its current underwriting capabilities, then perhaps that should be the focus area or priority for its innovation strategy. In this example, the company’s innovation strategy may be centered around doubling down on the future of underwriting if that is the competitive advantage it seeks to maintain—a move from initial underwriting to continuous underwriting, fluid-free underwriting and so on.

Due to its nature, incremental innovation is best achieved through internal efforts. Internally led efforts are more effective because making gradual improvements to existing practices often requires a deep understanding and appreciation of existing practice—what we do, how we do it and why we do it the way we do. Effective collaboration among internal research and development (R&D) teams and the business can generate appropriate returns on incremental innovation efforts.

An internally led effort does not mean the absence of external resources, however. To the contrary, external resources can complement internally led efforts and may provide much-needed subject-matter expertise or offer skills or experience that may not be available internally. External resources also can be used to provide necessary bandwidth that may not exist on the internal team.

Incremental innovation often is done within the constraints of existing regulation. Gains from this form of innovation are generally moderate at best, but the burden of regulation doesn’t tend to overly inhibit progress.

Breakthrough innovation, on the other hand, is best achieved through externally led efforts. This is particularly true for industries that are heavily regulated. As mentioned, one of the indirect costs of regulation is it can foster a mindset, way of thinking and culture that can be counterproductive to what is needed to achieve revolutionary innovation.

The emergence of InsurTech firms, which are often led by individuals from other industries, provides a breath of fresh air. These companies and individuals can help traditional insurance carriers reimagine what is possible for how they conduct business. This is due to the fact that such individuals and companies are not inhibited by years of insurance industry knowledge and experience of how things have always been done. They are free to think of an ideal future state and use that as a starting point for a new solution.

Of course, any final implemented solution must not fall foul of regulations. In fact, one of the challenges of breakthrough innovation is often the requirement that regulations must be changed. In addition to the costs of revolutionizing systems or upskilling personnel, a change in regulation creates the burden of demonstrating a benefit to policyholders, the improved stability of an insurance company or a benefit to the industry as a whole. And that takes time. Companies committing to the path of breakthrough innovation may be committing to a notable investment that often requires partnering with InsurTech firms and/or leveraging innovations from other industries to accomplish their goals.

The first wave of InsurTech firms was seen as competition or a source of dread for incumbent insurers. However, what could be termed “InsurTech 2.0” today is largely the exploration of partnerships between InsurTech firms and incumbents, where the InsurTech firm and the incumbent work together to achieve a common objective. Incumbents can achieve their breakthrough innovation objectives by partnering with an appropriate InsurTech firm that is focused on solutions that align with the incumbent’s broader company strategy and help it build and maintain its competitive advantage in its area of strength. Similarly, InsurTech firms get the benefit of partnering with an incumbent that has a deep understanding of the industry, regulations and general market environment. It has the potential for a win-win relationship.

Another example of breakthrough innovation being achieved through externally led efforts is in the form of industry groups or collaborations. A good example is the Blockchain Insurance Industry Initiative (B3i) consortium that is owned by a group of more than 40 (re)insurers. This consortium was established with a vision to see the insurance market deliver better solutions for end consumers through faster access to insurance with less administrative cost.

Opportunities exist to explore breakthrough innovation for the insurance industry as a whole through further collaboration. Breakthrough innovation solutions developed through industry groups may be more effective at getting regulatory buy-in, especially where tweaks to existing regulation are needed to move forward with such solutions. This can be helpful and necessary when proposed solutions result in a better outcome for the end consumer, such as reduced costs and a better customer experience.

Expanding the Role of the Actuary

Keeping the end consumer in mind should be at the heart of any breakthrough innovation strategy. Technological advances and new sources of data make new customer engagement models possible. Actuaries working in traditional roles at insurers often have been far removed from the end consumer and mostly focused on back- or middle-office activities. However, technological advances have the potential to blur the lines between front- and middle-office activities. For example, the potential to move from initial underwriting models that most insurers use today to a continuous underwriting model will blur these lines. There are opportunities for actuaries at insurance companies to get closer to the end consumer and expand their role.

Tesla’s approach to innovation includes having engineers front and center in the design process. Its engineers work closely with the design team to develop an appropriate product for the end consumer, instead of the traditional approach of using an iterative process where the designers create something only to later test it with the engineers for feasibility. Tesla found its approach, often referred to as “design thinking,” to be a more effective design process.

One can think of actuaries as the engineers of an insurance company. Similarly, we can be more involved in the design process when the end consumer is being considered. This expands the role of the actuary to front-office activities, which in turn has the potential to increase the speed of innovation in the industry.


The challenges to achieving innovation in a heavily regulated industry like insurance can be overcome by identifying the different types of innovation and establishing the appropriate strategy for each. Incremental innovation is best achieved through internally led efforts, while breakthrough innovation is best achieved through externally led efforts. Externally led efforts for insurers may occur through partnerships with InsurTech firms and industrywide collaborations. But remember, any innovation strategy must be aligned with a company’s overall strategy and risk appetite.

The rise of InsurTech caused a wave of disruption in the insurance industry. This is an exciting era for insurance, and actuaries have an opportunity to expand and redefine their roles at an insurer in these changing times.

Ailen Okharedia, FSA, MAAA, is a director with PwC Actuarial Services and is based out of New York City.

Many thanks to Jeff Klanderman, FSA, MAAA; Steve Walsh, FSA, FCAS; Yusuf Abdullah and Tim Koenig, FSA, MAAA, for their contributions to this article.

Copyright © 2021 by the Society of Actuaries, Schaumburg, Illinois.