Achieving Innovation in a Regulated Industry

This is an exciting era for insurance, and actuaries have an opportunity to expand and redefine their roles in these changing times.


Achieving innovation in an industry that is heavily regulated can be challenging. First of all, regulation by definition imposes restrictions on what is allowed — for good reason, in many cases. Additionally, there are direct costs associated with regulation, and spending more on achieving compliance may mean fewer resources are available to invest in innovation. Regulation may also foster a way of thinking and culture that are counterproductive to truly revolutionary innovation.

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, the need for insurers to accelerate their digitization journey has emerged.

The long-term impacts of the COVID-19 pandemic on customer expectations are still unknown, but an important trend to date is an uptick in e-commerce. This 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 to achieve their innovation goals.

Insurance regulation is broad. For example, it mandates that insurers are appropriately set up and licensed, that the products sold are appropriate and that insurers maintain an appropriate level of financial health.

Regulation builds public confidence, which 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.

Some argue that insurers have fallen behind most other industries when it comes to achieving digital transformation. Even compared with other financial services that have accelerated their digitization transformation — such as banking, personal savings and investments — the insurance industry has lagged. 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 have focused on moving what they currently do to a digital platform, as opposed to rethinking what they currently do and how they do it. (There are, of course, challenges given the personal and emotional nature of buying insurance, particularly life insurance.

Types of Innovation

Broadly speaking, innovation can be divided into two categories:

  • Incremental. As the name suggests, incremental innovation is a gradual build-up of little improvements that result in better, faster and cheaper performance.
  • Breakthrough. This category is revolutionary and often disrupts the industry. Breakthrough innovation involves a complete reimagining of what is possible.

Insurers should consider taking different approaches to achieve their objectives for incremental innovation and breakthrough innovation, but, for both, it’s important to create an innovation strategy that is aligned to the broader company strategy and risk appetite. As an example, to the extent that an insurer’s competitive advantage is its underwriting capabilities, then perhaps that should be the focus for its innovation strategy. The company might double down on the future of underwriting — generating a move from initial underwriting to continuous underwriting, fluid-free underwriting and so on.

See also: COVID-19 Highlights Gaps, Opportunities

Incremental innovation is best achieved through internal efforts 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.

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, given that the culture can counterproductive for 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, because they 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.

One of the challenges of breakthrough innovation is that regulations often must be changed. That means demonstrating a benefit to policyholders, improving the stability of an insurance company or providing a benefit to the industry as a whole. And that takes time. Companies committing to breakthrough innovation may be committing to a notable investment that requires partnering with insurtech firms or leveraging innovations from other industries.

The first wave of insurtech firms was 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.

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 tries to help deliver better solutions for 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. Innovations developed through industry groups may be more effective at getting regulatory buy-in, especially where tweaks to existing regulation are needed.

Expanding the Role of the Actuary

Keeping the 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 can blur the lines between front- and middle-office activities. For example, moving 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 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 process.

One can think of actuaries as the engineers of an insurance company, and 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 can increase the speed of innovation in the industry.

See also: How to Outperform on Innovation


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.

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.

This article first appeared in The Actuary magazine online, January 2021

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