Innovating in Fort Knox

COVID-19 has been an urgent push for insurers looking to accelerate the time to market of their products and services. But innovating rapidly and successfully in this highly regulated environment comes with its own set of challenges. Here’s a primer.

The Dutch insurance industry has been hurtling into a perfect storm of converging market threats. One of the responses we see in the market is in the investments in Innovation focused both on customer experience and organisational improvements (e.g. Digitalisation & Operational Excellence.  But the buck doesn’t stop there.

Insurers should also be looking to speed up the time to market of their innovations, while staying within the boundaries and limitations imposed by regulators. The impact of COVID 19 provides both the opportunity and the momentum to achieve this.

For incumbents, the apparent contradiction between innovating fast and colouring inside the lines raises the feeling of having to innovate in a regulatory environment which seems as impenetrable as Fort Knox. In this post we will share insights on innovating successfully in a regulated environment. 

Previously, we discussed how insurers are defending themselves against a perfect storm of converging market trends. Innovation is an offensive way of responding to the current market trends. It is a particularly useful response to the increasing customer expectations and the threat of new entrants, while taking into account continuously changing regulation.

In order to win in an ever-changing market, innovation efforts should be focused on customer engagement, new propositions, organisational transformation (e.g. Agile), compliancy, empowering employees, connecting front, middle and back offices and leveraging ecosystems (as we discussed here). Most insurers use Innovation Units^(a) to create value , or do so from within the business. However, a number of important challenges remain in the area of data (particularly its quality and availability), scaling innovation and getting innovations from incubator to business whilst having to deal with regulatory pressure. 

One of the main issues in innovation efforts for insurers is data quality and availability. New businessmodels – focusing on hyper personalization, prevention, solidarity etc – heavily rely on data availability and quality.

On the one hand, the data reside inside the insurer’s (legacy) systems. On the other hand, other data sources are of importance (e.g. weather data, traffic data). The challenge for Innovation Units is that often they are not responsible for the company’s internal data although they do rely on them heavily. Having to wait for the data department to deliver the desired data could lead to missing valuable business opportunities.

However, there is a method for innovation to get data needs higher up on the executive agenda. An interesting way of achieving this is by experimenting using public, anonymous or even fictitious data that may be created especially for the Innovation Unit.  It can then use those data to simulate how innovative initiatives would perform and forecast learnings and business opportunities. This can encourage executives to ramp up their efforts to get the right data in place as soon as possible. If done successfully, innovation can pave the way for data transformation in the ‘regular’ business. 

A frequently discussed question is whether the Innovation Unit should develop spin-ins, spin-outs or a combination thereof. Knowing that there is no right answer to this question, we believe that the Innovation Unit should in some way have a positive effect on the incumbent as a whole (see the data example above).

A vast number of Innovation Units aim to get innovations implemented within their existing business. In our work, we have seen Innovation Units developing MVPs rapidly, which subsequently stay on the backlog for longer than it took to develop the MVP. The main reasons we see this are:

1.       Limited business sponsorship/alignment at the start of the innovation process from the adopting Business Unit

2.       Security, regulatory, risk and compliancy issues as a result of limited involvement of the firm’s according departments and the regulators.

3.       Unclear and unvalidated business cases

So how can innovators align risk and regulation, internally as well as with the regulators?

Innovation and regulation may sound like paradoxical, but by taking the right steps it is possible to effectively innovate in a regulated environment. We propose that the Innovation Units orchestrate this process over the different innovation horizons by implementing the following tactics.

Tactic 1. Involve Compliance, Security and Risk from day one

An often-heard stance of Innovation Units is to keep Compliance, Security and Risk out as long as possible as they limit the creative process by imposing unnecessary barriers. However, it actually increase the chance of adoption success if you involve them right from the ideation phase. These departments can often help you understand the important requirements for the future and how to engage regulators on this journey. This prevents the Innovation Unit from spending a lot of resources to find out later that the chosen direction is impossible.

Note, however, that it is  time well-spent to first educate these departments on the innovation process and the steps to be taken before involving them in your creative sessions. In this way, they are enabled to help you realise your goals more effectively and efficiently.

Tactic 2: Discover the possibilities of involving and collaborating with regulators

For some experiments it may be useful to use the regulatory sand boxes that some local regulators offer. In the Netherlands, the AFM (Authority Financial Markets) and DNB (Dutch Banking Authority) created such a sandbox to offer more room for innovation by enabling financial parties to roll out innovative financial products, services or business models^(a). The sandboxes provide market players the opportunity to experiment whilst not being fully bound by regulations. DNB and AFM’s point of view is that they’ll focus on what rules are actually trying to achieve instead of applying unnecessary barriers.

Tactic 3: Start with public and anonymous/fictitious data to build a business case

Naturally, in the early stages of innovation, a lot is unknown and uncertain. Whilst this phase feels comfortable for innovators, regulators, business units and departments concerned with compliance, security and risk, generally feel less comfortable in this phase. This mismatch might lead regulators and the aforementioned department to raise barriers for the Innovation Unit.

One approach that has proven useful is for the Innovation Unit to do the first experiments using public and/or anonymous/fictitious data. In our experience, this is often just enough to create a first idea of the viability (mainly the technical operability) of a new proposition without being subject to too much regulation. With the obtained results, effective discussions can be held with the business units and the departments Compliance, Risk, Security and possibly with the regulators themselves.

This approach prevents discussions based on hypothetical situations and replaces them with worthwhile discussions. It especially helps to prepare the organisation and its regulators for the future when the new proposition and its business case is validated and ready to go live. By taking a “start small” approach, innovation and regulation go hand in hand and create an environment where innovations create value for the customer whilst keeping up with regulations. 

In this storm of converging market trends (including COVID-19), a lot of old conventions are no longer in place. If you haven’t started yet: we suggest trying to let innovation go hand in hand with regulation and innovate successfully in Fort Knox!