FSI Member Spotlight, Episode #1: How Regulations Impact Innovation in Insurance
For the inaugural episode of our Financial Services Innovators (FSI) Spotlights, Lance Vaughn, Praxent Senior Director of Innovation sat down with Caribou Honig, Chairman and Co-Founder of Insuretech Connect (ITC). Caribou is passionate about the impact of technology on insurance and the workplace, having also co-founded HR Transform while serving as Partner at Semper Virons, a VC firm focused on future of work investments.
In their FSI Spotlight conversation, Caribou and Lance unpack the topic of regulatory restrictions and their impact on innovation in the insurance industry. Caribou helps put this topic in context, citing a 2017 ITC conference in which over two dozen states were represented at the event. This allowed VCs, execs, startups, and others in the industry to network with the regulators, attend presentations together, and make lasting professional connections. The result? Innovations that have since stemmed from this event are directly informed, driven, and enabled by the regulators.
But what about the constraints of regulations on the insurance space? With a decade and a half background in banking, Caribou is strongly positioned to make an informed comparison. In his view, insurance and insurtech aren’t particularly hindered by regulations relative to other financial services. That isn’t to say insurance is a ‘free for all’ compared to other industries, of course — rather, as Caribou points out, be mindful of hardline requirements and stay ahead of the regulators by anticipating their goals and intentions behind setting new regulations. Ultimately, while regulations may at times slow down innovation, Caribou believes they are there to ensure minimal ‘good hygiene’ in the industry, while also protecting the consumers. And while 2017 may have seen many startups trending towards an MGA structure, the end of 2020 shows the product-market fit leans towards fully-regulated carriers.
When it comes to the long term, innovators in the insurance space would do well by investing in the right types of systems, technology, and partnerships to move forward successfully — while also investing in the right types of risk. Caribou highlights underwriting as a particular pain point, noting that it is the innovator’s priority to ensure the taxpayer isn’t left holding the bag for underwriting mistakes. Another tip for successful innovation in a heavily regulated startup? Empower a Chief Compliance Officer — someone besides the CEO — in your organization. This role isn’t meant to slap wrists, but to act as a conduit between the ever-evolving side of regulations and the teams responsible for key product decisions on the startup’s side.
The number one ingredient Caribou recommends? The ‘API-ification’ of insurance. While there are numerous components to the value chain in any given insurance company, these companies are already quite comfortable with allowing third parties to interface with parts of that chain. In short, if your legacy system has not yet been modernized to be API-friendly, you risk missing out on not only enhanced internal capabilities, but those afforded by being enabled to directly plug into the outside modules too.
- Highly-regulated doesn’t necessarily mean highly-constrained; regulations can directly inform, enhance, and enable innovation in the insurance space.
- While trends can be difficult to predict, product-market fit points to favoring fully-regulated carriers over MGA structured startups.
- Successful innovation involves taking smart risks, paying special attention to underwriting, constant vigilance of regulations, empowering Chief Compliance Officers, and above all, the API-ification of insurance software
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