The Innovator’s Dilemma in Insurance

Innovative may not be the first word that comes to mind when people try to describe the insurance industry. However, the record-breaking growth of MGAs or Program Administrators in insurance may prove the skeptics wrong.

In “The Innovator’s Dilemma,” prof. Clayton Christensen very eloquently shows how most established firms do not pursue disruptive technologies because of the small size of the opportunity in the short term. Christensen then recommends firms establish independent, focused units within a company that are dedicated to exploring disruptive technologies uninterrupted. These units need to operate autonomously, free from the constraints of the parent company’s existing processes and structures. Key characteristics of these teams include:

1. Autonomy: Independent from the core business to prevent existing processes from stifling innovation.
2. Focus: Dedicated to a single project or goal to ensure undivided attention and resources.
3. Flexibility: Able to experiment and iterate rapidly without bureaucratic hurdles. The firm should not expect immediate returns.

Autonomy, focus, and flexibility. Sounds familiar? It’s three basic characteristics of what carriers see in MGAs.

The Role of MGAs in Insurance Innovation

Managing General Agents (MGAs) are specialized entities that operate with delegated authority from insurers, allowing them to underwrite policies and manage other critical insurance functions. This model has gained significant traction due to its agility and ability to address niche markets effectively. The growth of MGAs illustrates the broader industry trend towards decentralization and specialization, enabling more tailored and responsive insurance solutions.

For the non-initiated reader, MGAs get an insurance carrier to agree to let the MGA do the underwriting for them. The formation of a separate business entity and the delegated authority relationship create the autonomy and flexibility needed. When the carrier is multi-tasking multiple lines of business and a bunch of corporate fluff, the MGA comes in and conquers markets with small, specialized, focused teams.

MGAs are great but can’t be the only solution

Creating MGAs is not the only strategy for fostering innovation in insurance. From the carriers’ perspective, there are a few down-sides for using MGAs as the sole model for innovation and growth:

1. Talent: the innovative, dynamic, MGA world incentivizes the most dynamic, innovation-driven, nimble, risk-taking talent to move out of the carrier world and into the MGAs. As carriers lose talent to their MGA partners they only exacerbate the innovation resistance problem among their workforce.
2. Exclusivity: MGAs could be working with other carriers instead. The best MGAs have more choice and can get higher commission, leaving the carrier with smaller chunks of the premium pool, other things equal. Keeping the book in-house would have yielded better financial results.
3. Incentive misalignment: MGAs are owned by other people that may have different objectives than only creating more premiums and higher underwriting profits. Some VC-backed MGAs, for example, have overly weighed premium growth over any other metric to allow them to raise more capital, at the cost of abysmal profitability.

So while the MGA model has been a wonderful vehicle to create field experiments in launching new products, they can’t be the only solution for carriers to innovate. From a carrier’s perspective they are somewhat of an outsourcing of your insurance innovation efforts.

Autonomous Product Teams

Another effective approach is to create dedicated Autonomous Product Teams within the carrier. An “in-house” MGA of sorts. By empowering these teams to operate independently, they can develop and test new products, strategies, and technologies more rapidly.

Key Benefits of Autonomous Product Teams:

1. Focused Expertise: Teams can deepen their domain expertise to the specific niche you assign them to, crucial for understanding and addressing unique market needs.
2. Less Red Tape: Making Autonomous Product Teams “a thing,” allows you to create spaces—islands off the mainland—with minimal bureaucratic hurdles. These teams can quickly adapt to changes and pivot strategies as needed.
3. Freedom to Experiment: When you isolate the team and the technology, you create a risk-reducing mechanism by design. MGAs, like any startups, make mistakes. The trial and error is inherent to the innovative process. The separation of the dedicated team builds barriers around it so that mistakes stay small and controlled and don’t propagate into catastrophic failures. Being isolated from traditional risk-averse culture and legacy tech stacks, the Autonomous Product Team can fearlessly experiment with new ideas and technologies.Autonomous Product Teams are not your regular Innovation Teams

Many insurance carriers have innovation teams. In most cases they are very different than the autonomous product teams I am proposing here. Classic carrier Innovation teams usually seek new startups to match them to business units within the carrier. While there have been a number of successful such matches made, the innovation team’s tech exploring priorities often acts as a solution looking for a problem. Lack of ownership and a clear common goal where priorities align also hinders success. In the end, most of them are not solving for the problem of launching new insurance products and creating new premiums that move the needle.

The Future of Insurance Innovation

As the insurance landscape continues to evolve, the ability to innovate rapidly and effectively will be a key differentiator for successful carriers. Whether by supporting MGAs or by creating Autonomous Product Teams, insurers can position themselves at the forefront of industry transformation to deliver superior value to their customers.

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