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Innovation vs. Governance - Can They Coexist?

By Paul M. Fedchak and Stacy Koron

Product Matters!, June 2021


Editor’s Note: This article was previously published on the Milliman website in September 2020. It is reprinted here with permission.


Big data, technology, and demographic changes have increased competitive pressures to the point where innovation has become essential for insurers. Nevertheless, innovation is often at odds with many insurers’ governance structures. Governance seeks to define a framework under which business decisions are determined and executed. In contrast, innovation by definition seeks new methods, ideas, and products. Viewed by many as a natural, or even acceptable, state of affairs, this tension can edge out a potentially profitable initiative, recasting it into a familiar mold with few growth possibilities. However, does the process really have to be that way?

Governance and risk management typically dominate many insurers’ corporate cultures and with good reason. Insurers have a hefty regulatory burden, especially with the implementation of the Own Risk and Solvency Assessment (ORSA) and other enterprise risk management (ERM) regulations in recent years. Current events have no doubt highlighted the value of continual monitoring and stress testing business within a governance framework. In tandem with regulatory requirements, insurers need to balance shareholder and consumer demands as they consider the ever-present specter of reputation risk caused by some inadvertent misstep. A poorly designed or implemented innovation can bring about severe consequences.

The consequences of "standing in place" can also be severe. Changing consumer preferences and technology are driving much of the need for innovation and, as the emergence of COVID-19 has shown, the most vulnerable parts of an industrial sector can be quickly brought down by an unexpected event. “Adapt or die” has become an urgent call to action.

A Cultural Divide

This “adapt or die” mandate is often assigned to an innovation team, which is charged with generating a flow of ideas that will differentiate the company. Meanwhile, a governance team is often charged with evaluating every nuance. Whether it’s entering a new product space, upgrading an existing product, or bringing to life a novel idea, innovations carry risk that, in some organizations, may undergo a heavy vetting process with multiple layers of actuarial, legal, and tax review. This governance, most often, uncovers genuine vulnerabilities in product innovations.

Unfortunately, overly cautious governance can also create a continual, recycling loop of reviews. Each layer of review requires the innovator to balance the trade-off between the desired innovation and the potential negative review outcome of being sent back to the drawing board. This dynamic negatively affects innovation in two ways:

  1. Each layer of review prolongs the development process and endangers the primary value proposition of innovation—being first to market.
  2. It pulls innovative development back toward terrain that is more familiar and within the insurer’s comfort zone. Innovation is shed with each layer of review and moves closer and closer to a traditional approach of operating.

This outcome often stems from a corporate culture that sees itself as innovative, but in reality is less so. The perception of the insurer’s culture as a risk taker can be out of touch with the reality of its operation. This disconnect often results when the development and evaluation of innovation and governance practices are isolated from one another. It can also fuel conflict between innovation and governance. (See figure 1)

Figure 1
A Cold, Hard Assessment

Innovation-dominated organization

Governance-dominated organization

Does the insurer have a culture where the primary question is “why” things are done a certain way?

Does the insurer have well-documented project parameters and expectations?


Does the organization have the flexibility to try new ideas, even if they might fail?

Does the company have robust audit and peer review procedures in place, and broad market expertise to perform them?

Does the company have proprietary ideas or technology?

Does the organization prefer to be an influencer or “early adopter” of regulatory change?


Does the company value creativity?

Does the company heavily weight tail risk in its in-force and new business management?


Regardless of the culture, change and innovation carry some level of risk that needs to be managed. Operating otherwise is undoubtedly perilous. However, the tension between innovation and risk management does not need to be divisive or counterproductive. This dynamic can instead be a positive force that promotes innovation as long as the shared goal is to manage an acceptable level of risk rather than completely eliminate it.

A New Dynamic

Rethinking the dynamic between innovation and governance can follow a number of strategies. At its core, a successful strategy needs to abandon the idea of innovation and governance as two positions along a cultural spectrum and instead establish an integrated process that links innovation and governance. Taking this approach avoids many of the drawbacks that spring from formal reviews during which an idea must suddenly overcome a major regulatory or compliance hurdle. This system could take the form of more informal communication between the two functions, for example. An alternative strategy could include the recruitment of a person or team with a governance background but with an innovation mindset who can move seamlessly between the two functions and participate in discussions about a new or emerging concept as it arises. Integrating the process could help avoid the pass-fail milestones of a formal review process or ensure that issues likely to cause failure in review are minimized in advance. This increases the flexibility and agility of the development process.

Other supporting strategies might include:

Defining governing principles in advance. Defining governing principles in advance creates a governance space for an innovation team to work within rather than one or more hurdles for the innovation team to clear. Working within a set of predefined principles naturally turns governance review from a hurdle into a formality. The onus on the governance function shifts from finding issues in a concrete plan (much easier) to anticipating issues of a new concept (more challenging).

  • Uncovering the root cause of objections. Innovations often run into concerns that can seem, and perhaps are, relatively insignificant. The question needs to be answered whether objections share a common feature or perhaps originate from a common cause, such as a larger compliance issue. It can be easier and timelier to confront the larger issue than to run circles around the smaller ones.
  • Building a diverse portfolio of products. More innovation naturally mitigates the risk of any single innovative idea because the collective failure of a broad suite of diverse products is less likely. A portfolio of products with different types of risk gives a company some flexibility in deciding which innovations to pursue, depending on its resources, markets, and risk tolerance. It also allows an insurer to grow into an increasing level of risk.
  • Building a learning culture. Whether it is a complete product meltdown or a poorly implemented product launch, failure provides a fertile learning environment. Did product profitability depend too heavily on one source of revenue? Were assumptions too optimistic? The goal is to improve the process in the next effort rather than merely develop a list of missteps to avoid.
  • Learning how to fail fast. In a truly innovative culture, failure is inevitable. A key tenet of governance needs to be a culture of embracing failure and minimizing repeated failures. The ability to assess emerging data quickly is critical to curbing losses and can help governance gain a level of comfort with the ability of the innovation team to manage risk.
  • Defining success and failure in advance. A product can only fail fast if its success or failure is first clearly defined. The company can only be ready to invest resources in a successful venture if it is known to be a success. Knowing when to act and when to wait out a rocky product launch is tricky, especially after the enormous effort that goes into the startup and development of a product. However, recognizing when it is time to pull the plug is essential to a product development strategy.
  • Developing an exit strategy. The development of an exit strategy needs to be part of the overall development process. Having a plan B or even plan C can give risk managers assurance that the risk can be managed effectively even in a worst-case scenario. That can help to overcome some concerns during the development process.
  • Embrace innovation as a success. While there will always be room in the insurance industry for companies that flawlessly execute a traditional approach to traditional products, innovation is key to ongoing success. Embracing the act of innovation itself as a success, rather than judging solely by its outcome, breeds a culture for long-term success. A strong integration of innovation and governance should strive to define success by the number of new ideas making it to the market while using the strategies above to mitigate risk.
  • Celebrate diversity. There is comfort in the familiar, both with people and ideas. But many times the best creativity stems from a fresh perspective. Diversity of thought is fundamental to seeing problems and their solutions from new angles. A team with different professional backgrounds and life experiences will also identify more problems and clever solutions.

Rather than standing at opposite ends of the development process, innovation and governance need to be closely integrated. Like gears of a wheel, these connections can move the process forward, instill confidence in product development, and increase the possibility of bringing a successful product to the market.

Insurers tend to fall along an innovation-governance spectrum rather than at one end or the other. Identifying a company’s dominant risk culture can help to establish risk parameters that can guide innovation and avoid unnecessary conflict as ideas move forward.


Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.

Paul Fedchak, FSA, MAAA, is a Principal & Consulting Actuary with Milliman in the Indianapolis office. He can be reached at

Stacy Koron, JD, CLU, is a Principal & Compliance Consultant with Milliman in the Tampa office.  She can be reached at