State insurance commissioners, NAIC model laws, and risk-based capital requirements create a framework where 'move fast and break things' isn't just inadvisable, it's potentially catastrophic. At the same time, insurtech startups are capturing more and more of the millennial market.
This generation is using technology-first solutions, such as Lemonade, due to their mobile-first preferences.
For starters, venture building allows insurers to create new business models and test innovative solutions within a structured framework outside of their core business functions so they don't have to make big bets on unproven concepts internally. Instead, they can build separate entities with dedicated teams, clear metrics, and defined milestones. This containment limits potential losses while maximizing learning opportunities.
Within these startups, teams can run what we like to refer to as "fast, cheap, and weird" experiments -- experiments that challenge the status quo and prove that there are ways to do things differently -- because there are fewer legal hurdles and regulations that must be followed. In business, success comes from disruption, but disruption means risk. Startups are the best way to experiment and deploy this risk. For life insurers, this might mean testing blockchain-based beneficiary payments, experimenting with wearable device integration for dynamic pricing, or piloting simplified underwriting that approves policies in under 10 minutes. These experiments would require years of regulatory preparation if attempted within the core business.
Risk can also seem more digestible if it's distributed across a few ventures. By building multiple startups simultaneously in a "venture studio," insurers can spread the risk across a portfolio of innovation bets. Though it's possible that some will fail, the ones that succeed can generate outsized returns.
Venture-backed startups offer an advantage over other innovation tools because organizations maintain a high level of control throughout the process, so if something isn't working, they can easily pivot and try something else. This is the difference between working with a venture studio and trying to innovate within a corporate environment. Corporate innovation fails because it operates within the constraints of the corporation. The venture building approach leverages proven processes that come with clear success metrics and defined strategies.
Another advantage of venture building is the focus. Building a startup means that your team can concentrate on the core business while more strategic options are being developed outside of your foundational operational scope. Because it's a separate entity, there are no resource conflicts or distractions from established priorities. These two units operate separately so they can each excel at what they do.
On top of all of this, this structure means you're able to fund these investments off the balance sheet without a hit on your P&L. For life insurers managing billions in statutory reserves in today's low interest rate environment, venture building offers a path to generate meaningful returns on surplus capital while developing capabilities that could eventually enhance core operations, all without impacting risk-based capital ratios or triggering regulatory capital requirements. Right now, corporations are sitting on more capital than ever, but they are going out of business faster. This is a way to optimize balance sheet investments for de-risking the disruption of your entire business model.
The stakes are particularly high for life insurers. While property & casualty companies can adjust pricing annually, life insurance involves decades-long commitments with mortality and morbidity assumptions that must prove accurate over time. The carriers that survive the next decade will be those that can innovate at startup speed while maintaining the actuarial discipline and regulatory compliance that the industry demands.
The insurance industry is transforming, and staying abreast of these changes will require taking some risks -- but that's not a bad thing! With the right strategies in place to thoughtfully leverage risk through a venture-built startup, the possibilities for innovation in the space go from constrained to endless. It's time for insurance agencies to stop viewing "disruption" as a dirty word and embrace it by running as many fast, cheap, and weird experiments as possible to get to the solution no one has thought of yet. Through venture building's innovation on the outskirts approach, you can drive long-term, future-proofed success that could make a lasting impact on the industry.
Elliott Parker is CEO of Alloy Partners, a venture builder that co-creates advantaged startups with corporations and entrepreneurs. He previously launched dozens of startups at High Alpha, the pioneering venture studio, and helped Fortune 100 firms design and execute growth strategies at Clayton Christensen's firm Innosight. Elliott is passionate about helping big organizations move fast and think boldly -- and wrote The Illusion of Innovation to inspire transformation through bold experimentation.