Innovating Inside the Box - An Exploratory Comparative Case Study of Regulations’ Impact on Innovation in the Insurance Industry

Abstract: Innovation in general is an important driver for economic growth and consumer welfare. However, with the purpose of consumer protection and ensuring stability of the financial system, the insurance sector is bound to follow stricter regulations than most other sectors. The purpose of this study is to explore and gain insights into how insurance companies perceive, work with and are affected by regulations in relation to innovation activities. The research question is defined as How do regulations impact insurance companies’ innovation? By carrying out a qualitative explorative comparative case study of two Swedish insurance companies, understanding of innovation in a regulated industry from a company perspective is expanded. The study revealed that regulations impact the case companies in four major ways. (1) Regulations can prevent innovation and reduce customer value; regulations close off avenues of innovation. Radical innovation seems especially difficult to pursue, making incremental innovation most prevalent. The absence of innovation negatively affects customers through higher prices and inferior products. (2) Regulations require additional resource investments; guiding an innovation project through the regulations requires both expertise, knowledge and extended project development times. As a result, both time and cost requirements are increased, effectively reducing the incentives to innovate. (3) Regulations are negative for creative performance; the regulations act as boundaries that limit the perceived creative space. Frequent regulatory setbacks demotivate employees, and overall creativity is reduced as a result. (4) Regulations can stimulate and shape innovation. Regulations have the power to change the market dynamics. Especially increased competition drives innovation. Innovation may be forced by regulation or steered into different directions due to regulations. While the findings in themselves are not generalisable, interesting points for further research are identified. The main contribution of this study is thus the broad view attained of innovation and regulation in the insurance industry. While it shows that it is possible to pursue innovation inside the box, defined by regulations, there is a need for further research on how regulated companies best work with innovation and how effective regulation may be developed in order to find a balance between protection and innovation that best benefits society and the economy.