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In this episode of the Accenture Insurance Influencers podcast, InsureTech Connect’s Caribou Honig explains how incumbents can reduce the risk of investing in new solutions, the importance of talent and culture—and why failure and innovation go hand in hand.

Highlights

• Lessons learned from Caribou’s time in credit cards and lending: Talent and culture play important roles in driving a company’s strengths and weaknesses; failure is essential for innovation; sometimes it’s not enough to access data—you need to create data.  
• Lessons learned from Caribou’s time as a VC: A visionary leader can drive success or catalyze change in an industry; and positive selection is essential to creating strong business opportunities. 
• For incumbent insurers looking to improve their innovation capabilities, two options are to acquire a start-up or to build those capabilities in-house. Buying requires the incumbent to foster cross-pollination of the start-up’s innovation capabilities; building requires a look at operational and compensation structures. 

Creating a more dynamic future in insurance

Season two of the Accenture Insurance Influencers podcast takes a deep dive at insurtech. Scott Walchek explains Trov’s journey from direct-to-consumer offering to provider of white-label services for incumbents. Ruth Foxe Blader, a managing director with VC firm Anthemis, looks at what the insurtech industry needs to do for long-term viability.  

Risk, failure and innovation, with Caribou Honig

This is our third (and last episode) with Caribou Honig. So far, we’ve looked at the evolution of insurtech and the social implications of digital-first insurance products. In this episode, he explains how incumbents can take a page from the start-up playbook to innovate more effectively. 

The following transcript has been edited for length and clarity. 

Hello and welcome to the Accenture Insurance Influencers podcast. I’m your host, Eagranie Yuh. My guest today is Caribou Honig. Caribou is the chairman and co-founder of InsurTech Connect, as well as the co-founder of the HR Transform conference. Thanks for being here today, Caribou. 

It’s my pleasure. Thanks for having me.  

Your background spans multiple industries and I think that has interesting implications for what you’re doing today.  I wanted to start not quite at the beginning, but at Capital One, which is an organization that’s known for its data- driven focus. What did you learn there and how does it apply to what you’re doing now in insurtech? 

I really had the good fortune to cut my teeth for my career at Capital One. I started there in ‘96 and it was the heyday for the company, the hyper-growth years. I was able to extract a few lessons.  

• Talent and culture. As you build an organization, talent and culture drives both the strengths—and ultimately, the weaknesses—of a company. I still remember the founders allocated 20 percent of their time to interviewing candidates for the company, all the way through the whole history of the company. That was in order to make sure they were hiring the talent that they wanted. The impact of culture is something I still think about today from those days.  
• The importance of failure in company culture. There’s an anecdote I remember, that the CEO would put up what he’d call The Eureka List. It which was around how some individual had so boldly proclaimed that some idea was going to work. To be at the top of the Eureka List, you had to have had that idea championed and have it fail amazingly in the marketplace. This was actually meant to encourage people. This was actually a point of pride to be on the Eureka list, because if you weren’t sticking your neck out with ideas that could fail, then you weren’t doing your job.  
• Data and the scientific method. Capitol One is very data-driven as an organization, and a big part of that is the scientific method was really ingrained into thinking about how to operate the business. It wasn’t just using the data that was at hand, although it certainly did that, but how it created data, right? The notion that we have a hypothesis about how consumers are going to behave, how they’ll react to some offer, what their risk will be and once we’ve actually given them a product. And we may not know the answer, so let’s go ahead and do the test and create the data set for that.  

I think that’s really applicable actually to the insurance world as well, both the talent culture aspect and the notion of, you sometimes have to actually create the data rather than just access existing data.

There’s this reputation for financial services and insurance, in particular, as being quite risk-averse. So you’ve mentioned, first of all, this idea that in order to be on The Eureka List you had to fail. That’s pretty atypical, I think. And the scientific method entails not knowing the answer and going out to find it––I think it’s something that makes incumbents a little bit uncomfortable. Would you agree or disagree? 

I think it makes them very uncomfortable. I think that’s OK. When I think about incumbents that might have been around for decades or in a few places, centuries, they’re really good at resilience. They’re really good at risk management—and that’s not meant as a euphemism for “not actually good at risk.” They’re actually, really, quite good at risk management. 

And that applies for many, many banks and that applies for many insurance companies and the like. But usually, what they’re not structurally that good at––and there’s always going to be exceptions of course––is nimbleness and agility rather than resilience. They’re not going to be as good, typically, at smart risk-taking, right? At how to create a culture, how to build the talent pool, the product designs that facilitate taking risks, rather than managing risks. And that’s where you get these openings for the start-ups to come in, or other kinds of organizations, that can start to find pockets of opportunity and grow them into something interesting. 

That’s an idea that I’m sure we’ll be returning to later on in our conversation. For now, I’ll bring us back to our walk down memory lane. After Capital One you co-founded QED Investors, a boutique venture capital firm that had a focus on data-driven companies. So same question: what did you learn there and how does that apply to what you’re doing in insurtech today? 

Sure. There were probably two big lessons that I learned or got reinforced during my time at QED: 

• The impact of a visionary leader and how they can drive the success of a company or even catalyze change in an industry.  
• The importance of positive selection in providing us a strong pool of companies to select from, and invest in. 

First, start-up leadership. We had the good fortune to invest in many companies that had visionary leaders. Not every leader that we invested in turned out to be a visionary, and a handful were visionaries who maybe couldn’t execute on the vision all the time, but you could really see the impact that a singular, top-notch entrepreneur had on the outcome for the company. And it’s a little bit of classic VC wisdom, but I think it’s also true regardless, that you’re really backing, first and foremost, the entrepreneur. Everything after that comes secondary.  

The other lesson I learned—and this was an insight by one of my partners—is that at a certain point you start to become like a hammer in search of a nail. Where you start to do a lot of insurtech investing, you start to see everything like an insurance play.  

As VCs, what really struck us was the notion of positive selection as the key to the castle. We saw how so much of the job of investing was creating a brand and a value proposition about who we were as investors, so that the best entrepreneurs and best companies that were the best fit for us, would seek us out or get referred to us. That meant we could be pretty good at figuring out which companies were great prospects (and which ones weren’t), but also that we would have an amazingly good pool of companies to look at and select from when making our investments. 

It all comes down to: How do you drive some positive selection? That’s an unexpected lesson from the VC side that I think applies to all these risk businesses. 

There have been a lot of corporate VC arms sprung up as subsidiaries or associated businesses of insurance companies, trying to capture some of what boutique or private venture capital firms are doing. Do you feel like there’s a difference in how that business is executed? Are there places where maybe the smaller firms are better, the bigger firms are better, and what can they learn from each other? 

I really like and have been…I’ll call it surprisingly impressed, by the corporate VCs from insurance. I have to admit I go into it having a fairly skeptical, maybe even cynical, view of corporate VC. It’s hard, and they often are asked to serve too many masters at once. Their incentives are often wrong in corporate VC. They often have to have a line operator as one of the champions and that ends up messing up the timelines. But I’ve been really impressed that the corporate VCs in insurance are operating, for the most part, quite smartly—and not just from the perspective of industry knowledge, which of course they’ve got, but from a process standpoint. 

It’s back to being an adverse selection / positive selection question. If you’re an entrepreneur and you have a couple of term sheets from traditional, financial–type VCs and you’ve got the promise of maybe a term sheet from a corporate VC two or three months in the future (because of their process and timelines), you’re going to take the bird in the hand. Even if, everything else being equal, you prefer the corporate VC. 

That means that a corporate VC that has an unusually long timeline or an unusually onerous process is only going to get the entrepreneurs and the start-ups that the traditional VCs don’t give term sheets to. And that’s a recipe for adverse selection.  

I don’t know if it’s explicit in the mindset and thinking of the corporate VC, or if it’s just so deeply rooted in the DNA of insurance companies, the notion of “how do we avoid adverse selection?” But I think that they’ve gotten and internalized that lesson, and for the most part operate in a very industry-standard way. 

I think many of them have made great investments. There have been some real winners out there among the corporate VCs and insurance. So I like what they’re doing.

Within incumbent insurers, there’s a talent gap and challenges attracting younger workers. At the same time, the insurtechs tend to skew a little bit younger and are attracting younger people to the insurance industry. So what’s happening as incumbents and old-school workflows are coming together with younger workers and insurtech?   

When it comes to talent and culture, I think that insurtech is really good news for the industry as a whole. I firmly believe it’s drawing in an incremental talent pool that previously would not have been likely to consider insurance for their career. 

I think we can agree that insurance, as an industry, has a little bit of a brand problem. It’s either very stodgy and old-school or it’s lizards with an Australian accent. And I think that insurtech shines a spotlight on innovation opportunities.  

There are some real interesting ideas about transformation of this industry, particularly led by technology and particularly led by, in some cases, some leading-edge technology. I think that plays into the consideration set for people looking for work. Whether that has them graduating from a great college comp science program and going straight into a start-up, or going to an incumbent first, it almost doesn’t matter. As long as you bring the talent into the industry, then that talent will start finding ways to do great things.  

Now, you’ve got to make sure that the antibodies don’t come out if they go to the incumbents. If I’m really fired up about making a difference in people’s lives and I join an insurance company with 40,000 people and all my excitement gets snuffed out by the antibodies from people who’ve been there for 30 years…well, that’s a shame. 

I think that the most ambitious insurance companies that have been in the industry for decades or centuries, they do need to be really mindful that they’re creating the right environment. An environment where innovators and a next-generation, very different type of talent, don’t just feel at home, but can actually thrive. And that’s not an easy task from a change management perspective.

I think a lot of people focus on the technology: we need to be digital, we need to be customer-centric. But as you say, at the end of the day it’s a culture issue and that’s much more challenging to change.  

You’d mentioned that at Capital One culture was really driven by the leadership. They were spending 20 percent of their time interviewing people and making sure they were getting the right people. If you are an incumbent that has historically not had that kind of a culture, where do you even begin? 

I think there’s a few different paths there, and I don’t think there’s solely one path that works or doesn’t work universally.  

There is a classic “build, buy, rent” approach when it comes to corporate strategy, intertwined with the talent and culture piece. 

I think that if you’re going to try to build from within—which is a perfectly legitimate approach—you’ve got to do it really eyes wide open. Are you going to do it by ring-fencing: creating a group that’s off to the side? Or are you going to do it within the existing management structure? You don’t want to do it halfway and not succeed at all because you’re mixing and matching. 

You’ve got to think about compensation. There are fair critiques and downsides of the equity-based compensation that start-ups use, particularly in their first few years, to attract great talent. But there’s also a lot of upside to it, including at a cultural level. Because by the way, if you’re asking people to work twelve hours a day instead of nine, then giving them some equity—some sense of ownership—in what they’re building, is important.   

How do you do that? Even if you’ve got a skunkworks, or ring-fenced group right within a large organization, how do you give the employees of that skunkworks some sense of ownership and some sort of economic participation in what they’re doing? And if you do start to give them some equity participation or phantom equity in it, then does that anger everyone who’s not in the skunkworks? Do they say, “Hey, those guys over there are getting equity, but I thought I was doing something important but I’m not getting any.” Do I open a difficult can of worms there? Maybe. 

You can acquire. But when you acquire, you’re also getting a team, you’re getting people and you’re getting a culture with it. And especially at the kind of multiples that you need to pay to acquire anything in fintech or insurtech, you really are buying a lot more than just the product and distribution that the company has today. You’re really betting on the team that you’re acquiring, that they will continue to deliver. How do you do that?  

One of my favorite acquisitions that I’m tracking, because I have my own thesis about it, is completely unrelated to fintech or insurtech. It’s the Walmart acquisition of Jet.com. I think when Walmart acquired Jet.com, they basically put the founder/CEO of Jet in charge of Walmart.com. Walmart actually expanded the acquisition scope to include a very important part of the acquired’s company. 

Number one, that’s key for spreading like the culture and DNA of Jet to the broader organization, like a retrovirus. Walmart wants more Jet DNA; it doesn’t want to have its antibodies come out and snuff out Jet’s DNA. In my own head, I bet that the CEO of Jet.com is the eventual CEO of Walmart. That’s probably a little bit more out there as a prediction. 

But I think that if the view is, “Okay, how do we set up this company for the next 50 years?” Ultimately, this is an e-commerce company, married to a brick-and-mortar company. We’ve got all the brick-and-mortar DNA we’ll ever need; we need that e-commerce DNA coming on strong. 

So if I hear tomorrow that some 50-year-old insurance company is buying a succeeding insurtech start-up, then I’ll be most excited to see what scope of authority that acquired company has and whether they’re actually getting to manage a bunch of the acquirer’s business, not the other way around.  

I love this analogy of a retrovirus. Instead of seeing the insurtech as being engulfed by the incumbent, it’s the other way around––the influence moves the other way. Do you see other types of retroviral therapies to go with the analogy? 

I think that any time that an incumbent is partnering with start-ups, I think that it’s going to create exposure and, particularly if it goes well, that can start to create some beacons and behavioral changes and a sense of what’s possible. I think that the corporate VCs play a role in that, but certainly not the only role because I think that there’s a lot of commercial partnerships happening. 

I think that there’s a third category of company besides the incumbents and the insurtechs. And it’s basically the tech titans, and I loop some of the winning fintechs into that as well. These companies have the DNA of start-ups, grew their business somewhere outside the scope of insurance, but now are starting to somewhere between dabble and encroach in the insurance space. 

And I think that’s interesting again, as an opportunity for an incumbent to start to engage there. Maybe they’ll engage cautiously, but start to engage, because again it’s a chance to start to get exposure to other ways of doing business, other ideas, other examples of bringing risk management and risk-taking together. How do you take resiliency and agility under one roof?

Do you have any comments on how to make those things come together a little bit more easily? If you’ve got resilience on the part of a fairly large incumbent, and you’ve got the agility of what is probably a smallish start-up, what are ways to get those two things connected? And how do you cross-pollinate the right things versus the antibodies? 

From a business perspective, I think it often comes down to, “How do we invest in reducing the risk of being wrong?” If I can take the risk of being wrong down to something where it’s the minimus, then that gives me the ability to take a lot more risk taking without sacrificing my risk management commitment. Typically, it lets me move more nimbly without sacrificing my resilience.  

For instance, this is where I get obsessed with automated programming interfaces (APIs). They’re the glue between different pieces of software.  

I like to say that an API is a really a business strategy masquerading as a technology strategy, because although nominally it’s about the technology you’re using, really it’s a business thesis around reducing the cost of integration between different parts of your business. When you reduce the cost of integration or exposing some capability you’ve got to the marketplace, down to something that is the minimus, then biz dev, for instance takes on a totally different look.  

If I have to do a half–million–dollar IT integration in order to try out some new data set or some new algorithm or some new claims capability, that’s not just a half million dollars I have to outlay of IT. There’s actually a whole decision-making apparatus I need to apply, and a sales apparatus that has to get applied by whoever is trying to make that sale to me. And so on. And that means then there’s also a long timeline that probably lasts months. Why? Because the minimum cost to try it is half a million dollars.  

But if the API is out there already and it’s well documented, my cost of trying it is much less. If I’m the developer and I want to try it out, I read the docs and register my email and I get to do 10 pings a day. All right, okay. And maybe I need pay five dollars per ping for it, great. I can do that on my corporate card. I don’t need my CFO to sign off on anything. I don’t need a sales person to talk to a purchasing department. 

So you get this capability tested much more cheaply and quickly. And I think that’s very, very powerful for enabling this mix of risk taking and risk management, this mix of agility and resilience. 

We’ve talked about a lot. Collectively, what steps does this industry need to be taking in order to prepare for a healthy, agile, resilient future? 

If I have to take it down to one core piece, it comes back to one of my starting themes here, which is positive selection. I think that in a risk business—and certainly insurance is a risk business, as is lending—the really interesting transformations happen when companies build out product innovations that drive positive selection.  

When a company does that, whether they’re a 100-year-old incumbent, or a 20-year-old tech titan, or a 2-year-old start-up, that’s where the magic can really happen. And it’s magical because it benefits the customer and the provider and the whole value chain. 

It’s been really interesting to have this conversation Caribou. Thanks for taking the time to join our podcast. 

Thank you. I’ve enjoyed it and I hope your listeners do as well.

Summary 

• Incumbent insurers are skilled at risk management, but not at risk taking—and that’s creating pockets of opportunity for insurtechs.  
• Insurtechs provide incremental lift to the insurance talent pool—in particular, attracting talent who would not have been likely to consider career options in insurance otherwise. 
• To foster innovation, incumbents need to look at ways to reduce the risk of being wrong. For example, APIs can significantly reduce the time and cost of testing ideas. 
• To achieve a healthy, resilient future, insurance players should look at product innovations that drive positive selection—that attract the customers they want, that drive the results they want, and that reinforce the talent and culture they’ll need to succeed again. 

For more guidance on balancing risk and reward: 

• Find out why many incumbents are deciding to join, design or execute ecosystems to ensure they’re disruptors—not the disrupted.  
• Learn how two insurers—one incumbent and one insurtech—are using open platforms to thrive. 
• Read this blog post on how to unlock the passion and potential within your workforce. 

In two weeks, we’ll pull back the curtain on Coverager. Every weekday at 8:00 pm Eastern, siblings Shefi and Avi Ben-Hutta deliver their slightly snarky, often humorous and always insightful email newsletter that makes it easy—and even fun—to stay up to date on insurance industry news.  

In the interim, you can catch up with earlier episodes of the podcast. 

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