Insurers that do not embrace innovation risk being left behind by new entrants and more innovative traditional players, AM Best has warned.
“Society is changing so fast with things such as technology and climate change, which is putting more pressure on insurers to innovate,” Greg Williams, senior director at AM Best, told Intelligent Insurer.
“In the past, it may not have been as important for insurers to be innovative but they certainly need to be now. If they don’t, eventually they will be adversely selected against by those who do.”
To help insurers embrace innovation, and better understand where they need to improve, AM Best has developed an innovation assessment score system. The score incorporates inputs, including things such as leadership, culture and resources, and outputs: the fruits of innovation.
Companies are assessed on a scale with five descriptors: minimal, moderate, significant, prominent and leader. A score under 12 puts a company in the minimal category, while over 28 is enough to be classed as a leader.
“COVID-19 has accelerated the digital transformation trend and forced insurers to be more innovative.” Greg Williams, AM Best
The rating agency is not publishing innovation scores yet, although it does plan to eventually. For now it shares the scores with the rated companies themselves to help them develop strategies around innovation.
AM Best first surveyed its clients on the subject of innovation in 2018, with 80 percent of the responses confirming the view that innovation is relevant to a firm’s long-term success. It then began refining its criteria for a new innovation benchmarking system, which was refined via industry consultation over the course of 2019. In March 2020 it published “Scoring and Assessing Innovation,” its final criteria for scoring innovation.
“The insurance industry has been slower to innovate than other financial services companies, and certainly less than other non-financial industries,” noted Williams.
The industry could now, however, be on the cusp of a period of accelerated innovation. “COVID-19 has accelerated the digital transformation trend and forced insurers to be more innovative than they have traditionally been,” he said.
In assessing the innovative prowess of its rated companies, AM Best had expected most insurance companies to come out at the lower end of its scoring system, as minimal or moderate innovators.
In fact, half of AM Best’s rated insurance companies did come out as moderate, with 17 percent ranked as minimal. Just under a quarter achieved significant status, with less than 10 percent achieving the score prominent. Only 1 percent of insurers ranked as a leader.
“We saw significant correlation between AM Best’s financial strength ratings and the innovation score, which did not surprise us,” added Williams.
“We have always talked about innovation as part of our ratings discussion so it makes sense that there is correlation between the two.”
AM Best, Innovation, Insurance, Reinsurance, Greg Williams, North America