Insurers that innovate achieve underlying aggressive benefit
In March 2020, AM Best officially introduced a new criteria procedure called “Evaluation and Evaluation of Innovations”. The assessment of the level of innovation of an insurance company is based on two elements: innovation inputs – the components of a company’s innovation process; and innovation outcomes – the impact of a company’s innovation efforts. The resulting innovation value is the sum of these two ratings.
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“As a rating analyst, we’ve realized for years that there are some companies out there with a climate, culture, and leadership role that drives change to become more competitive,” said Steve Chirico, director of the P&C Rating Division. AM Best. “And as we evaluated companies over time, we found that those things benefited both from a net income point of view and, of course, from building a surplus. There was this underlying competitive advantage that can be achieved through the use of so-called innovative techniques.
“There was a clear distinction between companies that were innovative and took things to the next level and companies that were more or less on their laurels. And it’s very evident in things a policyholder will be interested in, such as: [building a] sustainable competitive advantage that [leads] to a consistently stable net income and to build surpluses, which makes the company safer from a credit risk perspective. “
AM Best’s decision to formally evaluate innovations was made after numerous ongoing discussions with outside stakeholders, including insurance agents and brokers, stock analysts, other industry regulators and policyholders. This was followed by a provocative July 2019 article by The Economist entitled “Run for Cover – The Future of Insurance Happens Without Insurance Companies,” which made a strong case for how the insurance industry lagged behind and was badly needed.
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“The perception was that innovation was something that wasn’t really embraced by the insurance industry on a large scale,” said Chirico. “I’m going to tell you that from a percentage point of view, when we started looking at companies and ranking them on the methodology drafted at the time, it became very clear that the insurance industry really needed to improve their game from an innovative perspective.”
Insurers worldwide have made great strides over the past year due to the pressures caused by COVID-19. The pandemic has changed so much in terms of global business activity that the insurance industry has had to respond to these systemic changes almost overnight. The industry has adapted quickly to close new deals, settle claims, and maintain customer service in a virtual business environment. Many analysts have cited this unprecedented year as a turning point for innovation in the insurance industry. Only time can tell whether this prediction will come true.