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What A.M. Best Says
Insurers’ Approaches to Innovation in the Spotlight

Best's Special Report (Excerpt): Insurers Agree Innovation Is Critical for Future Success (September 24, 2018)
  • November 2018
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A.M. Best believes innovation is becoming increasingly critical to the success and long-term financial strength of an insurer, as it enables a company to maintain relevance by developing meaningful solutions to ever-evolving risks and to improve operational efficiencies. Historically, A.M. Best has captured innovation indirectly through the building blocks of its rating process. However, A.M. Best will be reviewing its Best's Credit Rating Methodology (BCRM) to consider including innovation explicitly in the rating process—another step in its efforts to constantly advance its rating analysis and provide a valued rating to insurance market constituents.

A.M. Best defines innovation as a multistage process whereby an organization transforms ideas into new or significantly improved products, processes, services, or business models that have a measurable impact over time and enable the organization to stay relevant and successful. These new or significantly improved products, processes, services, or business models can be organically grown or adopted from external sources.

In August 2018, we surveyed our rated insurers to obtain a better understanding of the state of innovation in the industry. The findings in this report are based on responses from the 459 insurers who participated in the survey.

According to the survey results, insurers agree with A.M. Best that innovation is critical to their future success, and that they must innovate to attract and retain customers and to gain a competitive advantage. A slightly less but significant reason for innovation was improving efficiencies.

Breakthroughs in data storage technology, exponential growth in computing power, and the advent of cloud computing have enabled advances in machine learning, the internet of things, and blockchain. Insurers also seem to be aware that technology is not one of their core competencies and are willing to make investments and form partnerships to get up to speed. To keep up with current innovation developments, insurers rely on diverse sources, including employees, customers, and consultants.

More than 80% of survey respondents indicated that innovation was moderately to extremely critical to the success of their organizations. However, insurers are naturally somewhat risk averse, which warrants a well-articulated innovation strategy and investments. Measuring the impact of innovation is important, as it allows insurers to gauge the success of their initiatives.

One of the key challenges to developing an innovation strategy or process is the issue of human capital, and insurers are making concerted efforts to attract employees who are in tune with both changing technologies as well as shifting demographics and economic factors.

Key Reasons to Innovate

Twenty-two percent of insurance companies innovate because they want to address their customers' needs. As customer profiles evolve owing to both technology and demographic developments, so do their needs. Insurers have to be innovative to attract and retain these consumers, by responding appropriately to their changing insurance needs. Consumers nowadays can use mobile phones, computers, agents, or mobile apps to research and obtain insurance. Typical advertising channels such as print newspapers and television need to be complemented by effective online strategies. Insurers are becoming acutely aware through social media that they are being evaluated every time they interact with customers. Life insurers face the challenge of marketing a product that is seldom a top priority for today's consumers. In addition, evolving demographics and a gig economy make these products harder to sell. Reinsurers face intense competition from traditional channels and alternative capital, while P/C insurers must contend with competition from new entrants. Health insurers have their challenges delivering a fulfilling customer experience through vertical integration and other means.

Gaining a competitive advantage was a close second (21%) among the reasons for innovation. As the pace of innovation picks up, insurers who do not innovate successfully may have to contend with adverse risk selection and challenges owing to significantly higher expense ratios compared to their more innovative competitors, and lower growth because more innovative peers may have access to lower-risk customers.

Improving Efficiencies a Priority

Sixteen percent of insurers stated that innovation is needed to improve their operational efficiencies. More than most industries, insurance has struggled with inefficiencies in processes and systems, and insurers are hopeful that technology can help them address these issues. Insurance companies that have grown through acquisitions have found that integrating claims, reserves, underwriting, and pricing systems remain a challenge even many years after transactions have closed. Very few companies initially realize the importance of integrating IT systems and thus underestimate the challenges inherent in reconciling different operating systems, database providers, languages, and software versions, for example.

Outdated systems; a reliance on individual employees' stand-alone spreadsheets and memories; duplicate or low-quality data—these are factors that could result in highly inappropriate decisions for insurers. Legacy systems also lack acceptable levels of cybersecurity and can be compromised relatively easily, exacerbating operational risk.

Nearly 90% of insurers are hopeful that innovation can help them address system inefficiencies, while 63% believe that ongoing investment in innovation can help them navigate business disruptions and remain relevant. Fifty-seven percent believe that innovation can minimize underwriting risk, possibly owing to more precise machine learning algorithms. This is consistent with a majority of insurers who stated that innovation would have a significant impact on their IT systems, followed closely by customer experience, 47%.

The complete version of this Best's Special Report is available at

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