What AM Best Says
Looking Beyond Technology
AM Best’s Gillard discusses AM Best’s new innovation criteria.
- Kate Smith
- May 2019
James Gillard, senior managing director, criteria, research and analytics, sat down with AMBest TV to discuss AM Best's criteria document, “Scoring and Assessing Innovation.” The criteria, which has been released for public comment, examines the elements that go into an insurer's innovation process, measures innovation output, and looks at the impact of innovation efforts on the organization.
Following is an edited transcript of the interview.
AM Best has released a new criteria titled, “Scoring and Assessing Innovation.” Can you walk us through the new criteria?
We released our new criteria, “Scoring and Assessing Innovation,” for public comment. The criteria is out [until May 13] for public comment, where we invite industry participants to comment and give us their feedback on their views on our criteria. I would just say, innovation is currently implicitly included in our criteria. However, given the rapid pace of innovation in the industry, we thought it important to come out with a more formal, explicit assessment of innovation and how we view the innovativeness of companies. Any time you talk about innovation it's important to start with a definition. We're very clear that we don't think innovation just equals high-tech. Technology plays an important role. However, we certainly view innovation as a process that transforms ideas into new processes, products and business models. Innovation, while it includes technology, is certainly not limited to just technology.
The criteria takes an input-output approach. We really want to evaluate a company's innovation process. That creates an input score. Then, look at the results of their innovation efforts. That creates the output score.
The process is evaluated, looking at four subcomponents. We look at the leadership of the company. How does it drive innovativeness? The culture. We hear about corporate culture playing a huge role in a company's innovativeness. If you don't have the right culture to accept new ideas, you're going to very much struggle being innovative.
Third, we look at their ability to strategically allocate resources toward innovation. That doesn't mean you need to have a chief innovation officer or dedicated resources solely focused on being innovative, coming up with the next big thing. It does mean you need to have people working and thinking about, “What's next? What do we do going forward?”
Last, we look at organizational process and your structure around innovation.
On the output side, what we're looking for is more concrete. We want companies to be able to measure their innovation. We want to see the tangible results that innovation efforts have led to.
Lastly, we're also looking at the level of transformation. How far has innovation taken you to move your company forward? That walks through the criteria, in general.
Why is AM Best releasing a criteria now?
The pace of innovation in the industry has really increased. We expect that trend to continue. We see significant demographic changes, climate-related trends, and technological advancements, things like internet of things, machine learning, blockchain. These things all have the potential to be transformative for the industry. We think now is a good time to get out and start assessing the innovation in the industry because companies that don't embrace this change, adjust to it, ultimately will be disadvantaged, which will lead to an erosion in their financial strength, which is, obviously, what we care about most.
Today, while that impact on their profile and the company's financial strength may be small, we expect the weight that innovation will carry to increase over time. That's why we want to start now with a formalized assessment. It creates a starting point for us. Then, we can continue to improve our assessment of innovation over time.
In addition, it really does highlight the importance of innovation for the industry. AM Best's take is that this trend is going to continue and that companies that don't really get there are going to be left behind.
Companies have to understand, the whole industry has to understand, where innovation can, and probably will, take the industry in the coming years.
Do you expect this to have a big impact on ratings once it's live?
We don't expect this criteria to have an impact on ratings once it's released live as an active criteria. As I mentioned, right now, it's out for comment, but even when it's released live, we don't expect there to be a significant change.
Innovation is already included. Our management meetings include innovation on the agenda. We talk through companies, what they're doing, what changes they're doing. How are they adjusting to market conditions?
However, now we're coming out with a creation of a formal assessment. We do not think the creation of this formal assessment changes the weight of innovation in the criteria. It will still play a similar role to what it plays now. However, our expectation is that this weight will rise over time.
As the industry changes, as this becomes more transformative, the weight that innovation will play in your financial strength assessment will increase.
Innovation is a leading indicator of financial strength. It starts with, if you fail to innovate, you're going to start lagging behind your market position. Market position is an important factor in the business profile component of our methodology. You start to see a deterioration in your business profile.
As your business profile deteriorates, your performance is going to start to lag. You're not going to get the best business. You're not going to be on the cutting edge. You're not going to be where you need to be. You're going to start to see deterioration in your operating performance.
Ultimately, your operating performance lags. You're going to see it in your balance sheet strength. You're going to lose capital. That ultimately will impact your financial strength over time.
The complete draft criteria procedure is available at www.ambest.com/ratings/methodology.asp.