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AM Best Assesses Innovation in Draft Criteria

Methodology and Criteria (Excerpt): Scoring and Assessing Innovation

AM Best is requesting comments from market participants in the insurance industry and other interested parties on the draft of a new criteria procedure, “Scoring and Assessing Innovation.”

AM 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 positive impact over time and enable the organization to remain relevant and successful. These products, processes, services or business models can be created organically or adopted from external sources.

Historically, AM Best has captured innovation indirectly through the various building blocks of its rating process. AM Best's evaluation of a company's innovation level, outlined in the draft criteria procedure, will be based on two elements: (1) innovation input—the components of a company's innovation process, and (2) innovation outputs—the impact of the company's innovation efforts. The resulting innovation score is the sum of these two evaluations. Within its business profile building block, AM Best explicitly will consider whether a company's innovation efforts, or lack thereof, have had a demonstrable positive or negative impact on its long-term financial strength. AM Best expects that all rated companies eventually will be scored and assigned a published innovation assessment.

Innovation always has been important for the success of an insurance company, but with the increased pace of change in society, climate and technology, it is becoming increasingly critical to the long-term success of all insurers. While AM Best believes that the pace of innovation in the insurance industry is accelerating and that an insurer's ability to innovate is becoming an increasingly important indicator of a company's long-term financial strength, AM Best does not expect any changes to ratings as a result of the release of this criteria procedure.

This draft criteria procedure is available at www.ambest.com/ratings/methodology.asp.

Written comments should be submitted by email to methodology.commentary@ambest.com no later than May 13, 2019. When submitting comments to the methodology in-box, commenters have the option of requesting anonymity, but not confidentiality. All comments received through the methodology in-box that do not request anonymous treatment generally will be published in their entirety, with attribution to the author/sender at the time of implementation of the criteria procedure.

The following criteria procedure should be read in conjunction with Best's Credit Rating Methodology (BCRM) and all other related BCRM-associated criteria procedures. The BCRM provides a comprehensive explanation of AM Best Rating Services' rating process.

The Importance of Innovation

Innovation is becoming increasingly critical to the long-term success of all insurers. With innovation, companies can develop sustainable competitive advantages and better respond to external challenges such as evolving consumer preferences, growing business complexity, shifting market dynamics, and ever-expanding technological advancements. Companies need innovation to outpace competitors, fend off potential external disruptors, and promote organizational longevity.

Insurers agree with AM Best that innovation is critical to their future success and that they must innovate to attract and retain customers. By improving efficiencies through innovation, insurers can gain a competitive advantage. Technological developments—such as advancements driven by machine learning, the internet of things (IoT), and blockchain—tend to be the innovations that receive the most fanfare. However, while technology plays a non-trivial role in providing tools for innovation, innovation is not all about technology. Many insurers have historically found nimble ways to adapt to an ever-changing market environment without having to become sophisticated technology players. To keep up with current innovation developments, insurance innovators rely on diverse sources, including employees, customers, and consultants and, when faced with challenges requiring innovations outside of their core competencies, are willing to make investments and form partnerships to get up to speed.

In the insurance industry, the importance of innovation is not segment-specific. Given the accelerating pace of innovation and magnitude of change, insurance companies that fail to innovate may find it difficult to sustain long-term success/profitability and may ultimately be subject to anti-selection and loss of relevance. Those insurers that successfully incorporate innovation will likely strengthen their organizations, increase their customer base, and improve efficiency, which will support their financial strength.

Historically, AM Best has captured innovation indirectly through the various building blocks of its rating process. AM Best now believes that the pace of innovation in the insurance industry is accelerating and that an insurer's ability to innovate is becoming increasingly critical to its long-term financial strength. From a rating perspective AM Best's innovation initiative is two-pronged: (1) all rated companies will be scored and then assigned a published innovation assessment; and (2) within its business profile building block AM Best will explicitly consider whether a company's innovation efforts, or lack thereof, have had a demonstrable impact (positive or negative) on its long-term financial strength.

Defining Innovation

AM 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 positive impact over time and enable the organization to remain relevant and successful. These products, processes, services, or business models can be created organically or adopted from external sources.

There are several key aspects to AM Best's definition of innovation. First, innovation can take many forms—it is not limited to a particular type of innovation or technological development. The definition also allows for flexibility regarding the source of innovation; for some organizations, innovation through adoption may prove to be the most appropriate path, as there may be inherent barriers to innovation within the organization.

Second, AM Best expects the output of the innovation process—those new or significantly improved products, process, services, or business models—to have a measurable impact. Some level of failure is an expected part of any innovation program, but companies receiving the highest innovation scores will have a demonstrable success in innovating. Without productive results, the resources consumed by the innovation process will be a financial drain rather than an aid.


The complete draft criteria procedure is available at www.ambest.com/ratings/methodology.asp.



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