What AM Best Says
A Look at Innovation

• John Weber
• November 2019
• 

Steve Irwin, managing director of Credit Ratings Criteria, Research and Analytics, provides an overview of the updated innovation criteria released by AM Best. AM Best held a second comment period for the innovation criteria draft, releasing an update to Best's Credit Rating Methodology and issuing a Best's Commentary that will cover some of the changes.

Following is an edited version of the transcript.

The criteria was released earlier this year in March and went through a comment period. What's happening right now?

One thing we certainly learned through this journey and process is that it reinforces our opinion that innovation is certainly important to the industry. That's something that was shared with us through the comment period.

What's happening now is we're having a second comment period for the scoring and assessing innovation criteria draft. We're also accompanying that, simultaneously releasing an update to Best's Credit Rating Methodology.

Finally, we're also issuing a Best's Commentary, which will talk about some of the changes that are occurring within both the scoring and assessing of innovation criteria, as well as the Best's credit rating methodology.

[Comment period closed October 31, 2019.]

Either as a result of those comments or other reasons, what are the major updates to the draft?

Let's talk about the things that aren't changing first, then we'll talk about some of the things that are changing. If you look at some of the core components of the criteria that are not changing, that includes the definition of criteria.

We certainly received input from commenters talking about their own definition of innovation, but we feel our definition of innovation is appropriate in terms of focusing on while technology plays a non-trivial role, innovation itself is not just about technology.

We also looked at the formula for innovation, which continues to be the same. It's the sum of the innovation inputs, as well as some of the innovation output scores.

Finally the subcomponents of innovation are also not changing. The input components of leadership, culture, resources, and process and structure remain the same, as well as outputs, which are results and the level of transformation.

Those things remain consistent.

What is changing is that we indicated in our initial draft that we were publishing the innovation scores. We're not publishing the innovation scores at the time of the release. That is certainly a change.

We also looked at the innovation assessment descriptors, which in the first draft of the criteria were non-innovator, reactor, adopter, innovator and innovation leader. And it moved away from that perspective and looked to an assessment of the innovation abilities.

So those assessment descriptors will now be minimal, moderate, significant, prominent and leader.

We also looked to try to find some points of clarification which we go through in the criteria. Throughout the document, we did make clarifying comments. An example of that is that within the actual culture subassessment we don't expect companies to actually change their mission statement to explicitly include innovation.

We also provided some clarifying elements within the culture and leadership sections, as well.

Finally, within the Best's Credit Rating Methodology, the BCRM, I indicated we will be updating that, as well. What we're doing there is incorporating innovation as the ninth element of the business profile subassessment.

That joins market position, degree of competition, distribution channels, pricing sophistication, and data quality, management quality, product and geographic concentration, product risk, and the regulatory events, markets and country risk.

Will the update impact ratings?

It's important to have a distinction between the innovation score and the impact within the BCRM. All rated companies will be scored and then given innovation ability assessments.

That's an absolute assessment of a company's level of innovativeness. As part of its building block profile, AM Best will consider whether a company's innovation efforts have had an impact on its financial strength and considers a company's innovation relative to its particular circumstances.

It really depends on the context of the company's particular circumstances if there is going to be an impact on the rating.

We expect that if the rapid pace of innovation continues, it will serve as a leading indicator for a company's financial strength. However, at the time of the release we are not anticipating that any ratings will be impacted.

You mentioned the end of the commenting period. What happens after that?

The commenting period [closed] on October 31, 2019. We will go through the same process we went through in terms of the first comment period, which is we'll be reviewing comments that are received and need to see if there's a need to update the criteria to reflect any comments that were received, as well. Internal as well as external.

It's the same process we go through for any new criteria that's developed. The process is that we expect it to take effect in the first half of 2020, both the updates to the BCRM as well as the scoring and assessing innovation criteria. As always, that is comment dependent.

As you mentioned, we don't plan on publishing individual company assessments. However, we are looking at looking at a special report which will provide an industry level review of the innovation assessments. We will continue to have dialogue with companies as we go through this process to talk about their innovation efforts.

John Weber is a senior associate editor with ^AMBestTV. He can be reached at john.weber@ambest.com.