An Industry Transformed
Prodded by changes in regulations, the pandemic and the ratings process, insurers are finding new ways to improve and produce products.
- John Weber
- September 2020
Spurred by the pandemic's impact on people, businesses and society, the need for innovation has moved from an aspiration to a necessity for many insurers. A recent discussion organized by AMBestTV and Best's Review drew a variety of perspectives on the topic of insurance innovation, including the role that regulation and ratings play in fostering an environment for innovation.
Matthew Mosher, president and CEO of AM Best Rating Services, said the agency has always considered innovation in its evaluations of insurers but only recently made that a formal element in the rating process.
“It's going to grow in its importance overall to a company's financial strength,” Mosher said. “We wanted to start laying that out, put it out there for companies to understand what we're looking for, and understand that aspect. Once we have that out there, we can then evaluate companies. It's part of their rating now. It's not a major weight, but as it grows, they'll understand it. It'll be part of the process and the rating process.”
One challenge is to define innovation.
Matthew Mosher, AM Best Rating Services
Michael Pieciak, Vermont Dept. of Financial Regulation
Matthew Josefowicz, Novarica
Hank Watkins, Lloyd’s America
“That's where it comes back to the fact of what is innovation. Is it just about technology? It's an important aspect,” Mosher said. “We spent a lot of time walking through with people and explaining to them what the differences are and what we're looking for.”
Matthew Josefowicz, president and CEO of Novarica, agrees, and names the issue as one of the elements of insurance innovation.
“The first is just definition,” Josefowicz said. “Is it real strategic innovation or is it tactical innovation and improvement? Tactical innovation is about fixing broken processes. Strategic innovation is about fixing broken experiences and broken value propositions.”
The Paths to Innovation
Innovation begins by focusing on the objective, not the tools to be used, Josefowicz said. “A lot of carriers think about innovation just in terms of emerging technology.
“While sometimes that's helpful, sometimes it leads to carriers starting from a technology and looking for an application as opposed to thinking about their core business values and process improvement opportunities and then thinking about how technology could potentially enable or support that.”
of AM Best’s rating units scored as Leaders for innovation capability.
Source: Best’s Special Report: Understanding AM Best’s Innovation Scoring
Josefowicz points to a contradiction within the insurance industry. “It's fascinating to me that an industry that's built on a comprehensive understanding of risk and a managed failure rate, which is called underwriting, is still so risk-averse when it comes to its own operations.”
Just as claims occur, not all business initiatives blossom. “Insurance companies are very comfortable with underwriting loss and managing underwriting loss to tolerable margins, but they're very uncomfortable with failed operational initiatives,” Josefowicz said. “Very few companies think about their operating strategy with the same level of risk tolerance that they think about their underwriting side,” he said.
“There's no way to do innovation without failure. Some of the most innovative initiatives that we've seen in other industries are the result of failures. One of the best examples is Amazon's Alexa, which came out of their Fire Phone, which was a huge disaster.”
Another irony: The insurance industry's relative stability can lull insurers into complacency.
“How do you prioritize betting on a different future when the present is mostly working out?” Josefowicz asks. “Insurance isn't retail, where customers can abandon you when a better deal comes along. Most insurers have a greater than 80% renewal rate, so it takes a complacent insurer a long time to feel the pain.
“A lot of technology companies like to talk about innovate or die, but for an insurance company it's more like innovate or accelerate a slow decline.”
One of the reasons we created a sandbox last year … was because we often heard … from national players … that the insurance laws were not built for the 21st century. They were not built for innovation.
Vermont Department of Financial Regulation
A Different Approach
Vermont Insurance Commissioner Michael Pieciak said legislators in his state recently enacted a “regulatory sandbox” designed to allow insurers more latitude in creating new products.
“One of the reasons we created a sandbox last year in our legislative process and implemented rules that went effective this January, was because we often heard from the industry, not necessarily here in Vermont, but more from national players when we go to the NAIC or other industry groups, that the insurance laws were not built for the 21st century. They were not built for innovation,” Pieciak said.
“Not that we're disagreeing with that point, but what our sandbox allows us to do is to say, 'Tell us specifically, what part of our regulation, what part of our statute is preventing you from innovating?'”
The sandbox was implemented prior to pandemic closures but may benefit from timing, Pieciak said. “We think both the non-pandemic related products and the products that will come out of the pandemic have the potential to utilize this regulatory regime we've created here in Vermont.”
But regulatory guardrails remain intact, Pieciak said. “We do an analysis, and so long as it's not a core regulatory function like dishonest trade practices or something that's going to impact the solvency of the company, we at the department have the ability to waive that provision, whether it's a regulatory provision or a statutory provision, for a period of time while that product is in our marketplace.”
Hank Watkins, president of Lloyd's America, said Lloyd's and its members have been turning their attention to earlier stages in the risk cycle, with an eye on not only new coverages but risk prevention services and tools.
“Look over the past number of years. Anybody in the industry has seen how we've evolved from providers of capital following events and basically repair and restore properties to an industry that recognizes full well that there are a lot of intangible assets that people need covered, whether it's IP, brand, reputation or other things,” Watkins said. “Our industry has responded very well to that.”
[Innovation] is part of their rating now. It’s not a major weight, but as it grows, they’ll understand it. It’ll be part of the process and the rating process.
AM Best Rating Services
Watkins points to a track record of product innovation. IP coverage has been around for quite a while, he said. “We've had cyber respond for decades now and reputational risk is taking front and center now.”
Some risks will be bigger than any individual insurer, or even the industry, Watkins said. “I'd suggest that not just the future pandemics, but other systemic-type risks, such as a major cyberattack or effects of climate change, are going to require all of us to work together.”
Innovation also plays a growing role in how insurers treat their customers, Watkins said. “Our industry has done a pretty good job of responding over the past four months to the current crisis. Whether it's delaying or deferring premium payments, or returning premiums, in many cases, oftentimes, without regulatory encouragement.”
Insurers have responded to the pandemic, Watkins said. “There have been a number of brokers and underwriters around the world who've actually created coverages to facilitate return to work, and so we're seeing a lot of progress made in that front.”
Lloyd's is also betting with its own money, Watkins said. “We've got about a £15 million investment by the Lloyd's market into a seed capital funding for governments, NGOs [nongovernmental organizations], capital markets, customers, and the insurance industry to get together on our platform and try and develop solutions that the entire world can use going forward as we move toward a healthier and more resilient future.”
As the pandemic gives way to recovery, Pieciak sees a widening vista of insurance opportunity. “If you think of what the pandemic has done to both employers and employees, I think it's fast-forwarded a lot of trends that were occurring prior to the pandemic. Remote work, work from home was certainly something that we saw prior to the pandemic, but the amount of folks that are going to want to stay remote is going to be quite considerable.”
A range of coverages are up for reinvention, Pieciak said.
“What does that do for things like workers' compensation insurance—for auto rates? People might not be driving as much. What does that do for cybersecurity risks and threats and insurance?”
of AM Best’s rating units scored as Moderate for innovation capability.
Source: Best’s Special Report: Understanding AM Best’s Innovation Scoring
“Think about other areas. Telemedicine is certainly one. There were certainly trends toward telemedicine prior to all of this but we've heard from folks that you probably wouldn't have thought would like telemedicine who say, 'I'm never going to go to my doctor's office again after this pandemic.'”
The switch to remote work and all-digital communication is more than substituting new modes for old, Josefowicz said. “Technology and video conferencing and digital communication is not just about streamlining and taking cost out. It's also about providing an opportunity to share content and educate in totally different ways,” Josefowicz said.
“That's something that the industry will start to explore.”
Insurers may have embraced innovation, but many other sectors enjoy a multiyear or multidecade head start, Pieciak said. “Financial services probably was one of the last big industry segments to be disrupted by waves of innovation and technology. You look at the ways that we book hotel rooms, the ways we catch a ride to a location downtown—any of the ways that we interact on a daily basis with our smartphones to get something done for our daily lives.”
Whatever future innovation looks like, it won't be uniform, Mosher said.
“I'd say we're out of the starting blocks, but it's not everybody at the same pace,” Mosher said. Some companies have made progress and others have just gotten started. “The best part is that everybody's looking at it. They're looking for ways they can do things better,” he said.
“I've seen some presentations that talk about the insurance industry turning into more of an active risk manager than a risk transfer type of aspect,” Mosher said.
“There are many different ways of where the insurance industry could go. It will be up to the individual companies for what they feel best suits their customers and delivering the risk management approaches that they need.”