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OLDWICK - MARCH 15, 2022 12:24 PM (EDT)
Five-year benchmarking analysis of AM Best-rated nonlife companies’ innovation assessments indicates that COVID-19 widened the innovation divide, with a clear link to better top-line growth for insurers with more-developed innovation initiatives.
AM Best formally integrated its criteria procedure, “Scoring and Assessing Innovation,” in March 2020, but for the purposes of this analysis, considered operating performance metrics for each innovation assessment from 2016-2020. The Best’s Special Report, titled, “Insurers Leverage Innovation for Financial Strength,” states that rated global nonlife insurers with higher innovation assessments had a five-year average net premium written growth rate of 11.9%, while those assessed in the bottom two tiers – moderate and minimal – had growth rates of 9.1% and 7.9%, respectively. Companies with higher innovation assessments also reported lower loss and expense ratios, as well as less-volatile underwriting results. According to the report, the divergence in premium growth rates became particularly acute in 2020, as more-innovative companies leveraged their digital operating models to continue business as normal, while less-innovative companies struggled to retain existing customers or attract new customers.
One of the biggest obstacles to operational innovation and its associated benefits continues to be a fragmented landscape on legacy information technology (IT), driving costs higher while hindering innovation efforts. To fully capitalize on emerging technologies and capture operational efficiencies, AM Best believes less innovative insurers need to address legacy systems. Unsurprisingly, COVID-19 accelerated various automation initiatives, especially the customer-facing ones, such as claims. AM Best’s review showed that companies further along with their digital transformation on average had lower expense ratios. However, at the same time, the report notes that innovative companies may need to make a trade-off between higher expense ratios in the short run for lower and more-sustainable combined ratios in the long run.
“The costs and risks associated with migrating to new systems can be daunting. Still, due to shrinking payback periods and proliferating efficiencies, the issue of legacy systems may well become a key priority for insurers,” said Edin Imsirovic, associate director, AM Best.
Insurance industry innovation leaders have been able to leverage innovation as a competitive advantage, even in a strained underwriting and investment environment. Insurers that have not transitioned to a more automated process or modernized their IT systems have paid the price with higher expense ratios. Earlier adopters of digital transformation initiatives have been able to translate their innovation efforts into concrete results, bolstering their financial strength. As some of the pressures in the underwriting environment ease, AM Best expects that innovation leaders will further cement their expense optimization, preparing them for future challenges.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=318280 .
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.