AM Best to Add “Innovation Scores” to Carrier Rating Models

In a very intriguing announcement, the “gold standard” of insurance company credit rating organizations, AM Best, has decided that how a carrier does or does not invest in areas of technological innovation will impact their long term financial viability and thus potentially their rating.

“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.” www.ambest.com

While I think this is a fantastic move, other agent peers not so much. My favorite quote of the article is:

“The Council of Insurance Agents and Brokers took a more dubious view of the innovation scoring proposal, in a blog post titled “AM Best Aims to Quantify the Unquantifiable: Innovation.”

What companies spend on innovation as a percentage of surplus/premiums is a pretty black and white measurement and I would think the ability to make innovation actionable and meaningful can also be quantified. Why would agents not want the carriers to be more advanced?

I have a quote of my own to reference on that front…

“If you want something new, you have to stop doing something old.”

 -Peter F. Drucker

The insurance industry is arguably the most behind on innovation than any other financial sector – let’s hope this change helps to jump-start a movement of investment in the improvement of the client and agent experience through technological innovation!

  • By Elaine Goodman and from our friends at workcompcentral.com

Rating agency AM Best has proposed a new scoring system for assessing carriers’ innovation efforts, an idea that is sparking mixed reactions from the insurance industry.

Mike Fitzgerald

Mike Fitzgerald
(Celent photo)

AM Best announced its draft proposal, “Scoring and Assessing Innovation,” in March. A public comment period ran through mid-May. The agency continues to meet with different groups to discuss the proposal, including a presentation this week at the Farm Bureau Insurance Managers Conference in Jackson Hole, Wyoming.

AM Best said it has been capturing innovation indirectly through the “various building blocks” of its rating process. But now, a more direct focus on innovation may be needed.

“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,” AM Best said in announcing the initiative.

Under the proposal, all companies rated by AM Best would be scored and their innovation assessment would be published. In addition, AM Best would “explicitly consider” whether a company’s innovation efforts are impacting its financial strength.

A proposed scoring system would rate companies on their innovation “inputs” — factors such as whether the company has an innovation strategy, and management’s attitudes toward innovation. AM Best would also assess measurable results, or “outputs,” a company is seeing from innovation.

Although some failure is expected when a company is trying new things, AM Best said the lack of productive results may indicate that innovation has become a financial drain on a company.

AM Best noted that not all innovation involves fancy technology such as blockchain or the “Internet of Things.” Innovation can come from outside sources and doesn’t have to be developed within the company, AM Best said.

Mike Fitzgerald, a senior analyst with information technology consulting firm Celent, called the AM Best proposal a positive step that will help ensure that the insurance industry moves forward.

“It’s a fantastic idea,” Fitzgerald said. “I think they’re right on target.”

One of the first results of the innovation assessment will be that insurance executives are more involved in innovation initiatives at their companies, he predicted.

“Senior leaders at all insurance companies are going to have to be a lot more engaged and conversant than they have been in the past,” Fitzgerald said.

One part of the AM Best proposal that could use more fleshing out, Fitzgerald said, is the definition of innovation.

In its proposal, AM Best defined 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.”

Although Fitzgerald said innovation is likely to involve technology, he said there could be some cases where it doesn’t.

The Council of Insurance Agents and Brokers took a more dubious view of the innovation scoring proposal, in a blog post titled “AM Best Aims to Quantify the Unquantifiable: Innovation.”

“Market incentives already exist to push companies to innovate — will establishing an innovation rating system encourage companies to invest in new technologies for the right reasons?” CIAB said.

In addition, CIAB said, the scoring could push companies toward investing in risky companies to show their interest in innovation.

“Investing in immature or unnecessary startups presents an opportunity cost that in turn may harm a company’s overall rating if those investments do not result in any created value,” CIAB said.

Paul Carroll, editor-in-chief of the Insurance Thought Leadership website, called the AM Best announcement great news for the insurance industry.

“With this new focus on innovation, AM Best has done the insurance industry a big favor by not only sounding a warning but also offering the industry focus, structure and direction to avoid the danger of inaction,” Carroll wrote in a blog post.

The assessment will force insurance companies to move beyond merely “checking the boxes” when it comes to innovation, Carroll said. He cited as an example companies that go on innovation tours and then claim to be on top of the latest technology.

Shortly after the AM Best announcement, the strategic consulting arm of Insurance Thought Leadership, ITL Advisory, announced it was offering insurance companies a new innovation assessment service. ITL Advisory said its assessment can help insurers determine whether their innovation programs align with best practices and are likely to produce a return on investment, as well as whether the company is prepared for the AM Best review.

“The release of (the AM Best) draft criteria and procedures will create some urgency among insurers to understand the innovation process, and start or accelerate efforts to implement innovation programs,” Wayne Allen, chief executive officer of Insurance Thought Leadership, said in a statement.

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