What AM Best Says
Eyeing Innovation
AM Best examines innovation in the insurance industry.
As part of AM Best's innovation initiative, it conducted preliminary testing of its rated universe.
In this five-part Best's Special Report, The Advent of Innovation, AM Best presents the key findings of its testing and aggregated results. The report also discusses AM Best's innovation assessment profiles, as well as the outlook for innovation.
Edin Imsirovic, associate director, AM Best Rating Services, discussed the findings of the report with AMBestTV. He said many of the insurers that scored highest on AM Best's innovation criteria tended to operate in more competitive, faster-evolving lines of business.
Following is an edited version of the interview.
If I had to pick a theme, then I would say that we saw the validation of the phrase that necessity is the mother of invention, or innovation in this case. Consistent with this, the most innovative lines of business that we identified were reinsurance, health and auto lines of business.
Edin Imsirovic
AM Best Rating Services
How did insurance companies score overall?
In our report, we highlighted general trends related to distribution scoring and innovation. I do want to stress that these findings are very preliminary. In many instances, analysts had to rely on very early discussions to reach their conclusions.
Having said that, we do have some fairly interesting results. For example, only 1% of all of the companies in our rated universe scored in the highest or the leader category. Conversely, 17% of all of the insurance companies that we rate scored in the lowest or the minimal innovation category.
What I found very interesting is that a majority, or actually 50% of all of the companies in our rated universe, actually scored in the second-lowest or the moderate category. I found that very interesting, but also within our expectations, given the general state of innovation within the insurance industry, especially if you compare it to some of the other verticals.
Another general observation that we noticed as we went through these companies is that companies generally tend to score higher on their input scores versus the output scores, the input scores being the leadership, the culture, resources, and processes. Thinking about it, it makes sense as the insurance industry has recently started to accelerate their innovation efforts after, and in response to, the changing market conditions. It makes sense to have this lag between all of the investments that they're being made in the inputs and the actual tangible outputs.
Are you seeing any other interesting correlations between innovation scores and other rating factors?
As a part of our research, we conducted various benchmarking exercises, where we compared innovation scores with various characteristics of companies, things like overall rating, operating performance, financial size category, business profile, and so on.
We really tried to look at this data from many different angles to see what kind of correlations we can find. Unsurprising to us, we found that the companies that had the highest ratings also generally tended to have the highest innovation scores.
Again, this was expected as innovation can often lead to sustainable competitive advantages that can often strengthen the company's position in the marketplace. In addition, we found out that the companies that had particularly high output scores also scored very well in innovation.
Again, this was within our expectations, given that in order to have those high output scores, you really have to have well-developed inputs and score well in those inputs to have such outputs.
In addition, when we were designing the criteria and the weighting on inputs and outputs, it's designed in such a way that it's really impossible for a company to be a leader or a top innovator in the industry without having the demonstrable, tangible output from their innovation efforts.
Have you noticed any common themes that differentiate companies?
Through this process, it became apparent that the most innovative players, and by most innovative players I mean those in the top two categories, the leader and the prominent category, were able to differentiate themselves by credibly quantifying their results of the output that's resulting from innovation. If you look at the top 1% or the leaders, they really further distinguish themselves by being the first innovative movers within the insurance space, where they were really the timeliest in responding to changing market conditions and were often the companies that were the first to take advantage of these changing market conditions, either through introducing new products or services to the emerging needs.
Also, the top 1%, or the highest ranked leaders in innovation, also generally tended to have high transformation scores.
As we move down the ladder, the companies that we tested as significant, these companies typically recognize the need to innovate, but really hadn't yet fully developed deep connections between their inputs and their outputs. The second-lowest category, or the moderate, where incidentally 50% of our universe is, they're often just beginning to develop an innovation strategy, often in response to the changing market conditions.
Finally, in the minimal category, those were the types of companies that really had no meaningful innovation initiatives. In many cases, not all the time, but often these companies generally operate in less competitive conditions or market conditions.
Did any lines of business stand out as being particularly innovative?
We noticed that those lines of business where you're having the most competition, or those lines of business where you're having these significant structural shifts happening, or the lines of business where they're very exposed to some of these exponential technological trends, these were the lines of business that were the most innovative.
If I had to pick a theme, then I would say that we saw the validation of the phrase that necessity is the mother of invention, or innovation in this case. Consistent with this, the most innovative lines of business that we identified were reinsurance, health and auto lines of business.
If you really look at these lines of business, you'll see that all of these lines of businesses underwent quite a bit of change that really has forced these lines of businesses, or the players within these lines of businesses, to become more innovative.
We're all familiar with the reinsurance space and what has been going on there in terms of the introduction of third-party capital, through things like insurance-linked securities and so on. That's created a lot of pressure within the reinsurance space, and really has forced these reinsurance players to focus on becoming more than just capital providers. This has really created a lot of pressure, consolidation perhaps, but it has also spurred a lot of innovation in the reinsurance space as well.
