Innovation appears to have reached the risk-averse insurance industry.
A few weeks ago A.M. Best issued a press release seeking comment on draft criteria for scoring and assessing innovation at the insurance companies it rates. “A.M. Best has captured innovation indirectly through the various building blocks of its rating process,” the company said, adding that if the proposed criteria are approved, that process will become more explicit.
Widely discussed in many industries, innovation has now become a hot topic in the most unlikely of sectors—insurance and financial services. To become more competitive, leadership in those industries is expected to foster a culture that embraces innovation, and to intentionally and effectively allocate resources to enable innovation to yield transformative improvements to business.
A.M. Best’s draft criteria call for moving from indirect assessment to direct assessment by evaluating the innovation process (inputs) and the impact of innovation efforts (outputs) of a specific insurer. This will translate into a score that results in an assessment category: non-innovator, reactor, adopter, innovator or innovation leader.
Proactive measures
What can middle market insurers do to prepare for an evaluation by A.M. Best or another ratings agency that has factored innovation into its ratings mix?
- Ensure your executive leadership team and board of directors sets the tone that innovation is a critical element of long-term viability and sustained success.
- Leverage your leadership team’s messaging to embrace a culture of innovation, and consider creating innovation-enabling training programs for various levels within your company to create innovation evangelists within the ranks.
- Dedicate resources to innovation; many successful innovative companies have developed metrics for resource allocation. Some determine a specific percentage of time employees are allotted to do something outside their job description, while others allocate specific dollar amounts to fund innovation projects. It’s important to consider a plan that best fits your company’s long-term vision.
- Define success and track it. It will be critical not only to raters like A.M. Best but also to your board, investors and other key stakeholders who measure your success. Innovation can be tied to finances, such as reducing claims expenses, or more holistic, such as improving the customer experience.
New entrants to the insurance sector are bringing innovative ideas to change the industry’s traditional business model. For instance, the website of one new entrant says the company charges a flat fee; traditional insurance companies, by comparison, make money by keeping what they don’t pay out in claims. The same business appeals to socially responsible consumers by offering to give back left over money to charities. New entrants to the sector, along with progressive incumbents, have also leaned heavily on improving their digital experience to enhance customer engagement.
We will continue to watch the progress of A.M. Best’s draft criteria; in the meantime, we suggest that middle market insurers continue to define their strategy for innovation. Becoming an innovative company will not happen overnight.