est’s special r eport - am best company · 2020-03-12 · b est’s special r eport our insight...

BEST’S SPECIAL REPORTOur Insight, Your Advantage.

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The Advent of InnovationStructural shifts—demographic, technological, economic, and environmental—are redefining the insurance industry. Low investment yields, stagnant growth, and deteriorating expense ratios—innovation can be a way for an insurer to rise above these challenges. Additionally, for many insurers, embracing emerging technologies and nontraditional relationships can help improve underwriting performance and enhance the customer experience.

Moving forward, we expect the pace of innovation to continue to accelerate and insurers to offer ever-more comprehensive solutions, such as digital ecosystems. As innovation becomes more pervasive, insurers that don’t innovate can expect to find themselves at a disadvantage through adverse selection and worsening operating efficiencies. Our new criteria procedure, Scoring and Assessing Innovation (along with a revised Best’s Credit Rating Methodology) highlights AM Best’s expectation that innovation will evolve into a critical determinant of financial strength.

As part of our innovation initiative, we conducted preliminary testing of our rated universe. In this five-part report, we present the key findings of our testing and aggregated results. We also discuss our innovation assessment profiles, as well as the outlook for innovation.

Our first report, “Understanding AM Best’s Innovation Scoring,” looks at where the majority of the industry falls in terms of our innovation assessment. Unsurprisingly, half the rated insurers garnered assessments of Moderate innovation capability. Input scores led output scores, indicating that, although companies are starting to develop innovation initiatives, sustainable, quantifiable results are still a ways off for many. Of our four input subcomponents, companies scored the highest on Leadership. Management teams across the industry recognize the importance of innovation although companies still have significant technological and cultural barriers to overcome.

“AM Best’s Innovation Capability Assessment Profiles” looks at the characteristics of our five innovation assessment categories: Leader, Prominent, Significant, Moderate, and Minimal. More innovative companies (Leader and Prominent) differentiate themselves by quantifying the results of their innovation efforts over the long term. Moderate companies—the majority of our rated population—are not necessarily behind the curve, but have not yet fully committed to, or developed a track record on, innovation.

An important part of understanding the impact of innovation on a company is gauging the competitive landscape, including its line of business, which we explore in “Innovation by Line of Business.” The health, reinsurance, and auto lines stood out as the most innovative lines, with external pressures driving the need for transformation. “Innovation – Benchmarking” takes an even deeper look at our innovation assessment distributions, analyzing results by rating, business profile, financial size category, and geographic region.

Finally, “Innovation Spurring Insurance Industry Transformation,” explores our expectations for innovation in the industry. We see the most innovative insurance companies shifting from a product-based approach towards a customer-focused approach. We identify some of the underlying drivers that will promote further innovation and areas that will likely see the most movement over the medium term.

For both the insurance industry and AM Best, this is a new era. As the industry evolves, innovation may be the answer to the multitude of emerging risks insurers face.

Jim GillardExecutive Vice President & Chief Operating Officer

1

Innovation

Successful implementation, along with mea-surable returns on investment, is still a ways off for many insurers

Trend ReviewMarch 10, 2020

Analytical Contacts:Clare Finnegan, Oldwick+1 (908) 439-2200 Ext. [email protected]

Jason Hopper, Oldwick+1 (908) 439-2200 Ext. [email protected]

Edin Imsirovic, Oldwick+1 (908) 439-2200 Ext. [email protected]

Kevin Varvaro, Oldwick+1 (908) 439-2200 Ext. [email protected]

Valeria Ermakova, London+44 20 7397 [email protected]

2020-016



Understanding AM Best’s Innovation ScoringAM Best’s Innovation Score is derived from a two-pronged assessment of a company’s innovation initiatives: inputs and outputs. The evaluation of a company’s innovation input is divided into assessments of four sub-components: (1) leadership, (2) culture, (3) resources (allocation, strategy, and management), and (4) processes and structure. Each of these sub-components is evaluated on a scale of 1 to 4, with 1 being the worst and 4 the best. The most innovative company could therefore receive a total of 16 points for its innovation input efforts.

The output evaluation is divided into two sub-components: (1) results and (2) level of transformation. These are also evaluated on a scale of 1 to 4 but are doubly weighted, to reflect our belief that innovation prowess must be evidenced through tangible results. Thus, companies can also receive up to 16 points for their innovation output, potentially bringing the total innovation points to 32. AM Best translates its innovation scores into five assessments: Leader, Prominent, Significant, Moderate, and Minimal. Overall, our innovation capability assessments skew towards lower profiles, as half of our rating units scored as Moderate, versus 23% for Significant, 9% for Prominent, and 1% for Leader (Exhibit 1).

This report discusses trends that emerged from the preliminary testing of this scoring rubric across AM Best’s rated universe. We emphasize the preliminary nature of the testing, given that in many instances analysts have had to rely on early discussions to reach their conclusions. Initial results reflect a lag in output scoring—which was not unexpected. Nevertheless, testing did identify critical areas in which companies can improve the foundational components of their innovation initiatives, with the goal of generating concrete results.

Output Scores: Lower than Input ScoresIn developing its scoring rubric, AM Best relied on its experience as the leading provider of insurance credit ratings. Following long-standing dialogues with insurers, which also incorporated the topic of innovation, we formally surveyed the rated universe in 2018 to measure the industry’s innovation efforts. In the survey, companies were asked to assess how well they have implemented

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Minimal Moderate Significant Prominent Leader

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Exhibit 1Innovation Assessments

Source: AM Best data and research

Table of Contents: Scoring ..............................1

Assessment Profiles ...........7

Line of Business ...............11

Benchmarking ..................20

Outlook ............................28

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Trend Review Innovation

innovation initiatives and where they stood. In response to the question of how well the insurance industry has adopted and implemented innovation, nearly a quarter of respondents answered “not well.” This view was borne out by our testing results, with the vast majority of companies scoring higher on their innovation input scores than their output scores (Exhibit 2). Further, the average input score divided by the output score increases as you move down the scale, signaling that the level of innovative output at these organizations is aligned more closely to the level of resources used to fund these innovative projects (Exhibit 3). Most companies are at the earlier stages of developing innovative initiatives, and that successful implementation, along with measurable qualitative or quantitative returns on investment, is still a ways off for many.

When developing the innovation scoring, questions were raised as to how start-up insurtech companies would score. Preliminary testing identified some market disruptors. These companies generally had high scores across the four input components, along with higher transformation scores. However, their results score was generally at the lower end and did not provide rating enhancement. Actualizing innovativeness takes time. A high degree of innovativeness is not a rating positive until a company can achieve concrete results, such as greater market share or a better competitive position.

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Exhibit 2Average Total Innovation Score by Assessment


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Exhibit 3Average Input Score/Output Score by Innovation Profile


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innovation initiatives and where they stood. In response to the question of how well the insurance industry has adopted and implemented innovation, nearly a quarter of respondents answered “not well.” This view was borne out by our testing results, with the vast majority of companies scoring higher on their innovation input scores than their output scores (Exhibit 2). Further, the average input score divided by the output score increases as you move down the scale, signaling that the level of innovative output at these organizations is aligned more closely to the level of resources used to fund these innovative projects (Exhibit 3). Most companies are at the earlier stages of developing innovative initiatives, and that successful implementation, along with measurable qualitative or quantitative returns on investment, is still a ways off for many.

When developing the innovation scoring, questions were raised as to how start-up insurtech companies would score. Preliminary testing identified some market disruptors. These companies generally had high scores across the four input components, along with higher transformation scores. However, their results score was generally at the lower end and did not provide rating enhancement. Actualizing innovativeness takes time. A high degree of innovativeness is not a rating positive until a company can achieve concrete results, such as greater market share or a better competitive position.

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Exhibit 3Average Input Score/Output Score by Innovation Profile


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Innovation Input OverviewLeadership: Slightly Ahead of the CurveThe first of the four components of AM Best’s input assessment, leadership, was ahead of the curve in terms of scoring. Leadership had the smallest percentage of 1s and nearly the largest percentage of 4s (Exhibit 4), compared with culture, resources, and processes and structure. Although overall industry scores are still mostly concentrated at the lower end, management teams have largely recognized that innovation is a critical aspect of an organization’s continued operations. For Leaders, this recognition reaches the highest level and includes board participation. Management that can clearly describe the relationship between their company’s mission and their innovation strategies were able to achieve concrete innovation results.

Management may be encouraging innovation, but filtering this encouragement throughout all of the organization’s levels is still a challenge. Compared with leadership scores, culture scores skewed more towards the bottom of the scale, which speaks to the difficulties companies face when trying to embed innovation among business units, even with support from the top.

Culture: Incentives LackingFor many companies, developing an innovative culture is an ongoing challenge. The culture in insurance companies is often conservative by design, given that one of the industry’s missions is to provide a means of risk management and mitigation. More than most industries, insurance is subject to shock losses that, owing to a poorly developed insurance product or badly handled claims, can quickly result in financial weakness or even company insolvencies. These issues result in a conservative culture that evaluates new initiatives skeptically, from the drawing board to the final result. This can make innovation in insurance companies challenging if it is not fully supported enterprise-wide across business units and leadership.

The majority of respondents to AM Best’s survey on innovation agreed that innovation was not just a buzzword but rather “very” or “extremely” critical to the success of their organizations. However, the testing results suggested the opposite. For example, testing revealed that most organizations did not have explicit incentives for their employees to innovate, which could dampen development of an innovative culture (Exhibit 5). Without such encouragement, even direct instruction from upper management might not result in potential efficiencies and opportunities. Entities that had incentives in place—such as rewarding employees monetarily if their ideas were implemented and resulted in cost savings

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Exhibit 4Innovation Leadership Scores


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Exhibit 5Innovation Culture Scores


(%)

44


or improved bottom line results—had higher innovation output scores.

Many organizations could not sufficiently demonstrate that they have learned from past failures in the innovation process. There is a host of explanations for this result, from inadequate processes to address and document failures, to human nature—as well as the fact that companies seldom want to discuss failures with a credit analyst. In some instances, companies do not have any notable failures owing to a lack of innovation projects to begin with. Regardless, AM Best analysts noted in their scoring that many companies were either unable or unwilling to discuss past innovation failures or how they may have learned from mistakes.

Resources: Systems and Technology KeyWhere companies were viewed most favorably on resource inputs was in general systems and technology (Exhibit 6). This came as a bit of a surprise, as the insurance industry has been bogged down for many years by obsolete legacy systems that are inefficient or do not facilitate appropriate analysis of data. Still, in discussions with companies about resources available for innovation, AM Best analysts found that general systems and technology was the most popular topic, possibly due to the legacy system issue itself. Many entities may be upgrading to modern systems due to need, while many others are seizing this opportunity to partner with insurtechs or create internal initiatives to leverage emerging technologies, and acquire more advanced capabilities.

Processes and Structure: Innovation Still an Ad Hoc EndeavorCompanies are already starting to dedicate resources to innovation and developing structures for the innovation process to effectively leverage these resources and create value. However, the vast majority of companies lacked a replicable innovation process (Exhibit 7). Most entities instead elected to formulate innovative initiatives ad hoc; few provided AM Best analysts with evidence that they had processes or structure in place to consistently develop, implement, and assess changes. Those companies scoring low in processes and structure were much more likely to be reactive when it came to major changes in their markets. In some instances, resource constraints appeared to hinder the development of an agile innovation framework. Companies scoring well on processes and structure often did so due to appropriate governance, management, and use of data.

Of all the different technologies associated with innovation in recent years—AI, IoT (Internet of Things), blockchain, and cloud computing—Big Data was viewed by survey respondents as having the greatest impact on the industry by far. Companies are starting to leverage Big Data in innovative ways to better price, reserve, market, and distribute products. Given that data provides valuable insights on all facets of company operations and performance—from consumer behavior to underwriting practices—insurers are increasingly seeking new sources of data that they can leverage into actionable insights. However, leveraging this data requires clearly defined and documented governance structures that facilitate data quality, stewardship, and ownership.

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Exhibit 6Innovation Resources Scores


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54


or improved bottom line results—had higher innovation output scores.

Many organizations could not sufficiently demonstrate that they have learned from past failures in the innovation process. There is a host of explanations for this result, from inadequate processes to address and document failures, to human nature—as well as the fact that companies seldom want to discuss failures with a credit analyst. In some instances, companies do not have any notable failures owing to a lack of innovation projects to begin with. Regardless, AM Best analysts noted in their scoring that many companies were either unable or unwilling to discuss past innovation failures or how they may have learned from mistakes.

Resources: Systems and Technology KeyWhere companies were viewed most favorably on resource inputs was in general systems and technology (Exhibit 6). This came as a bit of a surprise, as the insurance industry has been bogged down for many years by obsolete legacy systems that are inefficient or do not facilitate appropriate analysis of data. Still, in discussions with companies about resources available for innovation, AM Best analysts found that general systems and technology was the most popular topic, possibly due to the legacy system issue itself. Many entities may be upgrading to modern systems due to need, while many others are seizing this opportunity to partner with insurtechs or create internal initiatives to leverage emerging technologies, and acquire more advanced capabilities.

Processes and Structure: Innovation Still an Ad Hoc EndeavorCompanies are already starting to dedicate resources to innovation and developing structures for the innovation process to effectively leverage these resources and create value. However, the vast majority of companies lacked a replicable innovation process (Exhibit 7). Most entities instead elected to formulate innovative initiatives ad hoc; few provided AM Best analysts with evidence that they had processes or structure in place to consistently develop, implement, and assess changes. Those companies scoring low in processes and structure were much more likely to be reactive when it came to major changes in their markets. In some instances, resource constraints appeared to hinder the development of an agile innovation framework. Companies scoring well on processes and structure often did so due to appropriate governance, management, and use of data.

Of all the different technologies associated with innovation in recent years—AI, IoT (Internet of Things), blockchain, and cloud computing—Big Data was viewed by survey respondents as having the greatest impact on the industry by far. Companies are starting to leverage Big Data in innovative ways to better price, reserve, market, and distribute products. Given that data provides valuable insights on all facets of company operations and performance—from consumer behavior to underwriting practices—insurers are increasingly seeking new sources of data that they can leverage into actionable insights. However, leveraging this data requires clearly defined and documented governance structures that facilitate data quality, stewardship, and ownership.

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Exhibit 6Innovation Resources Scores


(%)

5


The exponential growth of IoT devices in particular is providing insurers with new data, particularly in the form of telematics. Equally important, more advanced forms of machine learning are helping insurers make greater sense of both structured and unstructured data, which in turn is further accelerating how companies leverage Big Data throughout their operations. The key is to be able to manage, organize, and fully use that data through defined processes and structures, ensuring data accuracy and quality, that result in sound and appropriate decisions.

Innovation Output OverviewResultsMost companies score at the lower end of the innovation output scores. More favorable assessments are seen in the results subcomponent, as 20% of companies score 3 or 4, while only 9% score 3 or 4 (Exhibit 8) on the other output subcomponent—level of transformation. Ultimately, innovation must lead to measurable results that make the investment of resources worthwhile. Companies that invest significantly in innovation infrastructure but derive no tangible benefit will score poorly on results. About a third of companies earned the lowest score of 1 in their results assessment, while roughly 80% scored a 1 or 2. The limited number of companies earning the highest scores shows that achieving a positive impact —such as improved underwriting, low combined ratios, and higher growth—from innovation over a sustained period is a challenge most of the industry has yet to overcome.

Level of TransformationOutput scores for the level of transformation are even less favorable; less than 1% of organizations earned the highest score of 4, while just 8% earned a 3 (Exhibit 8). Only those companies with best-in-class output receive higher transformation scores. Transformative initiatives are those that create value, improve customer engagement and experience, lead to superior business models, or significantly enhance growth opportunities and are comparable to leaders in other industries. As such, most companies scored at the lower end of this category. Few innovations in the industry tend to be ground-breaking.

Refining AM Best’s Innovation ScoresAM Best’s initial innovation scoring results were largely in line with what was expected during the development of its scoring rubric and hence a good indicator that the new criteria is effective at quantifying aspects that in many respects are inherently qualitative. These results will be used to further refine the questions AM Best analysts pose to managers and in turn the innovation scoring process. Initial results revealed that challenges with innovating and producing measurable results are not limited to a specific type of insurance entity. Furthermore, managers can learn from the best practices of high scorers through post-mortem analysis, leveraging ideas from employees at all levels, and working towards a replicable innovation process, for greater agility when market disruptions occur.

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Exhibit 7Innovation Process & Structure Scores


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Exhibit 8Innovation Output Scores


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Exhibit 8Innovation Output Scores


Innovation

Insurers are classified according to five innovation capability assessments: Leader, Prominent, Significant, Moderate, and Minimal


Analytical Contacts:Clare Finnegan, Oldwick+1 (908) 439-2200 Ext. [email protected]


Contributors:Jieqiu FanVictoria OhorodnykJennifer AsamoahConnor Brach

2020-008



AM Best’s Innovation Capability Assessment ProfilesAM Best’s review of the innovation capabilities of rated companies reveals common trends among insurers in each of our five innovation assessment categories: Leader, Prominent, Significant, Moderate, and Minimal. Overall, our innovation capability assessments skew towards lower profiles, as half of our rating units scored as Moderate, versus 23% for Significant, 9% for Prominent, and 1% for Leader (Exhibit 1).

Companies assessed as being more innovative (Leader and Prominent) differentiate themselves by credibly quantifying the results of their innovation efforts. Leaders further distinguish themselves by pushing the innovation ceiling of the industry and responding to market pressures by offering new products to solve emerging needs. They often leverage cutting-edge technology to enhance the customer experience, redefining the role of an insurer—and, unsurprisingly, generally had high “level of transformation” scores. The total number of Leaders was quite low. The priority that Leaders place on innovation is reflected in the rating assessments of their lead rating units, which generally had some of the strongest operating performance and business profile assessments of AM Best’s rated population.

Prominent companies leverage innovation to their competitive advantage, although their innovations tend to be somewhat less transformative, or their results are less entrenched, than for Leaders. Those companies assessed as Significant recognize the need to innovate, but frequently have yet to develop deep connections between their innovation inputs and tangible outputs. Companies deemed Moderate are often just beginning to develop an innovation strategy in reaction to competitive pressure. The least innovative companies—those assessed at Minimal—frequently operate in heavily regulated lines of business or have fewer competitive pressures, leaving little incentive to innovate.

In the following sections, we highlight the key characteristics that define each assessment group. The conclusions are derived from preliminary testing of AM Best’s innovation criteria procedure. Additionally, with only five assessment categories and over 1,300 ratings around the globe, the range of companies in a specific assessment is

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Exhibit 1Innovation Assessments


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broad; differences between those scoring the lowest and the highest in a particular category are to be expected.

LeadersWe assess a company as “Leader” when its innovation score is 28 or higher. Leaders fully embrace and develop their innovation initiatives with demonstrated support from their boards. These companies have clearly documented innovation strategies linked to their long-term strategic objectives and have succeeded in executing such efforts. Their initiatives are proactively developed and drive the achievement of the companies’ mission, vision, and values. Leaders strive to create a culture receptive to new ideas and open to risk-taking—and anticipate the possibility of failure. Their risk management programs proactively identify emerging risks and implement corrective action plans.

Highly innovative Leaders experiment with new ideas and approaches. Frequently, these companies are subject to market pressures stemming from externally driven shifts in their marketplace. Their adeptness with innovation has been honed as a response to these pressures and their resulting innovations tend to be the most transformative.

Leaders have extensive resources allocated to innovation and, in some instances, develop partnerships with insurtechs and others to support innovation initiatives. Leaders use technology to develop new products, provide better customer experiences, and improve both accuracy and underwriting. The superior operating performance of Leaders is consistent with their output evaluations.

ProminentA company is assessed as “Prominent” when its innovation score falls between 23 and 27. The companies in the Prominent category have a clear track record of using innovation to improve their business profile and achieve a competitive advantage. Prominent companies quantify the benefits of their innovation initiatives over the long term and see innovation as critical to their continued success.

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Exhibit 2Average Output Score* by Innovation Assessment

* Score prior to doubling.Source: AM Best data and research

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broad; differences between those scoring the lowest and the highest in a particular category are to be expected.

LeadersWe assess a company as “Leader” when its innovation score is 28 or higher. Leaders fully embrace and develop their innovation initiatives with demonstrated support from their boards. These companies have clearly documented innovation strategies linked to their long-term strategic objectives and have succeeded in executing such efforts. Their initiatives are proactively developed and drive the achievement of the companies’ mission, vision, and values. Leaders strive to create a culture receptive to new ideas and open to risk-taking—and anticipate the possibility of failure. Their risk management programs proactively identify emerging risks and implement corrective action plans.

Highly innovative Leaders experiment with new ideas and approaches. Frequently, these companies are subject to market pressures stemming from externally driven shifts in their marketplace. Their adeptness with innovation has been honed as a response to these pressures and their resulting innovations tend to be the most transformative.

Leaders have extensive resources allocated to innovation and, in some instances, develop partnerships with insurtechs and others to support innovation initiatives. Leaders use technology to develop new products, provide better customer experiences, and improve both accuracy and underwriting. The superior operating performance of Leaders is consistent with their output evaluations.

ProminentA company is assessed as “Prominent” when its innovation score falls between 23 and 27. The companies in the Prominent category have a clear track record of using innovation to improve their business profile and achieve a competitive advantage. Prominent companies quantify the benefits of their innovation initiatives over the long term and see innovation as critical to their continued success.

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Exhibit 2Average Output Score* by Innovation Assessment

* Score prior to doubling.Source: AM Best data and research

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Prominent companies typically have multiple rating strengths across AM Best’s building blocks. Senior management actively encourages an innovation mindset throughout the whole organization, integrating innovation with their overall business strategy, their business model, and company culture. Similarly to Leaders, Prominent companies have demonstrated a significant and sustained competitive advantage because of their innovation programs.

Typically, a Prominent company consistently dedicates a material portion of its annual budget to innovation initiatives (in house, acquisitions, and partnerships) , often leveraging external resources to support internal innovation efforts.

Prominent companies typically score very high on innovation output. Their innovation initiatives have a measurable impact on their financial and operating results, through lower expense ratios; higher revenue growth; more robust, customer-centric, data-driven product design; better customer retention; greater brand recognition; and stronger data analytics.

Significant“Significant” companies are those whose innovation scores fall between 18 and 22. Companies assessed at Significant see innovation as an important aspect of operations and are quite active with regard to innovation initiatives. These initiatives receive buy-in from senior management and are supported by some budgetary resources. Significant companies may have a number of simultaneous projects, including partnerships with insurtechs and others, to accelerate internal innovation efforts.

What distinguishes Significant companies from Prominent companies is their perspective on innovation. These companies tend to view themselves more as “adopters” instead of “innovation leaders.” This approach often results from senior management’s assessment of its strengths and weaknesses, as well as from cost/benefit analyses. These companies focus on innovation that is more incremental rather than transformative, particularly as it relates to underwriting, predictive analytics, and modernization of IT infrastructure.

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Exhibit 3Average Input Score by Innovation Assessment


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“Results” for these companies may be scored relatively high, compared with the “level of transformation.”

ModerateWe assess a company as “Moderate” when its innovation score falls between 12 and 17. These companies are generally focused on the insurance basics. Although aware of the emerging risks and opportunities related to cutting-edge technologies, they have not materially benefited directly from innovation.

Innovation may not be a priority for Moderate companies, owing to limited resources. These companies may be slower to adopt new systems and strategies than their competitors. However, even though operating results may not have benefited from recent innovation, Moderate companies are not necessarily behind the curve. For these companies, there may be early signs of innovation outputs, but a longer track record is needed to determine their commitment to innovation. Their business profile assessments are typically Limited or Neutral.

Minimal“Minimal” companies have innovation scores below 12. They tend to be narrowly focused, operating in a limited geographic area and in highly specialized lines of business protected by regulation or other barriers to entry. The business profiles of a majority of Minimal companies have been assessed as Limited, reflecting this concentration.

Minimal companies may view innovation as secondary to their core business operations. In certain instances, these companies have customer relationships outside the insurance area that make retaining customers through innovation less pressing. In other cases, these entities are in run-off. Frequently, Minimal companies face resource constraints that prevent them from implementing innovation initiatives.

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“Results” for these companies may be scored relatively high, compared with the “level of transformation.”

ModerateWe assess a company as “Moderate” when its innovation score falls between 12 and 17. These companies are generally focused on the insurance basics. Although aware of the emerging risks and opportunities related to cutting-edge technologies, they have not materially benefited directly from innovation.

Innovation may not be a priority for Moderate companies, owing to limited resources. These companies may be slower to adopt new systems and strategies than their competitors. However, even though operating results may not have benefited from recent innovation, Moderate companies are not necessarily behind the curve. For these companies, there may be early signs of innovation outputs, but a longer track record is needed to determine their commitment to innovation. Their business profile assessments are typically Limited or Neutral.

Minimal“Minimal” companies have innovation scores below 12. They tend to be narrowly focused, operating in a limited geographic area and in highly specialized lines of business protected by regulation or other barriers to entry. The business profiles of a majority of Minimal companies have been assessed as Limited, reflecting this concentration.

Minimal companies may view innovation as secondary to their core business operations. In certain instances, these companies have customer relationships outside the insurance area that make retaining customers through innovation less pressing. In other cases, these entities are in run-off. Frequently, Minimal companies face resource constraints that prevent them from implementing innovation initiatives.

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Innovation

Reinsurance, health, and auto are the lines that have been the most transformed by innovation


Analytical Contacts:Steven Chirico+1 (908) 439-2200 Ext. [email protected]

Edin Imsirovic+1 (908) 439-2200 Ext. [email protected]


Jennifer Asamoah+1 (908) 439-2200 Ext. [email protected]

Contributor: Bridget Maehr

2020-020



Innovation by Line of BusinessLine of business makes a difference when discussing innovation in the insurance industry. Certain lines lend themselves more readily to innovative strategies than do others. In lines where competition is fierce or regulation has undergone significant change, innovation provides a means for a company to, not just survive, but also to gain a sustainable advantage. The degree of complexity and scalability also affect the extent to which a particular line has been transformed by innovation. Our testing of innovation throughout the insurance industry finds that reinsurance, health, and auto are the lines of business that have been most transformed by innovation (Exhibit 1). AM Best identified Leaders in each of these lines that have managed to survive and thrive in an environment that has been subject to rapid change.

Complexity is key factor driving innovative success. Many of the innovative tools and techniques currently available lend themselves to application in less complex underwriting and claims handling situations. Once implemented, successful initiatives often may be scaled and replicated across an enterprise, improving profitability. Health, auto, and certain types of reinsurance are able to benefit from the relative simplicity of their underwriting and claims demands, enabling scalability and replication, and ultimately resulting in greater innovation success.

Compared with most other industries, the insurance industry has been slow to innovate. Innovation and technology budgets typically are 5% of revenue or less, making R&D a relatively low priority. Some lines have demonstrated innovative leadership, but other lines are more difficult for insurers to apply innovative strategies. Insurers in lines of business that are highly complex or subject to significant litigation risk and entrenched regulation may be less pressured to innovate. In other lines, the arm’s-length distance between the insurer and the consumer, along with more limited competitive pressures and low-risk products, have moderated the drive to innovate. For these lines, innovation lacks the same urgency as for the reinsurance, health, and auto segments. As the pace of innovation increases, the top performers in these lines may be those that successfully overcome the innate challenges of their segment to develop new products, processes, services, and business models.

Regardless of the line of business, however, the unique situational characteristics of a particular company can affect the impact of innovation on the insurer’s financial strength. For instance, even within the same line, the competitive position of a small regional insurer is much different from that of a national writer, and its innovation needs are

Health, 19

Reinsurance, 11

Auto/Home, 9

Other Lines, 61

Exhibit 1Leader & Prominent Assessments by Line of Business(%)


122


also likely divergent. When assessing the impact of innovation on a company’s rating, AM Best considers not only the line of business, but also circumstances specific to an insurer.

Reinsurance The reinsurance segment scored the largest share of Leaders (6%) (Exhibit 2). Reinsurers have been consistently challenged by high severity events and competitive pressures and have had to be innovative to stay relevant and profitable. During soft markets, they have to contend with pricing and high competition. At the same time, they have to make sure they have “dry powder” so they can, not just survive, but also thrive after market-changing events. Reinsurers, therefore, need a culture of innovation embedded throughout their organizations.

Reinsurers became innovators following the significant damages inflicted by Hurricanes Hugo (1989, estimated insured loss of $4.2 billion) and Andrew (1992, estimated insured loss of $15.5 billion) in the US, adopting catastrophe modeling before much of the industry and using modeling results to manage risk. They have also pioneered the use of risk and economic models to measure and manage capital. The more successful reinsurers have used prudent modeling results—along with analytical judgment—to achieve operating results that exceed their cost of capital.

Additionally, the relatively straightforward composition of most reinsurance contracts lends itself readily to innovation, given that ceding companies manage much of the complex underwriting and claims functions. The more open regulatory environment of many offshore domiciles has enabled some reinsurers to craft terms and conditions and rates that incorporate the results of sophisticated risk modeling, contingent pricing, and novel ways of approaching difficult risks. The relative newness of some reinsurers facilitates the development of a more innovative culture as they have fewer legacy systems or less entrenched operating norms. Moreover, a reinsurer’s value proposition is more closely aligned with an innovative culture, which rewards creative product design and uses internal risk modeling to seek out profitable opportunities.

Growing Competition Competition in the industry has intensified, especially with regard to the distribution of risk, and all stakeholders in insurance are trying to get closer to the end user. Reinsurers have made good strides by investing in predictive modeling, artificial intelligence, and new products, and are using their expertise to help clients manage risk, develop new products, and become valuable business partners. Large reinsurers with economies of scale have made more advances in this area through partnerships with technology firms, investing in accelerators and engaging with innovators.

18

44

1815

60

5

10

15

20

25

30

35

40

45

50


(%)

Exhibit 2Reinsurance Innovation Capability Assessments

Percentages may not add up to 100 due to rounding. Source: AM Best data and research

132


also likely divergent. When assessing the impact of innovation on a company’s rating, AM Best considers not only the line of business, but also circumstances specific to an insurer.

Reinsurance The reinsurance segment scored the largest share of Leaders (6%) (Exhibit 2). Reinsurers have been consistently challenged by high severity events and competitive pressures and have had to be innovative to stay relevant and profitable. During soft markets, they have to contend with pricing and high competition. At the same time, they have to make sure they have “dry powder” so they can, not just survive, but also thrive after market-changing events. Reinsurers, therefore, need a culture of innovation embedded throughout their organizations.

Reinsurers became innovators following the significant damages inflicted by Hurricanes Hugo (1989, estimated insured loss of $4.2 billion) and Andrew (1992, estimated insured loss of $15.5 billion) in the US, adopting catastrophe modeling before much of the industry and using modeling results to manage risk. They have also pioneered the use of risk and economic models to measure and manage capital. The more successful reinsurers have used prudent modeling results—along with analytical judgment—to achieve operating results that exceed their cost of capital.

Additionally, the relatively straightforward composition of most reinsurance contracts lends itself readily to innovation, given that ceding companies manage much of the complex underwriting and claims functions. The more open regulatory environment of many offshore domiciles has enabled some reinsurers to craft terms and conditions and rates that incorporate the results of sophisticated risk modeling, contingent pricing, and novel ways of approaching difficult risks. The relative newness of some reinsurers facilitates the development of a more innovative culture as they have fewer legacy systems or less entrenched operating norms. Moreover, a reinsurer’s value proposition is more closely aligned with an innovative culture, which rewards creative product design and uses internal risk modeling to seek out profitable opportunities.

Growing Competition Competition in the industry has intensified, especially with regard to the distribution of risk, and all stakeholders in insurance are trying to get closer to the end user. Reinsurers have made good strides by investing in predictive modeling, artificial intelligence, and new products, and are using their expertise to help clients manage risk, develop new products, and become valuable business partners. Large reinsurers with economies of scale have made more advances in this area through partnerships with technology firms, investing in accelerators and engaging with innovators.

18

44

1815

60

5

10

15

20

25

30

35

40

45

50


(%)

Exhibit 2Reinsurance Innovation Capability Assessments


3


Third-Party CapitalAs third-party capital continues to grow, threatening the traditional reinsurance model, reinsurers have formed partnerships—non-technological innovation—with third-party players to better align investors’ risk appetites with the cost of capital, by using retrocession markets, insurance-linked securities, and sidecars.

Insurtech OpportunitiesReinsurers have been making substantial insurtech investments designed to gain competitive advantage both horizontally and vertically. The industry is highly competitive horizontally, with reinsurers and alternative capital fiercely competing on standard business while attempting to carve out pockets of advantage wherever they can. Vertical integration will also require getting closer to and becoming a more integral part of the reinsurance supply chain. Reinsurers can become more vertically integrated by taking advantage of their institutional knowledge and deep pockets, which position them well to leverage insurtech investments.

One of the main ways reinsurers invest in insurtech is by buying or partnering with technology intermediaries that use technology to attract business the reinsurer desires more quickly and at much lower ceding commissions, than current arrangements with reinsurance brokers (which entails commissions) and ceding companies (which need to be reimbursed for inefficient expense ratios). By collaborating with insurtechs and primary insurers, life reinsurers add value to automated underwriting given their expertise, in addition to offering direct writers an avenue to transfer risk.

Furthermore, the reinsurance segment provides instant credibility to the insurtech start-up intermediaries they invest in by providing a large, highly rated balance sheet and superior enterprise risk management capabilities to protect policyholders. Reinsurer-backed start-ups can thus gain traction and scale to quickly outpace their peers. The symbiotic relationship between reinsurers and insurtech start-up intermediaries is not confined to the large reinsurers.

Distribution Advancements, Third-Party Capital PartnershipsOver the next few years, reinsurers are likely to continue to innovate primarily in distribution and third-party capital management. They will likely continue purchasing and partnering with managing general agents and new novel incubation production facilities that offset the concentration risk of relying on reinsurance brokers and traditional ceding companies.

Reinsurers are also likely to play a larger role in the formation and feeding of third-party capital facilities that remove tail risk from traditional balance sheets. The property catastrophe seasons of 2017 and 2018 affirmed the enterprise risk management capabilities and discipline of the reinsurers writing these coverages. The disciplined approach, superior property catastrophe modeling, and strong enterprise risk management generated results attractive to third-party capital providers. As a result, many reinsurers have expanded their appetite for starting or expanding their own third-party capital vehicles, as well as partnering with unrelated third-party capital providers.

Health Over one fifth of the health segment scored in the top two innovation capability assessments: Leaders (4%) and Prominent (17%) (Exhibit 3). It is also the only segment with nearly as many Leader assessments as Minimal (6%). Health insurance companies have large claims volumes and high loss ratios, with generally low margins. Innovation enables them to stay ahead of rising medical cost trends and administrative expenses—and remain profitable. Additionally, the health insurance market continues to change rapidly owing to regulatory and legislative

144


changes, market demand, and medical advances. As a result, health insurers are quite receptive to new technologies and are usually early adopters that have produced quantifiable results (Exhibit 4).

Innovation takes many forms for the health segment. Some collaborate with providers for a more holistic medical care management program to improve the quality of care—examples include integrated delivery models, value-based reimbursement models, risk-sharing, and population health management. In addition, health insurers typically have more advanced technology and data capabilities that they can share with providers for better coordination of care. Insurers and providers can use data analytics to improve quality of care, lower costs, and improve health outcomes, which will result in more satisfied and engaged members. Data is also key to the ability to implement more advanced reimbursement models, especially those that include quality and cost-of-care metrics. Strict privacy rules can make sharing data and allowing access to records problematic, but insurers and providers are designing their systems and processes to ensure patient privacy.

Data ResourcesInsurers in general recognize that advances in cloud computing, the Internet of Things (IoT) and artificial intelligence (among others) have reshaped how the industry captures, stores, and uses data. For health insurers, the large volume of claims creates a vast data resource; they employ a large number of data experts to harness this information to support high-quality, cost-efficient care.

6

34

39

17

40

5

10

15

20

25

30

35

40

45


(%)

Exhibit 3Health Innovation Capability Assessments


9.2

7.77.0 6.8

0

1

2

3

4

5

6

7

8

9

10

Health Reinsurance Life/Annuity Property/Casualty

Aver

age

Inno

vatio

n O

utpu

t Sco

re

Exhibit 4Average Innovation Output Score


154


changes, market demand, and medical advances. As a result, health insurers are quite receptive to new technologies and are usually early adopters that have produced quantifiable results (Exhibit 4).

Innovation takes many forms for the health segment. Some collaborate with providers for a more holistic medical care management program to improve the quality of care—examples include integrated delivery models, value-based reimbursement models, risk-sharing, and population health management. In addition, health insurers typically have more advanced technology and data capabilities that they can share with providers for better coordination of care. Insurers and providers can use data analytics to improve quality of care, lower costs, and improve health outcomes, which will result in more satisfied and engaged members. Data is also key to the ability to implement more advanced reimbursement models, especially those that include quality and cost-of-care metrics. Strict privacy rules can make sharing data and allowing access to records problematic, but insurers and providers are designing their systems and processes to ensure patient privacy.

Data ResourcesInsurers in general recognize that advances in cloud computing, the Internet of Things (IoT) and artificial intelligence (among others) have reshaped how the industry captures, stores, and uses data. For health insurers, the large volume of claims creates a vast data resource; they employ a large number of data experts to harness this information to support high-quality, cost-efficient care.

6

34

39

17

40

5

10

15

20

25

30

35

40

45


(%)

Exhibit 3Health Innovation Capability Assessments


9.2

7.77.0 6.8

0

1

2

3

4

5

6

7

8

9

10

Health Reinsurance Life/Annuity Property/Casualty

Aver

age

Inno

vatio

n O

utpu

t Sco

re

Exhibit 4Average Innovation Output Score


5


The health segment relies heavily on accumulated data to manage medical expenses, using sophisticated data analysis in a number of ways—one example is using biometric data to identify high utilizers of medical services, such as individuals with conditions such as high-risk pregnancies, diabetes, cancer, heart or lung conditions, or kidney disease. These individuals can then be referred for more in-depth case management with medical professionals. Data analysis can also assist in determining which individuals would benefit from screening and preventive measures, while predictive modeling using claims and pharmacy data can help insurers identify members who may be likely to become high utilizers.

Wellness ProgramsIncreasingly, health insurers are also offering online wellness programs (which may include voluntary health risk assessments) that encourage and reward members for developing healthier lifestyles. For example, insurers can help members who have been identified as pre-diabetic to adopt healthier habits (such as diet and exercise) to help improve their health and lessen the risk of developing Type 2 diabetes.

WearablesSome insurers offer coverage for the use of wearable technologies, including smart watches, fitness trackers, and other devices. Remote monitoring is now a reality, transmitting data

Life/AnnuityOverall, more than two thirds of our L/A rating units are concentrated in the Moderate (37%) and Significant (33%) Capability Assessment categories, with an additional 23% assessed as Minimal (Exhibit 5). Challenges for the segment include the lengthy process of updating/transferring old legacy systems, which remains a top priority for many in the segment.

The L/A carriers have made strides in developing the front-end sales aspect of products. Companies have focused their efforts on using Big Data to better target their marketing efforts and leverage technology, to both streamline business processes and make it easier and more efficient for agents and customers to interact with them. Addressing customer needs is the primary reason that innovation is important to the segment, leading to growth in the direct-to-consumer (DTC) distribution channel, achieving better penetration of the elusive middle and Millennial markets. Companies are also exploring the use of data-driven underwriting models that can render decisions instantly without additional tests.

The pace and scale of innovation in the segment is likely to accelerate, as life companies refine their strategies to enhance their competitive positions, improve the customer experience, strengthen profitability, and remain relevant in an ever changing market, while simultaneously creating new platforms for new business.

23

37

33

80

0

5

10

15

20

25

30

35

40


(%)

Exhibit 5L/A Innovation Capability Assessments


166


directly from the patient to the healthcare provider—more convenient, timely, cost-effective, and potentially life-saving. Virtual doctor appointments are becoming more popular, with some health plans making visits available to members via their app, with reduced or no cost-sharing. Tele-medicine is a cost-effective means to increase capacity and access for less critical care or for behavioral health.

Cost ManagementTraditionally, health insurers have used technology to automate processes to manage costs, especially for claims processing and customer service call centers. Claims imaging, auto adjudication, claims editing, and voice recognition technology were game changers for the health segment. Innovative technology also allows health insurers to detect fraud and abuse by identifying abnormal claims patterns. Health insurers have built on these successes and now routinely use artificial intelligence and advanced programming and analytics.

Streamlined ProcessesInnovative technology reaches almost all operational areas, including sales, enrollment, billing, and customer service. Insurers use online tools or apps to quote, enroll, and bill customers. Members can look up claims or chat with customer service representatives. More advanced uses of technology include routing calls to a nurse from members who could benefit from wellness or preventive screenings.

Vertical IntegrationMore advanced collaborative models with providers include a degree of vertical integration. There has not been a one-size-fits-all approach to vertical integration between health insurers and providers; collaborations range from hospital/insurer, pharmacy benefit manager (PBM)/insurer, and outpatient services and primary care/insurer. Some are the result of M&A; others are formed through risk-sharing arrangements. These types of arrangements are also being formed for competitive reasons, as new entrants in the health insurance market are using more innovative models, with reliance on technology and convenience to attract younger consumers, who tends to be healthier.

New Ideas, New Business ModelsInnovation isn’t limited to technology. It also includes a company’s ability to generate ideas that can be incorporated into—and even lead to—new business models. Some health plans with more developed capabilities have capitalized on their ideas, selling their services to other plans. This satisfies a need in the market as not all health plans have the resources or desire to build capabilities themselves. Health insurers, both large and small, have fostered relationships with digital health companies and insurtechs to develop and implement new technologies that can change how care is delivered or managed. As both medical treatment and delivery of care continue to advance, the health segment will remain open to new ideas and continue to evolve.

AutoAuto insurers face intensifying competitive pressures, with escalating severity and persistently inadequate pricing in commercial auto. Technological changes are driving some immense changes in the auto lines, with the potential to rapidly change the competitive landscape. The speed and scale of these changes is transforming the auto line into one of most innovative in the industry—especially when compared with other P/C lines of business (Exhibit 6). The innovative companies that are able to leverage these trends to their advantage stand to reap significant benefits over their slower peers.

176


directly from the patient to the healthcare provider—more convenient, timely, cost-effective, and potentially life-saving. Virtual doctor appointments are becoming more popular, with some health plans making visits available to members via their app, with reduced or no cost-sharing. Tele-medicine is a cost-effective means to increase capacity and access for less critical care or for behavioral health.

Cost ManagementTraditionally, health insurers have used technology to automate processes to manage costs, especially for claims processing and customer service call centers. Claims imaging, auto adjudication, claims editing, and voice recognition technology were game changers for the health segment. Innovative technology also allows health insurers to detect fraud and abuse by identifying abnormal claims patterns. Health insurers have built on these successes and now routinely use artificial intelligence and advanced programming and analytics.

Streamlined ProcessesInnovative technology reaches almost all operational areas, including sales, enrollment, billing, and customer service. Insurers use online tools or apps to quote, enroll, and bill customers. Members can look up claims or chat with customer service representatives. More advanced uses of technology include routing calls to a nurse from members who could benefit from wellness or preventive screenings.

Vertical IntegrationMore advanced collaborative models with providers include a degree of vertical integration. There has not been a one-size-fits-all approach to vertical integration between health insurers and providers; collaborations range from hospital/insurer, pharmacy benefit manager (PBM)/insurer, and outpatient services and primary care/insurer. Some are the result of M&A; others are formed through risk-sharing arrangements. These types of arrangements are also being formed for competitive reasons, as new entrants in the health insurance market are using more innovative models, with reliance on technology and convenience to attract younger consumers, who tends to be healthier.

New Ideas, New Business ModelsInnovation isn’t limited to technology. It also includes a company’s ability to generate ideas that can be incorporated into—and even lead to—new business models. Some health plans with more developed capabilities have capitalized on their ideas, selling their services to other plans. This satisfies a need in the market as not all health plans have the resources or desire to build capabilities themselves. Health insurers, both large and small, have fostered relationships with digital health companies and insurtechs to develop and implement new technologies that can change how care is delivered or managed. As both medical treatment and delivery of care continue to advance, the health segment will remain open to new ideas and continue to evolve.

AutoAuto insurers face intensifying competitive pressures, with escalating severity and persistently inadequate pricing in commercial auto. Technological changes are driving some immense changes in the auto lines, with the potential to rapidly change the competitive landscape. The speed and scale of these changes is transforming the auto line into one of most innovative in the industry—especially when compared with other P/C lines of business (Exhibit 6). The innovative companies that are able to leverage these trends to their advantage stand to reap significant benefits over their slower peers.

7


Additionally, the auto line is a relatively short-tailed line of business, which encourages experimentation and innovation. Machine learning, Big Data, IoT, and changing consumer expectations are transforming the entire insurance industry, but less complex lines of business, such as auto, are more scalable than most and tend to be more affected by these trends.

Customer ExpectationsChanging consumer tastes and preferences and higher consumer expectations are particularly important for the consumer-oriented lines such as personal auto. Digitization of the economy is having a significant impact on customer expectations, as consumers are drawn to leading technology that delivers a seamless and personalized user experience—insurers are also increasingly facing expectations set by other industries rather than by direct competitors. Price remains a major factor in measuring the quality of the customer experience, but billing and payment, policy offerings, and online and offline service have grown in importance. The notion that insurance is a low-engagement category in which customer relationships can be delegated is becoming outdated. Developing a more streamlined and personalized buying experience can rapidly affect growth, profitability, and expenses. Younger consumers in less complex lines of business such as personal auto are drawn to digital-only self-driven experiences that include advice but remain non-intrusive and available on demand.

Data ToolsBig Data, machine learning, and IoT are dramatically changing the way auto insurers approach risk, as analysis moves from proxy to source data. The explosion in customer data, the growth in analytics, and the rapidly declining cost of computing power and data storage encourage insurance companies to innovate on data analysis. These trends are transforming the underwriting capabilities of all insurance segments and lines of business—especially the commercial and personal auto lines.

Innovative auto insurers are leveraging these technologies to enhance customer interaction. Data-driven tools can direct marketing dollars toward the most promising shoppers, simplify

0 2 4 6 8 10 12 14 16 18

Private Passenger Non-Standard Auto

Medical Professional Liability

Fidelity & Surety

Commercial Automobile

Warranty

Personal Property

Commercial Property

Workers' Compensation

Commercial Casualty

Private Passenger Stand Auto/Homeowners

Exhibit 6Total Innovation Score by P/C Line of Business


188


onboarding, and build personalized offers to customers based on individual preferences and behavioral data. Additionally, advanced forms of machine learning enable instant interaction with customers through chatbots and automate the claims process through visual computing.

On the commercial side, telematics devices are providing fleets, drivers, and companies with an abundance of real-time data that was previously not available. A vehicle telematics device can capture and transmit a large amount of data, including time of day and journey duration, as well as more sophisticated information about a driver’s behavior, including acceleration, braking, and corner speeds. This information allows insurers to determine a driver’s safety and risk profile, and reward good driver behavior, as well as more accurately price policies based on driver risk profiles. In addition, sensor feedback can be used to modify driver behaviors that diminish the level of risk, benefiting both the carrier and the driver as the policyholder. The adoption of telematics in the personal and commercial auto lines is already having a material impact on results, with the most sophisticated users of this technology reporting favorable results.

The personal auto lines have attracted a large share of external (insurtech) entrants, driving both competition and innovation in the segment. Insurtech players in the personal lines are attracted to multiple aspects of the value chain, including telematics, analytics, product development, client acquisition, underwriting, and claims. The majority of insurtechs are not seeking to compete or displace incumbent insurers; rather, they are being launched to help solve legacy problems from general operational inefficiency to underwriting, distribution, and claims functions. Increasingly, innovative auto insurers are finding ways to partner with insurtechs and leverage or emulate their most promising aspects, to speed up their own innovation initiatives. By collaborating with insurtechs or emulating their best practices and business models, innovative insurers gain a competitive advantage and raise the bar for the industry.

Automated ProcessesLess complex lines of business such as auto have significant opportunities to more easily implement automated processes. Digital technologies that give rise to ever-increasing amounts of data hold significant potential for more accurate pricing and risk mitigation. Automated processes should touch every step in the value chain regardless of the line of business or channel, and increase customer satisfaction while reducing operating costs. Automation, when properly implemented, helps insurers with claims, fraud detection, underwriting, customer interaction, administrative processes, and compliance.

Achieving a high degree of automation may require substantial changes to IT architecture, so less complex lines of business can initially benefit the most from innovative changes. For example, the auto line is increasingly making efforts to automate claims from the first notice of loss through liability assessment, damage estimation, and electronic payment, without cumbersome and expensive processing by claims adjusters working in separate claims, payment, and reporting systems. Innovative insurers are working on customer-friendly self-service tools to report and process complex auto claims. The significant opportunities for digital claims transformation are enhancing the customer experience, efficiency, and effectiveness and, in the process creating a competitive advantage for most innovative insurers.

198


onboarding, and build personalized offers to customers based on individual preferences and behavioral data. Additionally, advanced forms of machine learning enable instant interaction with customers through chatbots and automate the claims process through visual computing.

On the commercial side, telematics devices are providing fleets, drivers, and companies with an abundance of real-time data that was previously not available. A vehicle telematics device can capture and transmit a large amount of data, including time of day and journey duration, as well as more sophisticated information about a driver’s behavior, including acceleration, braking, and corner speeds. This information allows insurers to determine a driver’s safety and risk profile, and reward good driver behavior, as well as more accurately price policies based on driver risk profiles. In addition, sensor feedback can be used to modify driver behaviors that diminish the level of risk, benefiting both the carrier and the driver as the policyholder. The adoption of telematics in the personal and commercial auto lines is already having a material impact on results, with the most sophisticated users of this technology reporting favorable results.

The personal auto lines have attracted a large share of external (insurtech) entrants, driving both competition and innovation in the segment. Insurtech players in the personal lines are attracted to multiple aspects of the value chain, including telematics, analytics, product development, client acquisition, underwriting, and claims. The majority of insurtechs are not seeking to compete or displace incumbent insurers; rather, they are being launched to help solve legacy problems from general operational inefficiency to underwriting, distribution, and claims functions. Increasingly, innovative auto insurers are finding ways to partner with insurtechs and leverage or emulate their most promising aspects, to speed up their own innovation initiatives. By collaborating with insurtechs or emulating their best practices and business models, innovative insurers gain a competitive advantage and raise the bar for the industry.

Automated ProcessesLess complex lines of business such as auto have significant opportunities to more easily implement automated processes. Digital technologies that give rise to ever-increasing amounts of data hold significant potential for more accurate pricing and risk mitigation. Automated processes should touch every step in the value chain regardless of the line of business or channel, and increase customer satisfaction while reducing operating costs. Automation, when properly implemented, helps insurers with claims, fraud detection, underwriting, customer interaction, administrative processes, and compliance.

Achieving a high degree of automation may require substantial changes to IT architecture, so less complex lines of business can initially benefit the most from innovative changes. For example, the auto line is increasingly making efforts to automate claims from the first notice of loss through liability assessment, damage estimation, and electronic payment, without cumbersome and expensive processing by claims adjusters working in separate claims, payment, and reporting systems. Innovative insurers are working on customer-friendly self-service tools to report and process complex auto claims. The significant opportunities for digital claims transformation are enhancing the customer experience, efficiency, and effectiveness and, in the process creating a competitive advantage for most innovative insurers.

9


Property/Casualty More than three quarters of our P/C rating units scored in the bottom two innovation assessment profiles (61% Moderate, 15% Minimal), the most of the four insurance segments (Exhibit 7). Given the segment’s diversity in terms of size and scale, the effect on innovation P/C carriers has varied.

Although the insurance industry has been using analytics and data for decades, the digitization of the world is providing the industry with new sources of data, allowing companies to become more data-driven. P/C insurance has always been a data-centric industry, and carriers are always seeking an edge, trying to charge premiums commensurate with the actual underlying risk characteristics, with some form of predictive modeling. With the growing amount of data gleaned from telematics devices or social media websites, the possibilities for even deeper data mining are growing rapidly. Insurers can use Big Data to build unique customer profiles, enabling the creation of personalized offers based on individual preferences and behavioral data. A deeper understanding of customers can facilitate cross-selling opportunities, increase retention, and enhance the customer experience.

Technology has had a stronger impact on the personal lines and some of the commercial lines, such as small commercial and workers’ compensation. The more complex lines, such as surplus lines and large commercial, combine technological advancements to some extent but still depend on old-fashioned boots-on-the-ground, engineering-oriented underwriting. We expect complex product lines and liability lines (which have hidden unknown mass tort elements) to continue to use experience-based underwriting judgment.

15

61

18

5 10

10

20

30

40

50

60

70


(%)

Exhibit 7P/C Innovation Capability Assessments


20

Innovation

Higher-rated companies tend to be more innovative, but opportunities abound across the board


Analytical Contacts:Jason Hopper, Oldwick+1 (908) 439-2200 Ext. [email protected]@ambest.com

Clare Finnegan, Oldwick+1 (908) 439-2200 Ext. [email protected]


2020-011



Innovation—BenchmarkingInnovation is critical to the long-term success of insurers. Innovation allows companies to develop sustainable competitive advantages and better respond to external challenges such as evolving consumer preferences, growing business complexity, shifting market dynamics, and ever-expanding technological advancements. Through innovation insurers can remain competitive and fend off potential external disruptors.

The insurance industry is facing competition from both traditional and non-traditional sources. New private equity players have entered the market, while innovation-focused insurtechs have gained a strong foothold in the sales and servicing processes. Companies that have a clear strategy to integrate innovation will distance themselves from companies struggling to do so.

This report discusses our preliminary innovation scoring results by various company characteristics and building block assessments. Overall, there are significant opportunities for insurers to take steps to be more innovative.

Rating CategoryGiven the accelerating pace of innovation and the magnitude of change, insurance companies that fail to innovate may find it difficult to sustain long-term profitability and success, and may ultimately be subject to anti-selection and loss of relevance. Those insurers that successfully incorporate innovation will likely strengthen their organizations, increase their customer base, and improve their efficiency, which will support their financial strength. This was borne out in testing: The more favorable innovation assessments skew towards higher-rated organizations because they have been able to generate tangible results (Exhibit 1), leading to a replicable and sustainable competitive advantage (Exhibit 2). Superior-rated companies translate their innovation initiatives into transformative results, effectively using cutting-edge processes and technology, resulting in innovation comparable to leaders in non-insurance industries. This creates value, improves customer engagement and

612

3042

58

80

24

55

54

44

25

20

43

24

14 15

23

7

2

174

1

0

10

20

30

40

50

60

70

80

90

100

Superior Excellent Good Fair Marginal Weak

(%)

Leader Prominent Significant Moderate Minimal

Exhibit 1Innovation Profile by Rating Category

Percentages may not add up to 100 due to rounding.Source: AM Best data and research

21

Innovation

Higher-rated companies tend to be more innovative, but opportunities abound across the board


Analytical Contacts:Jason Hopper, Oldwick+1 (908) 439-2200 Ext. [email protected]@ambest.com

Clare Finnegan, Oldwick+1 (908) 439-2200 Ext. [email protected]


2020-011



Innovation—BenchmarkingInnovation is critical to the long-term success of insurers. Innovation allows companies to develop sustainable competitive advantages and better respond to external challenges such as evolving consumer preferences, growing business complexity, shifting market dynamics, and ever-expanding technological advancements. Through innovation insurers can remain competitive and fend off potential external disruptors.

The insurance industry is facing competition from both traditional and non-traditional sources. New private equity players have entered the market, while innovation-focused insurtechs have gained a strong foothold in the sales and servicing processes. Companies that have a clear strategy to integrate innovation will distance themselves from companies struggling to do so.

This report discusses our preliminary innovation scoring results by various company characteristics and building block assessments. Overall, there are significant opportunities for insurers to take steps to be more innovative.

Rating CategoryGiven the accelerating pace of innovation and the magnitude of change, insurance companies that fail to innovate may find it difficult to sustain long-term profitability and success, and may ultimately be subject to anti-selection and loss of relevance. Those insurers that successfully incorporate innovation will likely strengthen their organizations, increase their customer base, and improve their efficiency, which will support their financial strength. This was borne out in testing: The more favorable innovation assessments skew towards higher-rated organizations because they have been able to generate tangible results (Exhibit 1), leading to a replicable and sustainable competitive advantage (Exhibit 2). Superior-rated companies translate their innovation initiatives into transformative results, effectively using cutting-edge processes and technology, resulting in innovation comparable to leaders in non-insurance industries. This creates value, improves customer engagement and

612

3042

58

80

24

55

54

44

25

20

43

24

14 15

23

7

2

174

1

0

10

20

30

40

50

60

70

80

90

100


(%)


Exhibit 1Innovation Profile by Rating Category


2


experience, and ultimately results in a superior business model or significantly enhanced growth opportunities (Exhibits 3 and 4).

The innovation score does not automatically translate into a positive or negative rating factor as, given a company’s particular business profile assessment, AM Best must also assess whether innovativeness enhances (or diminishes) its long-term financial strength.

However, given the accelerating pace of change, insurers that fail to embrace innovation may be subject to rating pressure as they may find it difficult to compete amid potential loss of relevance in the market. In contrast, insurers that embrace innovation will find it easier to grow market share and improve efficiency, providing them the opportunity to enhance their financial strength.

There may be instances where lower-rated companies score well on innovation, as well as cases where higher-rated companies have more limited innovation abilities. For example, the population for “Marginal” contains only 12 rating units; two companies were still assessed as “Prominent,” but are lower-rated due to a weaker balance sheet, operating performance, or business profile.

Organizations with higher innovation scores have innovation strategies as a key component of their overall strategic objectives. In contrast, nearly a quarter of those companies with an innovation assessment of Minimal do not even have an innovation strategy. Further, the Minimal category has the greatest share of companies that have an innovation approach that does not explicitly align with current overall strategic objectives.

10

29

4656

6780

36

54

4836 17

20

49

155 7

175

1 1

0

10

20

30

40

50

60

70

80

90

100


(%)

1 2 3 4

Exhibit 3Results Score by Rating Category


10.58.9 7.5 6.6 6.3

4.6

9.2

7.26.1

6.0 6.0

4.8

19.8

16.0

13.612.6 12.3

9.4

0

5

10

15

20

25


Total Output Score Input Score

Exhibit 2Average Innovation Scores by Rating Category


223


Business ProfileWhen determining the effect of innovation on the company’s financial strength, AM Best takes into account a company’s unique characteristics. More favorable business profiles tend to align with better innovation assessments, but there are exceptions (Exhibit 5). Some rating units may have a more limited business profile due to their monoline or single-state profile, but as part of a larger organization, there may be a more robust innovation plan and strategy in place. This works to the benefit of the isolated rating unit, in a manner similar to our enterprise risk management assessments.

California and New York, for example, have more stringent regulatory environments for some insurance segments. Large organizations may set up a company for licensing purposes to isolate that business, resulting in a more limited business profile assessment. Such a business would benefit from the lead rating unit’s innovation initiatives and would thus receive the enterprise-wide innovation score.

Property/casualty companies in the alternative risk, special casualty, and small personal lines segments may experience a similar dynamic. Some of these companies are on the cutting edge of product design, significantly use technology, and have an innovative culture that focuses on improving the customer experience. Regardless of the relatively high innovation assessment, the business profile assessments for these companies would reflect the concentration risk inherent in these markets.

15

32

4761

678052

59

50

3917

20

29

83

174

1

0

10

20

30

40

50

60

70

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100


(%)

1 2 3 4

Exhibit 4Level of Transformation Score by Rating Category


413

2329

8

32

49

58 45

20

43

27

15 26

56

1710

4

164 1 1

0

10

20

30

40

50

60

70

80

90

100

Very Favorable Favorable Neutral Limited Very Limited

(%)


Exhibit 5Innovation Profile by Business Profile Assessment


233


Business ProfileWhen determining the effect of innovation on the company’s financial strength, AM Best takes into account a company’s unique characteristics. More favorable business profiles tend to align with better innovation assessments, but there are exceptions (Exhibit 5). Some rating units may have a more limited business profile due to their monoline or single-state profile, but as part of a larger organization, there may be a more robust innovation plan and strategy in place. This works to the benefit of the isolated rating unit, in a manner similar to our enterprise risk management assessments.

California and New York, for example, have more stringent regulatory environments for some insurance segments. Large organizations may set up a company for licensing purposes to isolate that business, resulting in a more limited business profile assessment. Such a business would benefit from the lead rating unit’s innovation initiatives and would thus receive the enterprise-wide innovation score.

Property/casualty companies in the alternative risk, special casualty, and small personal lines segments may experience a similar dynamic. Some of these companies are on the cutting edge of product design, significantly use technology, and have an innovative culture that focuses on improving the customer experience. Regardless of the relatively high innovation assessment, the business profile assessments for these companies would reflect the concentration risk inherent in these markets.

15

32

4761

678052

59

50

3917

20

29

83

174

1

0

10

20

30

40

50

60

70

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100


(%)

1 2 3 4

Exhibit 4Level of Transformation Score by Rating Category


413

2329

8

32

49

58 45

20

43

27

15 26

56

1710

4

164 1 1

0

10

20

30

40

50

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70

80

90

100

Very Favorable Favorable Neutral Limited Very Limited

(%)


Exhibit 5Innovation Profile by Business Profile Assessment


4


Operating PerformanceSimilar to the business profile, there is a correlation between more favorable operating performance assessments and more favorable innovation assessments (Exhibit 6). To sustain their competitive advantages, companies need to continually refine their innovation strategies and initiatives, which requires ongoing capital deployment. Earnings consistency is the most dependable source of capital accumulation, while earnings volatility is more likely to strain capital, which could negatively affect current and upcoming projects and budgets, including innovation efforts.

Companies with more favorable operating performance assessments post a higher average innovation output score, demonstrating that these companies have proven tangible results from their innovation efforts (Exhibit 7). Companies with higher innovation output scores have a well-balanced mix of operational and growth-oriented innovation, resulting in benefits such as lower expense ratios, higher revenue growth, better customer retention, and stronger data analytics.

Financial Size CategorySimilarly to higher innovation scores trending towards higher rated organizations, favorable innovation assessments tend to be higher as we climb the financial size category scale (Exhibit 8). Companies with larger amounts of capital at their disposal do tend to have more financial resources, and thereby receive higher scores for the resource input (Exhibit 9). However, smaller organizations that may not have the financial resources to set aside large budgets for innovation have still scored well, deriving benefits from partnering with insurtech companies, managing general agents (MGAs), or other innovative companies. Newer entrants can be launched with the most innovative technology and incorporate an innovative culture and process from the very beginning, without legacy issues. Due to the company’s relatively short tenure, absolute capital may still be low and its operating results might not have reached those of a mature stage company. This kind of company may receive a high

413 15

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4854

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2622

192011 8 6 10

42 1 1

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Very Strong Strong Adequate Marginal Weak

(%)


Exhibit 6Innovation Profile by Operating Performance Assessment


245


innovation input score while the output score is still on the lower side, as it waits for output results to catch up, regardless of capital scale.

9.2

7.67.1

6.4

5.6

0

1

2

3

4

5

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9

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Aver

age

Out

put S

core

Exhibit 7Average Innovation Output Score by Operating Performance Assessment


43

33

21

18

14

7

4

5

7

49

53

63

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45

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25

7

12

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25

39

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42

2

1

5

7

7

11

16

23

1

2

2

1

3

0 20 40 60 80 100

II-IV (Less than $10 Million)

V ($10 Million to $25 Million)

VI ($25 Million to $50 Million)

VII ($50 Million to $100 Million)

VIII ($100 Million to $250 Million)

IX ($250 Million to $500 Million)

X-XI ($500 Million to $1 Billion)

XII-XIV ($1 Billion to $2 Billion)

XV ($2 Billion or greater)

(%)Minimal Moderate Significant Prominent Leader

Exhibit 8Innovation Profile by Financial Size Category


255


innovation input score while the output score is still on the lower side, as it waits for output results to catch up, regardless of capital scale.

9.2

7.67.1

6.4

5.6

0

1

2

3

4

5

6

7

8

9

10


Aver

age

Out

put S

core

Exhibit 7Average Innovation Output Score by Operating Performance Assessment


43

33

21

18

14

7

4

5

7

49

53

63

60

54

60

45

45

25

7

12

14

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25

39

33

42

2

1

5

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7

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1

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2

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3

0 20 40 60 80 100










(%)Minimal Moderate Significant Prominent Leader

Exhibit 8Innovation Profile by Financial Size Category


6


52

43

44

39

32

26

21

18

15

45

51

52

49

52

59

47

56

37

4

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3

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24

45

1

1

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3

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3

0 20 40 60 80 100










(%)1 2 3 4

Exhibit 10Results Score by Financial Size Category


51

42

29

17

13

12

2

4

3

45

44

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48

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27

5

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(%)1 2 3 4

Exhibit 9Resources Score by Financial Size Category


267


Some companies take a hybrid approach, allocating a specified budget for innovation while also partnering with other organizations to improve products, services, or business models. External investments in such companies can also support an organization’s overall innovation strategy.

Having resources is not enough; a company also needs to be able to use these resources efficiently and create value, as deploying capital itself does not guarantee productive results. Companies of varying size, both large and small, can be innovative and score well (Exhibit 10).

Geographic Region & Country Risk TierLevels of innovation implementation vary across both AM Best Country Risk Tier (CRT) and geographic region (Exhibits 11 and 12). Insurers in developed markets (Country Risk Tiers 1 and 2) view the adoption of innovation, with one eye on the large tech companies and the other on the wider global financial market. In emerging markets (CRTs 3, 4, and 5), however, most insurers compare themselves against regional players rather than on a global scale. What might be a relatively normal course of action for an insurer in a developed country may be a market-first in an emerging market. For example, a more standard product in a more mature market might be innovative in emerging markets. Insurers operating in more favorable country risk tiers generally have more favorable innovation assessments, with more companies identified as Prominent and fewer as Minimal.

Insurers in emerging markets have significant untapped potential, given the low levels of insurance penetration. Despite potential opportunities, insurers in emerging markets have greater obstacles to overcome than their counterparts in developed countries when developing an innovation process. We observed in our 2018 survey on innovation that talent, organizational culture, and limitations in information technology are the three biggest challenges. More prominent digital ecosystems in more developed countries may allow for more pervasive use of innovation tools such as the Internet of Things, telematics, and data-driven advanced machine learning. Developing geographies may experience less competition from global companies, which can inhibit innovative efforts, leading to some complacency.

16 16 1526 23

50 46 52

51 59

2421

2617

189

13

6 51 4

0

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CRT-1 CRT-2 CRT-3 CRT-4 CRT-5

(%)


Exhibit 11Innovation Profile by Country Risk Tier (CRT)


277


Some companies take a hybrid approach, allocating a specified budget for innovation while also partnering with other organizations to improve products, services, or business models. External investments in such companies can also support an organization’s overall innovation strategy.

Having resources is not enough; a company also needs to be able to use these resources efficiently and create value, as deploying capital itself does not guarantee productive results. Companies of varying size, both large and small, can be innovative and score well (Exhibit 10).

Geographic Region & Country Risk TierLevels of innovation implementation vary across both AM Best Country Risk Tier (CRT) and geographic region (Exhibits 11 and 12). Insurers in developed markets (Country Risk Tiers 1 and 2) view the adoption of innovation, with one eye on the large tech companies and the other on the wider global financial market. In emerging markets (CRTs 3, 4, and 5), however, most insurers compare themselves against regional players rather than on a global scale. What might be a relatively normal course of action for an insurer in a developed country may be a market-first in an emerging market. For example, a more standard product in a more mature market might be innovative in emerging markets. Insurers operating in more favorable country risk tiers generally have more favorable innovation assessments, with more companies identified as Prominent and fewer as Minimal.

Insurers in emerging markets have significant untapped potential, given the low levels of insurance penetration. Despite potential opportunities, insurers in emerging markets have greater obstacles to overcome than their counterparts in developed countries when developing an innovation process. We observed in our 2018 survey on innovation that talent, organizational culture, and limitations in information technology are the three biggest challenges. More prominent digital ecosystems in more developed countries may allow for more pervasive use of innovation tools such as the Internet of Things, telematics, and data-driven advanced machine learning. Developing geographies may experience less competition from global companies, which can inhibit innovative efforts, leading to some complacency.

16 16 1526 23

50 46 52

51 59

2421

2617

189

13

6 51 4

0

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CRT-1 CRT-2 CRT-3 CRT-4 CRT-5

(%)


Exhibit 11Innovation Profile by Country Risk Tier (CRT)


8


These dynamics may change as developing geographies become more technologically advanced and competitive pressures escalate as globalization introduces more pervasive competitive sources. However, many companies operating in emerging markets are free of the legacy system issues prevalent in more mature markets. Large insurers in developed countries with economies of scale can also partner more easily with technology companies and have more capital for hiring or investing in start-ups. Insurers in emerging economies may not enjoy the same opportunities.

Insurers’ reasons for innovating vary depending on where they operate. Insurers in emerging countries are more focused on realizing operational efficiencies because they may not have the same economies of scale as insurers in developed economies do. Insurers in emerging economies typically focus on improving risk selection, while insurers in developed countries focus on addressing customer needs, primarily through data analytics. Innovation allows emerging market insurers to improve operational efficiency and thereby create greater value.

Historically, risk selection in emerging markets has not been as sophisticated as in developed markets. In emerging markets, the level of data available varies significantly by market and product line. Big Data and artificial intelligence could help improve risk selection. Emerging market insurers would have to hire those with the requisite knowledge to make informed risk decisions.

However, improvements in technology alone do not necessarily equate to better risk selection. Most emerging market insurers lack the resources to invest in these technologies. Even for those companies that can afford to buy innovative solutions from third parties, the knowledge base to run and maintain these systems is not necessarily readily available. Human capital can be outsourced via consultancies or reinsurers based in developed markets but invariably comes at a high cost, so some companies may view certain innovative technologies and ideas as not worth the investment.

10

27

15

28

15

30

20

9

70

61

64

51

51

33

37

27

20

9

18

18

24

26

29

38

2

3

3

8

11

15

24

2

2

0 10 20 30 40 50 60 70 80 90 100

Sub-Saharan Africa

Caribbean

MENA

Asia

North America

Oceania

Latin America

Europe

(%)


Exhibit 12Innovation Profile by Geographic Region


28

Innovation

Technological changes are modifying customer behavior—and insurers’ practices and approaches


Analytical Contacts:Edin Imsirovic, Oldwick+1 (908) 439-2200 Ext. [email protected]

Steven Chirico, Oldwick+1 (908) 439-2200 Ext. [email protected]


Contributors:Jennifer AsamoahConnor BrachBridget MaehrSally Rosen

2020-009



Innovation Spurring Insurance Industry Transformation The insurance industry continues to face dramatic changes in 2020 due to technological, economic, and political shifts. Persistently low investment yields, ongoing trade conflicts, stagnant growth, and overcapacity in many markets add to industry pressure. The relentless pace of technological change is altering consumer behavior and transforming the insurance landscape across product lines. These challenging macro trends will create both challenges and opportunities for insurers, which will make innovation more important than ever.

AM Best has positive expectations for innovation in the insurance industry over the medium term, based on the following:

• The decline in profitability due to low investment yields, stagnant growth, and excess capital, has made the focus on underwriting results and expense optimization stemming from innovation more critical.

• Insurers are differentiating themselves through profitable customer retention, while growing their customer base by enhancing the consumer experience.

• As deteriorating expense ratios continue to pressure the insurance industry’s bottom lines, optimizing operating efficiency through innovation becomes a crucial component of the overall insurer strategy.

• Improving underwriting performance by even marginal amounts through predictive models, AI, Big Data, etc., can result in insurers’ outperforming the industry through superior loss ratios and better policy pricing/selection.

• Relationships between insurtechs and insurance companies are maturing with the proper alignment of core competencies.

• Expanding digital ecosystems are creating new avenues for insurers to offer comprehensive solutions.

Our positive expectations are counterbalanced by complex legacy systems and issues with data, governance, and culture that make the execution of innovation strategies a huge challenge. However, the insurers that capitalize on these trends will shape the future of the insurance industry. As a result, the most innovative insurance companies will shift from a product-based approach towards a customer-focused approach.

In addition, emerging technological trends involving advanced forms of machine learning, the Internet of Things (IoT), and Big Data will be used increasingly to improve overall operational efficiency and underwriting performance. Given the proliferation of IoT sensors, insurance companies are likely to become ever more focused on active loss prevention, while accelerating the use of Big Data and predictive analytics in underwriting. With the rapid advancement of new technologies, the insurance industry is bound to find innovative ways to automate more complex tasks involving claims, underwriting, risk assessment, customer interactions, and fraud detection, among others.

The exponential growth of emerging technologies may drive significant changes in the insurance industry, but technology on its own will not create competitive advantages for

29

Innovation

Technological changes are modifying customer behavior—and insurers’ practices and approaches


Analytical Contacts:Edin Imsirovic, Oldwick+1 (908) 439-2200 Ext. [email protected]

Steven Chirico, Oldwick+1 (908) 439-2200 Ext. [email protected]


Contributors:Jennifer AsamoahConnor BrachBridget MaehrSally Rosen

2020-009



Innovation Spurring Insurance Industry Transformation The insurance industry continues to face dramatic changes in 2020 due to technological, economic, and political shifts. Persistently low investment yields, ongoing trade conflicts, stagnant growth, and overcapacity in many markets add to industry pressure. The relentless pace of technological change is altering consumer behavior and transforming the insurance landscape across product lines. These challenging macro trends will create both challenges and opportunities for insurers, which will make innovation more important than ever.

AM Best has positive expectations for innovation in the insurance industry over the medium term, based on the following:

• The decline in profitability due to low investment yields, stagnant growth, and excess capital, has made the focus on underwriting results and expense optimization stemming from innovation more critical.

• Insurers are differentiating themselves through profitable customer retention, while growing their customer base by enhancing the consumer experience.

• As deteriorating expense ratios continue to pressure the insurance industry’s bottom lines, optimizing operating efficiency through innovation becomes a crucial component of the overall insurer strategy.

• Improving underwriting performance by even marginal amounts through predictive models, AI, Big Data, etc., can result in insurers’ outperforming the industry through superior loss ratios and better policy pricing/selection.

• Relationships between insurtechs and insurance companies are maturing with the proper alignment of core competencies.

• Expanding digital ecosystems are creating new avenues for insurers to offer comprehensive solutions.

Our positive expectations are counterbalanced by complex legacy systems and issues with data, governance, and culture that make the execution of innovation strategies a huge challenge. However, the insurers that capitalize on these trends will shape the future of the insurance industry. As a result, the most innovative insurance companies will shift from a product-based approach towards a customer-focused approach.

In addition, emerging technological trends involving advanced forms of machine learning, the Internet of Things (IoT), and Big Data will be used increasingly to improve overall operational efficiency and underwriting performance. Given the proliferation of IoT sensors, insurance companies are likely to become ever more focused on active loss prevention, while accelerating the use of Big Data and predictive analytics in underwriting. With the rapid advancement of new technologies, the insurance industry is bound to find innovative ways to automate more complex tasks involving claims, underwriting, risk assessment, customer interactions, and fraud detection, among others.

The exponential growth of emerging technologies may drive significant changes in the insurance industry, but technology on its own will not create competitive advantages for

2


insurers. Technology will expand and strengthen insurers’ toolboxes; those organizations with forward-thinking leadership and culture will be the ones to find the most innovative ways to leverage these new tools into a sustainable competitive advantage. Companies that approach innovation as a dynamic and ongoing process with a long-term commitment, stand to capitalize the most from the transformation of the insurance industry.

Enhancing the Customer ExperienceRising customer expectations, spurred by digital innovation, are impacting the insurance industry. Customer service and the customer experience are becoming an increasingly important competitive differentiator. Providing a positive customer experience is no longer just about offering great service. It’s increasingly a way for companies in competitive markets to distinguish their brands. Insurance companies will continue to find ways to leverage Big Data and machine learning in an effort to gain a more comprehensive understanding of customer behavior, habits, and needs, while anticipating future developments, offering relevant products and identifying the right segmentations. As a result, the most successful insurance companies will engage customers on their own terms, while moving away from a product- to a more customer-focused approach.

Insurance companies will increasingly use new sources of data to derive insights that can improve customer experience, marketing, sales, and service optimization. For example, extending analytics beyond traditional customer data points to include behavioral economics has a potential to provide a more comprehensive view of the customer. Sophisticated analytics and predictive insights can enable insurers to provide highly customized products and services that are immediately relevant to a policyholder’s situation. In addition, predictive analytics, coupled with Big Data, can help insurers identify whether a customer is a retention risk and suggest corrective action to mitigate that risk. A data- and analytics-enabled view of policyholders may help insurers more readily anticipate customer needs for cross- and up-selling opportunities.

Another key focus for the insurance industry will be simplifying the use of insurance products while providing better access. For example, as the use of digital health and virtual care or tele-docs continues to gain momentum, health insurers have started building capabilities to enhance convenience, which is especially key for the younger generation, which does not always want to spend time in a doctor’s office. Furthermore, to improve access to care, a vertically integrated model can include the use of convenient locations, such as a clinic in a retail location or urgent care centers. Health insurers are designing insurance plans to incorporate some of these non-traditional forms and sites of care.

Connected to enhancing customer experience, digital tools are unlocking new distribution opportunities for insurers. AM Best believes that insurance companies will increasingly find new ways to engage customers efficiently and effectively with personalized messages and improve speed, service, and consistency to raise satisfaction, by moving from a product-focused sales process to one that is grounded in the needs of the customer. For example, policyholders expect to be able to move between digital or self-service channels and human-based interactions without repeating their information each time. Data and analytics will increasingly help insurers solve this problem by gathering insights from historical and real-time web or app clicks and applying them to present relevant interactions digitally. In addition, “gamification” may become an increasingly popular tactic where policyholders can play game-like scenarios to determine the right policy fit and the insurer can offer real-time feedback on different options during the game.

303


The accelerated pace of innovation is continuously shifting consumer behavior and expectations. AM Best anticipates increasing levels of business model experimentation in response to these trends. For example, insurers are increasingly experimenting with offering coverage for specific situations where the consumer can choose when to start and end coverage, thereby paying for coverage for the period of time that is most efficient for the customer. This is typically done via a mobile platform. Many subscription business models also leverage IoT devices to gather valuable customer information. This data can be used to improve and introduce related products.

Unlocking Operating EfficienciesBy its nature, insurance is a high-volume and low-margin business. Innovation can optimize operational efficiency and will remain a key priority. Many insurers use emerging technologies in innovative ways to drive greater efficiency—particularly in the back office, where automation through robotics offers major operational improvements. Using automated tools reduces errors, lowers costs, and increases speed with compliance checks, data entry, and repetitive tasks. With the rise of Big Data and advanced machine-learning technologies, the use of increasingly sophisticated algorithms will facilitate more complicated skills such as claims automation, underwriting, risk assessment, reconciliation, customer interactions, and fraud detection.

AM Best believes that insurers will accelerate adoption of advanced machine learning tools in an effort to optimize their claims processes, especially for less complex, lower-value claims. For example, insurers are increasingly using data mining techniques to automate the clustering and scoring of claims to prioritize and assign them to the most appropriate employees based on their experience with complex claims. These trends save insurers a significant amount of labor and time in initiating customer contact. There are also increased efforts toward a “touchless” claims process in less complex lines of business (such as auto), in which no claims adjuster or insurance carrier employee is involved in the process at all. Technology is used to report the claim, capture damage or create invoices, run a system audit, and communicate with the customer electronically. If the claim meets approved criteria, it is automatically paid without human intervention. AI-powered visual computing is one of the big enablers of this trend. The ability to classify images to connect the car to the policyholder and assess damage can lead to near-instantaneous estimate and repair authorization, which can dramatically cut costs and significantly enhance the customer service experience.

Advanced forms of visual computing are playing a greater role in property claims management, underwriting, and catastrophe modeling. Drones, airplanes, and satellites improve the response time and safety. Drones are particularly valuable in catastrophe property claims, for which they can reach hard-to-access post-event sites. A number of insurers are still in the initial or pilot phases of drone rollout, but early results have been very encouraging. In conversations with AM Best, rated companies have indicated that they anticipate great potential for drones with regard to speed, safety, the ability to obtain more accurate data, and customer retention. Drone benefits are no longer hypothetical; the industry may well scale drone usage through either internal resources or third parties.

Insurers are increasingly seeking ways to use Big Data to improve fraud detection and detect criminal activity through data management and predictive modeling. Matching the variables in every claim against the profiles of fraudulent claims in the past can flag a claim for further investigation. Predictive analytics can help categorize fraud risk and deliver fraud propensity scores to claims adjusters in real time so they can adjust their line of questioning and route suspicious claims to investigators. In addition, insurers hold a wealth of data on customers,

313


The accelerated pace of innovation is continuously shifting consumer behavior and expectations. AM Best anticipates increasing levels of business model experimentation in response to these trends. For example, insurers are increasingly experimenting with offering coverage for specific situations where the consumer can choose when to start and end coverage, thereby paying for coverage for the period of time that is most efficient for the customer. This is typically done via a mobile platform. Many subscription business models also leverage IoT devices to gather valuable customer information. This data can be used to improve and introduce related products.

Unlocking Operating EfficienciesBy its nature, insurance is a high-volume and low-margin business. Innovation can optimize operational efficiency and will remain a key priority. Many insurers use emerging technologies in innovative ways to drive greater efficiency—particularly in the back office, where automation through robotics offers major operational improvements. Using automated tools reduces errors, lowers costs, and increases speed with compliance checks, data entry, and repetitive tasks. With the rise of Big Data and advanced machine-learning technologies, the use of increasingly sophisticated algorithms will facilitate more complicated skills such as claims automation, underwriting, risk assessment, reconciliation, customer interactions, and fraud detection.

AM Best believes that insurers will accelerate adoption of advanced machine learning tools in an effort to optimize their claims processes, especially for less complex, lower-value claims. For example, insurers are increasingly using data mining techniques to automate the clustering and scoring of claims to prioritize and assign them to the most appropriate employees based on their experience with complex claims. These trends save insurers a significant amount of labor and time in initiating customer contact. There are also increased efforts toward a “touchless” claims process in less complex lines of business (such as auto), in which no claims adjuster or insurance carrier employee is involved in the process at all. Technology is used to report the claim, capture damage or create invoices, run a system audit, and communicate with the customer electronically. If the claim meets approved criteria, it is automatically paid without human intervention. AI-powered visual computing is one of the big enablers of this trend. The ability to classify images to connect the car to the policyholder and assess damage can lead to near-instantaneous estimate and repair authorization, which can dramatically cut costs and significantly enhance the customer service experience.

Advanced forms of visual computing are playing a greater role in property claims management, underwriting, and catastrophe modeling. Drones, airplanes, and satellites improve the response time and safety. Drones are particularly valuable in catastrophe property claims, for which they can reach hard-to-access post-event sites. A number of insurers are still in the initial or pilot phases of drone rollout, but early results have been very encouraging. In conversations with AM Best, rated companies have indicated that they anticipate great potential for drones with regard to speed, safety, the ability to obtain more accurate data, and customer retention. Drone benefits are no longer hypothetical; the industry may well scale drone usage through either internal resources or third parties.

Insurers are increasingly seeking ways to use Big Data to improve fraud detection and detect criminal activity through data management and predictive modeling. Matching the variables in every claim against the profiles of fraudulent claims in the past can flag a claim for further investigation. Predictive analytics can help categorize fraud risk and deliver fraud propensity scores to claims adjusters in real time so they can adjust their line of questioning and route suspicious claims to investigators. In addition, insurers hold a wealth of data on customers,

4


such as call center conversations, notes from customer service agents alongside social media activity, and other data held by third parties. The old-school method of verifying all of this information was time-consuming and expensive—at times, impossible. However, by leveraging predictive modeling and Big Data, insurers can improve and automate fraud detection.

More efficient IT infrastructure and better processes should enhance insurers’ speed to the market. Companies are increasingly adopting cloud computing and software as service offerings to rapidly deliver solutions to the market, allowing more room to experiment and innovate. Additionally, process development has at least as much impact on speed to market as does technology. For many carriers, better alignment between business units and better process control are increasing speed to market. Given the accelerating stream of new risks such as driverless cars, legalized cannabis, exploding opioid use, and cyber, the ability to introduce new products to market faster while managing risk exposures should help facilitate even more innovation.

To fully capitalize on emerging technologies and capture operational efficiencies, insurers will be increasingly pressured to address legacy systems. Most insurers are still grappling with the challenge of simplifying and consolidating legacy systems while building new technology solutions. Legacy systems are expensive and inefficient, with hidden costs, significantly longer lead times for the introduction of new products and price changes, and slow adaptation to new regulatory requirements. They make an organization significantly less agile, but the costs and risk associated with implementing new major systems for claims and underwriting can be daunting. Still, payback periods have been shrinking and efficiencies have been escalating to the point that addressing these legacy system issues may well become a key priority for insurers.

Improving Underwriting Performance Given the growing presence of IoT sensors in vehicles, homes, and elsewhere, insurance companies will focus more on active loss prevention. These devices allow insurers to not only enhance customer interaction, but also greatly improve risk mitigation. IoT creates new business opportunities for insurers by aligning data and analytics strategies with policyholders’ lifestyles.

The most common application of sensor data in the insurance industry is usage-based insurance or telematics products for P/C insurers. For example, in auto, the use of sensor feedback to modify driver behaviors and minimize the risk level has been increasing, benefiting both the carrier and the policyholder. Auto insurers can analyze a driver’s feedback in real time, sending data to a smartphone that can reinforce positive driving behaviors (e.g., complying with speed limits) or alert drivers in real time when risky or dangerous driving patterns are detected. AM Best believes that insurance companies will continue to adopt telematics solutions at an accelerating pace, as these solutions will become increasingly necessary for insurers to remain competitive. In addition, data from other IoT-type of devices (wearables, connected home, etc.) will be increasingly leveraged in an effort to better predict and calculate risk in lines of business ranging from workers’ compensation to homeowners.

Health insurance is another area likely to focus on risk prevention. Many health insurers encourage the use of wearable technology to help manage Type 2 diabetes, monitor heart data, and collect biometric data from high-risk premature babies. As medical advances continue and the ability to monitor patients remotely expands, many insurers will continue to embrace new technologies to provide superior care and to monitor high-risk individuals with chronic health conditions. Early alerts to health care professionals can benefit all parties.

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AM Best believes that insurance companies will accelerate the use of Big Data and predictive analytics in underwriting. Health insurers have expanded the use of data analytics and predictive modeling to analyze trends, identify potential high-risk individuals, ensure that individuals receive appropriate care, and enroll individuals in disease management and wellness programs. Data analytics and predictive modeling provide a competitive advantage, allowing carriers to design value-based provider reimbursement programs, collect required quality and risk-factor data for programs such as the Medicare Advantage star bonus and risk-adjustment programs, and determine new pricing for programs such as the individual health exchanges and Medicaid bids. Health insurers use artificial intelligence to analyze member applications and claims processing activities. With new diagnostic tools and treatments, insurers can better monitor the efficacy, quality, and cost-effectiveness of providers.

Insurance companies will likely come to rely more on Big Data for risk reduction and modeling. Insurance companies can improve their underwriting capabilities as they integrate Big Data sources with their pricing and underwriting systems. In addition, insurance companies can use machine learning to gather data about consumer behavior. For instance, insurers are increasingly using Big Data to enrich the information in the submission workflow by incorporating external data to enhance submission data quality, which allows them to more accurately price the risk. Insurers that have adopted these tools have minimized underwriting bottlenecks and improved risk selection.

Deepening Relationships to Drive the Digital TransformationInsurtechs, once seen as disruptors, are now viewed as enablers, driving the adoption of digital technologies by incumbent carriers. Insurtechs have expanded well beyond their original limited scope, playing a role in many more areas. AM Best expects the collaboration between insurtechs and traditional carriers to deepen further as insurtechs focus on developing a wider spectrum of solutions to address a broader set of organizational needs.

Many insurers benefit from their reputations as trusted brands, earned through decades of quality service to customers. A loyal customer base has generated volumes of data that help shape strategy and consumer engagement. Large teams of skilled and experienced employees provide insurers with a strong operational foundation. Insurtechs, by contrast, are often start-ups with simple business models and narrow areas of focus. However, many insurtechs are exceptionally strong in their ability to leverage emerging technologies such as artificial intelligence or machine learning. As start-ups, many insurtech companies cultivate a culture that rewards innovation.

The deepening relationship between successful insurtechs and legacy insurers allows the insurtech sector to mature and the carriers to accelerate their innovation efforts. Signs of a maturing ecosystem can already been seen from the robust insurtech funding trends of late. The movement towards later-stage funding events and an increase in average deal sizes portends that insurtech startups will continue to gain traction in the coming years.

The majority of insurtech investment comes from outside the industry. AM Best believes, however, that as the insurtech ecosystem matures, traditional carriers will increase their investments and M&A will grow. In the future, the potential for top-line growth may no longer be enough to drive the validity of large-scale valuations. Unless startups can demonstrate clear paths to profitability, they will very likely face far more scrutiny on large rounds and garner less generous evaluations not just from insurers, but also the private sector in general, given the amount of scrutiny the public IPO market came under in 2019, as many high profile tech IPOs failed to live up to their prior private market valuations.

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AM Best believes that insurance companies will accelerate the use of Big Data and predictive analytics in underwriting. Health insurers have expanded the use of data analytics and predictive modeling to analyze trends, identify potential high-risk individuals, ensure that individuals receive appropriate care, and enroll individuals in disease management and wellness programs. Data analytics and predictive modeling provide a competitive advantage, allowing carriers to design value-based provider reimbursement programs, collect required quality and risk-factor data for programs such as the Medicare Advantage star bonus and risk-adjustment programs, and determine new pricing for programs such as the individual health exchanges and Medicaid bids. Health insurers use artificial intelligence to analyze member applications and claims processing activities. With new diagnostic tools and treatments, insurers can better monitor the efficacy, quality, and cost-effectiveness of providers.

Insurance companies will likely come to rely more on Big Data for risk reduction and modeling. Insurance companies can improve their underwriting capabilities as they integrate Big Data sources with their pricing and underwriting systems. In addition, insurance companies can use machine learning to gather data about consumer behavior. For instance, insurers are increasingly using Big Data to enrich the information in the submission workflow by incorporating external data to enhance submission data quality, which allows them to more accurately price the risk. Insurers that have adopted these tools have minimized underwriting bottlenecks and improved risk selection.

Deepening Relationships to Drive the Digital TransformationInsurtechs, once seen as disruptors, are now viewed as enablers, driving the adoption of digital technologies by incumbent carriers. Insurtechs have expanded well beyond their original limited scope, playing a role in many more areas. AM Best expects the collaboration between insurtechs and traditional carriers to deepen further as insurtechs focus on developing a wider spectrum of solutions to address a broader set of organizational needs.

Many insurers benefit from their reputations as trusted brands, earned through decades of quality service to customers. A loyal customer base has generated volumes of data that help shape strategy and consumer engagement. Large teams of skilled and experienced employees provide insurers with a strong operational foundation. Insurtechs, by contrast, are often start-ups with simple business models and narrow areas of focus. However, many insurtechs are exceptionally strong in their ability to leverage emerging technologies such as artificial intelligence or machine learning. As start-ups, many insurtech companies cultivate a culture that rewards innovation.

The deepening relationship between successful insurtechs and legacy insurers allows the insurtech sector to mature and the carriers to accelerate their innovation efforts. Signs of a maturing ecosystem can already been seen from the robust insurtech funding trends of late. The movement towards later-stage funding events and an increase in average deal sizes portends that insurtech startups will continue to gain traction in the coming years.

The majority of insurtech investment comes from outside the industry. AM Best believes, however, that as the insurtech ecosystem matures, traditional carriers will increase their investments and M&A will grow. In the future, the potential for top-line growth may no longer be enough to drive the validity of large-scale valuations. Unless startups can demonstrate clear paths to profitability, they will very likely face far more scrutiny on large rounds and garner less generous evaluations not just from insurers, but also the private sector in general, given the amount of scrutiny the public IPO market came under in 2019, as many high profile tech IPOs failed to live up to their prior private market valuations.

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Expanding Digital EcosystemsThe ongoing digitization of the economy has led to the rise of ecosystems. Most consumers’ lives feed off a digital environment, with companies such as Facebook, Google, and Apple creating ecosystems that tailor to new consumer needs and experiences. In essence, these ecosystems are locking in consumers by offering a wide variety of services and vendors on one platform. As consumers continue to migrate to these platforms, the insurance industry may need to adopt a platform strategy to adjust to the new digital reality and changing consumer behavior.

The rise of digital platforms and ecosystems will make relationships with customers even more important. Insurers can improve their access to customers and grow their revenue streams by providing additional services. They are already improving their value proposition by offering products and services beyond the traditional insurance policy. In medical professional liability, for example, many insurers offer comprehensive risk management and patient-safety initiatives to their policyholders, reducing both the frequency and severity of claims.

What is old can become new again owing to innovation and technology. Most insurers (other than some specialty players and the alternative risk industry) have precipitously cut back their loss control and claims mitigation services because of cost concerns. Innovation and technology allow insurers to deliver these services much more cost-effectively, thereby saving loss dollars for claims—and preventing unnecessary claims in the first place. Some also offer a full suite of financial services products, including equipment/working capital loans, credit card processing, and insurance agency services. In the future, insurers can open new revenue streams by providing solutions to ecosystem partners—for example, insurers can leverage their expertise to offer solutions to ecosystem partners looking for cyber coverage.

Participation in digital ecosystems may be a challenge for some insurers, which may need to rethink how they operate and bring their products and services to market. Insurers using white-label strategies in their platform offerings may lose control over their sales channels. Insurance companies that develop a deeper understanding of their customers stand to benefit the most from digital ecosystems. The most ambitious and innovative insurers will strive to become ecosystem organizers, creating their own branded platforms. As ecosystem organizers, insurers could use their customer knowledge and data to match customers with third-party providers that can offer plug-and-play products in their ecosystems.


SPECIAL REPORT

Published by AM Best

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Best’s Financial Strength Rating (FSR): an independent opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations. An FSR is not assigned to specific insurance policies or contracts.

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Rating Disclosure: Use and LimitationsA Best’s Credit Rating (BCR) is a forward-looking independent and objective opinion regarding an insurer’s, issuer’s or financial obligation’s relative creditworthiness. The opinion represents a comprehensive analysis consisting of a quantitative and qualitative evaluation of balance sheet strength, operating performance, business profile, and enterprise risk management or, where appropriate, the specific nature and details of a security. Because a BCR is a forward-looking opinion as of the date it is released, it cannot be considered as a fact or guarantee of future credit quality and therefore cannot be described as accurate or inaccurate. A BCR is a relative measure of risk that implies credit quality and is assigned using a scale with a defined population of categories and notches. Entities or obligations assigned the same BCR symbol developed using the same scale, should not be viewed as completely identical in terms of credit quality. Alternatively, they are alike in category (or notches within a category), but given there is a prescribed progression of categories (and notches) used in assigning the ratings of a much larger population of entities or obligations, the categories (notches) cannot mirror the precise subtleties of risk that are inherent within similarly rated entities or obligations. While a BCR reflects the opinion of A.M. Best Rating Services, Inc. (AM Best) of relative creditworthiness, it is not an indicator or predictor of defined impairment or default probability with respect to any specific insurer, issuer or financial obligation. A BCR is not investment advice, nor should it be construed as a consulting or advisory service, as such; it is not intended to be utilized as a recommendation to purchase, hold or terminate any insurance policy, contract, security or any other financial obligation, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. Users of a BCR should not rely on it in making any investment decision; however, if used, the BCR must be considered as only one factor. Users must make their own evaluation of each investment decision. A BCR opinion is provided on an “as is” basis without any expressed or implied warranty. In addition, a BCR may be changed, suspended or withdrawn at any time for any reason at the sole discretion of AM Best.

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