Creating the agile insurer

Vasilis Katsipis, General Manager, Market Development MENA, South and Central Asia
Vasilis Katsipis, General Manager, Market Development MENA, South and Central Asia

Insurers need to adapt to cutting-edge technologies to improve and upgrade existing insurance products, develop innovative new ones, and reshape the industry. Vasilis Katsipis, General Manager, Market Development MENA, South and Central Asia, explains why innovation and evolution will lead to an exponential growth in the sector

As the world changes and the (re)insurance industry evolves to adapt to the challenges thrown up by demographic, technological, economic and environmental shifts, innovation was always going to be critical  for companies to stand out from their peers. However, the reduced levels of global economic activity as a result of the Covid-19 pandemic means that its importance for insurers has further increased.

In the coming years, the pace of innovation is only likely to accelerate and insurers that don't innovate can expect to find themselves at a disadvantage through adverse selection and worsening operating efficiencies.

At AM Best, we believe innovation will evolve into a critical determinant of financial strength for insurers and so we've established a scoring and assessing innovation criteria procedure.

Calculating an innovation score

AM 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: leadership, culture, resources (allocation, strategy, and management), and 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.

AM Best translates its innovation scores into five assessments: Leader, Prominent, Significant, Moderate, and Minimal.

For 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 sceptically, 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.

In discussions with companies about the resources available for innovation, AM Best analysts have found general systems and technology to be 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

Companies are already starting to dedicate resources to innovation and developing structures for the innovation process to effectively leverage these resources and create value. Of all the different technologies associated with innovation in recent years-AI, IoT (Internet of Things), Blockchain, and cloud computing-insurers see Big Data as having the greatest impact on their industry. Companies are starting to leverage Big Data in 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 behaviour to underwriting practices - insurers are increasingly seeking new sources of data that they can leverage into actionable insights. However, the acquisition and use of this data requires clearly defined and documented governance structures that facilitate data quality, stewardship, and ownership.

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, organise, and fully use that data through defined processes and structures, ensuring data accuracy and quality that result in sound and appropriate decisions.

AM best's innovation scores

AM Best continues to refine the questions its analysts pose to managers in (re)insurance companies and in turn the innovation scoring process. Initial results have revealed that challenges with innovating and producing measurable results are not limited to a specific type of insurance entity. Furthermore, by learning 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, managers can achieve greater agility when market disruptions occur.

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