Why ROI-Focused, Research-Based Innovation is a Necessity for Legacy Insurance Carriers

Innovation and digital disruption are hitting industries from hospitality to financial services and everything in between. In order to remain relevant in today’s fast-changing landscape, it’s essential to innovate. While innovation is common when it comes to startups and newer tech-related companies, when it comes to legacy brands (including insurance carriers), innovation and departure from proven, firmly-rooted procedures is far less common.

This fact must change. Customers’ preferences and expectations are changing, the complexity of business operations is increasing, and market dynamics are shifting fast. Of course, things will only accelerate as technology continues to advance. In order for legacy brands to compete and secure long term success in today’s digital-forward world, they too must achieve digital transformation:

• Develop competitive advantage and stay ahead of competitors
• Respond to external challenges and external disruptors
• Safeguard future business and improve operational efficiency

To illustrate the point, we take a look at a recent piece of news from the industry’s ratings agency, AM Best. A legacy brand itself, AM Best has been around 121 years and recently made a major change to their ratings methodology. While the new criteria affects you as a carrier directly, it also illustrates a larger point – that innovation is essential to sustain success and profitability in the industry in the long-term.

Assessing Insurance Carrier Creditworthiness

AM Best is a credit rating agency that was founded in 1899. AM Best rates the creditworthiness of insurance carriers worldwide, or the companies’ ability to pay claims, based on criteria including their past performance. AM Best operates in the United States with an increasing presence in Europe, the Pacific Rim, and Latin America.

Creditworthiness is relevant for insurance carriers because policyholders and agents/brokers want to be sure an insurance company can pay all of the claims it is committed to based on the policies it has underwritten (source).

A Change To The Model

AM Best applies quantitative and qualitative scoring methodology to evaluate the creditworthiness, or financial stability, of various insurance carriers. They have been using their method for a long time, as it’s proven effective and deeply rooted in their operations.

Recently, however, AM Best released a draft of an updated scoring model to account for a company’s ability to innovate. While this sounds small, it’s actually a major deal. In updating their model, AM Best is acknowledging that insurance carriers that do not innovate effectively face an existential threat to their survival (and, as a result, their ability to pay claims). By shifting their longstanding, legacy evaluation model, they’re essentially setting the expectation of innovation for the entire industry – and “punishing” those carriers (via a lower rating) who fail to do so.

Accounting For Innovation

AM Best’s new scoring method accounts for innovation in a very specific way. Innovation isn’t just a buzzword or based upon nebulous criteria. Instead, it is expected to be both effective and ROI-driven; not just “smoke and mirrors” or fancy features. In brief, it actually has to make a difference for customers.

As outlined in their methodology, AM Best’s innovation initiative includes two key parts:

• All companies are scored then given an “innovation ability assessment”
• AM Best will “explicitly consider whether a company’s innovation efforts, or lack thereof, have had a demonstrable impact (positive or negative) on its long-term financial strength in its business profile building block”

While innovation has many meanings, AM Best considers it a process “whereby an organization transforms ideas into new or significantly improved products, processes, services, or business models that have a measurable positive impact over time and enable the organization to remain relevant and successful.”

• Innovation is diverse and flexible, not limited to a technology or a singular type of advancement
• Output of the innovation must have a measurable impact and productive results
• Innovation is a dynamic, ongoing process to occur over the long term

Companies that innovate effectively within these three parameters will receive the highest scores. To learn more about the method and specific formulas used, you can view the draft. 

Takeaways For Your Business

AM Best’s new methodology not only recognizes the importance of innovation across industries, even legacy ones, but imparts the importance for insurance carriers to innovate. Aa a carrier, you must figure out a way to innovate from now going forward. Not only that, you must do so in a way that produces effective results and offers an ROI.

When the official ratings agency for insurance companies, a 121-year-old institution, has determined that digital transformation is so significant that it needed to update its scoring  and rating approach to account for it — it’s important that you listen.

Want to start innovating in your company but not sure where to start? Praxent partners with FinServ companies and insurance carriers to help get you on the road to innovation and future success. Contact us today to learn more.