Stefan Holzberger discusses AM Best’s scoring model and the crucial importance of innovation

“One common misconception is that innovation is all about technology


Stefan Holzberger, Chief Rating Officer at AM Best

Insurance Innovators spoke to Stefan Holzberger about the insurance industry’s need to introduce more innovative practices and the potential road blocks implementation might face.

Please can you give us an update on AM Best’s innovation scoring model?

S.H. As you are aware, we officially kicked off our innovation initiative back in the summer of 2018 when we surveyed the industry. The survey was followed by a special report on innovation, and the release of the first draft of the innovation criteria in March, 2019.
In September, 2019, AM Best released a revised draft of its innovation criteria for a second comment period. At the moment, we are working on incorporating a second round of comments prior to the criteria going live in the first half of 2020.
In terms of the approach, AM Best intends to explicitly capture the impact of innovation on an insurer’s financial strength in the Business Profile building block within its rating process. Currently, the Business Profile encompasses eight subcomponents. AM Best is adding innovation as an additional subcomponent, and will examine whether an insurer’s innovation efforts (or lack thereof) have a material impact on its financial strength. It is important to note that AM Best does not expect any ratings to be immediately affected by the inclusion of innovation in the Business Profile, given that the impact of innovation is already implicitly captured in the rating process.

Why is innovation so crucial to the insurance industry right now? What drove AM Best to introduce this measure?

S.H. From AM Best’s perspective, discussing company specific innovation is nothing new. In our rating committees, we have always discussed a company’s innovative strategies, from innovative capital deployment to new product rollouts to innovative uses of technology such as telematics. So the analysis of innovation and its impact has always been part of our rating process. Under the new methodology it will covered more explicitly within Business Profile.

The main reason to formalize the analysis of innovation is the accelerated nature of change that society and the global economy are experiencing. The changes are not occurring in a linear fashion, but at an accelerated pace.

For example, we have already witnessed many fascinating changes within the insurance industry, from the way insurance linked securities (along with third party capital) are transforming the reinsurance sector to potential changes in distribution models and product strategies driven by changing consumer tastes and preferences — especially among millennials. The digitization of the world is generating entire new exposures, as we can see from the ever growing importance of cyber. And the accelerated pace of technological change and continuous improvements in AI, coupled with ever increasing volumes of Big Data and a host of other technologies, have the potential to significantly transform the insurance industry.

Given the heightened industry focus on innovation we decided it was prudent to publicly highlight innovation in our criteria so that we can receive formal feedback on our efforts, and ultimately work together with the industry to create a consistent framework on measuring innovation.

What are some of the biggest blockers to innovation?

S.H. There are several factors that may explain the relatively slow pace of innovation in the insurance industry. First is the heavy amount of regulation in the industry, particularly in the United States and Western Europe, which can limit an insurer’s ability to experiment and innovate. In addition, culturally, insurance companies often incorporate a high level of risk aversion that permeates all aspects of the entity.

What do you think is the most common misconception about innovation within the insurance industry?

S.H. One common misconception is that innovation is all about technology. While the current need for innovation may be driven by technological trends, a company’s ability to innovate is highly dependent on non-technological factors such as leadership and the prevailing culture at the company. While the exponential growth of emerging technologies may drive significant changes in the insurance industry, the technology on its own will not create competitive advantages for insurers. Technology will expand and strengthen insurers’ toolboxes, but the 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.

Finally, which innovative trends in insurance do you think hold the most weight right now?

S.H. We are seeing clear trends in companies trying to leverage emerging technologies such as advanced machine learning, the Internet-of-Things and big data as they try to become more customer centric, while increasing operating efficiency and underwriting capabilities.

Starting with customer centricity, companies are increasingly recognizing that great service is a way for companies in competitive markets to distinguish their brands. Insurance companies are increasingly utilizing new sources of data to derive insights that can improve the customer experience — involving marketing, sales and service optimization. There is also a focus on simplifying insurance products while providing better access. Importantly, digital tools are unlocking new opportunities for insurers with regard to distribution.

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