AM Best are a credit rating agency, specialising in the insurance industry. Their recent announcement of a new innovation rating process has made the insurance industry sit up and think hard about what innovation should mean for them.
Our Managing Partner, Dan White, shared a stage with AM Best’s Senior Director, Carlos Wong-Fupuy, at Instech London’s event on 30th April 2019.
In the blog article below, Dan summarises his take on the AM Best draft methodology, and how insurers might want to approach it.
The AM Best announcement that it plans to introduce a formal methodology to rate insurers’ innovation maturity is one that I welcome. For two reasons: firstly, that it adds fuel to the conversation and debate around innovation in insurance; secondly, that it recognizes the strong link between innovation effectiveness and financial performance. This is a link that we are on the cusp of launching a significant white paper to explore.
Colleagues and I have spent time looking at the AM Best draft methodology, and note some positive elements, including:
- Outcomes-based, long-term perspective: there is too much innovation theatre in insurance, and AM Best’s approach should bypass that and focus on the stuff that matters.
- Emphasis on people involved: it is people that make innovation happen, and AM Best’s approach recognizes this and looks for quality and caliber in insurers’ innovation staffing.
- Sector-wide view of ‘level of transformation’ (disruptiveness): this may be the first time that anyone has tried to apply a common scale of ‘disruptiveness’ to the industry – probably a helpful thing.
In my experience working to help insurers become better at innovating, however, what matters is the day-to-day practice. The degree of innovation discipline. And so in some sense, whilst the AM Best initiative is helpful in shining a spotlight on this area, what will shift the dial for insurers is actually making the day-to-day practice better.
And that’s an area with many nuances, that I don’t see the AM Best methodology being able to cope with. A few examples:
- Importance of incremental innovation: whilst it is the high-risk, high-profile, high-disruption innovations that get the limelight, my experience tells me that it is the multitude of small-scale, incremental innovations that positively impact the bottom line. It is also easier for competitors to copy ‘one big idea’ than it is for them to keep up with a thousand small innovations: thus, the ‘crowd of small ideas’ supports competitive advantage. This phenomenon will not be tracked by the AM Best methodology, as I understand it.
- Emphasis on customer-led innovation: too much innovation is borne out of a level of arrogance (“my idea is the best”), rather than out of the humility of listening to customers before solving their problems. The AM Best methodology could do, in my view, with greater recognition of this nuance.
- Challenge of calculating ROI on innovation initiatives: one of the four dichotomies in insurance innovation that I have written about is the tension between ‘learnings’ and ‘commerciality’. Insurers classically seek the bullet-proof business case and proof of ROI, before they will invest in learning. We need to challenge ourselves as a sector to value learning more highly and to engineer innovation processes that allow ideas to be evaluated without the burden of proving ROI. The AM Best methodology does not allow for this, in my view.
Overall, a possible negative outcome here is that – because AM Best are trying to codify what successful innovation looks like – it may enforce that practice, putting in potentially more barriers to innovation as leaders follow ‘good-practice’ blindly, rather than considering what is best for their org.
I am concerned, too, that the AM Best methodology may return false positives. For instance, the existence of a dedicated, well-funded innovation lab may generate a high score with AM Best, but experience tells us that such a model carries the seeds of its own demise, and – except for high-specialism, high-risk, horizon 3 ideas – is ultimately unproductive (see my blog article on the four models for insurance innovation).
We will be providing a thoughtful response to the AM Best methodology, offering our perspectives in humility, in the hope of putting through some adaptations to the methodology before it gets deployed.
In the meantime, our guidance to insurers is unchanged: take a proper look under the hood of your business, at how different teams/functions operate and behave. Identify and reinforce positive innovation behaviors; and spot and deal with negative ones.
A year ago, we launched a health check tool that tries to give insurers such a view (see our Insurance Innovation Health Check). As we’ve been running this health check on some of our large insurance clients, we’ve spotted a set of things in the day-to-day practice of innovation that bears sharing. (Here I am removing any attribution to specific clients to spare blushes!)
- Strong on strategy; poor on execution. Several insurers who used the health check rated themselves strongly on innovation vision and strategy, but weak on execution. (Note: does this imply further false positives in a management-driven AM Best rating process?)
- Management high; staff low. We see a recurring pattern of management believing the business is better at innovation than their front-line colleagues are reporting. In a world where, as we believe firmly, innovation should be done by everyone, this will stymie innovation outcomes.
- Low CEO sponsorship. A third of staff in the insurers we health checked did not know whether their CEO monitored innovation efforts. Academic research on the topic suggests a strong link between innovation effectiveness and CEO advocacy and involvement.
- Women 20% less empowered/engaged in innovation. Shockingly, we found instances where women reported being significantly less likely to propose or develop new ideas, as well as reduced awareness of company vision. We know that diversity benefits innovation. This is an area to target.
- Experiment failure not seen as a success. This returns to my earlier point about the value of learning. In our risk management industry, there is still too little willingness to learn through failure.
We can do something about each finding. And that’s what matters.
Tools like our Insurance Innovation Health Check are not there for the sake of ‘getting the ship in order’ before the inspector from AM Best calls. No, they’re there to help insurers do innovation well. To do it in a disciplined fashion. To distribute it across their organization. To engage the distributed creativity of the employee base and customer book.
Not for the inspector, but because innovation is good for insurers, and because it’s the right thing to do.
I look forward to continuing to engage in the debate.