A significant majority of global insurers understand that innovation is increasingly becoming a competitive differentiator in the global marketplace, according to the results of an A.M. Best survey of its rated entities.
More than 80 percent of survey respondents said that innovation was moderately to extremely critical to their organization’s success, revealed the survey results, published as part of an A.M. Best special report on innovation, titled “Insurers Agree Innovation Is Critical for Future Success.” The findings in the report were based on responses from 459 insurers in 48 markets, representing every segment of the industry worldwide, the ratings agency said.
Nearly 90 percent of insurers are hopeful that innovation can help them address system inefficiencies, while 63 percent believe that ongoing investment in innovation can help them navigate business disruptions and remain relevant, said A.M. Best. At the same time, 57 percent of respondents believe that innovation can minimize underwriting risk, through the use of more precise machine learning algorithms.
This is consistent with a majority of insurers who stated that innovation would have a significant impact on their IT systems (57 percent), followed closely by customer experience at 47 percent, the report said.
In its report, A.M. Best confirmed that innovation is needed for the industry to remain relevant so it can provide meaningful solutions to ever-evolving risks while improving operational efficiencies. As a result, A.M. Best said it will be reviewing its Best’s Credit Rating Methodology (BCRM) to consider including innovation explicitly in the rating process.
The A.M. Best survey revealed that top three reasons for insurers to innovate are:
- Better address customers’ needs (cited by 22 percent of companies). Insurers have to be innovative to attract and retain customers whose profiles and needs are evolving along with technology and demographic developments, said the report. A.M. Best explained that consumers nowadays can use mobile phones, computers, agents, or mobile apps to research and obtain insurance. “Typical advertising channels such as print newspapers and television need to be complemented by effective online strategies,” the report added.
- Gain a competitive advantage (21 percent). As the pace of innovation picks up, insurers that do not innovate successfully may have to contend with significantly higher expense ratios compared to their more innovative competitors as well as lower growth and adverse risk selection because their more innovative competitors may have access to lower-risk customers.
- Improve operational efficiencies (16 percent). More than most industries, insurance has struggled with inefficiencies in processes and systems, and insurers are hopeful that technology can help them address these issues. Insurers that have grown through acquisitions have found that integrating claims, reserves, underwriting and pricing systems remain a challenge. Very few companies initially realize the importance of integrating IT systems and thus underestimate the challenges inherent in reconciling different operating systems, database providers, languages, and software versions, for example.
The other reasons for innovating were: improving risk selection (11 percent); expanding to new markets/products (10 percent); revamping the business model (8 percent), and growing in existing markets (6 percent).
The report revealed that more than half of the respondents’ companies have allocated between 1 percent and 5 percent of their budgets toward innovation, while 17 percent of insurers have allocated more than 5 percent.
A.M. Best said the use of artificial intelligence, big data, Internet of Things, cloud computing and blockchain technology all have the potential to reshape the industry’s value chain, but are experiencing differing levels of acceptance in the insurance industry.
The adoption of blockchain in particular faces a more difficult hurdle than the other technologies due to its current narrow usage, A.M. Best said, pointing to the fact that only 13 percent of insurers have invested or are planning to invest in blockchain.
“Reinsurers are more optimistic about blockchain than other segments, as evidenced by the B3i initiative, which includes the top global reinsurers,” said the report, explaining that B3i is a startup formed to explore the potential of using distributed ledger technologies in the re/insurance industry for the benefit of all stakeholders in the value chain.
“Other segments remain much more skeptical about blockchain in general and its applicability to their business, which is also reflected in the low numbers for insurers who have invested in these technologies as well,” the report continued.
Source: A.M. Best
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