COVID-19 Pandemic Forced Insurer Innovation, but Progress Varies

Changes to the way we live and work forced by the COVID-19 pandemic spurred innovation across the insurance industry, though the degree to which individual insurers have innovated varies, according to A.M. Best.

Today, more insurance companies are placing great importance on data quality to improve their efficiency and profitability, Best says in an April 4, 2023, report titled Insurers Continue To Innovate, Albeit to Varying Degrees. Insurance company leaders understand the need for system and information technology (IT) infrastructure upgrades to meet those goals, the rating agency says.

The pandemic also helped insurers better see the connection between their innovation efforts and strategy objectives, Best says, prompting them to develop more comprehensive yet focused innovation strategies.

In addition to the impact of the COVID-19 pandemic, since March 2020 insurers have also faced low yields and stagnant growth and, more recently, inflationary pressures and rising interest rates, Best notes. Meanwhile, technological change continues to alter consumer behavior, transforming the landscape for insurance products.

Together, those trends have created both challenges and opportunities for insurers, the Best report says. Those challenges and opportunities have accelerated the need for insurance company innovation, leading to rewards for insurers that innovate effectively.

The Best report suggests that faced with an evolving risk environment, insurers moved more rapidly toward digital technology and intensified their focus on product innovation and policy language modifications.

The Best report notes that the rating agency first released its Scoring and Assessing Innovation criteria in March 2020, shortly before the COVID-19 pandemic transformed the world. The rating agency first sought to assess insurance company innovation in March 2021.

Best's latest assessment showed that some companies have made demonstrable improvements in their innovation efforts since that initial 2021 evaluation, the report says.

Best's innovation assessment examines companies based on four components: leadership, culture, resources, and process and structure. Companies are scored on a 1-to-4 basis for each component, with 4 being the highest score.

Leadership had the highest percentage of 4s and the lowest percentage of 1s compared to the other components in the current assessment, Best says.

"The focus on and importance of innovation starts at the top, and we have observed more actions guided by clearer vision, such as more companies creating chief innovation officer positions, more frequent discussions at board meetings, and a greater emphasis on innovation throughout an organization," Best's report says.

Many insurance companies have faced ongoing challenges in attempting to develop cultures of innovation, Best found. Still, a persistent leadership focus on innovation and employees experiencing the environment firsthand have bolstered the move to an innovation culture.

"Insurance industry culture is normally conservative by design, providing a means to support risk management and mitigation, but the pandemic upended the industry's methodically slower pace, as insurers needed to act swiftly and decisively to adapt to the rapidly changing environment," the Best report says.

There has been more active promotion of innovation throughout organizations, though some are better able to quantify their results than others, Best says. In addition, some companies are increasing the emphasis of technological and innovative skills among new hires, helping to embed innovation culture in their organizations.

In the area of resources, Best notes that the pandemic's impact on technological changes forced many insurers to find the resources needed to remain competitive. The result is that innovation resources scores improved in this latest Best assessment.

"Systems and technology improvements have helped drive the more favorable scores, although budgets and personnel resources have also grown," Best says. "More companies are focusing on data quality to help improve efficiency and profitability, and leadership teams understand that system and IT infrastructure upgrades are critical to achieving these goals."

In addition, many companies are introducing training sessions to improve knowledge, as well as investing in or partnering with technology, FinTech, and InsurTech start-ups to boost existing business or start new businesses, according to Best.

Best's assessment found that insurers' innovation in processes and structures remains "an ad hoc endeavor," with a sizable majority of companies still lacking a replicable innovation process. Underscoring that observation was the fact that the process and structure component received the largest percentage of 1s among the four components in Best's innovation assessment. Still, there has been improvement, Best says.

"The pandemic further highlighted seamless, well-planned innovation processes and structures on the one hand, and disjointed innovation efforts on the other," Best said. "Leadership at more companies was able to better view the links between their innovation strategies and strategic objectives and develop a more comprehensive yet focused innovation strategy."

Many insurers view data governance and management as integral elements of their strategy, the report says, as they look to the flow and quality of data to boost profitability.

While its most recent insurer innovation assessment showed improvements, most companies still score at the lower end, Best says. Ultimately, insurers' innovation efforts must produce measurable results that make investments in innovation worthwhile, according to the rating agency.

"Companies that had invested significantly in innovation infrastructure before the pandemic were a leg up in resources and improved capabilities," the Best report says. "Innovation initiatives have accelerated, but whether they will result in sustainable results over the long term remains to be seen."