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Given the highly competitive non-life market, and the depressed pricing that accompanies excess capacity, leaders in the global property/casualty insurance and reinsurance markets have found innovative ways to cut expenses to improve underwriting profit margins.

Executive Summary

Innovators stand out. Facing significant bottom-line pressure and seeking top-line growth, P/C industry leaders have made optimizing operating efficiency through innovation a crucial component of their overall strategy, according to AM Best. In a special report titled "Insurers Leverage Innovation for Financial Strength," AM Best analysts used innovation assessments that the rating agency assigns to insurers and reinsurers to gauge levels of invention and then compared five-year operating performance metrics of innovators and laggards. Here, AM Best's Chief Operating Officer James Gillard and Associate Director Edin Imsirovic provide highlights, finding that the most innovative companies demonstrate lower expense ratios, less volatile loss ratios and combined ratios, and higher premium growth rates.

A five-year benchmarking analysis of AM Best-rated non-life companies’ innovation assessments indicates that COVID-19 has widened the innovation divide, with a clear link to better top-line growth and favorable key operating ratios across the board for insurers with more developed innovation initiatives. These companies’ investments in underwriting and claims systems, designed to reduce losses and the costs of administering policies, help them to enrich their analytical capabilities and improve their risk management capabilities—all of which enhance their underwriting efforts.

AM Best formally integrated its criteria procedure, “Scoring and Assessing Innovation,” in March 2020, and within weeks of its official launch, the criteria was put to the test by the COVID-19 pandemic. The pandemic challenged insurers’ ability to pivot and innovate in the midst of global upheaval. Not surprisingly, the pandemic accelerated insurers’ investments in digital transformation initiatives, with increased focus on customer experience. More innovative companies leveraged their digitally enabled operating models to continue business as normal even under pandemic conditions, while less innovative companies struggled to retain existing customers and attract new ones.

AM Best’s innovation scores are the sum of two factors: an input score and an output score. Innovation input scores are based on leadership, culture, resources, and processes and structure. Output scores are based on results and levels of transformation. Innovation scores are then translated into five innovation capability assessment categories: leader, prominent, significant, moderate and minimal.

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