AM Best Aims to Quantify the Unquantifiable: Innovation
In a press release on March 14, 2019, insurance industry rating agency AM Best released the draft of a new criteria procedure, “Scoring and Assessing Innovation”, to acknowledge the critical role innovation plays in the survival of companies of all sizes. AM Best created the scoring mechanism to measure how organizations innovate in response to the many rapid social, climate-based and technological changes happening today. Evaluation of innovation is based on two factors: the “components of a company’s innovation process” (innovation inputs) and the “impact of a company’s innovation efforts” (innovation outputs).
More than a few questions come to mind when considering this new criteria procedure, not least the question of whether this new rating is necessary. As AM Best admits, innovation is already captured “indirectly through the various building blocks of its rating process.” Some have challenged whether it’s possible to effectively quantify something intangible like innovation.
Another concern is the effect this rating may have on decisions companies make. Those who are eager to demonstrate they are pursuing innovation with the appropriate fervor may feel compelled to invest resources into risky startups. Investing in immature or unnecessary startups presents an opportunity cost that in turn may harm a company’s overall rating if those investments do not result in any created value. Additionally, the innovation score may potentially inflate an “insurtech bubble” as companies rush to invest in order to signal how “innovative” they are.
Finally, it is not clear what need AM Best will be meeting by introducing this rating. Market incentives already exist to push companies to innovate—will establishing an innovation rating system encourage companies to invest in new technologies for the right reasons?