Have you ever wondered, “Where would basketball be without the three-point shot?” It has been my husband’s favorite shot as a player, coach and fan, and it's mine as we watch Big East Creighton basketball games, because the energy, excitement and momentum completely change in seconds! You may never have considered this (and you may not even care), but it bears real relevance to what is happening within the insurance industry right now regarding the relationship between innovation and regulation.
The history behind the development of the three-point shot is fascinating. The rule was actually tested as early as the 1940s, but it didn’t become mainstream within the NBA and NCAA until the mid-1980s. Suddenly, a team that was down by two points with only seconds left could do more than tie the game — they could win! A dunk used to be thrilling (and it still it is), but there is no question that the three-point shot (one simple new rule) has generated greater popularity, attendance and income for basketball teams – literally a game-changer!
But here’s the nugget: The reason that the rule became mainstream was NOT because coaches and players wanted the rule. It was because fans loved how it transformed watching the game, and league commissioners wanted to please fans. The regulating organizations and the fans were jointly instrumental in bringing about the change.
Moving Innovation From Concept to Precept
Today’s insurers are finding themselves at a similarly historic point on the pathway to innovation. Customer needs, expectations, desire, lifestyles and technologies are driving change in insurance. Some insurers have been innovating and testing their ideas, with some success. But now, regulatory organizations that govern our industry are fostering innovation with sandboxes for testing new products, and rating agencies are planning to score carriers’ innovation efforts and outputs as part of the ratings process. This completely changes the nature of the word "innovation." It borrows the idea of innovation as a conceptual word and recasts it as a formal precept.
Some insurers might see enforced rigidity, but it is the exact opposite. It is the freedom to innovate in the direction of customer and market opportunity, with potential guidelines that may help insurers invest wisely. This is just another example of the customer driving the change, with the regulatory bodies listening well enough to bring validation and accreditation to the change. As we’ll see throughout the rest of this blog, insurers are now free to make three-point shots and have them count!
In our latest thought leadership report, The Future of Insurance: Optimization, Growth and Innovation
, we explored the idea that companies should take this opportunity to reinvent themselves. Last week
, we started by looking at this opportunity from the standpoint of strategic alignment. How does a two-speed model for transformation fit the strategic alignment needs of insurers that are trying to innovate while they also need to optimize their current business?
See also: An AI Road Map to the Future of Insurance
This week, we’re looking at how two recent regulatory events signal innovative opportunity for insurers. Can we use the changes in our game to learn and innovate? Can we use the rule-book as a tool for optimizing our processes and growing through innovation? We begin by looking at the details of regulatory possibilities. We will then follow up with some suggestions for insurer response.
Innovation and Regulation — Is there really an opportunity here?
With the rise of insurtech, the flow of capital into insurtech, changing customer demographics, shifting market boundaries and the pace of emerging technologies adoption, insurance regulators have noticed.
- The National Association of Insurance Commissioners (NAIC) established an Innovation and Technology (EX) Task Force to monitor insurtech developments and help regulators stay informed and educated. One of their tasks was to explore the use of a sandbox to accelerate innovation.
- A.M. Best proposed a new innovation assessment to be included in the annual AM Best rating review.
So, the regulatory gears are in motion for change. Let’s look at both of these signals in light of their impact on insurers.
The Sandbox Concept — “You are now invited to innovate.
Potentially, one of the most important changes considered by regulators is the sandbox. In November 2016
, Munich Re America submitted a proposal to the NAIC to lower the barriers to test new ideas, address how innovative ideas can be quickly developed and launched in an environment that is strictly regulated via a “regulatory sandbox.”
This legislative proposal for the sandbox, similar to what has been used in Europe, would allow an insurance commissioner to receive an application from an insurer or other licensee that essentially says, “We can meet the consumer protection need of that law in another way,” but still in a supervised environment via the sandbox.
Adding support to the concept, the American Insurance Association in December 2017
presented a model law to the National Association of Insurance Commissioners that would allow for the creation of a regulatory sandbox in which insurers could test digital innovations without fear of running afoul of regulations.
In 2018, I had the opportunity to speak to a few state insurance commissioners and some of their staff, sharing our consumer and SMB research that reflects the changing customer needs and expectations. At the end of one discussion, the commissioner commented to staff that they needed to understand these changing needs because these are the customers they serve. What an insightful comment!
Since that time, states have been taking differing approaches. Some believe sandboxes are not necessary or that their legislature would not allow for sandboxes. Others, including Connecticut, Illinois and Wisconsin, believe
their current regulatory environment allows them to provide guidance to innovators without the need for a sandbox. Arizona, Utah, Vermont and Wyoming are taking steps to encourage sandbox environments.
In late May 2019, Kentucky became the first state to pass a bill to create a sandbox for the development of creative risk management. The launch of the sandbox concept in various forms offers one of the most potentially important shifts made by regulators to encourage insurance innovation.
This is a potential game-changer — one that aligns regulators with customers! Where previously some innovations might be stifled by regulatory constraints, the NAIC is signaling that it would like for these innovations to count toward the improvement of the industry. Those that embrace new ideas and test and learn are free to capture the growth opportunities in a changing marketplace.
The Innovation Assessment — “You can talk the talk, but can you walk the walk?”
In early March 2019, A.M. Best published a draft document, “Scoring and Assessment of Innovation Methodology and Criteria.” The document states, “Given the accelerating pace of innovation and magnitude of change, insurance companies that fail to innovate may find it difficult to sustain long-term success/profitability and may ultimately be subject to anti-selection and loss of relevance. Those insurers that successfully incorporate innovation will likely strengthen their organizations, increase their customer base and improve efficiency, which will support their financial strength.”
Hence, they are introducing new innovation scoring criteria.
The report states, “A.M. Best defines innovation as a multi-stage process whereby an organization transforms ideas into new or significantly improved products, processes, services or business models that have a measurable positive impact over time and enable the organization to remain relevant and successful. These products, processes, services, or business models can be created organically or adopted from external sources.”
How does this look in practice?
The innovation scoring and assessment includes two components: innovation input score and innovation output score, both of which have sub-components.
The innovation input subcomponents include leadership, culture, resources (allocation, strategy, management) and processes and structure for innovation.
Innovation output subcomponents include results and level of transformation.
The natural tendency for insurers will be to look at the criteria and find out what they need to do to “look innovative.” But when insurers examine the criteria more deeply, they will quickly realize that this is impossible. A.M. Best has created a framework for analysis that is transparent from top to bottom. The goal for insurers won’t be to look
innovative, but to take the innovation criteria as a helpful guide to actually become
innovative through and through.
See also: Future of Insurance Looks Very Different
If the A.M. Best proposal
moves forward, insurers will be tagged, like this:
- Non-innovator: Companies receiving an innovation score of less than 12
- Reactor: Companies receiving an innovation score between 12 and 17
- Adopter: Companies receiving an innovation score between 18 and 22
- Innovator: Companies receiving an innovation score between 23 and 27
- Innovation Leader: Companies receiving an innovation score of 28 or higher
The best part about the innovation scoring is that it is holistic, covering people, process, leadership, transformation and results. With the knowledge of what may be coming from A.M. Best, insurers are now able to ask themselves some important questions.
Are we investing our resources in areas of innovation where we are likely to see transformative results?
Cloud-based platforms, such as Majesco CloudInsurer and Majesco Digital1st Insurance platforms
will help insurers achieve the transformation results and launch innovative products in weeks rather than years that can lead to higher A.M. Best innovation scoring.
Are our processes and structure designed to make the most use of real-time data and digital connectivity?
A.M. Best will be scoring the alignment of strategy and innovation in light of data’s use in decisions, solutions, problem-solving and data governance.
Are we ready for insurance’s innovative three-point shots?
The lesson that we gain out of these regulatory signposts is that we are close to a day when innovation is no longer optional, but it becomes an embedded tool for buzzer-beaters against the competition. Regulation and innovation are not incompatible. When combined effectively, they will please customers and open new markets and opportunities. Insurance will see a resurgence of popularity and the game will never be the same.
Is your organization ready to change its game in light of an industry that is driving toward innovation?