Tag Archives: a.m. best

The Risk in A.M. Best’s Innovation Scoring

On March 14, insurance credit rating agency A.M. Best released its Scoring and Assessing Innovation (Draft). Per its press release, “AM Best defines innovation as a multistage 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.”

The rating agency further notes, “Innovation always has been important for the success of an insurance company, but, with the increased pace of change in society, climate and technology, it is becoming increasingly critical to the long-term success of all insurers.”

Best begins with an assessment of the commitment of senior management to innovation. In the compliance world, this is also called the “tone at the top.” Best broadly labels this criterion “Leadership.” If there is a firm commitment, then a positive culture of innovation follows throughout the enterprise, the second component (“Culture”) of the Best scoring model. This requires sufficient resources devoted by the insurer to bring to market new products, processes, services or business models and, per Best, “…a demonstrable impact on its long-term financial strength.” This is the third component of the model (“Resources”). Finally, existing company governance structures, policies and procedures must facilitate an innovative environment and address enterprise-wide data management and compliance obligations. (“Process and Structure”)

That all sounds logical.

See also: Changing Nature of Definition of Risk

In what could be said to be an understatement, Best next observes, “A challenge for insurers is aligning the use of customer data with varying regulatory restrictions related to consumer privacy. The rules for mining of personal data are expected to fall within the confines of governance and encompass regulatory guidance.”

While this is axiomatic, it also demonstrates an inadequate treatment of the various risks posed by innovation as characterized in the draft. Consider A.M. Best’s 2013 document, Risk Management and the Rating Process for Insurance Companies, in which “Operational Risk” is defined as: “Financial exposures arising from damage to a company’s reputation or franchise value stemming from a wide variety of external and internal factors, such as: management change; business interruption; fraud; data capture; data security and integrity; claims handling; and employee retention.”

Operational risk is one of the pillars of the A.M. Best Risk Management Framework. Consequently, a properly governed insurance company will take into account the full scope of regulatory compliance issues raised by innovative technology, which is more than today’s increasingly complex and fluid data security regulatory environment. Enterprise risk management (ERM) must also assess the risks associated with replacing a wide range of systems and, potentially, relationships, that may occur with innovation. While insurtech startups have captured the imagination – and capital – of insurers, these ubiquitous private firms are also third-party vendors that should be subject to the same due diligence as any other service provider.

This isn’t to suggest the insurance industry and the consumers of its products should curb their enthusiasm about innovation, or to minimize the benefits that are being realized by both insurers and insureds from what insurtechs have enabled. It is to say, however, that unless we innovate all elements of insurance operations at roughly the same time, innovation will be marked with unnecessary failures, regulatory entanglements and costly litigation. It is not just consumers who are affected by innovation. The whole spectrum of service providers integral to the delivery of benefits to insureds must be on board if there is to be success in these technological initiatives or, as Best puts it, if the insurance company is to be, “relevant and successful.” This includes legal and regulatory compliance, but it also must include making certain that every entity that must adapt to innovative technology adopted by an insurance company is capable of doing so.

Currently, predictive analytics driven by access to big data have already been adopted by many insurers to improve the underwriting and claims processes. New web-based distribution systems – which rely on big data, as well – make getting insurance easier in the increasingly competitive world of small business insurance. Platforms such as bi-BERK (from Berkshire Hathaway) and Pie Insurance are but two examples of how technology is making it easier for small firms to do business with large insurance companies. For personal lines of insurance, the Internet of Things (IoT) has provided new opportunities to enhance the customer experience.

It is vitally important, however, for insurers to understand the relationship between innovation and their partnerships with a wide range of service providers. In other words, change management is important throughout the environment in which the insurer operates. If any one participant in that environment is told to “just do it” (with apologies to Nike), then there is a risk that innovation will fail. While third-party service provider (vendor) management should already be part of the insurer’s ERM program, onboarding these vendors when new technology solutions are implemented should be something specifically acknowledged by A.M. Best when scoring for innovation.

In a recently released study, process mining company Celonis looked at how both leaders and business analysts in the U.S., U.K., Germany and the Netherlands view business transformation. The results were startling. Sixty-two percent of C-suite executives set key performance indicators (KPIs) for their transformation initiative without understanding what’s going wrong in their business first.

That led the sponsors of the survey to observe, “This suggests that many businesses are undergoing disruptive transformation processes because they think they should, rather than knowing exactly why they must.” See: Celonis (2019), Why are Business Transformation Initiatives Being Launched in the Dark?

See also: New Phase for Innovation in Insurance  

Echoing that theme, in a report by Valen Analytics, 2019 Outlook: The Data Race Intensifies, it was noted: “Adding to the innovation challenge in insurance is a trend of long IT backlogs, with most insurers reporting a backlog of one to two years. For the 22% of respondents unable to identify how long their IT backlogs are, it may be one indicator that technology innovation is not at the center of business strategy.”

Today, the risk run by the A.M. Best effort at innovation scoring is that insurers will not do the thorough risk analysis necessary before launching and implementing significant technology initiatives. Only then will the path to innovation be focused, aligned with well-defined company objectives and capable of delivering value to all who are part of the claims, distribution or underwriting environments. Without that assessment, “bright shiny objects” will continue to be embraced for no other reason than to say that they were.

3.5 Things to Know About Claims (Part 2)

Part 2 – You CAN reduce your claims expenses and improve the customer experience.

In Part 1, we looked at how your claims processes and systems are a customer experience issue. This time, I will dive into the fact that you can reduce your claims expenses while improving the customer experience. A recent article in A.M. Best’s journal shared a survey that indicated the top two items that needed technology improvement are:

–Improving the customer (and agent) experience.
–Legacy administrative and claims systems.

Reducing the claims expenses of a company does not have to mean a reduction in the customer experience. Improving the customer service or experience does not mean you need to increase expenses by adding human capital in the company. I have learned that there can be a happy medium.

See also: Finding Efficiencies in Claims Process  

Here are some questions and thoughts to keep in mind as you and your team evaluate ways to reduce the claims expenses while maintaining or enhancing the customer experience:

Does your company have a proactive or reactive digital strategy?

Digital strategy and digital capabilities are not the same thing. I believe digital channels and experiences are going to change the insurance industry. You must meet your customers where they are and want to meet. If that is mobile, then you need a way for your customers to process claims on their mobile devices. And not just some functions, all of the claims functions. Have you ever started a process on your mobile device only to go down a path that leads to – “We apologize, that function is not available on our mobile app, please go to www dot…” (You get the point.) It is frustrating, to say the least.

Insurtech: Does your company just talk about it, or do you actively engage in it?

Talking about insurtech and actively engaging are two different topics of discussion. Here is what I have learned in building businesses. A business is always in one of four phases at a given time: innovating, pivoting, growing or dying. Ask yourself, which category are we currently in? Let’s hope it isn’t the last category. Insurtech can help your company with the first three categories. However, you must become engaged. This means reaching out to insurtech companies and taking a new approach by working with them. You may be pleasantly surprised by what they can offer to you, your team, your company, your customer experience and your bottom line.

Are your legacy systems hindering innovation, or even preventing it?

Let’s discuss item #2 of the A.M. Best survey results. I can tell you from experience; When I inquire about legacy systems at life insurance companies, I hear a sigh. This is not a sigh of happiness, it is a sigh of not wanting to discuss this subject. At all! Most people almost cringe at the thought of discussing the legacy systems.

See also: Top 10 Claims Trends That Will Affect 2018  

Here are the facts: Your legacy systems exist and are currently a necessary part of the business. They will probably get phased out or updated. This process is going to be expensive. But does it have to be? What if an insurtech recognized this issue as a barrier to entry for its product or offering and decided to tackle the legacy issue head on? What if it could connect to your legacy systems and complete the claims processing functions while delighting and providing WOW to your customers? What if it could accomplish this with minimal resources and at a reasonable price?

My point is there are many ways your company can be innovative. If you start to have an open mind and explore some of the insurtech companies out there, you may get all of the innovation your business needs! Stay tuned for Part 3 of this article to learn how your claims process can become a revenue driver for your products.

Innovation Executive Video – A.M. Best’s Matthew Mosher

Matthew Mosher, Executive Vp and COO of A.M. Best Co., talks with Innovator’s Edge CEO Wayne Allen about the impact of innovation on insurance and how it is becoming part of a forward-looking view of a company’s financial health and security.

View more Insurtech Executive videos

Learn more about Innovator’s Edge

Time to Revisit State-Based Regulation?

The states do not have a constitutional “right” to oversee insurance. Clearly, insurance and reinsurance is interstate commerce, which gives federal government the oversight. There are no states rights issues involved.

The McCarran–Ferguson Act, 15 U.S.C. §§ 1011-1015, which was passed by Congress in 1945, does not regulate insurance, nor does it mandate the state regulation of insurance. Section 2(b) of the act does specify that the business of insurance is exempt from the antitrust laws only if it is regulated by the states. It provides that “Acts of Congress” that do not expressly regulate the “business of insurance” will not preempt state laws or regulations that regulate the “business of insurance.”

What else was going on in 1945? Oh, yeah, that World War II thing. Perhaps congress then did not want more responsibility.

It is time that this war-generated act is revisited.

“Perfunctory” would be a kind word for how some of the states actually oversee the insurance process. I have personally experienced insurance departments that are totally unaware of the laws by which they are supposed to be regulating insurance. Regulators either do not know the law or do not care about enforcing it. While I have not witnessed the federal government’s efficiency, to continue the regulatory status quo is to argue that the demonstrated 50-plus (states and territories) individual messes are better than one big mess, while having to accept as a foregone conclusion that a federal system would be a mess.

The states have clearly proven to be lacking in both integrity and self-restraint. The 2015 State Integrity Investigation shows the reality of the situation. Only three states score higher than D-plus; 11 states flunked. The State Integrity Investigation is an in-depth collaboration designed to assess transparency, accountability, ethics and oversight in state government, spotlight the states that are doing things right and expose practices that undermine trust in state capitals. The project is not a measure of corruption, but of state governments’ overall accountability and transparency. The investigation looks at both the laws in place and the “in practice” implementation of those laws to assess the systems that are meant to prevent corruption and expose it when it does occur. State foxes are guarding the henhouse.

While the state insurance regulatory heads are adamant about keeping their perfunctory regulation of insurance based on the misnomer of “states’ rights,” they are by design or defect giving away that power to the quasi-private nongovernmental National Association of Insurance Commissioners (NAIC) or the private rating agencies, which may be thought of as shadow regulators.

In the name of commonality of law among the states, the NAIC produces model legislation, which the states are pressured to accept, lest they lose their cherished accreditation status by the NAIC.

See also: How to Bulletproof Regulatory Risk  

The tactic used by the NAIC is not unlike the federal speed limit of 55 MPH in the ’70s and ’80s. Where does the federal government have the right to tell any state what its speed limit should be? It doesn’t. But the Transportation Department said, Do this, or we won’t give you any highway funds.

So how does this NAIC model legislation thing work? Here is an example.

In the NAIC’s Deceptive Trade Practices Act (DTPA) or (Unfair Trade Practices Act), the NAIC said that if a company does something (bad) with regularity, that may be considered a “trade practice.” Originally, this was NOT anything but additional ammunition for the state insurance regulator, but when Texas passed this model, it did so with two big changes:

  1. A one-time act of bad by the insurance company could be considered a trade practice.
  2. There was a private right of action against the insurance company for violating the DTPA — the right didn’t just belong to the insurance regulator.

Oklahoma passed the act close to the way the NAIC wrote it, yet according to the NAIC both states have passed the model. But sameness in name does not mean sameness in fact.

Fighting Back:

Not everyone sees this drift toward private oversight as a good thing for the insurance consumer. The National Conference of Insurance Legislators (NCOIL) — those elected guys who actually pass the insurance legislation — are trying to do something about the drift.

At its fall meeting in November 2015, NCOIL urged each state legislature, the departments of insurance and insurance commissioners to foster competition in insurer rating.

No single insurer rating agency should be allowed to position itself to supersede state regulation. The message is clear; the state is in charge of insurance regulation, not some private rating agency setting up rules as to what an insurance company must do to get a certain grade.

Major intermediaries appear to favor state oversight, which is logical because reinsurance intermediaries are basically unregulated by the various states, and they are not so likely to remain unregulated if the federal government assumes its rightful place in insurance regulation.

Thomas B. Considine, now NCOIL’s chief executive but previously commissioner of the New Jersey Department of Banking and Insurance, used NCOIL’s spring meeting in New Orleans as the venue to raise public concerns about states becoming subject to the authority of the NAIC, a private trade association composed of the nation’s insurance regulators. The circumstance under which lawmaking authority may be delegated to private organizations is narrow. For that reason, delegation of states’ authority to a private organization (such as the NAIC) needs to be stopped.

The situation makes a good argument for the Treasury Department’s Federal Insurance Office, an agency whose existence has been questioned by the NAIC, as well as some other elements of the industry.

State oversight is not a good argument against federal oversight, especially when the state regulator is doing what it can to cede its power to the private industry and away from itself.

See also: Investment Oversight: Look Beyond Scores!  

Bigger issue

This is not just a turf war; it goes to the very core of the McCarran Ferguson Act itself. An analysis of the act will determine the scope of the antitrust exemptions. History paints a narrow picture. Issues are not centered on whether Congress has the power to regulate the business of insurance but rather whether the commerce clause precludes state regulation altogether. That changes the argument and the analysis.

This is also not a case of which oversight is more appropriate, federal or state, but whether the state should be allowed to continue its oversight in order for various federal exemptions to apply to the entities in the business of insurance. That is, the Sherman, Clayton, and Federal Trade Commission (antitrust laws) apply to insurance only “to the extent that such business is not regulated by state law.” If states regulate, then exemptions apply; if the states do not regulate, the exemptions do not apply. This is a very clear indication that any dismissive perfunctory attitude of some state regulators invites the application of federal law against those in the business of insurance.


  1. Is the activity part of the business of insurance? (Unfortunately, the act does not define the business of insurance, and the legislative history here is not clear.)
  2. If it is, then the analysis goes to the extent to which the activity is regulated by the state. § 2 (b) of the McCarran -Ferguson Act addresses the state regulation activity. (Case law shows that any uncertainty regarding the applicability of the exemption should be resolved against a grant of antitrust immunity.) Unfortunately, the U.S. Supreme Court has not defined what extent is necessary; however, lower courts hold that a statutory framework that is a mere pretense is insufficient. Perfunctory regulation won’t suffice. The legislative history indicates that Congress intended the exemption only when effective state law exists.
  3. If the activity is not regulated effectively by the state, or if the activity constitutes a form of boycott, coercion or intimidation, the activity will be subject to the scrutiny of the antitrust laws.

The wholesale delegation of authority by the various states to the NAIC or deferring to select private rating agencies brings with it the very real possibility of a successful challenge to the state’s current insurance regulatory status quo.