Benchmarking Innovation: What Do Indices Foretell?

In a recent analysis of innovation assessment scores, a new addition to its carrier credit rating framework, AM Best found scores a tad below those from a year ago. The drop, it claimed, was on account of pandemic challenges. By calibrating innovation inputs (such as leadership, culture) and innovation outputs (results and levels of transformation) in its assessment framework, the rating agency reported that insurers have struggled with output, struggling to transform innovation efforts into results.

Innovation benchmarking is a relatively new phenomenon. Innovation indexes, as the norm goes, benchmark capability and change readiness instead of business outcomes. They tend to emphasize innovation input factors (or capabilities) over outputs (new products or new services). Rather than focus on start-ups as a veritable disruption engine, they instead examine potential from structural impacts such as high-capacity mobile telecommunications or high-performance business platforms.

In a backdrop of fast-paced innovation, market participants demand quantifiable frameworks to understand and measure innovation, which in turn lead to evaluating drivers such as:

  • Innovation-orientation of company’s mission and culture
  • Resource allocation to innovation
  • Success in executing its innovation landscape.

Using rules-based, proprietary approaches, innovation indices quantify these drivers, providing market participants with tools for navigating the dynamic landscape.

Innovation Indices

The S&P Kensho Moonshots Index, one such index, consists of 50 listed companies with highest Early-Stage Innovation Score, that are best positioned to produce next-generation products and services. The score assesses a company’s commitment to adopt disruptive technologies based on a natural language processing review of annual regulatory filings basis words & phrases related to innovation.

As per the S&P Dow Jones Indices, the market “consistently rewarded the Moonshots index over established Innovators on an annualized return basis, indicating the premium attached to early-stage innovators”. The top holdings are a mix of mid-caps and small-caps covering progressive themes, from among 17 thematic subsectors. Despite its focus on relatively smaller companies, the Moonshots index and the Established Innovators have exhibited similar levels of volatility, discounting outperformance as being a function of higher risk.

The MSCI ACWI IMI Fintech Innovation Index is another index that includes large, mid and small-cap securities across 23 Developed Markets and 27 EM countries. It represents performance of a set of companies that are expected to derive significant revenues from development of new products and services.

AM Best’s Scores

Developing an innovation-centric culture is onerous for carriers, but COVID-19 accelerated the industry’s pace, forcing insurers to adapt quickly. Despite strides in augmenting innovation inputs, most scored low on innovation output scores.

Carriers lagged in drawing clear linkages between innovation inputs and results, especially during crises as quantitative evidence got obscured by noise. However, superior-rated insurers effectively used cutting-edge processes and technology to transform innovation initiatives into results comparable to leaders outside the industry. Higher-rated companies made innovation-focused investments and were better prepared to deal with pandemic challenges, while others had to leapfrog years’ worth of changes to enhance customer engagement and pursue emerging growth opportunities.

The study reported certain lines were more effective at innovation-driven turnarounds. Reinsurance, health and auto were most buoyed by innovation. As complexity influences adoption, available tools and techniques are amenable to less complex underwriting and claims handling, such as in auto and health insurance. High severity events forced reinsurance segment to be innovative to stay relevant and profitable. Examples are pioneering catastrophe modelling and use of risk models to manage capital.

In APAC, AM Best found differences in markets. While geographic and demographic factors are shaping innovation in Japan, changing consumer behavior and threat of external disrupters are drivers in South Korea. European and U.S. markets resemble each other in that both are prioritizing efforts related to digital transformation, customer experience, product offerings and distribution channels.

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