Insurers are familiar with how benchmarking can help gauge their financialperformance. Now they're applying benchmarking to better understand how ITaffects their overall operations.Where do you stand?
That's never been an easy question for insurance company executives toanswer. For hundreds of years, insurers have struggled to develop aneffective means to measure their performance-whether it's internalprofitability goals or how their performance stacks up against industrycompetition.
For much of its history, simple metrics such as combined loss andexpense ratios, gross and net written premiums and net earnings served todescribe company performance. Market share, a simple percentage of totalpremiums collected on any line of business, was the mathematical key tointerpreting competitive success.
However, as the insurance and financial services industries began toevolve and converge in the past decade, these concepts have begun to wanein their value, insurers and industry analysts say. Static calculations ofincome and expense, profit and loss and other financial accounting are fastgiving way to dynamic databases of performance factors that expressemployee and organizational efficiency and executive judgment as well asfinancial bookkeeping.
"There are many ways to look at information in the insurance industry,"explains Russell Bingham, vice president and director of corporate researchat the Hartford Financial Services Group, Hartford, Conn. "First, there isthe GAAP (Generally Accepted Accounting Principles) accounting thatinsurers must perform to meet regulatory requirements. These include all ofthe old measurements that we often use to discuss performance in theindustry.
"Secondly, there is information that actually describes what happens inthe performance of business activities within a company. These activities,and the metrics we are using to measure them, are the real sources ofinformation that now drive strategic planning in our company," he says.
Although GAAP accounting may satisfy Securities and Exchange Commissionrequirements and state regulators, he notes, these numbers no longer fillcontemporary needs for an in-depth understanding of how the insurancebusiness happens on a day-to-day, quarter-by-quarter basis. And they nolonger form effective standards by which insurers can measure performanceinternally or compare performances among competitors externally.
Investment returns structured claims settlements, arbitrage of lossportfolios and other manipulation of capital and expenses have complicatedthe financial perspectives of the insurance industry. New understandings offinancial capital and human capital contribute to management decision-making.
As a result, the Hartford and many insurers are turning to computer-assisted "benchmarking," mathematical formulas that can involve hundredsand sometimes thousands of individual performance measures that are used toderive an understanding of true company performance, however a companychooses to define it.
Some insurers apply the process internally, using the measures overtime to analyze the success or failure of corporate planning and createfuture strategic plans. Others subscribe and contribute to multicompanybenchmarking surveys to establish their own position among industry peers.
For more than 15 years, the Hartford has been evolving its internalbenchmarking process and developing its own criteria for evaluating a broadspectrum of corporate activities. The current formula involves more than2,000 individual measures that include all lines of business conducted bythe multiline insurer and internal business processes.
Distribution, policy support, claims management, investment managementand information technology management are all criteria in this benchmarkingprocess, Bingham explains.
"We refer to it as benchmarking return on equity," he says. "We realizethat as a company we have many options in the way we invest our corporatecapital. The benchmarking process helps use understand how the way weinvest capital results in return on equity-which is our real measure ofsuccess."
Benchmarking has become a highly visible aspect of the Hartford'scorporate culture. Departmental performance is discussed in terms of returnon equity benchmarks. Strategic planning is based on benchmarking measures.Incentive compensation is linked to benchmarking measures.
"Our motto is create value; deliver equity," Bingham says.
The need for benchmarking is fueled in part by increasingly criticalinvestor relations and a need for recognition in an intensely competitivemarketplace.
Investment industry analysts are looking beyond gross premium, combinedratios, and product line market share for measures of total performance asa way of differentiating competitors to the investment community.
Use of technology is a favorite consideration among analysts who lookfor benchmarking data in their company reviews, but it's only one of manyfactors. Analysts are also digging deeper into how insurers use bothfinancial and human capital to generate total return on equity, balancingmeasures of underwriting efficiency, operations efficiency, investmentmanagement and strategic planning.
In a recent report on the property/casualty claims process, Gary Craft,managing director of e-finance research for San Francisco-based DeutscheBank Alex. Brown, described the insurance industry's need to evaluate andmeasure performance broadly, not just in terms of underwriting claimssettlement or IT spending.
"The challenge this massive industry faces is not necessarily intechnology automation; smarter decision-making among its human capital isan equally important objective...The industry really needs to balanceefficiency with decision-making intelligence," Craft wrote.
Ward Financial Group, a Cincinnati-based research and consulting firm,provides individual benchmarking consulting to insurers, but also conductsan annual survey and analysis of insurer performance, generating not onlyan industrywide database, but the Ward's 50 Benchmark Group. The surveyrecognizes outstanding achievement in safety, consistency and performanceover a five-year period.
The Ward benchmarking survey of more than 125 insurers identifies 2,500performance measures within 26 insurer business functions in its database.From this database, the firm generates 157 best practices that, accordingto its own analysis, lead to superior performances. Participation in thesurvey costs about $30,000, including travel expenses for Ward consultantswho visit and survey companies individually.
Insurers use the benchmarking database to monitor their own performancewithin the survey criteria over time and also against competitors that aregrouped by Ward into comparable categories for anonymous analysis, saysJeff Rieder, a Ward staff consultant. The development of the Ward's 50Benchmark Group also enables insurers to benchmark against the industryleaders from which the best practices are derived.
"Many companies use the benchmarking data as a way of evaluating theircost structure for budgetary purposes," Rieder says. "But the complexity ofthe information within the database provides for much more flexibleanalysis. An effective benchmarking program focuses on overallperformance."
Last year, American National Property & Casualty, a Springfield, Mo.-based insurer, was named to the Ward's 50 Benchmark Group for achieving"outstanding financial results in the areas of safety, consistency andperformance" from 1994 through 1998, according to a letter of recognitionfrom the consulting company.
American National Property & Casualty ranked in the top 10 of the Ward50 and chairman and president Gregory Ostergren is proud of theachievement. The letter of recognition is prominently featured on theinsurer's Web site, www.anpac.com.
"Benchmarking has become very important to our strategic planningprocess," Ostergren says. "We use the benchmarking process to define areasof performance and set standards for performance within our company.
"We have learned over the past few years that you can only achieve whatyou can measure. By turning to the benchmarking criteria as our means ofmeasuring, we cut through the natural subjectivity of managers in ourvarious departments and get directly to what is measured by theirperformance," he adds.
The process provides a common and consistent ground for managementdiscussion and the comparison of company practices to insurance industrybest practices provides a quantifiable approach to understandingachievement, he says.
"When we look at the best practices data in various operationcategories, we can not only determine where we are succeeding and failing,but also by how much we are off a competitive pace," he says. "In somecases, we may be only a few percentage points off the industry leaders. Inother cases, we may be far off. This helps us set reasonable, measurablegoals."
Benchmarking surveys are only as good as the information thatparticipating companies provide.
TCI Consulting & Research, based in Cresskill, N.J., conducts annualbenchmarking surveys for life insurance companies that analyze expenses forboth information technology and operations expenses.
Participating insurers pay an annual fee based on premium income andannuity deposits. Anonymous survey results are available to non-participants for $2,595.
The TCI surveys aren't as broad as the Ward surveys forproperty/casualty companies. Only 15 insurers participated in the 1999 ITexpense survey and nine insurers in the operations expense survey.
However, the insurers are active participants in the informationdevelopment, says managing director Jack Tyniec, helping to shape thecontent of the survey and identify questions and factors used inmeasurement.
"Members put overriding emphasis on the credibility of results," hesays. "Benchmarking must be objective if it is to be at all useful.Information must be complete and analyzed with a very high degree ofsensitivity toward what the data actually represents in terms ofoperations. We have to be comparing apples to apples if this is going to beuseful at all."
As a result, participants must agree to respond to the survey fully andaccurately, using authentic accounting from operations. TCI's surveyresults for 1999, for example, include actual 1998 expenses, which aredistributed to participating insurers. The survey is taken electronicallyusing software that includes a glossary of terms and explanations of datarequirements to eliminate inaccuracies and misconceptions.
Participating insurers also meet twice a year as a consortium fordiscussion of the survey results and insurance company operational issues.Participants in the 1999 surveys included the Equitable Life AssuranceSociety, Jackson National Life Insurance Co., John Hancock Mutual Life,MetLife, Minnesota Life Insurance Co. and Prudential Insurance Co. ofAmerica.
"Many of the consortium members use the survey results to establishbudgetary expenses each year, but benchmarking is more than just an aid tothe budget process," Tyniec says. "Benchmarking is the process ofdetermining where you want to be as a company and benchmarking data is thetrail that marks your progress to that goal. This is how you really knowwhether or not you are getting where you want to go."
Minnesota Life Insurance Co. began participating in the TCI surveyconsortiums in 1997 as part of a program to improve strategic planning. "Wewere looking for data and trends analysis that would tell us how wecompared to our peers," recalls Lisa Carriere, an associate actuary for theSt. Paul, Minn.-based carrier. "Are we in the ballgame? On what do we needto focus in the future? These are the kind of general questions we broughtto the process."
However, the benchmarking process began to reshape the questions forthe insurer, by demanding specific attention to expense and operationsfactors, she says.
"One of the most valuable returns we got from our participation was theself-discipline of the process-acquiring the specific data required by thesurvey, interpreting the descriptions of the data within our operations andcompleting the survey," Carriere says. "As a result of the survey process,we are better equipped to gather and analyze information within ouroperation and integrate the future survey results into our planningprocess."
Carriere also values the consortium meeting with other participants anda means of exploring the survey data and the issues the data describes."The face-to-face meetings allow us to take a broader view to the surveydata as well as define the survey questions for the future. The discussionsare frank and honest conversations of peers, focused by our specificunderstandings of the survey data," she says.
Len Strazewski is a freelance writer based in Chicago.
Register or login for access to this item and much more
All Digital Insurance content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access