Introduction

Successful insurance companies consistently strive for profitable growth, differentiation, and a unique, sustainable market position. The nature of the insurance market makes those goals challenging to meet. Competition only gets tougher, and differentiation is increasingly difficult to achieve.  Customers are more demanding, pricing has moved to a micro-rating model, and distributors are looking not only for product, but also for sales and underwriting support and business tools to help them better manage their businesses. Companies struggle for an edge in service or time-to-market.

The good news is that more data is available in more places than ever before, and one important key to achieving profitable growth, differentiation, and a unique market position is the ability to turn data into meaningful information and then make that information widely available inside and outside the company. The diagram below illustrates the measures involved in creating information visibility throughout a company and its business processes.

Information visibility

Perspectives and scorecardsMost insurance industry executives are keenly aware of the key performance indicators (KPIs) used to measure their company’s progress against goals. Experience in working with growth companies in the property and casualty (P&C) industry has taught us the value of tracking KPIs effectively by converting raw data into useful information from which informed decisions – both strategic and tactical – can be made.

KPIs can be grouped by areas of responsibility (perspectives), and by specific areas of common interest (scorecards). At the highest level, KPIs can be categorized according to perspectives such as underwriting, claims, marketing, and finance, with the understanding that there is significant overlap and interdependence among those areas of responsibility. The level of detail at which performance should be monitored is likely to vary based on management level, with executives benefiting from a broader view and line managers examining more granular detail.

Profit-related KPIsKPIs that measure profit performance include:

Return on surplus Loss ratio

Premiums per exposure

Losses per exposure

Frequency per exposure

Severity

Components of claim costs

Timing of closed claims

The key performance measurement of severity – the average cost of a claim measured over time – is affected by controlling (i) components of claim costs – the costs involved with significant controllable elements of claims, such as legal costs, and (ii) the timing of closed claims – a measure of the number of days to close each type of claim. 

Frequency is a measure of the number of claims that are expected based on exposure.  For workers’ compensation, the exposure base is measured in payroll dollars. Frequency multiplied by severity yields loss per exposure. Comparing loss per exposure to premium per exposure yields the amount of gross profit produced before consideration of expenses. This relationship is most commonly reported in terms of the loss ratio. Combining the loss ratio with expense and investment income produces a picture of the total profit for the business – a profit best expressed as return on surplus. This KPI monitors a company’s use of capital and the extent to which it achieves target rates of return on business investment.

Incurred vs. reported/policy year vs. accident yearIt is useful to measure profit performance on both reported and incurred bases, as well as on accident year and policy year bases to supplement the five profit-related categories, which include:

Loss ratio Premiums per exposure

Losses per exposure

Frequency per exposure

Severity

Reported results represent actual paid and reported data to date, but that is a difficult basis to use for management because it is undeveloped information. The addition of development factors converts reported data to incurred data, which provides an income statement perspective on an accident year basis. This involves the use of actuarial estimated development factors to convert reported statistics into incurred statistics.

In addition, accident year is point-in-time information, whereas policy year is a better indication of expected future results. More importantly, pricing decisions are made on a policy year basis and an ability to validate pricing expectations through policy year actual results is especially valuable. The availability of all four (incurred, reported, accident year and policy year) when combined on one scorecard for each KPI category provides additional insights regarding the consistency or quality of results.

Production-related KPIsThe five traditional KPIs that measure production performance include:

Premium vs. budget Renewal retention

Sales or new business

New business strike rate

Quoted business vs. production targets

Production performance measurement is a combination of (i) renewal retention, which is the amount of business that stays on the books after renewal and (ii) new business production. New business production performance is evaluated by quoted business vs. production targets and strike rates. Strike rates are measures of the quality of new business that agents or brokerages are bringing to the company and reflect the underwriting acceptance rate.

DimensionsDimensionality selections are of interest across most or all KPIs and are limited only by the availability of data.  Some common dimensionality selections are listed in the table below.

Dimensionality selections (examples)

Dimensions can either be company-focused, spanning various lines of business such as those listed in the table above, or specific to a single line of business like those listed in the table below.  Analyzing at both the company and the line of business level helps to pinpoint the most profitable opportunities and the biggest risks.

Single line of business dimensions

The value of a scorecard is greatly enhanced by the number of dimensions utilized and the extent that those dimensions can be spread across different KPIs.

Trended KPIsThe ability to examine KPIs over time is particularly important.  Individual biases can influence the interpretation of data anomalies at point in time in a way that misrepresents the actual situation. Trended results back up the validity of point-in-time interpretations. This capability is especially important in the insurance industry where the results of decisions can take several years to be fully realized and, conversely, where expected shifts in trends can begin to develop and become evident more quickly.

Component costs and timing of claims settlementThe analysis of component costs and the timing of the settlement of claims provides the controlling performance measurements to keep those average claim costs within their expected range. Understanding legal costs, for example, is important in controlling the claims settlement process. Further, many insurers monitor the ratio of litigated to non-litigated claims. 

The timing of settling claims is measured in terms of the average number of days for which all claims are open. A more common analysis is based on closed claim statistics.  An important distinction for workers’ compensation lines is the breakdown in loss types between medical claims versus indemnity claims, because settlement periods are very different –  the average closed claim settlement period is about ninety days for a medical claim and one year for an indemnity claim.

Significant value can be realized in claim cost savings by decreasing the time for settling a claim or decreasing the component cost of a claim. These Key Performance Indicators provide the tools with which to monitor and bring about those improvements.

Additionally, these improvements can be achieved by pushing performance measures down to the examiner level and summarizing for examiners’ work loads to provide feedback to examiners and their supervisors. The information can also be summarized at the supervisor or executive level for measuring enterprise performance.

SeveritySeverity is a measure of the change in average cost per claim over time.  Generally speaking, normal changes in severity, such as those due to inflation, will be offset by changes in product pricing. Examining dimensionality in severity is useful where cost trends vary dramatically.  For example, in workers’ compensation, medical cost trends are increasing by an average of 10% per year while the cost trend for lost time indemnity claims is nearly flat.

FrequencyFrequency is a measure of the quality of business. To state the obvious, expect riskier business to have more accidents per unit of measure, and less risky business to have a lower accident count for the same unit of measure.

Expected levels of frequency are reflected in prices. Variances in frequency from expected levels may reflect a need to reinforce underwriting guidelines, examine the performance of the underwriters, change underwriting guidelines or change pricing. 

A level frequency over time is expected for most insurance products. In workers’ compensation, because safety in the work place has been improving, the industry trend for frequency has been a continuing decline over the last ten years or so.

Further, many insurers are working with customers to help develop safety programs that reduce their frequency of loss and reduce their premiums accordingly; a “win-win” for both carrier and customer.

Dimensionality is used to examine actual results compared to expected changes in frequency. For example, if a carrier is successful in helping its customers reduce their frequency of loss, it should see a declining frequency with customer age.  Similarly, as a carrier looks at class codes within hazard groups, it should see a higher frequency of loss within higher hazard groups and a lower frequency within lower groups.

Profit per exposureProfit per exposure combines loss costs and premiums per exposure, looking at accident year and policy year profits. Because these are profitability measures, profit per exposure is looked at only on a fully developed, incurred (rather than reported) basis. Reported or undeveloped figures often provide a misleading view of profitability.

The calculation of profit is viewed both for the accident year and policy year. This information is very powerful in bringing together the combined cost and pricing trends to determine whether or not profit levels are being maintained. 

Loss ratioLoss ratio is a universally acknowledged measure of profitability across all dimensions. Loss ratio is measured both on an incurred and reported basis and for accident and policy years. The opportunity is presented here to carry that loss ratio into virtually every dimension and every broker allowing brokers to delve further into the detail of their individual accounts in order to analyze profitability trends. If issues that adversely impact profitability are identified, the other KPIs provide opportunities to explore further whether those issues are matters of frequency, severity, or pricing trends. 

RetentionRetention is a measure of renewal business performance. This can be viewed on a gross  (i.e., all accounts that are remaining after renewal) or net basis. Using a net basis is far more common; it excludes cancellations, so a net retention metric measures only the retention of desirable customers.

Dimensionality allows managers to evaluate retention of business in depth.  For example, if an insurer is good at retaining older customers (using “age” as a dimension), are they targeting the most profitable demographic given their basket of products?

Strike ratesStrike rates reflect the effectiveness of new business production efforts. They can be examined across five key metrics: percentage bound, percentage pending, percentage declined, percentage lost and percentage closed. Collectively, these metrics add up to one hundred percent of the business.

Percentage declined represents the percentage of business rejected from the broker – a good indication of the quality of business that brokers or agents are providing. Percentage closed represents business that was actually written. If a target strike rate for closed business is established, using dimensionality to evaluate strike rates by broker is a particularly powerful measure of their performance.

Premium budgetPremium uses detail budgets and quickly evaluates the roll-up impact of variances.  Its  power rests in the degree of dimensionality with which goals are established. For example, goals may be set by broker, office, policy size, class codes, or hazard groups; all of which help to evaluate whether or not the company is achieving a product risk profile that matches its strategy.

Return on surplusThe summary scorecard metric that reflects the total performance of all previous metrics is return on surplus. This metric monitors the performance of the company’s investment in markets based on its strategic risk profile by state, class code and office. It provides a very powerful tool to

evaluate and make decisions on “best use of capital” opportunities – for example, determining whether or not to invest to support new market opportunities based on the combination of lines of business that may or may not produce the firm’s target level of return on surplus. Similarly, it provides an easy means to analyze the tradeoff of increasing capital with surplus notes, reinsurance, or other forms of risk protection by measuring the expected increased return on surplus to the organization versus the anticipated cost of additional capital.

Loss ratio:

The ratio of claims to premiums. It may be calculated in several different ways, using paid premiums or earned premiums, and using paid claims with or without changes in claim reserves and with or without changes in active life reserves.

Formula: Claims / premium * 100

Unit Type: Percentage

Direction: Minimize

Average Insurance Policy Size:

Average insurance policy size of policies closed within measurement period.

Unit Type: Money

Direction: Maximize

Average handling cost per insurance claim:

Unit Type: Money

Direction: Minimize

Average number of insurance claims per handler

Unit Type: Number

Time Range: Month

Closure duration rate of insurance claims

This KPI monitors the average spent duration of insurance claims closed relative to the average allowed duration of those claims closed in a given time frame.

Unit Type: Ratio

Direction: Minimize

Combined cost and claims ratio

The combined cost and claims ratio measures costs and claims as a percentage of premiums.

Unit Type: Percentage

Direction: Minimize

Number of new insurance policies

Number of new insurance policies closed within measurement period.

Direction: Maximize

Policy renewal rate

Percentage of policies that are renewed.

Direction: Maximize.

Not taken up (NTU) ratio

Percentage of insurance policies that have been rejected.

Net Written Premium

Premium on the policies.

Unit Type: Money

Number of days open of Insurance Claims

The number of days a claim is open from the date it was reported to the date it was closed.

Unit Type: Time

In Force Policies to Headcount

Number of in force policies at month end divided by total headcount (including all permanent full and part time employees, contractors, casuals but excluding parental leavers.

Unit Type: Ratio

Gross Premium Income (GPI) Forecast v Actual (%)

Percentage of forecasted premium income vs the actual received premium income.

Worst Insured / Client GPI Forecast v Actual

Percentage of forecasted premium income vs the actual received premium income for the worst insured.

Best Insured / Client GPI Forecast v Actual

Percentage of forecasted premium income vs the actual received premium income for the best insured.

Claims forecast versus actual

Percentage of forecasted requests for payment of a loss which may come under the terms of an insurance contract vs actual claims.

Claim reserves

To ensure the level of reserves maintained by approved insurers is sufficient to meet current and future claim payments.

Policy Premium to Personnel Cost

Month end total policy premium divided by total personnel cost (salaries, variable pay, benefits, training, recruitment, FBT, etc.)

Gross claim paid

Gross claims paid during a period.

Unit Type: Money

%Growth - Net written premium

% growth of Net written premium. The comparison can be with respect to last Month or Quarter or Year.

Net written premium = Gross written premium – Cedeed Premium.