|
At a recent workshop, a panel of industry executives each told a story of how they had responded to an 'underwriting' crises. Each spoke in detail of how they had quickly marshaled their best people to thoroughly 're-underwrite' the book. Each was openly contented that, in a short time, they had isolated the symptoms, diagnosed the causes and proposed remedies. In every instance, the solutions were judged successful and, after eating a healthy reserve increase, the combined ratio returned to 'profitable' levels.
In retrospect, what struck us about these presentations was the eerie realization that we had heard them before, many times before over the last thirty years. As each executive waxed warmly in terms of loss ratios, combined ratios and other 'insurance speak,' we were not a little discouraged by the thought that over this thirty year period our industry may not have improved its approach to insurance company management as much as we may have thought.
Insurance executives still rely on substantially the same measures of performance that really haven't worked for more than thirty years. We still complain that we don't know soon enough that a problem is emerging and even when a problem has arisen, we still can't readily identify which area of the organization is most responsible.
As one response, we would like to make the heretical suggestion that managers quit relying on 'loss' and 'combined' ratios as measures of performance. Neither is a reliable measure of the financial success of a company. Neither is an adequate sign of an emerging problem. Worse, when a problem arises, neither is an indicator of where the cause of the problem lies.
Reflect on the matter of loss ratio. Who really contributes to a company's loss ratio? Sales? Underwriting? Claims? Administration? Obviously each does in its own way. Why not then better define what each of those ways are and set up management information and review systems which reflect those responsibilities?
Consider the specific contribution to loss ratio by each of the sales, underwriting and claims departments. The sales department can generate 'good' or 'bad' business. Even within the 'good' business of a line or program, there can be a wide range of subclasses which can greatly affect the type and level of expertise required to underwrite or adjust it. Measuring sales solely by written premiums is of little benefit in judging the effectiveness of a sales department and is useless to the administrative, claims or underwriting departments in effectively determining the number and qualities of staffing needed to handle the issues which can affect financial success.
Isn't the sales department better measured by the units of sales it submits and sells? This, in turn, will give rise to the average size sale. Both units of sales and average size sale are pieces of information of value in developing sales programs and measuring the effectiveness of the sales department. At the same time, such information is useful to those managing the underwriting, claims and processing areas.
Similarly, isn't the underwriting department really responsible for selecting the better risks from among those offered to it? If so, why not measure their responsibility in terms of the frequency of losses which arise among the risks selected by it? Isn't the claims department responsible for settling claims effectively? If so, isn't one important measure of its effectiveness the average loss cost which it achieves?
In every instance, this information can be budgeted from inception and, with forethought and refinement, can become the basis for an improved management process and information system. Budgeting and monitoring the specific factors which contribute to loss and combined ratios and assigning responsibility for each to the appropriate department will help signal variances sooner, will aid in pinpointing problem areas, and, because of the reliance among departments both for data and results, will mandate constructive dialogue among a company's managers.
|
|
