Does Your Insurance Organization Have a Digital Speedometer?

Executive Summary

Most of you have seen digital speedometers, either in your cars or on roadside speed enforcers. With such precise digital feedback compared to traditional needle speedometers, I am sure you have adjusted your speed to stay within the speed limit.

A study examining the effects of digital speedometers and fixed camera enforcement program applied to a 6.5-mile urban freeway section through Scottsdale, Arizona found the following results:

 

 

On similar lines, does your organization have a digital speedometer that it can use to adjust pace accordingly?

When running a multi-billion-dollar organization, a lot is at stake. Do you have tools in place to provide real-time precision feedback on how fast or slow your organization is moving?

This article explores a few key metrics that are important to an insurance company. What are they? Where should you look for them? How can you generate data to create real-time feedback?

Key Metrics in the Insurance Industry

Insurance companies consider the following metrics critical for profitability.

New Business Models

Metric Definition Related Functions
Revenue per policyholder Revenue per policyholder is a simple key performance indicator (KPI) that measures the amount of revenue generated by the insurance company per policyholder serviced. Distribution channels and strategy (agency and online sales), customer relationship management (service), and investment activities.
Sales or new business This metric tracks the number of new insurance policies on-boarded. This can be tracked by product line and/or by agent over a defined period of time. Sales and marketing, operations, strategy development.
Strike rate

Measures of the quality of new business that agents or brokerages are bringing to the company. Reflects the underwriting acceptance rate.

Strike 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.

Sales and marketing, underwriting.
Quota vs. production Measures the effectiveness of sales agents at meeting sales targets. Within the insurance world, there are typically two types of insurance sellers. The first group works exclusively for your organization, and only sells your products (often called captive agents). The second group works for a third party and sells policies for a number of companies, ostensibly finding the best rate for clients (non-captive). Sales and marketing, distribution strategy.
Average policy size The size or price of all policies sold in a given time frame divided by the number of policies sold. Operations, product risk profile, strategy.
Policy sales growth

Measures how many new policies your organization has sold over a set period of time and compares that to a target value. The policy sales growth can be defined based on the number of new clients, a measure of number of new policies sold, or a combination of the two.

It is calculated by dividing the difference between the current period’s sales revenue and the previous period’s sales revenue, and then dividing that difference by the previous period’s sales revenue.

Sales and marketing, revenue generation, distribution strategy.

Enhanced Consumer Interaction

Metric Definition Related Functions
Number of referrals Measures how many new clients were referred by existing clients. Customer relationship management.
Renewal/retention Measures the number of customers who continue coverage after the initial term has expired. Sales and marketing (reduced customer acquisition costs), operations (increased profitability).
Underwriting speed The number of business days within which the underwriting decision should be made as defined by the company’s service level agreement (SLA). Customer relationship management, operations (operational efficiencies), financial performance.
Average time to settle a claim

Measures how long it takes on average to settle insurance claims for each type of policy your organization offers. Each insurance policy will have different claim periods, and may vary in terms of how long it takes to settle that particular claim.

Total number of days taken to settle all claims (in each insurance claim category) / Total claims

Customer relationship management (satisfaction), operations.

Cost Optimization

Metric Definition Related Functions
Average cost per claim Measures how much your organization pays out for each claim filed by your customers. Financial performance.
Components of claim costs Tracks the costs involved with significant controllable elements of claims, such as legal costs, report delays, and time to settle. Operations (operational efficiency), cost minimization.
Expense ratio

The ratio of firm-wide expenses (before interest) to total amount of premiums earned over the same time period.

The percentage of premiums used to pay all the costs of acquiring, writing, and servicing insurance and reinsurance.

Operations (operational efficiency), cost minimization, policy pricing.
Frequency Measures the number of claims that are expected based on exposure—in other words, the likelihood that a loss will occur. This is expressed in frequencies: low frequency (the loss event is possible, but the event has rarely happened in the past and is not likely to occur in the future), moderate frequency (the loss event has happened once in a while and can be expected to occur sometime in the future), or high frequency (the loss event happens regularly and can be expected to occur regularly in the future). Policy pricing, underwriting, valuation models.
Severity The cost of a claim, with high severity claims being more expensive than average estimates and low severity claims being less expensive than the average. The average cost of claims may be estimated based off of historical cost figures. Policy pricing, underwriting, valuation models.
Loss ratio The total amount of claims paid out to policyholders by the insurance company as a percentage of the total premium earned over the same time period. Policy pricing, claims adjudication.
Average cost per claim Measures how much the organization pays out for each claim filed by your customers. With this KPI (as with other insurance KPIs), it’s important to categorize based on the type of claim, since each type of claim will differ in cost. Risk assessment, policy pricing.
Return on surplus How much profit an insurance company can bring in relative to the amount of revenue it generates from underwriting insurance policies and investing proceeds, with policyholder surplus representing how much an insurer’s assets exceed its liabilities. Operations.

Source: The Insurance Industry's 18 Most Critical Benchmarks

It’s imperative for insurance companies to set benchmarks and identify/measure the levers impacting these metrics. Benchmarked metrics help the company set goals and achieve its stated vision. Tracking these metrics helps measure the organization’s progress towards these goals. Identifying the levers lets help the company make operational changes and strategic investments in the appropriate areas to improve these metrics.

In order to measure these metrics, it’s critical to generate the data related to them in real time in a format that is easy to measure. The related functions identified in the table above contain the levers for these metrics. Here are some of the questions you should be asking yourself as they relates to generating these metrics:

  1. Distribution Channels and Strategy (agency and online sales)
    1. Do you have an omnichannel distribution strategy?
    2. Does your sales force have a single view of existing customers and potential leads?
    3. Do you have up-to-date, real-time, actionable insights on customer behavior or life-changing events?
    4. Does information flow seamlessly across all your channels?
  2. Customer Relationship Management (service)
    1. Do you have an end-to-end view of the customer journey?
    2. Have you digitally integrated all the customer touchpoints?
    3. Does data flow seamlessly across them?
    4. At any point of time, can any employee working on a customer relationship pull up their history, as well as preferences, spending habits, and demographics, all in real time?
    5. If not, what is preventing it from happening?
    6. Have you visualized how to cater to Millennial and Generation Z customers?
  3. Investments and Financial Performance
    1. Do you have real-time accounting of your investments?
    2. At any point of time, can you assess the performance of your existing investments and change course?
    3. How frequently are you generating management reports on your investments?
    4. How long is the closing cycle for your accounting department?
    5. Have you benchmarked the closing cycle?
  4. Sales and Marketing
    1. Have you partnered with other value-added service providers to increase revenue?
    2. How much of the wallet share of the customer does your company have?
    3. Are you able to generate actionable insights on increasing the wallet share of existing customers, as well as creating new leads?
    4. What is your strategy to reach Millennials and Generation Z customers?
  5. Revenue Generation
    1. What is your strategy for building an ecosystem around your products and services?
    2. What is your strategy to retain existing customers? What value-added services can you provide?
    3. More importantly, are you able to read the market interest for new products and services?
    4. If not, why?
    5. Can you, in real time, identify your best-performing market segments and products and services?
  6. Operations (operational efficiencies)
    1. Have you benchmarked your operational performance?
    2. At any point of time, are you able view the performance of your operations units and balance as per market need?
    3. If not, why?
    4. Have you identified the levers to lower your expense ratio?
    5. Which personnel and what processes contribute to your expenses?
    6. Are you able to accurately break down your costs and revenue per customer, product and service, operational unit, market segment, etc.?
  7. Product Management and Business Strategy
    1. What is your strategy on collecting market feedback regarding your products and services?
    2. What channels do you have to gather customer feedback quickly and accurately?
    3. How do you assess the performance of your existing products and services?
    4. Do you have a digital strategy for your business?
  8. Risk Management and Underwriting
    1. Do you have controls in place to enable effective, real-time risk management?
    2. Are those controls manual or systemic in nature?
    3. How much of your risk management is people-dependent vs. system-driven?
    4. What tools currently aid to help view “value at risk” on your products and services?
    5. Are your underwriting standards digitized or people-dependent?
  9. Policy Pricing
    1. Do you have access to actionable insights in real time to adjust your policy pricing?
    2. How long does it take to adjust your pricing based on market changes?
    3. How do you collect market feedback on demand for your policies?
  10. Valuation Models
    1. How do you currently feed data to your valuation models?
    2. Is it in real time? How do you collect the data for valuation models?
    3. How do you maintain the assumptions for your valuation models?
  11. Claims Adjudication
    1. How automated is your claims adjudication process?
    2. Can you measure the total time for your current claims adjudication?
    3. What is the current overpay percentage in your claims adjudication?

Conclusion

While these questions are by no means exhaustive, their intention is to enable you to think about the “digital speedometer” for your organization. By asking the right questions and identifying the levers that contribute to key performance metrics, you can take action to change those levers. Digitizing your organization is a key element that enables you to generate actionable insights on those levers.

To learn more about digital transformation, get in touch with Prolifics’ Digital and Cloud Advisory services. Our insurance experts can guide you on your digital journey. Happy driving!

 

About the Author

 

N. R. Vijay

Digital Automation and Cloud Solutions Advisor

N.R. Vijay has over 15 years of consulting experience in domains such as retail and healthcare, with an especially strong focus on financial services. He helps organizations gain operational efficiencies and align people, systems, and processes with strategy. His core competencies include creating data-based business cases by mapping technology benefits to solutions that solve business challenges, create opportunities, and achieve an optimum return on investment. He is well-versed in corporate investment evaluation, business architecture, information technology, and change management disciplines.