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Disciplined expense control and marketing research efforts as well as prudent evaluations of organizational structure are best practices found at some of the life/health insurers that lead the industry in consistently balancing solvency and financial performance, a benchmarking study shows.

Some of the best practices, such as trying to knock down expenses to levels even lower than those projected under pricing assumptions, would seem intuitive, said John L. Ward, chairman of Ward Financial Group, the Cincinnati-based insurer management consulting firm that facilitated the benchmarking study.

But not all life/health insurer executives agree, he said.

Ward Financial every year identifies the 50 insurers in the life/health industry and the 50 insurers in the property/casualty industry that do the best job of consistently balancing solvency with financial performance. Those insurers comprise the Ward's 50 group for each industry segment.

Many of the insurers in the two Ward's 50 groups participate in a separate benchmarking project that involves dozens of other insurers from both industry segments. A total of 100 insurers participated in the benchmarking study: 25 life/health insurers, including six from Ward's 50 group for that industry segment, and 75 prop-erty/casualty insurers, including 20 from the Ward's 50 group from that industry segment.

The insurers hope the benchmarking study's findings will help them identify and understand the business practices that underpin the financial measures that have earned companies a place on one of the Ward's 50 lists.

As was the case with the property/casualty segment, all of the life/health insurers in the benchmarking study are becoming more efficient.

From 1992 through 1996, there was a 14.7% annual decrease on average in the number of employees per $100 million of assets for the Ward's 50 study participants-the top performers in the group. The average annual decrease among the average performers during the same period was not as sharp, but it still was a significant 12.3%. (see chart, page 19).

Even so, the benchmarking study suggests the industry at large can learn a few things from the top performers in the study.

The best practice that Ward Financial has identified in the expense control area is a controversial topic, Mr. Ward said.

The prices of many products that life insurers sell do not change over the years that customers keep the products. The pricing assumptions for those products include an expense component that many insurers only try to meet.

However, virtually all of the top performers try to drive down those expenses to a level below their original projections, Mr. Ward said.

Most of the average performers do not try to beat their original expense projections. "That's like saying, 'What would you rather do: meet budget or beat budget?' I'd take beat budget every day," Mr. Ward said.

Insurers may be concerned about earning excessive profits on a product, he said.

However, "that doesn't work," he said. Insurers eventually will find they missed the mark on at least a few of the various elements that comprised their original pricing assumptions, so insurers should try to be as efficient as they can where they can, Mr. Ward said.

The top performers do not necessarily meet or beat the expense projections included in their pricing assumption, he said. However, by trying to beat those projections, they do a better job of controlling expenses than if they tried to only meet those projections, he said.

"They're focused on meeting their full potential," he said. As a result, if their original pricing assumptions took into account the expense of some inefficient departments within the company, the top performers try to reduce their expenses by making those departments more efficient, he said.

The top performers also take more care in analyzing whether they should be organized in strategic business units. An SBU is 100% dedicated to a single customer group or a marketplace initiative. It requires specialized or dedicated support systems separate from others at the company. As a result, those units are costly to establish.

However, if an insurer sets up a unit under the right circumstances, the resulting customer focus should help the insurer maximize its market share potential within its targeted customer segment.

If an insurer sets up a unit when there is no marketplace need to do so, then it will incur the associated costs without reaping any of the benefits.

The benchmarking study found that more than half of the top performers that have established SBUs did so only after determining there were true marketplace mandates for such units.

Only some of the average performers properly analyzed the market before deciding whether to establish SBUs, the study found.

Establishing an SBU is not a prudent move if an insurer separately tries to market other products to that unit's target customer base.

If an insurer is targeting one customer group for multiple products, the insurer would be better off foregoing any SBUs and instead setting up different product departments. Because those departments would be targeting the same consumers, they would not have to have their own dedicated systems, which would hold down the insurer's costs, Mr. Ward explained.

Even with a marketplace mandate, an SBU is not a good idea if the unit's management does not have substantial control over at least 50% of the cost of operating the unit and is not held directly responsible for the unit's financial performance, Mr. Ward said.

Beyond considering how the company should be structured to maximize market share, virtually all of the top-performing insurers focus on maximizing product synergies among affiliated entities, the benchmarking study found. Only some of the average performers do so.

Some insurers either do not see the connection between the different products their affiliates offer, or they are unwilling to take advantage of their potential product synergies, Mr. Ward said.

For example, an insurer with life/health and property/casualty subsidiaries likely would have that kind of opportunity when the property/casualty unit agrees to pay a claim under a structured settlement, Mr. Ward said.

In its product mix, the life/health unit may have a structured settlement annuity that its property/casualty affiliate could purchase. But, for a couple of reasons, property/casualty affiliates often do not purchase annuities from their life/health affiliates.

In some cases, the affiliated operations do not communicate effectively, so they do not know what the other operation is doing or wants to do, Mr. Ward said.

In other cases, the affiliates purposely do not do business with each other as a matter of policy to avoid any potential conflicts of interest.

Mr. Ward suggested that the better approach for the insurers would be to inform all parties involved in the settlement about the relationship between the two insurers and allow the parties involved in the settlement to decide whether the connection troubles them.

The problem of not adequately analyzing the implications of setting up an SBU is mirrored in many insurers' product development approach, the benchmarking study found.

Only some of the average performers have disciplined product development plans that force the insurers to analyze market demand before launching a new product. Virtually all of the top performing insurers have such plans.

Noting that incurring the expense of designing and introducing a new product without first gauging marketplace demand is poor business, Mr. Ward said: "This sounds so logical, but its not always practiced that way. It is tempting to hear or think about a new product and then go right to market with it without going through the exercise of determining cost and demand."

Just as there is a cost in taking a new product to market, there is a cost to keeping a product on the market.

Similarly, virtually all of the top performers have a disciplined process of evaluating whether current products should be continued or terminated.

"Most products have a life cycle, with a beginning, a middle and end," Mr. Ward observed. "Most companies fail to recognize an end."