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Many of the property/casualty insurers that best balance financial performance with solvency do not equally balance their loss control and underwriting efforts among all policyholders, according to insurer management consultant Ward Financial Group.

Instead, those insurers distribute their loss control and underwriting resources in an "80-20" fashion, which Ward Financial has determined is a "best practice" approach. Those insurers are focusing a majority of their efforts on their largest and most complex accounts, even though they typically represent a minority of their overall policies.

That may not be the most equitable system, but a comparison of loss ratios between the best-practice companies and other insurers show it is more successful at holding down losses, according to John L. Ward, chairman of Cincinnati-based Ward Financial.

Insurers with the best practices also have more effective agents, because the insurers base agent commissions on overall premium volume and the long-term profitability of the business they produce, according to Ward Financial.

In addition, the best-practice insurers have more up-to-date information technology links with producers, according to Ward Financial.

Those are some of the results of a benchmarking study involving some of the insurers that Ward Financial has identified as the best in balancing solvency and financial performance, as well as other insurers.

Based on numerous solvency and income data that insurers have provided to state regulators over a five-year period, Ward

Financial annually identifies

the 50 property/casualty and 50 life/health insurers that have done the best job of consistently balancing financial safety and profitability.

When either safety or profitability is measured in isolation, a Ward's 50 company may not rank among the 50 strongest in its industry segment. It is the combination of sustained solvency and profitability that vaults an insurer onto the Ward's 50 list (see story, page 19).

Ward Financial develops various aggregate solvency and earnings measures for each of those groups. Then in two separate, voluminous reports, it compares them with the measures for individual property/casualty and life/health companies.

The reports also evaluate how insurers have performed in relation to others in their peer groups. For property/casualty insurers, Ward Financial identifies 40 peer groups, based on product mix, premium level, location and ownership. For life/health insurers, there are 27 peer groups, based on product mix, premium volume, location, asset size and ownership.

A few financial measurements cannot tell the whole story about the balance of safety and profitability an insurer achieves, but they do provide a clear indication of how the two Ward's 50 groups stand out from the rest of the industry.

From 1992 through 1996, the Ward's 50 property/casualty insurers together posted a 101.9% combined ratio, compared with the overall industry's weaker 106% ratio.

Over the same five-year period, the Ward's 50 posted a 247.2% risk-based capital ratio, or the ratio of an insurer's capital and surplus to the amount it should have based on the risk profile of its business. The risk-based capital ratio for the industry over the same period was significantly weaker, though still a respectable 189.9%.

In addition, the percentage of assets attributable to surplus for the Ward's 50 was 36%, a safer percentage than the 28.6% for the industry during that five-year period.

Over the past five years, the Ward's 50 also reported a nearly 54% higher return on average equity-18.3%-than the industry's 11.9%.

Some results from a separate benchmarking project that Ward Financial has facilitated for property/casualty insurers since 1991 provide insight into the best practices that underpin the consistently strong solvency and profitability at many Ward's 50 insurers. Twenty of the Ward's 50 property/casualty insurers and 55 other property/casualty insurers participated in the most recent benchmarking project.

The project also included 25 life/health insurers, including six from the Ward's 50 life/health group. Life/health insurers have participated in the project since 1992 (see story, page 20).

Ward Financial has calculated 3,000 performance measurements of those companies and has analyzed the practices that drove some of those calculations.

A significantly greater percentage of the Ward's 50 participants, which were the top performers in the benchmarking group, employed the best practices compared with the remaining insurers in the benchmarking group, which were the average performers.

Overall, the benchmarking project shows that property/casualty insurers are becoming more efficient, according to Mr. Ward.

Among the top performers in the project, the total number of employees per $100 million of written premium has dropped 2.7% on average each year from 1992 through 1996.

The average annual decrease in head count for average performers has been even more significant: 3.5%.

Even so, employee productivity among the top performers continues to outpace productivity at other insurers. In 1996, the top performers on average had 246.9 employees per $100 million of written premium. The other insurers on average had nearly 273.3 employees.

Information technology investment could explain the difference. The top performers increased their information systems expense in relation to premiums written an average of 6.6% annually over the five-year period. At the other insurers, the expense as a percentage of premiums was flat.

When the expense of information technology is stated as a ratio to the number of employees, it jumped to 11% annually on average at the top performers and 3.7% annually on average for the other insurers.

In ascertaining the best practices in various insurer functions, Ward Financial found what Mr. Ward called a misleading figure-or benchmarking metric-in the crucial loss control area. The consultant found that the top performing property/casualty insurers have nine loss control employees for every $100 million of written premiums. Average performers in that area had 22% more employees, or 11 for every $100 million of written premiums.

"The ratio of loss control professionals can give you the impression that a lower number is a goal" or a best practice, Mr. Ward said. "But, that's not the point at all," he emphasized.

"It's only the result" for insurers that have learned how best to deliver loss control services to policyholders. "What those nine are doing is a lot more effective than what the 11 are doing," Mr. Ward said. The most effective service does not require as many employees, and boosting employees in this area will not by itself help reduce losses significantly, according to Mr. Ward.

That is reflected in the lower loss ratio of 62.5% for the 20 Ward's 50 companies involved in the benchmarking study, compared with the 66% loss ratio for the other property/casualty insurers in the study. Moreover, the loss ratio for the Ward's 50 participants in the benchmarking study has dropped by 0.8% on average in each of the past five years, according to Mr. Ward. The loss ratio for the other participants has increased 0.2% on average each year.

The difference in those ratios underscores the fact that "there are a lot of commercial accounts that haven't welcomed loss control representatives with open arms," Mr. Ward said.

That likely is occurring because "there still tends to be an inspec-tion/audit flavor taken by loss control professionals," he explained. "That tends to give the account a feeling that someone is coming out to look for mistakes they've made or something that they should have done differently."

Under that approach, a policyholder and an insurer's loss control professional are not working together as a team. The result of such a "we vs. them scenario" often is that a policyholder's goal takes on the short-sighted focus of passing a loss control inspection rather than implementing measures to reduce losses over the long term, Mr. Ward said.

"The goal is when the policyholder comes to the table with real good insights of his own on how to reduce accidents and where the real exposures are in his operation," he said. "In an audit or inspection environment, you don't get that free flow of ideas, where you get sustained improvements over time."

The more positive environment typically is fostered when an insurer offers its policyholder incentives and credits to initiate significant loss control measures.

The benchmarking study points out that such a program is one of three best practices in the loss control area that differentiate the top-performing companies from the rest of the benchmarking group. Somewhat more than half of the best performers offered such a program, while only some of the average performers offered it, the study showed.

Though insurers with such practices continue to conduct loss control inspections, those insurers assume more of a consulting role with policyholders and generate more policyholder input on how loss frequency can be reduced, Mr. Ward explained.

For insurers that establish that best practice, such an exchange of ideas with policyholders occurs more regularly than at an annual loss control inspection, Mr. Ward said.

The benchmarking study also found that the top-performing companies virtually always concentrate their loss control efforts on only their largest and riskiest accounts. Those insurers understand that the bulk of their losses are attributable to the relatively small percentage of their total number of accounts that have either the largest or most complex risks, Mr. Ward said.

Less than half of the average performers take that approach, the study found. They more often opt for a "cookie cutter" approach that spreads their loss control efforts evenly among all of their accounts, Mr. Ward said.

The study also found that virtually all of the top performers incorporate training and educational programs into their loss control efforts. But those training programs take on more importance with the insurers' smaller and less complex accounts because so much of the insurers' other loss control efforts are directed toward the most complex risks.

Somewhat more than half of the average performers offered training programs, again equally emphasizing their importance with all of their accounts.

The underwriting process is another area in which average performers can improve their efficiency by implementing the best practices used by the Ward's 50 participants in the benchmarking study, according to Mr. Ward.

As in the loss control area, a benchmarking metric in the underwriting area could give insurers the wrong idea about how to improve underwriting effectiveness, Mr. Ward said.

The study showed that commercial lines underwriters earned $51,300 annually on average at the top-performing companies, or 12% more than the $45,800 their counterparts earned at the other insurers that participated in the study.

However, each underwriter at the top performers wrote $2.7 million of premiums annually on average, 17.2% more than the $2.3 million of premiums that each underwriter at the other insurers wrote annually on average.

The story was similar among underwriters at personal lines insurers.

Insurers should not conclude that higher pay automatically will translate into more effective underwriting, Mr. Ward said.

Instead, moving more underwriters out from their desks and into the field, waiting to renew policies closer to the date they expire and beefing up automation are the best practices that improve underwriting effectiveness, Mr. Ward said.

Among commercial lines insurers, an important underwriting best practice is getting underwriters into the field more often for a more in-depth study of risks rather than relying on underwriters' own phone interviews with policyholders, on information agents provide or on reports from other third-party inspection companies, Mr. Ward said.

More than half of the top performers take this approach, while only some of the average performers in the benchmarking study do so.

"It's the quality of underwriting that emerges as the important thing. The key thing there is effectiveness, not the quantity" of premiums written, Mr. Ward said.

The trade-off for greater underwriting effectiveness is lower cost efficiency, which is not something too many insurers are willing to accept in a soft marketplace, Mr. Ward noted.

That is why insurers should not use the approach for every risk. Instead, it should be used with an insurer's most complicated and largest risks, he said. "It would not be a best practice to inspect every kind of risk," he said.

Another underwriting best practice is renewing an account no earlier than 45 days before its renewal date. That helps an insurer avoid locking into policy periods, which increasingly are expanding to multiple years, based on outdated underwriting information.

More than half of the Ward's 50 companies in the benchmarking project have implemented such an approach, while only some of the other benchmarking participants have.

Of course, even that best practice will not always generate for insurers the most up-to-date underwriting information on renewal accounts. For example, the insurers that write aviation coverage for Federal Express Corp. could not adjust the terms and conditions of the delivery service's renewal coverage after a Fed Ex plane flipped and burned July 31 just after landing at Newark (N.J.) International Airport. The crash occurred on the last day of Fed Ex's expiring coverage. The delivery service's aviation insurers had completed negotiations on the renewal coverage only about a month earlier (BI, Aug. 4).

The best-practice personal lines insurers have improved their underwriting efficiency by investing in automated systems. Those systems "allow more premium to be underwritten without as many people involved in the process," Mr. Ward said.

The systems are more efficient substitutes for lower-level underwriters.

Virtually all of the top performers have invested in such systems, while only somewhat more than half of the other insurers in the study have made a similar investment.

The benchmarking study also shows that top performers more effectively handle the policy processing stage prior to underwriting.

Top performers need fewer policy processors per $100 million of written premium.

On the commercial lines side, the top performers have 22.4 processors, while average performers have 24.1.

More than half of the top performing commercial insurers have only one rating and quoting computer system to support all of their products, while only some of the average performers take this approach.

That kind of set up prevents a "fragmented and less productive" policy processing environment, because an insurer then does not need multiple sets of processors running multiple systems.

That kind of set up also costs less.

So, why don't all insurers implement a system that is both more efficient and costs less?

"It's easy to have different systems pop up to support different products. They're not thinking about the most efficient way to do something," explained Mr. Ward, referring to many insurers.

In addition, "it sometimes does take extra work for a current rating and quoting system to accommodate a new product," he said.

For smaller and less complex commercial accounts, virtually all of the top performers provide their agents automated rating and quoting tools. Because these agents are able to turn around quotes more quickly, they tend to win the business more often, Mr. Ward said.

Only some of the average performers provide their agents this service.

The variance in the number of policy processors is far more significant among personal lines insurers: 19.7 processors per $100 million of written premiums at top-performing companies, compared with 31.3 processors at the average performers.

Virtually all the top-performing personal lines insurers have implemented computer systems that provide agents automated quoting and rating guidance. The insurers' systems also allow agents to upload their rating and quoting information electronically directly to the insurers, which eliminates the need for those insurers to rekey all of that information into their systems.

Only some of the average performers have installed such systems.

Top performers also impose some stricter compensation and management constraints on their agents. The result: Those insurers see $625,000 of written premiums per agency on average, compared with the $354,000 in written premiums per agency on average that the average performers see.

Virtually all of the top performers use contingent commissions to compensate their agents. Contingent commissions represent 2.5% of those insurers' written premiums. Among the average performers, which only sometimes use contingent commissions, the commissions represent 1% of written premiums.

Virtually all of the top performers base the commission on both the volume and the multiyear profitability of business their agents produce. Only some of the average performers that use contingent commissions base them on both volume and profitability.

In addition, virtually all of the top performers have:

A strong market position with their agencies, ideally ranking among their agents' top three writers. Insurers can attain that kind of market dominance in their agencies only over time by forging long-term relationships with their agents, Mr. Ward said.

A strong critical mass in terms of written premiums with their agents. That is especially important with large agencies, where a leading market still may write only a fraction of the business produced by an agent that uses numerous markets.

Insurers that have such a critical mass of premiums usually are treated more like a partner by their agents. That typically means agents will be sending their better risks to those insurers.

A system for frequently evaluating their agents' performance and severing ties with problem agencies. Many insurers are "unwilling to make the tough call on an agency because the insurers are managing their top lines rather than their bottom lines" during the soft market, Mr. Ward said