Insurance is a unique business, especially when it comes to measuring the performance of a company. Businesses in most industries have a precise knowledge of the cost of their product at the time it’s sold. Not so for insurance. At the time of sale, most (about 70 percent, on average) of an insurer’s costs are unknown, hence the prominence of actuaries in our industry.
Executive SummaryIt's not easy to measure operating performance for insurers, in large part because of the unknown costs at play. With that in mind, this J.D. Power piece explores some of the performance measures that may work best, such as those based on Efficient Frontier Analysis, which help spot the best, lowest possible cost level achievable for an insurer.
It is this difference that makes traditional measures of financial performance somewhat lacking for insurers. The ability to measure operating performance for an insurer is a trickier proposition than it is for companies in other industries because of the unknown costs with which we must deal.
Traditional measures of insurance company performance tend to focus on overall capital strength; profit/loss; and the time, cost and quality of operations within the company. All these areas are good and need to be measured and managed for company success, but there is a big missing piece from this traditional set of measures that focus on operational efficiency.