At the time Robert Stickle our COO was working for an insurance company and one of the industry performance indicators that was used by the industry as a benchmark was called “Expense Ratio”. At the time, that company didn’t focus on this ratio. The reasons were many but it came down to the fact that if they tried to bring the company to the “Industry Benchmark” for this key performance indicator it would have caused them to miss their strategic objectives at the time.
The issue was that the benchmark was based on the entire industry and what regulators felt was an acceptable value. The company was a small company which reduced the economies of scale and made achieving this benchmark difficult. The company’s strategic objectives required them to focus on different KPIs.
One of the objectives was to reduce the number of claims. No one wants to have an insurance claim. This means that they have lost something that they valued and that causes stress and emotional upheaval. So to assist their clients in not having a loss, they had a robust loss prevention program that assisted clients in identifying risks and mitigating them. However this very program added costs to their company and drove the “Expense Ratio” up.
Rather than focusing on the “Expense Ratio” they measured themselves on a number of other indicators that matched their strategic and tactical objectives. They used a number of other indicators, such as Claims Frequency and Underwriting Ratios for instance. The Claims Frequency helped them refine their loss prevention programs into areas their clients were having losses. The Underwriting Ratio allowed them to ensure that while their Expense Ratio may not be at industry standards according to the benchmark of the time, they remained profitable.
Having said all of that, they did keep an eye on the Expense Ratio but their internal targets for that KPI was higher than the benchmark. Since the industry used this as a KPI they couldn’t ignore it but they didn’t allow it to rule them. They set their own path and developed performance indicators that assisted them in achieving their objectives.
They also had to keep an eye on this indicator because it was an industry KPI and benchmark. Even though they didn’t focus on it the same way as the rest of the industry, within the industry they were compared to others using it and they had to be able to defend their position and results.
The key for acceptance in the industry was having the strategic plan and developing their performance indicators to support that plan. This made it easy to defend why they didn’t achieve the Expense Ratio indicator.
In closing, the first step is to have a strategic plan and objectives. Performance Indicators have the ability to shape the behaviour of your organization and staff so you need to ensure that they are driving you to where you want the organization to go, rather than just following the industry. Once you have the strategic direction set, examine the industry KPIs and their associated benchmarks to determine which ones will assist in achieving your goals. Where there are gaps, develop your custom performance indicators. For those industry key performance indicators that didn’t match your plan, look to see if they can by useful if you modified the target benchmark. If you are going to ignore them completely, make sure you also have the rational to support why. Others will compare you to the industry on those but if it is planned, it is easy to defend.