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Insurance: A blueprint for managing product profitability

March 7, 2007

In spite of its mature status, the insurance industry continues to show record gains. In the U.S., Allstate reported a $5 billion profit in 2006. That same year, State Farm Insurance profits climbed 65 percent.¹

But significant changes are afoot. And as IBM suggests, current modes of operation could "reach a point of diminishing returns in the near term."² Insurers will have to adapt if they want to maintain healthy growth.

Global trends are reshaping the industry

IBM cites a number of influences that could reshape the insurance marketplace: globalization, terrorism, and natural disasters such as hurricanes Katrina and Wilma.

Competition from the alternative investment community is also cutting into business. And Sarbanes-Oxley is having a big impact "on an industry whose largest liability is based on estimates and forecasts."³

And according to The Economist, export and international organizations are looking to insurers to allay the financial consequences of political turmoil worldwide: "The dangers of politics now hang over companies as diverse as fruit growers in Latin America, film producers in Fiji and bankers in Dubai."⁴

The need to stay nimble

To maintain profitability in the face of escalating risks, insurance companies have to be nimble enough to change course quickly – shifting emphasis from one product to another or one region to another, and so on.

The problem is that most insurers aren't able to sidestep so easily. Traditionally, the insurance business has been conducted using a silo structure.

This approach has worked in simpler times: underwriting and claims departments, for example, could operate independently.⁵ But as the insurance business becomes more complex, siloed operations can be a limiting factor.

The limits of old models

Too often, insurance executives struggle to gain consistent information about the overall state of the business. They don't trust the data because it comes from multiple, disconnected sources.

Planning too is typically a spreadsheet-based annual event, often based on prior-year results. Planning and forecasting are typically done in isolation according to product line or business segment – without considering overall impact.

In this kind of stovepipe operation, it's difficult to achieve a coordinated, efficient process – let alone business agility. How then to follow through on the most profitable course of action?

Gaining a 360-degree view

Through better information management, insurers can improve the picture. The first step is to consolidate corporate data into a single source of information.

Next, they should apply reporting and analysis tools to better understand business segments, product lines, and brands. This gives them a good vantage point to assess the current state of the business overall.

Finally, they can use enterprise planning tools to plan and forecast initiatives across the business and feed results back into the process. This creates a closed-loop cycle for continuous performance improvement.

Blueprint: Insurance Product Profitability

Enter the IBM Cognos Insurance Product Profitability Performance Blueprint, developed by the Cognos Innovation Center for Performance Management.

It provides pre-configured planning, policy, and process models, allowing insurers to analyze and report on business segments and plan initiatives to improve product profitability.

Create business segment P&Ls and balance sheets by product line, product, and brand.

Based on Cognos planning and business intelligence

The Blueprint is built on Cognos planning and business intelligence software. IBM Cognos 8 Planning is a Web-based, high-participation solution for modeling, planning, budgeting, and forecasting.

It lets finance executives plan and increase targets across business segments in a consistent manner – contributor plans from all departments roll up into a single, consolidated plan.

Dashboards and reports guide users through levels of detail. (Click to enlarge)

The Blueprint covers forecasts that encompass insurance premium revenues such as new policies and renewals, expenses, and claims.

It also provides full business segment-level rolling P&L statements and balance sheets. This helps insurers determine the best course of action and quickly adjust to changing market conditions.

Coupled with IBM Cognos 8 Business Intelligence, the Blueprint provides managed and ad hoc reporting, analysis, and intuitive dashboards.

It allows executives, product managers, and analysts to evaluate changing market conditions and the state of the business. They're able to consider multiple scenarios on a timely basis, taking into account impact on the overall business.

Better returns through effective decision-making: Suncorp

Suncorp is one of the largest diversified financial services providers in Australia and New Zealand. It supplies banking, insurance, and wealth management services to around eight million customers.

Having achieved success with Cognos BI, planning, and functional Blueprints already deployed, Suncorp suggested to Cognos that a general insurance Blueprint would be a useful addition to its inventory of industry-specific offerings. That resulted in joint development of the Product Profitability Blueprint.

"We saw a real value-add in developing revenue models for general insurance," says John Herrmann, Manager, Group Budgeting and Forecasting at Suncorp. Among the best practices that Suncorp injected into the Blueprint are techniques to simplify revenue planning and claims projections, and other enablers that Herrmann refers to as "difference initiatives."

"Insurers use different initiatives to help them forecast targets. Difference initiatives are literally the difference between how we deliver on where we are now and where we want to be," he explains.

"For example, if we model a percentage increase in the claims ratio, what initiative could we implement to achieve that percentage forecast?"

Summary

To maintain profits in an evolving and risk-based industry, insurance companies have to stay agile. That demands high levels of coordination across product segments, lines, and brands.

Insurers have to understand the state of the business, effectively plan, and make rapid adjustments as market conditions change. The Product Performance Blueprint is an ideal way to jump-start this process.

Find Out More Read the related story, "A blueprint is born" Listen to the podcast about IBM Cognos Performance Blueprints

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Sources

¹ Eileen Alt Powell, Complaints as insurance profits soar, BusinessWeek, March 26, 2007.

² James Bisker, Insurance 2020: Innovating beyond old models, IBM Institute for Business Value, May 2006.

³ Joseph Calandro Jr., An Enterprise Approach to Insurance Risk Management, IBM Global Business Services, September 2006.

⁴ Of Coups and Coverage, The Economist, April 11, 2007.

⁵ Joseph Calandro Jr., An Enterprise Approach to Insurance Risk Management, IBM Global Business Services, September 2006.