A useful tool in refocusing business planning is a monitoring and feedback process that provides information to management, allows assumptions to be updated and trends to be analysed. An efficient monitoring and feedback process will enable a business to adjust to changes in the market quickly, take corrective actions when needed and make pro-active decisions in order to manage the business effectively. Pro-active decisions can include identifying profitable products, sales channels and markets.
There are numerous analyses that can be undertaken, some of the most important ones, in my opinion are:
An analysis of the loss experience. The key here is not only the absolute amount, but the trend of loss escalation in relation to an appropriate inflationary index, in relation to market information or other small businesses.
Lapse rates should also be analysed. Some of the most important factors that impact the lapse rates are the current economic outlook, the product’s competitive situation and the perceived value of the product to the client. Several insightful splits of lapse rates are possible such as by region, product type and sales channel – the analysis will be important from the viewpoints of sales management, commission clawback calculations and measuring marketing campaign efforts.
An analysis of expenses is mainly concerned with the correct allocation of expenses between the different products in a portfolio which is used in premium setting and financial planning. Initial, renewal, claims and investment expenses should be identified separately. Expenses can be split further into overhead expenses and expenses dependent on the volume of business, although it can be difficult to distinguish between the two in practice.
Sales can be monitored against targets in order to understand the strains caused by the volume of new business in comparison to the capital set aside for the purpose. it also allows the monitoring of the mix of business versus the mix assumed in the pricing basis (as this affects the loss experience), staffing levels in terms of numbers and skills against those required by the business written and also commission paid against the amount assumed in the pricing basis.
Furthermore, an analysis of the investment experience should be undertaken in order to choose the investments that will maximise the overall investment return, subject to the liability based constraints and the risk appetite of the business.
A surplus and profit analysis allows management to understand the financial impact of divergences between the actual experience and the valuation assumptions.
Ultimately, the test of any analysis is whether it can contribute towards the business in a meaningful way. Good management information reports should be backed by reliable data, produced timely and be provided at an appropriate level of detail to allow management to make the right decisions and manage effectively.