A Summary of Caturano and Company’s Whitepaper
Presented by: Joseph L. Petrelli, President & Co-Founder
Demotech, Inc.
Benchmarking is the process of comparing the cost, cycle-time,
productivity, or quality of a specific process/method to another that is
widely considered to be an industry standard or leading practice. Similar
to a balance sheet, benchmarking provides a snap-shot of performance
measurement at a point in time, and needs to be re-measured on an
ongoing basis.
2
Strategically, benchmarking provides a baseline today for growth
tomorrow. Executives use this business data and analysis to drive
strategic decisions and initiatives. The continuous monitoring of
the metrics associated with the strengths and deficiencies of
business processes or systems allows organizations to focus on the
right levers for growth. Benchmarking shows the value associated
with any improvements, efficiencies and cost reductions gained,
which can translate into increased profit.
3
Organizations also use benchmarking for trend analysis and target
setting as part of their annual strategic planning process.
Established baseline measurements enable decision makers to
better plan and align business initiatives with corporate strategy.
The metrics and insights derived from benchmarking provide the
quantitative evidence into the effectiveness of critical business
processes or operations.
This information enables managers to proactively craft solutions to
address issues which increase efficiencies and reduce cost.
Benchmarks become the visible line in the sand against which
incremental improvements are measured, as managers drive
toward their targets.
4
Benchmarks can also be used to improve employee performance.
While process improvement and benchmarking sometimes have a
negative connotation for employees (such as layoffs resulting from
efficiency gains), they provide an educational opportunity if
communicated correctly. The baseline data serves as a report card
for employees letting them know how processes and systems are
performing
while
also
setting
expectations
for
future
improvements.
5
So, what do companies measure? Typically, organizations measure
the business metrics which are important indicators of the
business’ operational and financial health. Because of its strategic
use, benchmarking offers organizations and decision makers the
ability to measure critical business functions and operations
closely tied to revenues and profits.
6
Most areas of an organization can be benchmarked and to do so
would seem quite daunting.
When initiating a benchmarking
strategy within your organization, it’s important to focus on areas
where efficiency, effectiveness improvement, or reduction of costs
would have the greatest impact on the business, as measured by
dollars or value. Essentially, focus on areas where you can get the
“biggest bang for your buck.”
7
When benchmarking processes, it is important to keep an open
mind about the alternatives or non-typical solutions for your
business. Why? The comparison between leading practices for
certain function versus your industry’s best practices may be eyeopening for most executives. Benchmarking can point to several
opportunities for improvement or investigation, and that’s the
point.
Managers must focus on the quantitative evidence and
objectively address issues.
8

Specific: metrics are specific and targeted – they answer:
Who? What? Where? When? Why? Which?

Measurable: the data is accurate and complete

Actionable: metrics are easy to understand and are clear when
charting performance, so that appropriate action can be taken

Realistic: metrics should represent an objective that you are
both willing and able to work towards

Timely: you can get the data and are able to measure when you
need it
9
The benchmarking lifecycle is ingrained with the idea of continuous
improvement.
Improvements occur incrementally, thus metrics
need to be monitored, analyzed, and recalibrated periodically.
There are some best practices to consider before undertaking a
project.
10
Analyzing these three items individually and how they relate to
each other will focus the improvement effort on the correct areas of
the operation.
Spending time with as well as interviewing or
observing the key process owners gives the benchmarking team a
deeper understanding of existing business workflows and relevant
business operations. Therefore, managers can develop the optimal
solution to address current and potential issues.
11
Benchmarking is not a finite process. It is a continuous, evolving
cycle with six distinct phases:
Planning and setting scope and goals
2.
Gathering the relevant data and information
3.
Assessing and analyzing the data
4.
Creating an action plan based on the analysis and desired
changes
5.
Executing and implementing the action plan
6.
Reviewing results and recalibrating metrics based on expected
vs. actual results
The process does not end after reviewing and recalibrating, but
returns to the planning phase for the next iteration.
1.
12
Success comes in the planning. Benchmarking identifies which
processes and systems need attention and provides both data and
metrics used to calculate savings
13
The best approach towards business improvement services starts
by understanding the existing processes and systems. The data
collected includes any quantitative data specific for the business
function, the steps involved in the process, and who in the process
executes the steps, including when and how. In addition, the data
must be collected in a manner consistent with the benchmarking
data and guidelines.
14
With an understanding of the existing processes and technology
involved in the process being analyzed, the metrics are analyzed
and compared against different peer group benchmarks.
15
The data collection and analysis phases provide team members the
quantitative evidence prioritized projects it needs to develop the
business case for change. The comparison between the “as is” and
the desired “to be” state drives the action plan and roadmap of
initiatives and milestones that will help the company realize its
goals. It is important to set objectives for both near- and long-term
solutions in order to achieve the desired outcome.
16
Project management and change management are key components
to ensure the project success. It is critical that all key stakeholders
are apprised of the progress of the initiative. While a clear and
effective communication process is vital for raising issues and
opportunities
in
a
timely
and
efficient
manner,
open
communication and solid project management ensures the support
from
the
organization’s
executive
management
team
and
employees.
17
This phase in the lifecycle entails reviewing the results of the
implemented change and identifying the opportunities or
additional recommendations to improve the process or system.
This analysis is then incorporated into the plan and the process
begins the next iteration in its lifecycle. It is important to note that
when maintaining a long-term commitment to a roadmap, a onetime benchmarking effort is not enough.
As the organization
changes it needs to re-measure and compare those results to
ensure the implemented changes drive the process towards the
intended results.
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
Actionable information to help companies grow

Quantitative information drives strategic decisions and initiatives

Reduced uncertainty

Tactical Action Plan

Enhanced understanding of cost structure relative to others
19
Organizations seek ways to reduce costs and increase the
effectiveness and efficiencies to grow.
Organizations can use
benchmarking results to justify business initiatives and investigate
potential solutions by verifying process performance against
competitors. The quantifiable performance points provide a strong
business case for such initiatives and investments.
Defining a
roadmap with measurable targets and goals further supports the
argument for change and improvement.
20
P&C Insurance Example
Ohio Mutual Protective Associations
21
A. Net Admitted Asset Mix
2010
2009
2008
Bonds
$
10,079,708
$
7,492,779
$
8,290,744
Preferred and Common Stocks
$
3,012,131
$
2,715,507
$
2,876,711
Real Estate
$
578,748
$
776,304
$
804,284
Cash
$
15,652,006
$
15,373,982
$
15,589,699
Short Term Investments
$
634,005
$
1,251,879
$
1,075,874
Other Invested Assets
$
Subtotal Cash and Invested Assets
$
29,956,598
$
27,610,451
$
28,637,312
Investment Income Due And Accrued $
Assessments/Premiums in the Course
of Collection
$
112,788
$
148,564
$
129,608
2,060,343
$
1,470,484
$
1,219,510
Other Assets
$
3,541,435
$
3,952,482
$
3,751,052
Total Admitted Assets
$
35,671,164
$
33,181,981
$
33,737,482
-
$
0 $
-
22
A. Net Admitted Asset Mix
(cont.)
2010
2009
2008
Bonds
33.6%
27.1%
29.0%
Stocks
10.1%
9.8%
10.0%
Cash and Short Term Investments
54.4%
60.2%
58.2%
1.9%
2.8%
2.8%
Cash and Invested Assets
100.0%
100.0%
100.0%
Cash and Invested Assets
84.0%
83.2%
84.9%
Other Assets
16.0%
16.8%
15.1%
Total Assets
100.0%
100.0%
100.0%
Other Invested Assets
23
B. Liability Mix
2010
2009
2008
Unpaid Losses
$
1,501,413
$
1,458,916
$
2,667,248
Unpaid Loss Adjustment Expenses
$
14,925
$
2,000
$
15,000
Unearned Assessment/Premium
Reserve
$
7,546,723
$
6,787,255
$
8,356,451
Other Liabilities
$
4,004,161
$
3,282,142
$
2,200,715
Total Liabilities
$
13,067,222
$
11,530,313
$
13,239,414
Surplus as Regards Policyholders
$
22,603,942
$
21,651,668
$
20,498,068
Loss and Loss Adjustment Expense
Reserves
Unearned Premium Reserves
Other Liabilities
Total Liabilities
11.6%
57.8%
30.6%
100.0%
12.7%
58.9%
28.5%
100.0%
20.3%
63.1%
16.6%
100.0%
24
C. Liquidity Metrics
2010
2009
2008
Liquid Assets to Total Liabilities
220.8%
223.2%
203.1%
Liquid Assets to Loss and LAE Reserves
1903.0%
1761.3%
1002.4%
25
D. Net to Direct Earned Premiums
2010
2009
2008
Direct Earned Premium
$ 30,562,933 $ 30,701,972 $ 29,405,339
Net Earned Premium
$ 19,148,286 $ 20,814,021 $ 23,086,472
Net to Direct Ratio
Net Written Premium
Ceded %
62.7%
67.8%
78.5%
$ 19,907,754 $ 19,244,825 $ 23,716,838
38.3%
32.2%
21.5%
26
E. Operating Performance
2010
2009
2008
Premiums earned
$
19,148,286 $
20,814,021 $
23,086,472
Loss incurred
$
11,594,000 $
12,568,169 $
16,967,660
Loss adjustment expenses incurred
$
683,451 $
432,265 $
485,642
Total underwriting deductions
$
8,806,297 $
8,823,370 $
10,252,767
Net underwriting gain or loss
$
(1,935,462) $
(1,009,783) $
(4,619,597)
Net investment income earned
$
1,016,567 $
1,075,701 $
1,439,984
Net realized capital gain/(loss)
$
272,625 $
49,292 $
(51,379)
Other Income
$
1,384,655 $
1,437,962 $
1,388,543
Net income before federal and foreign
taxes
$
738,385 $
1,553,172 $
(1,842,449)
27
E. Operating Performance (Cont.)
2010
2009
2008
Loss and loss adjustment expense ratio
64.1%
62.5%
75.6%
Underwriting expense ratio
46.0%
42.4%
44.4%
Combined ratio
110.1%
104.9%
120.0%
8.7%
7.1%
5.8%
101.5%
97.7%
114.2%
Investment and other income ratio
Operating ratio after investment income
28
F. Gross, Ceded and Net Loss and LAE Ratios
2010
2009
2008
Direct Earned Premium
$
30,562,933
$
30,701,972
$
29,405,339
Ceded Earned Premium
$
11,414,647
$
9,887,951
$
6,318,867
Net Earned Premium
$
19,148,286
$
20,814,021
$
23,086,472
Direct Loss Incurred
$
20,836,215
$
23,320,811
$
24,069,703
Direct LAE Incurred
$
683,451
$
432,265
$
485,642
Ceded Loss and LAE Incurred
Net Loss Incurred
$
$
9,242,215
11,594,000
$
$
10,752,642
12,568,169
$
$
7,102,043
16,967,660
Net LAE Incurred
$
683,451
$
432,265
$
485,642
Direct Loss and LAE Ratio
70.4%
77.4%
83.5%
Ceded Loss and LAE Ratio
81.0%
108.7%
112.4%
Net Loss and LAE Ratio
64.1%
62.5%
75.6%
29
G. Insurance In Force
2010
Dollars
Policies in Force
$
2009
8,633,792,497 $
2008
8,729,195,380 $
8,785,750,930
54,567
56,170
57,824
Change in Dollars
-1%
-1%
-1%
Change in PIF
-3%
-3%
-3%
30
H. IRIS Ratios
2010
2009
2008
Unusual
Values
Gross Written Premium to Policyholder Surplus
135
142
143
over 900
Net Written Premium to Policyholder Surplus
85
96
113
Change in Net Premiums Written
3
-19
over 300
over 33,
under -33
Two Year Overall Operating Ratio
106
113
Investment Yield
4
4
Gross Change in Policyholder Surplus
4
6
-9
over 100
over 6.5,
under 3
over 50,
under -10
Liabilities to Liquid Assets
45
45
49
over 100
Agents Balances to Surplus
Loss and LAE Reserve IRIS ratios
(Schedule P not available)
9
7
6
over 40
N/A
N/A
N/A
Over 20
31
If you cannot measure it, you cannot improve it.
~ Lord Kelvin

Submit several consecutive years of annual statements (NAMIC,
Demotech)

Permit Demotech to compile historical financial information, by
state, as a base line for analysis

Once you receive and review basic baseline data, be prepared to
make your financial reporting more consistent with the majority
of data that regulators received

Stakeholders – creditors, customers and regulators –
are demanding more transparency. Being different or easier to
report will NOT be effective in the future
32