The Insurance Performance Measure: Bringing Value to the Insurance Industry

Abstract

The performance of the property and casualty (P&C) insurance industry has suffered in past years. Part of the industry's difficulties stems from its focus on premium generation, as measured by the combined or underwriting ratio, at the expense of overall operational performance. In this regard, the underwriting ratio is an incomplete measure of operating performance since it ignores two critical P&C operational functions: the investment return and reinsurance results.

In this paper we present the Insurance Performance Measure (IPM), a comprehensive performance metric for the P&C industry. The IPM captures the three critical operational functions mentioned above in an overall performance measure. The measure is versatile in that it can be easily decomposed into critical value drivers in each area of operation. Thus, the IPM framework enables P&C managers to observe the interaction and trade-offs between the operational functions of premium generation, investment return and reinsurance results separately or as a group, and as they relate to the opportunity cost of policyholders' surplus.

Keywords: insurance, economic profit, value based management

JEL Classification: G22, G30, M21