Benchmarking Your Insurance Coverage
Messick, Richard, Journal of Property Management
One of the hottest topics in property/casualty insurance is benchmarking. Risk managers in all industries are interested in obtaining a relative idea of the effectiveness of their property/casualty risk and insurance management programs. Benchmarking provides a method to measure this effectiveness by comparing an organization with its peers.
Common insurance benchmarks are:
* limits of insurance,
* premium costs,
* retention levels,
* loss amounts, and
* types of coverage purchased.
Property managers can use benchmarking to determine how their insurance and risk management program compares to the competition. However, sloppy or misguided benchmarking can cause more harm than good.
Doing it Right
An effective benchmarking exercise will provide a relative measure of how you "stack up" when compared to similar organizations. Although benchmarking against outside organizations only provides a relative comparison, the accuracy will be increased if the companies are most similar to one another in size (revenues and number of employees) and in scope of operations. In order to conduct a meaningful insurance benchmarking analysis, follow these three keys to success:
Key One. Compare yourself to peers. It is surprising how often companies compare themselves to companies in different industries for benchmarking purposes. This "apples-to-oranges" comparison is seldom helpful and can often be misleading. The better the match here, the more useful the benchmarking results will be.
Frequently used benchmarking surveys, such as Towers-Perrin's "Cost of Risk Survey" divide the responses into broad industry categories. The intention of these groupings is to lump the results from organizations with similar risk characteristics together. However, the results for each industry are comprised of responses from varying types of organizations. Asset size, overall financial strength, and the scope of operations will differ somewhat for the survey respondents. Therefore, these industry groupings include both large and small organizations that may have differing operating characteristics.
Conversely, benchmarking surveys often group results based on asset size, without regard to industry classification. In this case, the only common thread between the survey respondents is their financial size. Information from property management companies might be grouped with retail stores, manufacturers, and financial service companies. The usefulness of such data is limited, as these companies are not truly "peers" to one another.
How do you overcome the limitations inherent in much of the published benchmarking data? Try conducting your own "mini" benchmarking survey. Identify companies that have similar operations, exposures, and financial size as yourself, and ask the questions! In some cases, it may be difficult to obtain the information relating to deductible/retention levels, limits, premiums, losses, etc., as these are often considered confidential. One successful approach is to approach peers that are not in your immediate geographic area, so that there is no perceived competitive conflict. Even if this is not possible, we have seen good results by honestly stating your intention to assemble a confidential insurance benchmarking survey. State that the results will be shared with all of the respondents, with no company names being mentioned. …