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Top Five Financial KPIs for the Insurance Industry

insightsoftware -
December 22, 2020

insightsoftware is a global provider of reporting, analytics, and performance management solutions, empowering organizations to unlock business data and transform the way finance and data teams operate.

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In an unpredictable industry such as insurance, finance and accounting teams simply cannot ignore the importance of careful financial management. Smart accounting protects an insurer from changes in the competitive landscape, regulatory issues, internal shake-ups, and even history-making events like the COVID-19 pandemic.

To make the right financial decisions, you have to understand the reality of your organization’s situation. That may sound obvious, but all too often, those tasked with making mission-critical decisions do so before they fully understand the potential financial fallout. Because it is either too complicated or time-consuming to track key financial metrics, accounting teams may fall into the trap of checking KPIs occasionally and operating the rest of the time largely on assumptions and intuition. Unfortunately, those assumptions may veer widely from financial realities.

Imagine a scenario in which you have endless access to financial information and see the numbers update in real time. If you have limitless information at your disposal, to which financial KPIs will you pay the most attention? Lots of metrics add interesting context, but they don’t reveal much fundamentally about the strengths and weaknesses of your financial position. In an ideal situation in which it is effortless to track insurance industry financial KPIs, these are the five most important and illuminating KPIs to watch:

1. Expense Ratio

Taken by dividing the total cost of expenses by the total amount of revenue, the expense ratio indicates how much it costs to earn a single dollar. Insurance is a time-, labor-, and resource-intensive process wherein the amount of money going out can quickly (and invisibly) overwhelm the amount coming in. Decision-makers need to know what the expense ratio is at all times and whether it’s rising or falling.

2. Average Policy Size

Dividing the total amount of premiums by the total number of policies reveals the average policy size. Insurance companies can use that figure to evaluate the success of sales and marketing efforts. It also has implications for risk management; lots of small policies are less risky than a few large policies. Like all the metrics on this list, tracking this metric over time is just as important as pinpointing it at any given moment.

3. Loss Ratio

The ratio of money paid out in claims compared to money collected as premium makes it easy to understand “loss” at an insurance company. An increasing loss ratio suggests a company may be evaluating risk the wrong way or pricing premiums too low.

4. Cost Per Quote

Adding up all the expenses (labor, materials, postage, etc.) involved with creating a quote shows decision-makers how much it costs to attract a policyholder. Higher costs might be the result of inefficient practices, which could then result in an ineffective quote process and lost revenue opportunities. Track the cost per quote as a microcosm of overall effectiveness.

5. Net Profit Margin

Putting net income over total revenue results in the net profit margin. Every company, insurance or otherwise, uses this metric to track its overall profitability. Ratios above 10 percent are considered good for an insurance company. Decision-makers need to know if this metric is rising or falling. Just as importantly, they need to know when it starts to move, how much it’s moving, and (ideally) why.

Important as having the right KPIs may be, the right tools for tracking KPIs for the insurance industry are even more important. An insurance company can try to manually track the metrics outlined above, but without a quality reporting tool, it will become an overwhelming effort that produces underwhelming results. Becoming a data-driven, impact-oriented insurance organization requires a new approach to organizing and accessing data.

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