Metrics management: to improve performance in a soft market, smart insurers are measuring what matters.

As we enter the down cycle, insurers once again are challenged with how to manage it and meet various stakeholder expectations.

Insurers are armed with more data, cleaner data and analytic tools. Metric-driven insurers now can harvest some of their investments in data warehousing, data management and business intelligence tools to manage the cycle and demonstrate business value. The challenge is in focusing on the few metrics and true key performance drivers that really matter. To do so, insurers must align operational performance with corporate strategy and use only those metrics that can truly drive performance.

Many companies have embraced scorecards and dashboards, but have merely put a graphic interface on too many metrics--or even worse, on the wrong metrics.

To achieve a profitable growth strategy, a company must use both high-level results indicators like written premiums, combined ratio and expense ratio along with critical key performance indicators such as policies-in-force and retention rates and key drivers like housing starts or new car sales.

Actual metrics will vary by company, line of business, business model and strategy. An effective way to ferret out these critical drivers is through a top-down decomposition process, beginning with corporate objectives and strategies, then mapping business unit or operational area initiatives that link to them. Typically these total no more than 75 to 100 from the top to the lowest level.

Envision a triangle whose top portion contains three to five metrics that the chief executive officer typically looks at every day to measure profit and growth. There, the CEO sees written premiums, policies in force, incurred losses and earnings per share.

In the triangle's midsection reside up to 50 more metrics: three to five metrics for each of the company's five lines of business or strategic business units (e.g., number of new customers or retention rates).

At the bottom, middle management would have another three to five metrics, or total of 75, by region or functional area to support the middle layer (e.g., number of renewals processed or number of nonvoluntary cancellations).

Another benefit of metric decomposition is in understanding drivers that impact more than one objective or initiative for a more holistic view. Once current performance and key drivers are understood, scenario analysis can be used to project different results based on adjusting drivers and to make investment or cost decisions accordingly.

Activity-based costing, or process costing, can be used to better understand current costs and profitability, and to prioritize opportunities for process cost improvement. Modified or additional initiatives would then be reflected again in dashboards measuring changes in performance, providing a closed-loop performance process.

Data-driven organizations that can make the leap to metric-driven can achieve higher performance and better management of the forthcoming soft market. Those who cannot will risk a competitive disadvantage to those who can.

Best's Review columnist Pat Saporito is insurance solutions director with Business Objects and part of its Enterprise Performance Management Center of Excellence. She can be reached at [e-mail].