Strategic Planning
Define strategy, strategic planning, and strategic plan
Strategy - thoughtful deliberate plan of action; answers the "How" as in "How will we achieve our aim of creating and nurturing a successful insurance co.?"
Strategic planning - process used to create the strategic plan; answers "Where are we now? Where are we going? How will we get there?"
Strategic plan - formulated roadmap that describes how the company executes its chosen strategy; includes values, vision, mission statement
Three Interdependent Steps in the Strategic Mgmt Process
1. Strategy Formulation
2. Strategy Implementation
3. Strategy Evaluation
4 Types of Structures & their owners
1. Stock - stockholders
2. Mutual - policyholders
3. Reciprocal - subscribers
4. Hybrid
3 Duties of Board
1. Duty of care - must use due diligence
2. Duty of loyalty - always keep interests of organization as primary focus; self-interest must be put aside
3. Duty of obedience - must obey bylaws, organization's stated purpose, and laws
Two Types of Reserves
1. Case Reserves
2. IBNR (comprised of - adverse development, reopened claims, incurred but not reported to carrier, reported but not recorded yet)
Questions asked in the strategic planning phase
Where are we now? Where are we going? How will we get there?
Strategy Formulation
Where are we now? Where are we going? How will we get there?
-builds its values, vision, mission statmnts
-completes SWOT and ERM analysis
- make financial projections
Stock insurance company & characteristics
incorporated insurance company owned by stockholders; pressure on top-line growth; capitalization is easy; M&A is easier
Values, Vision, & Mission + questions they answer
1. Values - WHO we are (drives culture)
2. Vision - WHAT we want to be when we grow up, aspirational
3. Mission - WHY we do what we do in the here and now
Ultimate Losses
IBNR + Case Reserves + Paid Losses
Examples of tools used in strategic planning phase
ERM, SWOT, develop values vision and mission stmt, Financial projections
Strategy Implementation
- allocates resources
- assigns tasks to personnel
- provides financial resources
- communicates internally and externally
Mutual insurance co & characteristics
incorporated insurance co; objective is to provide insurance coverage at or near the cost of doing business; focus on bottom line; growth and expansion is harder
Risk Tolerance vs Risk Appetite
risk tolerance - max amount of risk a person or org is willing to assume
risk appetite - max amount of risk the org is willing to accept while striving to meet strategic and tactical plans; strives to put into motion a prudent version of the risk tolerance
-appearing to inflate surplus
-will attract regulatory attention
Under Strategic Mgmt - sustainable competitive advantage
all of the things that will distinguish the company from other companies in the eyes of its target customers (i.e. pricing, product stability, ease of doing business)
Strategy Evaluation
- gathers metrics
- relies on KPIs to compare desired and actual outcomes
Reciprocal & characteristics
UN-incorporated insurance co.; group of individuals or orgs who join together into an unincorporated association; purpose is to insure one another; "one for all, all for one" mantra of subscribers; less pressure on profits
Factors when a company is picking location & operations
-lines of business offered
-centralized or decentralized structure
-proximity to markets served
-regulatory environment
-judicial environment
-business environment
-availability of resources (personnel, real estate)
-future expansion flexibility
-cost of living
Combined Loss Ratio
Losses + Loss Adjusted Expenses + UW Expenses _______________________________________
Earned Premium
Free Space
Eat a snickers
Marketplace Evaluation
- determines how those needs can best be served
How do companies adopt hybrid structures?
STAT vs GAAP
GAAP - Generally accepted accounting principles - for transparency and to make business decisions
STAT - Statutory - used by regulators to monitor solvency; more conservative; expenses realized immediately but income recognized as it is earned, gradually
3 Primary Probability Ratios
1. Loss Ratio
2. UW Expense = (UW Expenses/Earned Premium)
3. Combined