How Insurance KPIs Drive Strategic Risk Assessment

The insurance industry is experiencing a period of significant transformation. Rising competition and evolving customer demands necessitate a data-driven approach to decision-making. Key performance indicators (KPIs) are crucial tools for insurers to navigate this changing landscape and achieve strategic objectives.

Insurance KPIs and metrics are crucial for leaders and managers to enhance business strategies and improve the organization’s performance. By monitoring these key indicators, companies can better understand their profitability, manage risks, and ensure customer satisfaction. Learn more on Guide to Insurance Reporting and Analytics Dashboards

This article will explore essential KPIs like loss ratio, customer retention rate, and solvency ratio, highlighting how they help managers make informed decisions that significantly impact their operations.

What are insurance KPIs?

Insurance KPIs are quantifiable metrics that track an insurance company’s performance, efficiency, and success in achieving business objectives. These indicators help companies track their progress toward goals, manage risks, and ensure long-term profitability and customer satisfaction. 

For instance, the loss ratio is a commonly used KPI that compares the losses paid out in claims plus adjustment expenses to the total premiums earned. It provides insight into the insurance products' profitability, where a lower ratio typically suggests better profitability.

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Insurance Analytics Dashboards
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The importance of insurance KPIs and metrics

These KPIs and metrics are essential for guiding and optimizing the performance of insurance companies. They fulfill multiple critical roles within the industry, such as:

• Strategic decision-making: KPIs provide essential data that guide key business decisions. Whether it's expanding into new markets, adjusting premium rates, or enhancing product offerings, these metrics offer a data-driven basis for decisions.

• Performance measurement: They provide a clear, quantifiable measure of how well an insurance company is performing against its strategic and operational goals. For example, metrics like the combined ratio help assess the overall profitability of insurance operations, indicating whether a company is making a loss or profit from its underwriting activities.
  
  
• Risk management: By monitoring insurance KPIs such as loss ratio and claims severity, insurers can better understand their exposure to risks and the effectiveness of their risk management strategies. This is essential in an industry that deals directly with financial uncertainties.
  
  
• Customer satisfaction and retention: Indicators such as Net Promoter Score (NPS) and customer retention rate highlight how well an insurer meets customer needs and maintains loyalty. High scores in these areas often correlate with greater customer retention and potentially more referrals.
  
  
• Regulatory compliance: Insurance companies must comply with various regulatory requirements. Compliance KPIs and regulatory metrics ensure companies adhere to legal standards and maintain ethical practices. This helps them avoid legal penalties and builds trust with stakeholders.

Key KPIs and metrics to track in the insurance industry

In the insurance industry, tracking the right KPIs and metrics is crucial for assessing company performance and guiding strategic decisions. Here are some of the essential KPIs and metrics that insurance companies should monitor:

1.Loss ratio: Gauge risk and measure profitability

It is a fundamental metric insurance companies use to evaluate their financial health and the level of risk they're managing. It measures how much money the company spends on claims compared to the amount it collects from premiums. 

How it’s calculated:  Loss Ratio = (Claims Paid + Adjustment Expenses)/Premiums Earned

For example, an insurance company has paid out $1,000,000 in claims and spent $200,000 in adjustment expenses in a year. If the total premiums earned that year were $1,500,000, the loss ratio would be calculated as follows:

Loss Ratio = ($1,000,000 + $200,000)/ $1,500,000 

= $1,200,000/ $1,500,000 

= 0.8 or 80%

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This indicates that 80% of the premiums earned were used to cover claims and adjustment expenses, suggesting the amount of risk the company is carrying.

2.Expense ratio: Track efficiency and reduce costs

This KPI measures an insurance company's efficiency by showing the percentage of premium income used to cover operating expenses, such as salaries, rent, and administrative costs. A lower expense ratio indicates that the company is operating more efficiently, keeping its costs in check relative to its premium income.

How it’s calculated: Expense Ratio = Operating Expenses/Written Premiums

For example, if the company has operating expenses of $300,000 and written premiums of $2,000,000, then:

Expense Ratio = $300,000/$2,000,000 

= 0.15 or 15%

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This shows that 15% of the premiums written go toward covering operating expenses.

3.Combined ratio: Total insight and complete control

It is a comprehensive measure that combines the loss and expense ratios. It provides a snapshot of the overall profitability from underwriting activities. A combined ratio below 100% means the company profits from its underwriting before considering investment income.

How it’s calculated: Combined Ratio = Loss Ratio + Expense Ratio

Using the loss ratio and expense ratio from the examples above:

Loss Ratio = 80%

Expense Ratio = 15%

Combined Ratio = 80% + 15% = 95%

A combined ratio of 95% indicates that the company is making a profit from its underwriting activities since it is below 100%.

4.Gross written premium: Business scale and growth indicator

This is the total amount of premium income collected by the insurer before deducting expenses for reinsurance and ceding commissions. It indicates the scale of the business and its growth trajectory.

Tracking this helps companies understand how effectively they are expanding their market presence and customer base.

5.Policy renewal rate: Measure customer loyalty and continuity

It tracks the percentage of existing customers who renew their policies at the end of their term. This rate is a direct indicator of customer satisfaction and loyalty. High renewal rates suggest that customers value the service and coverage they receive.

How it’s calculated: Policy Renewal Rate = (Number of Renewed Policies/Total Policies up for Renewal) x 100

For example, if out of 1000 policies up for renewal, 900 are actually renewed, the policy renewal rate would be:

Policy Renewal Rate = (900/1000) x 100 = 90%

This high renewal rate suggests strong customer loyalty and satisfaction.

6.Claims settlement ratio: Reflects claims efficiency and trust

This ratio measures the effectiveness and trustworthiness of the claims process by comparing the number of claims settled to the number of claims received. Policyholders typically view a high claims settlement ratio positively, indicating reliable and efficient claims service.

How it’s calculated: Claims Settlement Ratio = (Number of Claims Settled/Number of Claims Received) x 100

For example, if an insurance company receives 500 claims in a year and settles 475 of them, the claims settlement ratio would be:

Claims Settlement Ratio = (475 / 500) x 100 = 95%

This indicates a high level of efficiency in claims processing and is likely to enhance trust among policyholders.

7.Customer retention rate: Track customer satisfaction

This KPI measures the percentage of customers who remain with the company over a given period, indicating customer satisfaction and loyalty. A high customer retention rate indicates strong customer satisfaction and loyalty, suggesting that the company's products and services meet or exceed customer expectations. 

How it’s calculated: Customer Retention Rate = [(Number of Customers at End of Period - New Customers during Period)/Number of Customers at Start of Period] x 100

For example, if an insurance company starts the year with 1000 customers, gains 200 new customers, and ends the year with 900 customers, the calculation would be:

Initial Customers = 1000

New Customers = 200

Customers at End = 900‍

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Customer Retention Rate = [(900 - 200) / 1000] x 100 = 70%

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This means 70% of the initial customer base chose to stay with the company.

8.Solvency ratio: Metric of financial stability and security

This metric assesses the financial stability of an insurance company, indicating its ability to meet long-term debt obligations and other financial commitments. A robust solvency ratio ensures the company can withstand financial stress, cover all its liabilities, and remain solvent, even in adverse economic conditions.
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How it’s calculated: Solvency Ratio = (Net Assets/Total Liabilities)
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For example, if an insurance company has net assets of $10 million and liabilities of $5 million, the solvency ratio would be:

Solvency Ratio = $10 million/$5 million = 2.0

This ratio of 2.0 suggests that the company has twice as many assets as liabilities, indicating strong financial health and stability.

9.Cases managed per case manager: Insight into managerial efficiency 

It measures the average number of cases each case manager handles over a given period. Understanding this metric helps the company evaluate the effectiveness of its case management processes and staff capacity. 

How it’s calculated: Cases Managed per Case Manager = Total Number of Cases/Number of Case Managers
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For example, if there are 500 cases handled by 25 case managers:

Cases Managed per Case Manager = 500/25 = 20 cases per manager

This indicates each case manager handles an average of 20 cases, providing a measure of managerial efficiency.
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Why choose DataBrain’s insurance dashboard to track key metrics?

DataBrain's insurance dashboard offers several compelling advantages for companies looking to enhance their operational efficiency and decision-making processes. Here are a few of them:

• Predictive analytics capabilities: Uses advanced predictive analytics to forecast trends and potential risks. This allows insurance companies to be proactive rather than reactive, making strategic decisions based on future predictions of claims, customer behavior, and market conditions.
  
  
• User-friendly interface: Features a user-friendly, drag-and-drop interface that makes it easy to design and customize insurance dashboards according to your specific requirements. Using white-labeling options, you can effortlessly organize elements and tailor the dashboard to match your branding.

• Integration with existing systems: Seamlessly integrates into your current IT infrastructure. This means that it can pull data from various sources within your organization to provide a comprehensive view, improving consistency and accuracy in reporting.
  
  
• Seamless sharing: Allows for easy sharing of insights and data across teams and departments. This feature fosters collaboration and ensures that all relevant stakeholders have access to the information they need to make informed decisions.

Transform your insurance operations and enhance strategic decision-making with powerful insights. Register today to build your customized insurance analytics dashboard with DataBrain and begin managing risk, efficiency, and customer satisfaction more effectively!

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Insurance Analytics Dashboards