Warren Buffett once said, “Risk comes from not knowing what you are doing.” Most insurance companies have mountains of data, thousands of metrics and hundreds of key performance indicators (KPIs). However, many only track indicators that are easy to obtain, but not necessarily relevant. That translates into too much noise and not enough understanding about how, why or if those metrics support strategic outcomes.
To complicate matters, strategy itself begins as a hypothesis, and many are blinded by its eloquence. Collectively, this raises the risk that scorecards and dashboards will induce employees to concentrate on the wrong things, in the wrong context, at the wrong time. Unfortunately, few can prove it, let alone recognize that the issue exists.
As a result, employees may waste time, act in isolation, resort to guesswork or instinct, and become unable to see or prove if a strategy is flawed. Management and executives get frustrated and question the organization’s ability to move to a data-driven culture. For the organization as a whole, it means suboptimal performance and the potential to pursue flawed strategies for months or years – at higher cost and risk.
Today, many insurers communicate performance through reporting or business intelligence (BI). Reporting could be the monthly management packs with KPIs and metrics, or it could be a dashboard or a scorecard; typically it’s some combination of “all the above”. There is inherently a “self-service” aspect to reporting – the decision-maker knows that the information he/she needs is already available in one of these pre-packaged formats and retrieves it. Straight-up reporting is most valuable at the operational and tactical levels, and is always improved with the addition of context. Unfortunately, a single insurance company may track hundreds or even thousands of metrics, making it difficult to focus.
Another vital capability is data discovery for unknown values, which rules out standard BI and reporting mechanisms. In this scenario, insurers can’t precisely map out complete decision process ahead of time, so a “rules-based” decision would fail. There will always be decisions that fall outside of standard operating procedures, which can be important. Data discovery could lead to better operational, tactical or strategic decisions in equal measure.
Strategic scorecards go further, showing which metrics or KPIs are strategically important and which are influenced by the one being investigated. They also make it easier to trace and understand how one objective gets cascaded across multiple departments/units.
As good as strategic scorecards may be, however, there is still the fundamental problem of strategy being based on hypothesis – meaning the relationships that communicate influence are based more on instinct and intuition than fact. Fortunately there is an evolution, or should that be revolution, happening within the world of executive dashboards and scorecarding. Today, innovative insurance companies are using predictive performance indicator (PPI). These allow insurers to monitor performance based on predictive models and forecasting much earlier than the reflective KPIs, which are reliant on current actual data.
By using an intelligent, balanced scorecard, management is able to perform what-if scenarios with new understanding of how objectives, initiatives, processes and the associated measures drive performance today and how they are expected to drive future performance.
There is a big difference between creating a strategy and executing it. Insurance executives define strategic objectives, but often struggle to successfully implement these projects because they do not define metrics to determine the success of the strategy. Embedding predictive analytics into the performance management process empowers insurance companies to gain greater insights from their past – seeing where they have been and why – and then identifies the best strategic actions for today and the future.
About the Author: Stuart Rose is global insurance marketing manager at Cary, N.C.-based SAS. Rose, a 20-year veteran of the insurance industry, began his career as an actuary. He has worked for a global insurance carrier in both its life and property divisions and has worked for several software vendors, where he was responsible for marketing, product management and application development. He has driven successful development and implementation of enterprise systems with insurance companies in the U.S., the U.K., South Africa and Continental Europe.