It's our favorite time of month -- Metric Time!! This month's topic is Benefits and Claims Expense as a Percentage of Revenue. For anyone with clients in the insurance industry, you know this is a critical metric and can make or break a company's results. Thursday we'll post a follow-up relating this to fraud as a percentage of benefits and claims, and giving you tips on how you use these metrics and KPIs in your conversations with clients, so check back. Benefits and Claims Expense as a Percentage of Revenue: Who uses it? Insurance companies, including property and casualty insurers, life insurance companies and healthcare payors. Benefits and claims is a term largely used in the property and casualty industry. Life insurance companies may use the term policy benefits while healthcare payors refer to their claims as medical care benefits or health care costs. In the insurance industry, it’s broadly called as the loss ratio. How is it measured? Loss ratio is most commonly expressed as a percentage of premiums earned revenue. Total revenue for an insurance company is a combination of premiums earned revenue and non-premiums revenue like investment income. For calculation of loss ratio, the benefits and claims and claims adjustment expenses are divided by the premiums earned income. What’s in it? It includes all the losses paid and reserved by the insurance company in the form of claims and claims adjustment expenses. For example, for a property and casualty insurer, it would include all losses paid and reserved and loss adjustment expenses, which are costs for investigating and adjusting the claims. For health insurance companies, it would include the medical costs paid and reserved for estimated future claims. Why is it important? Benefits and claims ratio is the most significant metric to track an insurers underwriting profitability. It indicates whether the insurance company’s premiums are enough to cover its losses. Typically, for property and casualty insurance companies, it is in the range of 70%-75% and for health insurance companies, it is in the range of 80% -85%. Hence a small reduction in claims and claims expenses can result in significant improvement in overall financial performance. What drives it? It’s driven primarily by the frequency and severity of losses and the ability of the insurer to implement rate increases in response to the losses. Companies price their policies based on an estimation of future losses based on multiple historical inputs. But actual loss ratios often differ from the estimates due to unforeseen catastrophic events. Also companies may not always be able to implement rate increases which increase their loss ratios. What is the Goal? The lower the loss ratio, the better. Companies try to lower their loss ratios through effective claims management which includes among others improving claims recoveries, reducing the costs of investigation, and detecting and preventing fraudulent claims. Companies also invest heavily in pricing models in order to correctly price their policies in order to keep their losses within an acceptable range. It is important, however, that decisions made to lower the loss ratio don’t ultimately adversely impact other areas like revenue growth and hurt overall financial performance. So HOW do you translate this into conversation about value with your clients? See this Thursday’s posting on The KPI Connection. For a deeper discussion on Financial Metrics, Operational KPIs and how they drive sales, see our previous blog post at www.finlistics.com/blog.
