Benchmarking performance against your peers is nothing new. However, it remains a relatively new concept for captive insurers, says Jonathan Groves
Used effectively, benchmarking can offer insight into the market, insight into a company’s peer group and can provide an extra dimension in the decision making process. More specifically, benchmarking can:
? Act as a reference point for internal discussion. At one end of the range, it can be used to demonstrate that ratios and a range of other activities are within normal ranges. Alternatively, it may show that a company is the only one doing something or in that range.
? Serve as a warning flag that something should potentially be reviewed. For example, this might include if a business is moving out of a benchmark range. This could suggest an underlying concern or, equally, a success. It can also provide an extra dimension in determining whether performance has indeed been exceptional or simply reflects movements in the market in areas such as total shareholder return benchmarks.
? Provide additional background to senior management, and members of the board, both for peer group comparison as well as an indication of the overall state of the market.
? Help identify trends. This applies within the benchmarking sample as well as how the individual company is moving within that sample. The depth of the benchmarking sample is vital in this type of case. In establishing our advanced benchmarking tool for captives, Marsh used data from over 1,000 captive companies.
Why benchmark your captive’s financial performance?
There are a number of reasons for benchmarking the performance of your captive. These build on the general rationale for benchmarking but more specifically assist with the following:
“Benchmarking can reveal the relative investment approaches adopted by different captives (within a domicile and compared to other domiciles) and reflect their relative success.
? A common question is whether a captive is being too conservative or aggressive in the amount of business it underwrites in relation to its capital. Other than the capital requirements of the domicile, it is very difficult to determine what others are actually doing (as opposed to what one thinks they might be doing). Effective benchmarking can provide a range in terms of policy limits (net and gross) in relation to underlying capital as well as the type of risk being assumed.
? Operational expense varies by captive, by domicile, by reporting requirement, by investment activity and by claims activity to name just a few areas. When considered against an insurer’s target margin or administrative cost load, nearly every captive looks lean from an operational cost perspective. Benchmarking can demonstrate how competitive expenses actually are whether considered against domicile, captive structure, policy line or the like.
? Captive innovation (and its financial impact) is always much talked about but a lot of the answers provided by commentators are anecdotal. Whilst the line of business doesn’t necessarily reveal a great deal about the underlying risk, the aggregation of information separates the innovative from the mundane when analysed. When we created our benchmarking framework with data from captives representing over 20% of the estimated global captive market, it became apparent that some industries were more advanced in captive use than others. This in turn serves to help decision making for companies within certain industries e.g. power and nuclear.
? Some domiciles regulate captive investment strategies much more heavily than others. The level of investment performance is often a subject of much discussion at captive board meetings. Whilst the investment manager will undoubtedly include statistics on relative fund performances, the overall mix compared with other captives will often also come up. Benchmarking can reveal the relative investment approaches adopted by different captives (within a domicile and compared to other domiciles) and reflect their relative success.
These examples are only a selection of the ways in which benchmarking both the general and financial performance of a captive can lead to improved decision making. But as with all tools, it is important to be aware of their limitations. Sample size and data quality are key in developing the benchmarking. This was one of the reasons why, when Marsh developed its financial benchmarking tool and considered different industries, at least 90 captives needed to be in a specific industry.
The other aspect to consider is how benchmarking results are used. No two businesses are identical and this should always be borne in mind when making direct comparisons. That said, asking the right questions of the right data can certainly provide some very meaningful feedback when benchmarking the financial performance of your captive.
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