If youre the CIO of a property/casualty insurance carrier, you can help your company achieve best of breed performance. What does best of breed mean? Which companies have already attained this status? Can their performance be replicated?

Those were some of the key questions I intended to answer in a study I concluded in November in cooperation with the Insurance Services Office (ISO). Based on my analysis with ISO of the top 100 P&C companies (see How Were the Best of Breed Selected? p. 41), interviews with two best of breed companies (although my research covered all six companies, only Progressive Corp. and Motorists were willing to comment), industry analysts, and ratings agencies, I compiled the answers to these questions. I was able to identify the most profitably growing P&C companies, analyze how these best of breed perform key activities, and highlight the contribution of technology and CIOs in achieving best of breed financial results.

The six best of breed insurers lead the P&C industry in profitability and growth. According to an ISO analysis using data from A.M. Best Company, the best of breed earned 1997 to 2001 average combined ratios 7.4 percent below the industry average while growing premiums 6.2 percent faster. And the stock prices of three publicly traded best of breed grew between two and 11 times faster than the S&P 500 between 1988 and 2002.

Based on this analysis, the six best of breed are:

Progressive Corp., a $7 billion (2001 net written premium) national writer of personal lines;

Cincinnati Financial, a $2.6 billion midwestern writer of mostly commercial lines;

Mercury General, a $1.4 billion California writer of personal lines;

Auto-Owners, a $2.7 billion national writer of personal and commercial lines;

Motorists, a $381 million Ohio writer of mostly personal lines; and

Tennessee Farmers, a $295 million Tennessee writer of personal auto.

Doing It Better with Technology

The best of breed implement several strategies very well. One key tactic: They target customers precisely. How? According to several industry insiders, companies such as Progressive and other best of breed define narrow groups of customers (or cells)for example, college graduates with professional jobs who keep their cars clean and well maintained, have excellent academic records, and spotless credit ratings. For each cell, the best of breed perform regression analysis to identify the factors that correlate with its loss experience. They set prices for each cell they believe will enable them to earn a profit across a spectrum of customer groups, from those with low losses to those with high losses. They use software to simulate the financial implications of these hypotheses. If the new cell appears profitable, they can quickly incorporate the product attributese.g., cell definitions, pricing, and service levelsinto their agent and/or direct marketing systems so the new products can be marketed and sold immediately.

The best of breed sell to their targeted customers in a disciplined way. For example, Progressive and others advertise in mediaspecific TV or radio programswhich they believe are most likely to attract potential customers within targeted cells. Progressive sells about 30 percent of its policies through its direct channel (e.g., via an 800 number or over the Internet). According to Frank Holowach, director of business/IT for its agency business unit, Progressive developed software internally to forecast the level of call-center activity likely to result from its targeted advertising campaigns and uses TMS software to schedule its call-center staff to meet the anticipated demand.

Progressive also incorporates the details of its cell-specific product design into agents operations, notes Holowach. When a new customer completes a policy application, the agent software matches the customer with a cell, sets the price and other attributes, and produces the policy. This disciplined underwriting process differs from other insurers whose agents sometimes cut prices below designated levels to win market share.

Like some other best of breed, Progressive tightly links agent compensation to the loss experience of the customers whose policies they write, explains Holowach. The lower the loss experience from an agents customer, the higher the agents commissions. Progressives call-center-operations software monitors each callrewarding its call-center attendants based on how inexpensively they can convert a prospect into a policyholder. For example, a call-center attendant receives more bonus points for completing a sale at the first prospect call because doing so is less expensive than closing on the second or third prospect contact, he says.

The best of breed try to close claims quickly and fairly. For example, Progressive operates vans in the field that drive to accident scenes. These vans, Holowach says, are equipped with laptop computers and check printers. The laptops can link wirelessly to computers with damage estimation software that calculates the cost of the parts and labor required to repair the damage to a policyholders vehicle. This software produces a report that explains the costs to the policyholder and prints out a check the claims adjuster hands to the policyholder at the accident scene.

Progressive also offers a concierge service, adds Holowach. Here, Progressive provides the policyholder with a loaner car following an accident and picks up the damaged car. Progressive delivers the damaged car to an auto repair shop selected for quality repair work, reasonable pricing, and the earliest opening in its repair schedule. The insurers concierge service uses a database of auto repair shop schedules and the availability and pricing of auto parts. After the car is repaired, Progressive delivers it to the policyholder, retrieves the loaner, and settles the payment with the body shop.

Industry sources point out the best of breed investigate claims fraud by deploying special investigative units staffed with former FBI agents and professionals with other law enforcement backgrounds.

CIOs in the Vanguard

Several best of breed CIOs keep their companies ahead of the pack by applying the same management techniques used by Americas most profitable high-technology companies. The best of breed use what Ive called the Four Sources of Advantageentrepreneurial leadership, open technology, boundaryless product development, and disciplined resource allocationto sustain higher returns on their surpluses. This framework, published in my book The Technology Leaders (Jossey-Bass, 1997), resulted from research into the factors that led to the success of 20 U.S. technology companies selected from 1,309 companies based on high research expenses, superior five-year average return on equity, and a reputation for innovative products.

Entrepreneurial leadership entails hiring entrepreneurs and creating a work environment that allows them to flourish. By rotating top employees through different departments, the best of breed develop an ambitious cadre of general managers. Progressives retired CEO, Peter Lewis, hired people who would take risks to develop innovative products and services, according to Holowach.

Lewiss urge to hire risk-takers extended to Progressives IT executives as well. For example, Holowach joined Progressive in 1991 because he saw Progressive as a niche player doing cool things. Since then, he has moved around from strategic planning and systems architecture to managing the development of applications using object-oriented technology. He has built rate revision systems in a product IT organization, built systems that support direct-channel inbound telemarketing, and provided IT support for a sales and service function that accounts for 70 percent of Progressives revenues.

Like Progressive, Motorists encourages its best-performing employees to seek out new challenges within the company to broaden their understanding and to develop their capabilities. For example, Motorists CIO, Dave Kauffman, is also its head of claims and previously worked in its underwriting and actuarial departments.

Open technology entails using the most appropriate technology for solving a customer problem, regardless of the technologys source. The best of breed pick the best off-the-shelf technologies and build solutions that lower costs, enhance service, and/or increase revenues. Such technologies save money and time in customizing and maintaining applications. According to Holowach, Progressive used off-the-shelf analytical software from SAS, MBI, and Essbase to develop a customized application for pinpointing the factors that drive loss experience in different market cells. Holowach notes Progressives data mining application taps data processed on its IBM and Amdahl mainframes and stored on EMC and Hitachi disk drives.

Motorists also uses technology to support business goals. To enable Motorists to maintain tight agent bonds, Kauffman says, Motorists connected its computers with those of its agents Agency Management Systems (AMS)a connection that was designed to work with each of several different AMS technologies its agents used. To achieve this, Kauffman directed the development of three different classes of AMS interfacesone for agents without an AMS, another for agents using Applied AMS, and a third for agents using an AMS other than Applieds. While Motorists might have cut its development costs by requiring all its agents to use one system, Kauffman adapted to different agent systems because its IT department supports Motorists goal of making it easy for agents to do business with Motorists.

Boundaryless product development means developing new products through teams of people outside the companysuch as agents and policyholdersand people from different internal departments. According to Holowach, Progressive formed a team, consisting of its legal, marketing, product development, IT, and agency software departments, which in 1997 was the first to uncover the specific relationship between insureds credit scores and their insurance losses. This discovery enabled Progressive to use credit scores to predict losses and to set prices to earn a profit. Progressive also organized its IT department to encourage a partnership between IT and business units by assigning its business IT directors to a solid-line reporting relationship with the heads of its business units while maintaining their dotted-line reporting relationship to the CIO.

Disciplined resource allocation means rigorously allocating capital and people to product and process innovation projects. According to Kauffman, IT planning is part of Motorists three-year strategic planning and 15-month tactical planning processes. Motorists funds IT projects that lower cost and/or improve agency and policyholder relations. Motorists evaluates these projects at milestones and continues funding those that achieve targeted outcomes, while canceling those that fall short. Furthermore, Motorists carefully monitors actual cost savings from these projects against budgeted outcomes.

Progressives Autograph project de-monstrated how its IT department innovates frugally. Launched in Harris County, Tex., in 1998, Autograph used GPS and cellular technology to offer customers 25 percent cheaper auto insurance based on how many miles, when, and where they drive. According to Holowach, Progressives IT staffers developed patented technology to sense, transmit, and analyze a policyholders driving speed, seat belt and signal usage, and turning and braking action. Despite its investment in this new technology, Progressive put Autograph on hold because fewer than 100 policyholders signed up for it.

Achieving Best of Breed Performance

If CIOs are perceived as business partners, they can help their companies achieve best of breed performance by contributing to a four-phased transformation process.

The Assessment phase pinpoints an insurers opportunities for improvement. The first step of this phase is to perform a detailed financial analysis to identify specific cost advantages and disadvantages relative to the best of breed and the industry. The next step is to conduct in-depth interviews of customers, employees, and analysts to identify sources of dissatisfaction and highlight unmet needs. The third step is to develop process maps that expose handoffs and redundancies in key business processes. While CIOs should participate in the first two steps, they can tap their analytical skills and business knowledge to direct the third step of the Assessment phase.

The Strategy Formulation phase turns the output of the first phase into detailed plans for improvement. The first step is to brainstorm at least 50 ideas for improvement. The next step is to rank the ideas based on their cost to implement, the capabilities required to carry them out, the companys ability to perform those activities, their benefits to the company and its customers, and the time estimated to implement them. The third step is to form teams to accomplish the highest-priority strategic initiatives. The phase concludes with the development of plans for implementing these initiatives. While CIOs should participate in the first two steps, they should assign the right business unit and functional IT managers to contribute to the third and final steps of the Strategy Formulation phase.

The Roll-Out phase builds internal support for the strategic initiatives by generating results and corporate enthusiasm. The first step is to sequence initiatives so that visible results are achieved relatively quickly. The next step is to communicate the importance of the strategic initiatives widely and often. The third step is to assure the strategic initiatives receive sufficient executive time and capital to achieve the targeted results. The final step is to link psychological and cash incentives to the achievement of budgeted outcomes. CIOs and their staffs must support Roll-Out by developing the systems that support the new processes and train their users.

The Feedback phase repeats much of the first phase to identify further opportunities for improvement. Insurers aspiring to best of breed performance can never relax because the best of breed never stop enhancing their underwriting discipline, tightening their bonds with agents, and investing in process innovation.

Peter S. Cohan is president of Peter S. Cohan & Associates (http://petercohan.com), a management consulting and venture capital firm. The author of seven books, including Net Profit: How to Invest and Compete in the Wild World of Internet Business (Wiley, 2001), Cohan has appeared on ABCs Good Morning America, CNBC, and CNN and has been quoted in the New York Times, Time, Fortune, and BusinessWeek.

The information in this article originally was presented by the author at ISOTech 2002. The content of Inside Track is the responsibility of each columns author. The views and opinions are those of the author and do not necessarily represent those of Tech Decisions.

How Were the Best of Breed Selected?

To select these best of breed, specific criteria were applied to two databases of the top 100 P&C groups created from A.M. Best Company data. One database analyzed personal auto financial results, which represented the short-tail lines. The other database analyzed general liability results, which represented the long-tail lines.

For each of the top 100 companies, the databases calculated an overall score for each groupweighing profitability two-thirds and growth one-third. To calculate the profitability rank, the database assigned half the weight to the 1997 to 2001 combined ratio average rank and half to the 2001 combined ratio rank. The database calculated the premium growth rank similarly by splitting the weight between 1997 to 2001 average rank and 2001 results.

We welcome contributions to Inside Track from industry consultants. Articles should deal with industry issues only (no product pitches please) and offer advice on solving insurance IT challenges. E-mail contributions to insidetrack@tdmag.com. You will receive a reply only if your submission is chosen for publication. The editors reserve the right to edit for space and clarity.

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The CIOs Role in Achieving Best of Breed Performance

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