The importance of benchmarking


The importance of benchmarking

Many insurance captives are underperforming as a result of complacent attitudes towards business strategies. Bill Miller, director, advisory actuarial at KPMG, explained to Bermuda Captive just how crucial the benchmarking process is in terms of getting companies back on track.

here is a common misconception surrounding captives that, once set up, they enter a sort of ‘autopilot’ mode whereby they effectively run themselves. While a captive may seem to be operating smoothly and without incident, many captives are failing to keep up with their peers.

The ability to benchmark and measure the quality of a captive’s policies, programmes and strategies and compare them with the best firms in the business is therefore an extremely useful tool that can deliver significant value. Such oversight can help captives to restructure their programmes, help to boost performance and head off particular challenges they may face.

Bill Miller director, advisory actuarial at KPMG, told Bermuda Captive that benchmarking can prove invaluable for captives as they look to identify problems before they emerge, as well as patterns and trends in the captive’s ongoing performance that might highlight the need for change. The final piece in the puzzle is coming up with the solutions, and “creating opportunities for them to save money”, he said.

The claims and litigation side of captive business is an area where benchmarking can prove particularly valuable, said Miller. An example of a particularly important metric to benchmark is average claim duration, a standard that can help the captive calculate the overall cost per claim.

“Some captive managers may think things are fine, but they still might not be performing nearly as well as the typical captive in terms of their claims function,” said Miller. This may well be due to the fact that they are unaware of what the ‘typical’ firm, or even a close rival, is doing. Benchmarking exactly where they are in terms of their claims and litigation performance can prove invaluable.

The bigger picture

In order for captives to broaden their oversight of the market and their own performance, they must analyse key data in order to identify problems and solutions, which will then help implement the necessary changes, said Miller. The tendency to be complacent can be counteracted by a close re-examination of business performance—set against a backdrop of those in the wider industry.

“It’s a combination of benchmarking companies against peer groups—and also against themselves over time—in order to find out if things are getting better or worse,” said Miller.

Benchmarking can also provide an explanation for market trends, such as examining the large losses driving costs for different industry groups. “This is a particularly important benchmark because there is a general perception that large losses are by their nature unusual—both in their size and their frequency—so captives often get lulled into a sense of complacency.”

It is important that this does not happen and benchmarking helps to provide an indication of the frequency of these large losses and to enable captives to prepare for such eventualities, said Miller.

“By looking at a broader mass of data, companies can identify more precisely what these typical large losses are for a particular industry group and respond accordingly.” In a lot of cases captive managers are simply taking action when it is already too late, said Miller. “Captives must take a proactive, rather than a reactive, approach.”

Captives can also benefit from looking at their retentions and, more importantly, what their programme structure looks like within the context of what it is they are trying to achieve. Being able to benchmark their programme against others in the industry will help them to evaluate the structure of their captive programme and how this fits with their ambitions, he said.

An overview of the market is essential to this, rather than captives simply looking myopically at their own experience, said Miller. “The credibility of any one captive’s data will not be that high” so benchmarking is an essential tool in the captive arsenal.

Miller emphasised the need for benchmarking to be an interactive process. “When we start benchmarking a captive and we say something looks like an outlying problem, getting to the root cause involves discussions with the whole captive team and understanding how their processes work, after which it becomes clear pretty quickly what the causes of an issue are and possible routes to a solution.”

This interactive method can then allow additional data and benchmarking analytics to drill deeper into particular issues, by looking at different segments of the captive’s operation that are causing the drift or shortfall in performance.

Reform challenges

One of the major challenges facing captive benchmarking exercises is the uncertainty brought about by reforms to the market, said Miller. Citing the US Patient Protection and Affordable Care Act, aka Obamacare, as a case in point, Miller said there may be captives writing medical professional liability that will face “adverse outcomes” as a result of the changes and that these will in turn affect the credibility of their benchmarking.

As he explained, the new dynamics of Obamacare will change the risk profile of many of these captives and, as such, benchmarking needs to respond to the new landscape. Many of the patients centralised within new hospital systems will have been required to change doctors, travel longer distances and wait longer for treatment, he explained. 

It comes as no surprise then that many requiring treatment will be “left with a bad taste in their mouth” as a result of the reforms, he said. This will translate into more problems in the provision of healthcare coverage and a resulting rise in litigation and claims. “We are prepared to help captives identify early warning signals in their data to see if their policies are being affected in this way,” said Miller. Evidently the changes are going to affect past assumptions and future liabilities.

Miller also touched on issues surrounding the provision of healthcare associated with workers’ compensation coverage, where he believes access to care is becoming more difficult and the speed of treatment is being compromised due to the sheer volume of people in the healthcare system.

The state that causes the most concern is California, said Miller, where the biggest cost driver in the workers’ compensation system is cumulative injury claims. This is linked to the ageing workforce in the state, he said, and there is a big question mark in terms of how this will affect liability trends. Again, benchmarking can help captives to understand these changes and respond to them in a timely manner.

Regulatory reform and changing industry dynamics will encourage captive parents to re-examine the operation, use and success of their captives. As Miller explained, benchmarking will form a valuable part of this exercise, helping to inform the captive’s decisions. l

Bill Miller is director, advisory actuarial at KPMG Bermuda. He can be contacted at:

KPMG, captive insurance, benchmarking

Captive International