We have come a long way from the days when the business plan was filed away at the end of the planning round and taken out again only when the annual result was known. Nowadays progress against plan is monitored on a regular basis. But the practice of constantly revisiting the dynamics behind the plan, to ensure better direction of the business, is still being developed.

No two insurers will go about their planning in exactly the same way but all will seek to predict, over the planning period, the key numbers: premiums, claims, commission, expenses and investment income, the latter split between income on the insurance funds (technical reserves) and shareholders’ funds. This exercise will be done for all lines of business and the total result carried through into a putative balance sheet so as to determine, inter alia, likely availability of profits for distribution and projected solvency cover.

Sitting behind the plan numbers will be many detailed assumptions that provide their underpinning. For example, the premium figure will usually be an amalgam of anticipated number of units of exposure and expected pricing. The claims figure may be the product of a detailed assessment of expected exposure units, claim frequency and average cost, or may derived from a chosen loss ratio based on anticipated future claims trends versus assumed pricing strength. Predicted cash-flows will be used to determine future investment income; views will be taken on the development of earlier years’ run-off.

Unfortunately in most insurers’ offices these key assumptions are spread around amongst individual underwriters, actuaries and accountants with no central logging. Their systematic collation is a tedious process but well worth the effort because it provides an invaluable tool for management.

Now that the basic structure is in place it is possible to activate the feedback loop.

This is much more than simply comparing outturn with plan or looking at a number of key performance indicators. It is easy enough, for example, to spot premium running ahead of plan, but what is important is to know the reason for it. If achieved pricing is stronger than expected, then that is one thing. If, on the other hand, more units of exposure are being written at the expense of pricing strength, that is something else.

In both cases a reforecast will need to be done at an early stage to reset the loss ratio and work out the effect on the balance sheet. If the exercise shows underwriting conditions to be particularly propitious and there is the solvency strength for it, consideration may be given to expanding the book more rapidly if this can be done without compromising the business quality.

If the feedback shows that the underwriters are sacrificing pricing strength for the sake of growth, however, a different response will be indicated. Managing the often conflicting demands for both growth and profit at different stages of the cycle is one of the enduring challenges of the insurance business - and one that analysts and journalists frequently fail to understand (remember the Independent?). Difficult decisions may be required here but the most important point is that if pricing strength data is not being continuously captured and compared with plan, then the insurer’s management will be unaware of any problem - they may even be pleased about the above-plan growth - until adverse loss ratios start to emerge at a later stage. This underlines the importance of logging the plan assumptions in addition to the numbers themselves.

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