An Empirical Study of Insurance Performance Measure

In the ninth article from the (JACF Spring/Summer issue) this author applies Insurance Performance Measure (IPM) to a set of Indian insurance companies over the period 2005-2016. This is the first article published that applies the IPM model on real industry data and studies its implications.

The IPM was introduced in a Winter 2002 JACF article by Joseph Calandro, Jr., then at General Star management, a subsidiary of Berkshire Hathaway and by Scott Lane, then an accounting professor at the University of New Haven. Those authors explained why financial reporting for insurance companies was so challenging and presented the IPM metric as a better way to assess industry and company performance. Evaluating P&C companies is difficult because the unique format of insurance company financials does not lend itself to traditional financial accounting analysis and because the industry’s preeminent performance measure, the Underwriting Ratio, captures underwriting and claims activity but says nothing about investment and risk distribution (reinsurance).

By contrast, the IPM represents the interrelation of underwriting, investment and reinsurance along with a hurdle rate and is quite consistent with Warren Buffett’s expressed desire for a balanced overview of industry performance. IPM uses financial data without modification thereby simplifying and fastening computation. Operationally, it could help in negotiations for reinsurance renewals and identify “Maximum Profitable capacity”—the threshold limit for overall profitability.

Authored by Sai Ranjani Bharathkumar, XLRI Jamshedpur, India