CPCU 520, Chapter 10

Strategic management process

The process an organization uses to formulate and implement its business strategies

Mission statement

A broad expression of an entity's goals

Three steps of a strategic management process

Strategy formulation

Strategy implementation

Strategy evaluation

SWOT analysis

A method of evaluating the internal and external environments by assessing an organization's internal strengths and weaknesses and its external opportunities and threats

Strategy formulation steps

1. Internal analysis (SWOT)

2. develop long term strategies and organizational goals

3. determine strategies at different levels of the organization (who, what and when)

Functional structure

an organizational structure in which departments are defined by the operation they perform

Strategy implementation steps for Executives

1. Design the organizational structure

2. Determine the degree of centralization

3. Communicate

Multidivisional structure

An organizational structure in which divisions are organized into separate profit centers

Cost leadership

A business level strategy through which a company seeks cost efficiencies in all operational areas

Strategy implementation steps for mid level management

1. Create a roadmap of the specific processes, tasks and responsibilities necessary to disseminate the corporate strategy

2. Communicate clearly throughout the organization

3. Assign specific responsibilities, tasks, authority and accountability

4, Allocate adequate resources for successful implementation

5. Manage variances between goals and interim periods

Strategy evaluation

Establish standards

Create and apply measures

Compare actual results to standards

Evaluate and implement corrective actions if goals are not met

Example of steps in a control process applied to Underwriting

• Risk Identification – Gather information about the applicant and potential risks.

• Risk Assessment – Evaluate severity, frequency, and insurability.

• Decision Making – Approve, modify, or reject coverage based on assessment.

• Documentation – Record underwriting decisions and rationale.

• Monitoring – Review policies periodically to ensure compliance and performance.

Three categories of organizational controls that can be used to monitor goals

Financial

Operational or Process - example: average cost to settle a claim

Human or behavior - OSPE

An insurer's success depends on its ability to __________________

analyze the changing environmental factors and influences

Two methods used to analyze the environment an organization operates in

SWOT

Five Force Model

Five forces model components

Threat of new entrants

Threat of substitute products or services

Bargaining power of buyers

Bargaining power of suppliers

Rivalry among existing firms - pricing wars

Definition of the Five Forces model

analyzes industry competition through rivalry, new entrants, substitutes, buyer power, and supplier power.

Four SWOT analysis components

Strengths

Weaknesses

Opportunities

Threats

Trend analysis

an analysis that identifies patterns in past data and then projects these patterns into the future

Types of Organizational Strategies

Corporate level - long term, 5 year plan

Business - tactical - 3 to 5 year plan

Functional - 1 year

Operational - day to day processes to align with the functional strategy

Three generic Corporate level strategies

Single business

Vertical integration

Diversification

Vertical integration

when a company controls multiple stages of its supply chain, from production to distribution.

Example: A clothing brand owns both the factories that make its clothes and the stores that sell them.

Backward integration

when a company acquires or controls its suppliers to secure supply and reduce costs.

Example: A car manufacturer buying a tire company to produce its own tires.

Forward integration

when a company takes control of its distribution or retail, moving closer to the customer.

Ex: Selling policies directly to a customer instead of through a wholesaler

Related diversification

A corporate level strategy through which a company expands its operations into areas that are similar to its existing operations

Example: A car manufacturer starts making motorcycles, leveraging its expertise in engines and design.

Unrelated diversification

company expands into new products or markets not connected to its current business.

Example: A car manufacturer starts a chain of restaurants.

Four strategies that can be used when a business is declining

• Turnaround – restructure operations to return to profitability.

• Divestiture – sell or spin off parts of the business.

• Liquidation/Bankruptcy – close and sell off assets.

• Harvest – reduce investment to maximize short-term cash flow.

Harvest strategy

A corporate level strategy through which a company seeks to gain short term profits while phasing out a product line or existing a market. Ex - A company stops promoting an old smartphone model but continues selling it to loyal customers to generate revenue while focusing on newer models.

Turnaround strategy

plan to revive a struggling company and return it to profitability

Divestiture strategy

A corporate level strategy when a company sells or spins off part of its business to focus on core activities or raise cash.

Business Level Strategies

Cost leadership

Differentiation

Focus

Differentiation strategy

A business level strategy through which a company develops products or services that are distinct and for which customers will pay a higher price than that of the competition

Focused cost leadership strategy

when a company targets a specific market segment and offers products or services at the lowest cost within that segment.

Example: A budget airline focusing on short domestic routes while keeping ticket prices lower than competitors.

Focused differentiation strategy

A business level strategy through which a company focuses on one group of customers and offers unique or customized products that permit it to charge a higher price than that of the competition

Functional Level Strategy

Specific how a functional area can advance a business level strategy. Ex: Human resources finding ways to be to improve productivity

Three strategic reasons for global expansion

Revenue growth and financial stability - diversity risk

Global competitiveness - gain economies of scale, easy to expand

Global market considerations

Three key areas for insurers to evaluate when deciding to expand globally

Market analysis - surplus needed, distribution channels, etc.

Economic considerations

Political risks

Approaches to global expansion

• Strategic alliance – low-risk partnership

• Joint venture – shared ownership and control

• Merger – high risk, complex due to multi-country regulations

• Wholly owned subsidiary – highest business, political, and financial risk

Strategic alliance

An arrangement in which two companies work together to achieve a common goal

Joint venture

A business association formed by an express or implied agreement of two or more persons (including corporations) to accomplish a particular project such as the construction of a building

Merger

A type of acquisition in which two or more business entities are combined into one

Subsidiary

A company owned or controlled by another company

Q1: How do actuaries support marketing?

By creating new products and conducting competitive rate analysis.

Q2: How does marketing support actuarial work?

By providing market research and competitive analysis.

Q3: How do actuaries assist underwriting?

By compiling loss statistics to identify loss trends and concerns.

Q4: How do underwriters support actuarial work?

By helping with classification distinctions and developing policy language.

Q5: How do actuaries interact with risk control?

They detect new loss problems that may require stronger risk control.

Q6: How does risk control assist actuaries?

Alerts them to new hazards that may affect future loss trends and rates.

Q7: How do actuaries work with claims?

They help set accurate loss reserves and certify reserves in financial statements.

Q8: How does claims data affect actuaries?

enter loss data in class codes used by actuaries (errors affect rates).

Q9: How does marketing support underwriting?

By working together to identify new target markets and eligibility criteria.

Q10: How does underwriting support marketing?

By setting customer eligibility rules that marketing can target.

Q11: How do underwriters use risk control engineers?

As their “eyes and ears” on on-site to evaluate applicant exposures

Q12: How does risk control support underwriting?

By recommending improvements to make applicants more acceptable.

Q13: How does underwriting assist claims?

by providing the original risk assessment, policy terms, and coverage intent, which help claims staff determine if a loss is covered.

Q14: How does claims support underwriting?

By identifying new hazards that underwriters should avoid insuring.

Q15: How does marketing promote risk control?

By selling it as a key product feature of the insurer.

Q16: How does marketing use claims?

By promoting fast, fair claims service as a competitive advantage.

Q17: How does risk control interact with claims after a loss?

They investigate pre-loss conditions and may revise recommendations after new types of losses.

Q18: How do claims interact with risk control?

Claims adjusters identify hazards that engineers should address to reduce future losses.

Q1: What was one reason larger clients increased use of alternatives to traditional insurance?

Dissatisfaction with insurers.

Q2: Who conducted the Quality Scorecard Survey in 1998–1999?

Quality Insurance Congress (QIC) and Risk and Insurance Management Society (RIMS).

Q3: What three elements did the survey say remain in the competitive paradigm for insurers?

Price, quality, and service.

Q4: What additional elements were emphasized in the 21st-century competitive paradigm?

Speed, convenience, trust, innovative solutions, and partnerships.

Q5: What grade did the 1999 report give the insurance industry overall?

A “D”.

Q6: What grade did the 1999 report give insurance carriers in particular?

A “D”.

Q7: What are examples of “Must Haves” customers expect from insurers?

Identify needs & create solutions, timely accurate understandable policies, timely & accurate billings, developing & providing expertise.

Q8: What are examples of “Delighters” customers value?

Partnerships, effective claims process, trust & reliability, operational efficiency, two-way communication.

Q9: What does the “must have” of policy delivery include?

Timely, accurate, clear policies; fast certificates; multi-year contracts; easy changes.

Q10: What does the “must have” of billings include?

Accurate and readable statements, timely billing.

Q11: What does the “must have” of developing expertise include?

Expertise in risk management, knowledge of client’s industry, skilled underwriters, ability to access manage risk info, supplemental personnel, relevant training education.

Q12: What are examples of “delighters” under partnerships?

Works with intermediaries, manages conflicts of interest, develops client solutions, long-term partnership, unified company.

Q13: What are examples of “delighters” under effective claims?

Updates on claim status, fairness, timely settlements, follow-up to ensure satisfaction.

Q14: What are examples of “delighters” under trust & reliability?

High ethical standards, trustworthy advice, fulfills commitments, financial stability, consistent risk evaluation.

Q15: What are examples of “delighters” under operational efficiency & competitiveness?

are features or actions that exceed customer expectations and create a competitive edge.

Examples under operational efficiency & competitiveness:

• Faster delivery times

• Extra personalized service

• Seamless digital experiences

• Quick problem resolution

• Surprise perks or rewards

Q16: What are examples of “delighters” under two-way communication?

Active listening, reviewing policies coverages, keeping client informed.

Q17: What improvement areas were shown to increase retention and business if insurers improved by 10 points?

Partnerships, claims, trust & reliability, operational efficiency, two-way communication.

Q18: What happened to the Quality Insurance Congress (QIC)?

Sponsors dropped support; it no longer exists.

Q19: What did RIMS do in 2006 to address quality improvement?

Hosted a forum leading to performance expectation guidelines for partnerships (broker-risk manager, underwriter-risk manager, claims provider-risk manager, safety loss control-risk manager).

Q20: What risk do insurers face if they don’t respond to customer concerns?

They may be limited to small and mid-sized customers while larger clients turn to alternatives

Q1: What is the primary objective of studying international exposures & global risk management?

To understand the evolution of multinational loss exposures and how insurance and risk management address them at different stages.

Q2: What are key topics in international risk management?

Development of multinational exposures, challenges of international insurance programs, factors in analyzing foreign markets, global product needs, global service needs.

Q3: Why has the need for international risk management expertise grown?

Due to breakdown of trade barriers, advances in telecommunications, easier transportation, privatization, open foreign markets, and business expansion abroad.

Q4: What is the beginning stage of multinational exposure?

Importing and exporting goods and services.

Q5: What is often the next step after exporting in multinational growth?

Establishing distribution, storage, and warehousing in foreign markets.

Q6: What are common new exposures for multinational businesses?

Overseas distribution, foreign property, inventory storage, overseas travel, general liability.

Q7: What geographic and climate factors affect exposures in new locations?

Terrain, accessibility, disaster susceptibility, natural resources, and population.

Q8: What are key economic and infrastructure risks abroad?

Currency fluctuations, government-controlled markets, weak technology/transportation/communication systems.

communication systems.

Q9: What political and social risks may companies face abroad?

Government seizure of assets, corruption, crime, and fraud in insurance markets.

Q10: What cultural and business practice differences affect global operations?

Language barriers, social customs, contract perceptions, decision-making styles, emphasis on long-term vs short-term results.

Q11: How do legal systems vary internationally?

Romanistic (codes), Common Law (precedent), Far East (compromise), Islamic (religious law), Hindu (karma-based).

Q12: What is the best tax policy for multinational insurance programs?

Use local admitted contracts, companies, and currency to minimize tax complications.

Q13: What are common insurance distribution systems abroad?

Brokers, independent agents (mainly Europe & Australia), exclusive captive agents, direct sales.

Q14: What challenges exist with insurance regulation in foreign markets?

Entry restrictions, repatriation limits, preferential tax treatment for locals, corruption.

Q15: What sources can provide risk information for international exposures?

Clients, insurer underwriters, foreign offices, heads of sales purchasing travel.

Q16: What types of coverage are included in an exporter’s package policy?

Non-owned or hired auto, foreign voluntary workers comp, property, general liability, cargo transit, contingent business interruption.

Q17: Why is foreign voluntary workers compensation important?

Injuries abroad are more frequent and severe; it provides benefits for expatriates and protects U.S. loss experience.

Q18: What is contingent business interruption coverage?

Protection against loss if foreign suppliers’ shipments are interrupted by catastrophe or political disruption.

Q19: What is the purpose of a controlled master program?

To provide consistent global coverage and close gaps between local and global insurance policies.