To properly assess any industry or company, key performance indicators (KPIs) are used internally by enterprises, and externally by investors, researchers and regulators to measure performance. This could be in order measure a company's health, profitability, long-term performance, its ability to deal with tougher times or to assess a specific department. Essentially, KPIs are used to evaluate and measure, with the specific intention of the indicator particular to the person assessing it. To measure a company's size, one may look at the value of total assets held. To measure profitability and how well a company's management is running the business, one could review return on assets (ROA), the return on equity (ROE), value of sales and the return on common equity (ROCE), to name just a few. That being said, there are a number of KPIs which are specific to the insurance industry.
Written premiums are a key metric for insurers. They account for the total value of insurance policies sold to customers that is owed to the insurer. When customers buy insurance, the insurer charges a premium in exchange for coverage. As insurance premiums are paid in advance, insurance companies record both written premiums unearned and premiums earned. A premium is not earned and deemed as profit until the insurance company has fulfilled its obligation of insuring a policy over a given period of time.
Insurance claims are defined as such when a request has been made by a policy holder to an insurance company for compensation or coverage. The reason for a claim differs depending on the insurance type and the policy's coverage. A motor insurance claim is far different than that of a life insurance claim. To insurers, the bottom line figure of total claims and benefits paid is the most important. Profit margins are extremely tight in the insurance world. Premiums written may have reached over 1.3 trillion euros in 2018 in Europe, but claims and benefits paid also exceeded the one trillion mark. The future of the insurtech industry is changing due to insurers increasingly using technology to better evaluate risks and mitigate losses.
Total expenses represents the sum of all expenses related to operations. For businesses the main forms of expenses occur through the operational expenses of running a company and the administrative costs through wages and benefits to employees. In insurance and other sale lead businesses expenses will also include commissions from sales. In 2018, the French insurer AXA had the highest expenses of Europe's largest insurance groups.
The combined ratio, which is the sum of claims and expenses incurred divided by premiums earned, is a measure of profitability used by insurance companies to see how efficiently they are running their business. The combined ratio can be displayed as a measure of one or as a percentage of 100. Insurance markets with a ratio of over one means that companies are paying out more in claims than they are receiving through premiums earned. Several markets across Europe have combined ratios above 1, especially for the life insurance industry.
The expense ratio is the sum of expenses divided by premiums earned. Like the combined ratio, the expense ratio can also be displayed as a measure of one or as a percentage of 100. Insurance markets with a ratio of under one show that companies are earning more in premiums than they are paying out in expenses. In order to be profitable it is key for insurers to keep expense ratios as low as possible.