USE OF SWOT-ANALYSIS FOR INSURER RISK MANAGER

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1 Proceedings of the 10th International Conference Reliability and Statistics in Transportation and Communication (RelStat 10), October 2010, Riga, Latvia, p ISBN Transport and Telecommunication Institute, Lomonosova 1, LV-1019, Riga, Latvia USE OF SWOT-ANALYSIS FOR INSURER RISK MANAGER Nadezhda Novozhilova Baltic International Academy, Transport and Telecommunication institute Riga, Latvia Ph.: An activity of a certain insurance company A in the insurance market of Latvia is considered in this paper. A place of the given insurance company in the insurance market of Latvia is determined as well as its opportunity to compete with the leaders of the insurance market. The SWOT-analysis is conducted and the recommendations for the use of the analysis results by the top management of the insurance company A for the adequate strategic decision-making and insurer risk management in a certain competitive situation basing on the strong sides and maximum levelling of the weak sides are suggested. Keywords: risk management, insurer, SWOT-analysis 1. Introduction The insurance business like any other business activity needs management: planning, organizing, motivation and control. In the modern terms the insurance companies play in a specific insurance market where they offer various insurance products and services to a customer in conditions of a fierce competition of the limited insurance market of Latvia and the existing economic crisis. The insurance activity is impacted by the whole replenishment process. Attention to the insurer risk management is a fundamental precondition for the efficient functioning of the insurance system in Latvia and ensuring of the financial obligations fulfilment by an insurer. The insurance activity differs considerably from other types of the business activity. The main difference of the insurance business is an insurer s striving to take risks of various economic subjects. In terms of the increasing competition in the insurance service market, an objective necessity of an adequate assessment of an insurer s activity and the insurer risk management appears [1,2]. There is a direct connection between risks taken by the insurance company (insurance risks) and risks related to the insurance activity conduction. Activity of an insurer in terms of the market economics demands a high level of management, without which it is impossible to ensure the achievement of goals of this insurer, its competitiveness and constructing the strategy of an activity [3]. Specificity of management sphere in the insurance business pre-defines a necessity to single out its special direction in management the insurance management. In a narrow sense the insurance management represents the insurer risk management functioning in terms of the competitive economic environment that includes task setting, choice of measures and development of methods of their achievement. An insurant determines the insurer real business via its specific motives and preferences directed by the insurance interest. Reasoning from the existing insurance interests, an insurer creates a certain package of the competitive insurance products that is orientated to satisfaction of insurants` demands. Specificity of the insurance management is conditioned by peculiarities of the insurance activity. The process of the insurance policies sale always assumes a direct contact with a future insurant that is why it is difficult to standardize the operational technologies. Due to its specific character the insurance activity differs by its high riskiness. At that, the strategic management possesses a quite wide choice of own tools, one of them the SWOT-analysis is that is an assessment of the inner strength of a company and its weaknesses as well as its opportunities and threats.[4, 5,]. It is a method of the strategic survey obtaining of a company s situation. The SWOT-analysis obeys a main principle a strategy must provide a good compliance of the inner opportunities of a company (its strong and weak sides) with its outer situation (partially reflected in its opportunities and threats). SWOT (Strength, Weakness, Opportunity, Threats) is the analysis of weak and strong sides, opportunities and threats. The SWOT-analysis is performed with the purpose to study the business environment, legal terms, weak and strong sides of own enterprise and enterprises-competitors, as well as of complex inter-influencing of the studied factors. In 261

2 Session 4. Transport and Business Logistics the very general sense the SWOT- analysis is aimed to identification, structurization and comparison of already existing strong and weak sides of a company, probable events in the market (opportunitiesthreats), which attachment, may promote or impede the implementation of the analysed idea, structure, process, event. On the basis of the SWOT-analysis a general forecast of an insurer development is elaborated. Again, it is performed individually or by outsourcing for the period, for which the strategic plan is considered. This forecast is made by various parameters: by the insurance premium amount, by the market structure, and the insurance market tendencies. A professional management of the insurance activity that is performed in terms of the market relations and is directed to obtaining of maximum profit with a rational use of all existing resources is impossible without the insurance market analysis, application of the modern methods of the activity assessment and the multi-factor decision making. The use of the modern methods of management allows taking and implementing decisions for the insurer risk management that are adequate for the current situation 2. Analysis of Competitors The leaders of the insurance risk market of Latvia for the year 2009 are the following: BTA (23.18%), Gjensidige Baltik (21.48%), Balta (19.65%). In the previous years a leadership constantly belonged to Balta and BTA, and the ranking of the key factors of success will be performed with them. For the insurance market analysis we use a coefficient of the market concentration a specific gross premiums of five leading risk insurance companies in total sum of the signed gross-premiums of all risk insurance companies. Concentration of the market is calculated in percentage. Data about the distribution of the market shares between companies allows analysing a competitive structure of the market as well. The stronger is a competition between companies that are the leaders in the market the greater is a wish of other companies to struggle for their place in the market and to enlarge a share. A coefficient of the market concentration is calculated by the following formula 1: CR= Pri m Pri+ Pr j, m n where СR coefficient of market concentration; Pri amount of the collected premiums of the i-th insurer-leader; Prj amount of the collected premiums of the j-th insurer- non leader; m amount of leaders-insurers (5) by shares of the market; n amount of insurers by shares of the market non leaders. The index of the market concentration for calculating five insurers-leaders has been used. A coefficient of market concentration varies 75% to 83% for the whole period of the insurance risk market of Latvia existence and constantly among the leaders of insurers Balta and BTA are. Company А, unfortunately, is not among five leaders (indices are on the 6 th -7 th places), i.e. in case of a proper strategy of the top-management and professional risk-management a promotion to leaders is possible. For comparison of competitiveness two leading companies have been selected, which establish rules of game in the Latvian market of the risk insurance these are Balta and BTA. For assessment of the competitive strength of Company А it is necessary to analyse the key factors of success of a company and its two competitors with the help of the weighted coefficients. The given method consists in working up and ranking of the key factors of success of the insurance business, forming of the table of competitors` expert estimates (according to 9 point system) and Company А by success factors in the insurance business and the analysis of the results in Table 1. The weighted estimate is prolonged for each factor: VOij = Vij Rij, (2) where VOij weighted estimate of the i-th key factor of success of the j-th company; (1) 262

3 Vij coefficient of value of the i-th factor of success of the j-th company; Rij expect estimate of the i-th key factor of success of the j-th company. Total estimate (SVO) is determined in the following way: SVOj = VOij. (3) Table 1. Analysis of Competitors by Method of Weighted Coefficients Key Factor of Success Coefficient of Value Сompany "А" Weighted Estimate When assessing value of the key factors of success an attention has been paid to peculiarities of the insurance business where the most important thing is a full satisfaction of customers` demands owing to the service quality and a presence of a company next to a customer and in a customer s conscious. Thus, it is obvious, that Company А goes on a level with BTA according to the number of insurance products, and that it has a bad reputation and appropriate level of customer service. However, a company yields to both competitors in marketing and advertising quality, and in coverage of target segment of the market and availability of the financial resources (a foreign capital of Balta is almost unlimited). Besides, it should be noticed that according to a total weighted estimate, Company А is closer to Balta (in contrast to the results of the collected signed insurance premiums) and it has a considerable gap with the insurance company BTA (among customers of BTA there are a lot of institutes that makes it possible to conclude profitable transactions and to increase a reputation). 3. Insurer Risk Manager and Practice of SWOT Analysis Use for Company А The most important economic goal of an insurer activity as a commercial organization is to provide a maximum profit. Such approach to the economic goal goes from the nature of the share insurer and related share insurance. The owners of the share insurance company, when forming the registered capital, orientate themselves to a profitable allocation of means giving them a constant profit in the form of dividends. The customers of the share insurance company, that is the insurers, are also interested in profit, because the financial success of an insurer speaks about reliability and stability of the insurance organization they have to do with. A general interest in the profitable operation of the share insurance company their staffs have include top managers. Maximilization of a profit of the share insurance company is often understood uniquely: increase of amount of insurance payment entry owing to the growth of the insurance policies and simultaneous decrease of costs connected to a maintenance of the insurance company and the process of the concluded insurance contracts service. In such understanding the indicated goal does not orientate to a long-term operating of the share insurance company. The process of the insurance policies sale always assumes a direct contact with the future insurants; as a result Balta Weighted Estimate BTA Weighted Estimate Range of services 0,05 8 0,4 9 0,4 8 0,4 Reputation (image) 0,15 4 0,6 8 1,2 8 1,2 Dealer network 0,1 7 0,7 9 0,9 8 0,8 Marketing and advertising 0,2 4 0,8 7 1,4 8 1,6 Financial potential 0,15 6 0,9 9 1,35 7 1,05 Customer service 0,2 6 1,2 5 1,0 7 1,4 Cost position 0,05 8 0,4 5 0,25 8 0,4 Access to governmental authorities 0,1 5 0,5 3 0,3 9 0,9 Total 1 5,5 6,8 7,66 263

4 Session 4. Transport and Business Logistics the operational technologies hardly could be standardized. The insurance activity as a whole due to its specificity differs by its high riskiness. Forming of resources of the share insurance company and their allocation depends directly on a multitude of factors of the macro-economic character: political and economical stability in the country, level of inflation, trust of customers to an insurer, development and stability of the securities market, etc. Assessment of the inner strength of a company and its weakness, as well as its opportunities and dangers might be done during the use of the SWOT-analysis. This is a method of obtaining survey of the strategic situation of a company. The SWOT-analysis obeys a main principle a strategy must provide a good compliance of the inner opportunities of a company (its strong and weak sides) with its outer situation (reflected partially in its opportunities and threats). Those companies are successful that satisfy demands of clients (customers, consumers) more efficiently in comparison with the competitors. The problem consists in the fact that demands of consumers are subjects to change, and competitors are trying to defeat a company that has responded on the changes of environment not quickly enough. The analysis of the outer and inner environment in the insurance organization must be conducted constantly in various forms. The analysis is a basis for any decision making concerning an activity of the insurance organization, it is used with purpose and systematically to receive information necessary both for the strategic planning and for the assessment of success of strategy implementing. The performance of the environment analysis initially is based on the unlimited amount of information that is partially not useful for decision making. Therefore, to limit waste of time, power and financial means for the performance of the environment analysis it is necessary to find filters for identification of the needed information (relevant information). Such filters are mission, goals and strategies of an organization. For decision making it is necessary to find out, evaluate and analyse a totality of all factors influencing on the activity of the insurance organization environment and circles. Correspondingly one should differentiate outer environment and inner environment of an insurer. The outer environment is a sphere where an organization performs its activity and a totality of factors of influence outside an organization. A management of an enterprise cannot influence on them directly. The inner environment is a part of an environment that lies within the frames of an organization and a totality of factors of influence is inside an organization. They are directly under control of the management of an enterprise. The analysis of an environment is the most important process of the strategic management. On the basis of data of this analysis, goals and strategies of an organization are determined, and in less degree, its mission: analysis of environment. An environment consists of several elements neighbouring circle and distant circle. A neighbouring circle includes customers, shareholders, suppliers and competitors of an organization, a distant circle all other interested groups (state, society, etc.). A neighbouring circle (branch) is analysed mainly. analysis of the inner environment of an organization is usually conducted for comparison of the company s situation with the situation of the nearest competitors (for the assessment of the competitive strategic position of an organization). In particular, for this purpose the method for research of the inner environment factors of an organization might be used. Requirements to an organization on behalf of the outer environment might be presented in the form of a list of the inner environment factors ( that is those parameters of an organization that plays more or less important role during its interaction with the outer environment) being a part of the outer environment. There are many recommended sets of factors that should be used for performance of the inner environment analysis, but, at that, a majority of researchers think that is it necessary to consider various cut-offs of an organization, for example, the following: staff, management, marketing, financial. A qualified analysis of the competitive surroundings and an adequate assessment of the real situation of Company А in the insurance market of Latvia will allow minimizing risks of an insurer and to implement own strategy successfully. The method of the SWOT analysis, as Thompson and Strikland [6] indicate, is usually used for comparison of data of the inner and outer environment of its cumulation in a single whole that allows obtaining a general picture of a reality: strength is something where a company has success or some peculiarity giving it the additional opportunities. Strength may consist of skills, a considerable experience, the valuable organizational resources or competitive opportunities, achievements, which gives a company its advantages in the market (for example, more qualitative goods, progressive technology, a fame of trademark). Power might also be a result of an alliance or joint-venture with a partner having an experience or potential opportunities for strengthening of the competitive capabilities of a company. 264

5 weakness is an absence of something important for operation of a company, something, that it cannot manage to do (in comparison with others) or something that puts it in the unfavourable conditions. Weakness may consist in a low qualification of employees, deficit of patents, low technological level, unfavourable geographical position etc. Depending on its importance for a competitive struggle it may make a company to be weak. opportunities are determined as something that gives a company a chance to do something new: to issue a new product, to gain new customers, to implement new technology etc. Opportunities may consist in, for example, leaving the market by a competitor, appearance of a large number of new consumers, construction of a highway next to an enterprise and etc. threat is something that may cause damage to a company, to deprive its considerable advantages. Threats may consist in the illegal copying of the unique elaborations of a company, appearance of new competitors or goods-substitutes and etc. For performance of the SWOT-analysis a table is done where, resulting from the selected mission and strategic purposes of a company, main opportunities, threats, weak and strong sides of a company are enlisted, and, then, probable results of their interactions are identified. At the intersection of blocks four fields are formed: S&O (Strength and Opportunity); S&T (Strength and Threats)); W&O (Weakness and Opportunity); W&T (Weakness & Threats). In each field the pair combinations that must be taken into account during the working out of a strategy are selected. For example, in relation to pairs from the S&O field a strategy should use weak sides of an organization for obtaining a maximum outcome from opportunities given by the environment. For pair from the S&T field a strategy should foresee a use of strong sides of an organization for avoidance of threats and so on. Actually, fields of intersections (S&O, S&T, W&O and W&T) represent sets of possible scenarios of the development of events. The S&O pair may become a real scenario of the development of events favourable for an organization, but, only if the realization of the named strong side in view of opportunities of the environment will be strengthen in a strategy and accepted as one of the goals (tasks) of an organization. Selecting a strategy, one should remember that opportunities and threats may transform to their opposites. So, the unused opportunity may become a threat if it is used by a competitor. In Table 2 the factors of the outer and inner environment typical for Company А are revealed. Table 2. SWOT-analysis of Company САО А Strong potential inner sides of company 1) sale of exclusive insurance products 2) individual approach to customers 3) opportunities to react more operatively on changes of environment (in comparison with foreign competitors) 4) more qualitative after sale service Outer potential opportunities for company 1) use of more efficient advertising campaign and establishing of feedback for company s image improvement and attraction of new customers 2) integration with some competitors for defending national companies from intervention 3) expansion of activity in the neighbouring countries and entrance to the market of the Western Europe Weak potential inner sides of company 1) absence of marketing department 2) high level of insurance receivables 3) insufficient stimulation of labour activity 4) insufficient level of employees` professionalism and service quality is not being improved Outer potential threats for company 1) loss of a part of the market share due to dumping activity of competitors with foreign capital 2) worsening of a company s image as a result of propaganda 3) complication of work with intermediate parties in connection with new requirements of the insurance legislation and absence of the interested of reinsurance companies to cooperation with Company А On Figure 1 a ranking of each list of factors of the outer (OT) and inner (SW) environment with the help of the filtering matrix is showed using the sequence numbers of factors from Table

6 Session 4. Transport and Business Logistics Strength - S Influence Strong Medium Weak High 2 1 Medium 4 3 Low Opportunity - O Influence Strong Medium Weak High 1 Medium 3 Low 2 Weakness - W Situation Destruction Critical Difficult Light Injuries High Medium 4 Low Threats - T Situation Destruction Critical Difficult Light Injuries High 1 3 Medium 2 Low Figure 1. Ranking of lists of factors of the outer (OT) and inner (SW) environment Composed pairs and interpretation of pairs by matrix of the SWOT analysis for Company А are presented in Table 3. Table 3. Pairs of SWOT-analysis matrix for Company А Pairs with factor S O1 + S2 O1 + S4 O2 + S3 O3 + S2 O3 + S1 T1 + S3 T1 + S4 T2 + S4 Pairs with factor W O1 + W1 O1 + W4 T1 + W1 T2 + W4 T3 + W2 T3 + W3 T3 + W4 Pairs in the OS field are interpreted like such directions of the management activity where a use of strong sides in terms of opportunities existing in the environment of a company will give the greatest and immediate effect, at that, with the smallest costs of efforts and budget. Pairs in the TW field are interpreted as the most dreadful combination that the management will work with. Maximum effort must be applied and a large budget must be spent. Otherwise, a company may stop its existence. Pairs in the OW field are interpreted like such directions of the management activity when the favourable opportunities must be used that exist in the environment of a company for elimination of weak sides of a company. Pairs in the TS field are interpreted like such directions of the management activity when strong sides of a company should be used for resistance to threats coming from the environment. 266

7 4. Conclusions On the basis of the performed SWOT-analysis the following conclusions and recommendations might be given: in Company А the top management deals with the marketing strategy not involving in it the employees that communicate with customers directly and know better their needs. The operative decisions in the area of marketing are taken by the heads of departments of various types of insurance, at that, each pays attention only to own direction of an activity, i.e. departments are operating without taking into account the general goals of an organization that leads to no uniform development of the insurance products of a company. It speaks about a wrong approach to the development of an organization organizational structure is considered by the top management as a set of tools for realization of constantly changing strategy of the development of a company. Quite often the decision for making changes in the activity of some subdivision of a company are made without taking into account the influence of such decision on other elements of an organization. Such management promotes the development of only separate directions of an activity and not always this management is quite efficient because not all potential of an organization is used and there is a deficit of the marketing information; in the given situation it is necessary to use the system approach to the management of a company s development that assumes a management of a company as a management of the interconnected elements that are aimed to the achievement of a general goal and functioning as a single one. Because the insurance company is an open system, it is constantly interacting with the environment. Therefore, a task of the management is to perform a constant monitoring of the environment of a company, both outer and inner. The management of the insurance company must respond timely on changes in the environment taking into consideration the consequences of such changes for all elements of an organization and find new resources for its development. The performed analysis, as well as a positioning of the market opportunities and risks by its influence on a company and probabilities of their performance allow making an assumption about the situation development relating to a certain insurer in the national insurance market. Depending on a forecast and the environment analysis the insurance company determines its share in the market, segments of market, priority regions and products-locomotives. In the paper the activity of a certain insurance company A in the insurance market of Latvia is examined. A place of the given insurance company in the insurance market of Latvia and opportunity of competition with leaders of the insurance market are determined. Practical use of the SWOT-analysis and opportunity to use results of the analysis allows top managers of the insurance company to take the adequate decisions and to manage risks of an insurer in a certain situation. Taking into account the analysis results the suggestions for improving the activity of the insurance company А have been developed on the basis of strong sides and maximum levelling of weak sides. Top management success in the insurance company risk management lies in the knowledge and use of strategic tools as the original puzzles for constructing a general system of the strategic management of activity and risks of an insurer by its skilful combining. References 1. Pickford, D. Risk Management / Transl. from English by O.N. Matveeva. Мoscow: Vershina, Ltd., p. 2. Goncharenko, L.P., Filin, S.A. Risk Management: Manual / Edited by Oleynikov, 3rd edition. Мoscow: KNORUS, p. 3. Kurgin, E.A. Insurance Management: Insurance Company Activity Management. Мoscow: RosKonsult, p. 4. Bolshakov, A.S. Modern Management [Text]: Theory and Practice / A.S. Bolshakov, V.I. Mikhailov. 2 nd edition, corrected and added. SPb.: Piter, p. 5. Daft, R. Management, 6 th edition / Tranls. from English. SPb.: Piter, p.: il. (Series MBA Classics ). 6. Thompson, А.А., Strickland, A.J. Strategic Management. Мoscow: Banks and Exchanges; UNITY,