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October 24, 2006

BenchmarkingFor Excellence

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Presented by:

Charles Gall

Director, Benchmarking Services

Ward Group

513-791-0303

www.wardinc.com

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Agenda

About Ward Group

What Makes a Top Performer

Billing and Collections Measurements

Benchmarking Defined

Questions

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About Ward Group• Ward Group is an operational consulting firm specializing in the

insurance industry and . . .

• The leading provider of industry benchmarking and best practices services, using trusted "apples-to-apples" benchmarking methodology to help insurance companies better understand their company operations compared to industry peers.

• We offer benchmarking programs for total company operations, IT operations and claims operations. Separate programs are available for life, health and annuity companies and property-casualty companies and . . .

• Operational Consulting service including process reengineering, productivity improvement, cost reduction, distribution system analysis and cost allocation.

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Benchmarking Defined

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The search for those best practices that will lead to superior performance of a company.

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Search may occur across a wide spectrum of industries.

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Important to Integrate Best Practices and

Financial Comparisons

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One without the other is not benchmarking.

Comparing numbers without understanding the underlying business practices (in detail) of the other companies quickly leads one to the dead end question, “Now what do we do?”.

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Comparing business practices among companies without financial comparisons may lead one to implement a business practice that does not lead to superior performance.

Must have both elements.

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What is a Best Practice?

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BusinessPractice

Lead toSuperior

Performance?

FinancialQualityService

BestPractice

NO

YES(Prove it.)

It’s just abusiness practice.

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BenchmarkingFramework

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Establish Benchmarking Framework

Develop Apples-to-Apples Comparisons

Study Company Operating Practices and Philosophies

Review and Interpret the Results

Identify Best Practices

Step 1

Benchmarking Process

Continuously Monitor the Results

Step 2

Step 3

Step 4

Step 5

Step 6

Property-CasualtyBenchmarking Framework

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XYZ Company

Other Benchmarking Participants

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What makes a Top Performer?

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URBAN LEGENDS

• Stock companies are stronger than mutual companies

• Independent agents cannot compete with direct writers

• Mix of business determines success

• National companies are stronger than regional companies

• Size matters

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THE TRUTHInsurers can be profitable regardless of business mix, distribution channel, size, or geography.

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IndustryObservations

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Benchmark Observations 2003-2005

Excellent Company Results

• INCREASE 8.9% premiums in policy

• INCREASE 1.9 points in policy retention

• DECREASE 4.2 points in loss ratio

• DECREASE 14.1% in personal lines claims frequency

Declining Performance

• DECREASE 14.7% new policies per agency

• INCREASE 13.2% LAE paid per claim

• INCREASE 7.5% expense per policy in force

versus

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Profile of Property-Casualty Benchmarking Universe

Mix of Business

31.9%

68.1%

37.1%

62.9%Personal Lines

Commercial Lines

U.S. AgencyBenchmark

U.S. HighPerformer

Benchmark

$532 MillionAverage GPW

$829 MillionAverage GPW

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127.4

113.6

0

20

40

60

80

100

120

140

160

U.S. Agency U.S. HighPerformer

FTEs per $100 Million of Gross Premiums WrittenSelected Benchmarks Trend Analysis

0

20

40

60

80

100

120

140

160

2003 2004 2005

142.2 136.2 127.4

116.6 113.7 113.6

U.S. Agency

U.S. High Performers

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421

563

0

100

200

300

400

500

600

700

800

U.S. Agency U.S. HighPerformer

Policies in Force per FTE

Selected Benchmarks Trend Analysis

0

100

200

300

400

500

600

700

800

2003 2004 2005

411 407 421

564 562 563

U.S. Agency

U.S. High Performers

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$697

$534

$0

$100

$200

$300

$400

$500

$600

$700

$800

U.S. Agency U.S. HighPerformer

Total Expense per Policy in Force

Selected Benchmarks Trend Analysis

$0

$100

$200

$300

$400

$500

$600

$700

$800

2003 2004 2005

$648 $691 $697

$497 $528 $534

U.S. Agency

U.S. High Performers

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34.2%37.4%

0%

10%

20%

30%

40%

50%

U.S. Agency U.S. HighPerformer

Gross Expense as a % of Gross Premiums

Selected Benchmarks Trend Analysis

0%

10%

20%

30%

40%

50%

2003 2004 2005

37.9% 38.4% 37.4%

32.7% 33.7% 34.2%

U.S. Agency

U.S. High Performers

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Billing and CollectionsMeasurements

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0.44%

0.34%

0.00%

0.25%

0.50%

0.75%

1.00%

U.S. Agency U.S. HighPerformer

Billing and Collections Expense as a % of Gross

PremiumsSelected Benchmarks Trend Analysis

0.00%

0.25%

0.50%

0.75%

1.00%

2003 2004 2005

0.45% 0.44% 0.44%

0.32% 0.33% 0.34%

U.S. Agency

U.S. High Performers

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$9

$6

$0

$2

$4

$7

$9

$11

U.S. Agency U.S. High Performer

Billing and Collections Expense per Policy in ForceSelected Benchmarks Trend Analysis

$0

$2

$4

$6

$8

$10

$12

$14

$16

2003 2004 2005

$10 $10 $9

$6 $6 $6

U.S. Agency

U.S. High Performers

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IT Consulting 6.82%

Billing Personnel

43.19%

IT Personnel 20.45%

Credit Card Fees 11.36%

Equipment and Software 18.18%

Billing and Collections Expense Distribution

Approximately 45% of the total billing and collections expense is related to information technology support.

Credit card fees have increased 19% each year over the last 3 years.

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Offer online inquiry tools for agents and policyholders

View bill, pay bill, update billing information

Offer EFT and credit card payment options

Achieve superior EFT penetration (and retention)

Centralization of customer service and billing functions allows for better peak-period staffing requirements

Generally have one billing system that supports both direct bill and agency bill

Trends Among High PerformersCash Processing and Customer Service

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3.4

2.9

0

1

2

3

4

5

6

U.S. Agency U.S. High Performer

Billing and Collections FTEs per $100 Million of GPWSelected Benchmarks Trend Analysis

0

1

2

3

4

5

6

2003 2004 2005

4.3 3.9 3.4

3.1 3.0 2.9

U.S. Agency

U.S. High Performers

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$54.6K$57.2K

$20K

$30K

$40K

$50K

$60K

$70K

U.S. Agency U.S. HighPerformer

Average Compensation per Billing and Collections FTESelected Benchmarks Trend Analysis

$20K

$30K

$40K

$50K

$60K

$70K

2003 2004 2005

$50.4K $53.1K $54.6K

$53.0K $56.5K $57.2K

U.S. Agency

U.S. High Performers

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Benefits costs increasing 12% per year since 2003

High performers pay the personnel cost as the industry average

Higher span of control reduces company-wide expense

Trends Among High PerformersPersonnel Costs

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8

9.1

0

2

4

6

8

10

12

U.S. Agency U.S. High Performer

Span of Control: Ratio of Staff to Management

Selected Benchmarks Trend Analysis

0

2

4

6

8

10

12

2003 2004 2005

7.4 7.4 8.0

9.0 8.9 9.1

U.S. Agency

U.S. High Performers

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Fewer levels to communicate objectives

Personnel costs differences between management and staff

Top performers generally have higher span of control

Reasons to Consider Span of Control

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Billing Operating Practices

Operating Structure:

Percentage of cash processed by source: Bank lockbox

Process internally

2005

87%

34%

51%

Web – (EFT, CC)

15%

Percentage of commercial policies on direct bill

89%

13%

2.7

One location

Multiple locations

Number of locations

67%

Percentage of personal policies on direct bill

Average number of billing systems

1.58

Regional companies have centralized billing function

National companies have consolidated number of locations

Personal lines moving towards 100% direct bill

Consolidating systems to one system that can handle both direct and agency bill

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Telecommunications Expense per FTE

How can technology

help? Voice Over Internet (VOIP)

Call queue, scripting and call center management reducing call length

Web based services

- Online customer service eliminating phone calls

- Self service capabilities

Trend Analysis

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

2003 2004 2005

$1,388 $1,327 $1,220

$1,138 $1,131 $971

U.S. Agency

High Performers

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Credit Card

Credit Card Expense as a % of GPW

Credit Card Utilization - % of Policies:

Personal Lines

Commercial Lines

2005 2004 2003

0.05% 0.04% 0.03%

3.73%

1.32%

All Lines 2.75%

Credit Card Fees as a % of Total Billing and Collections (excludes IT)

20.83%

15.38%

11.11%

2.81% 1.87%

0.99% 0.72%

2.06% 1.38%

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Gained efficiencies in the billing and collections function offset by rise in credit card fees

Credit card fees account for one-fifth of the total billing and collections expense

Companies moving towards the use of third party vendors to reduce credit card expense

Credit Card Trends

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$4.6

$3.5

$0

$2

$4

$7

U.S. Agency U.S. High Performer

Bad Debt Expense per Policy in Force

Selected Benchmarks Trend Analysis

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

2003 2004 2005

$6.5 $5.7 $4.6

$4.5 $3.9 $3.5

U.S. Agency

U.S. High Performers

Note: Bad Debt Expense is not a subset of the Billing and Collections Expense metrics

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Offset to higher credit card use is lower bad debt expense

Implementing equity calculation to minimize past due balances

Approximately 6.5% of accounts receivable balance is past due

53% use in-house collections to attempt to collect past due amounts (versus external collection agency)

Average collection rate on accounts transferred into collections is 39%

Collection Trends

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Questions

?