Chapter 3 - Management of Insurance Businesses: Planning and Control

Question 1

Give some examples of strategic planning

Answer 1

• Setting objectives
• Identifying what needs to be done for those objectives to be achieved
• Creating the most appropriate organisational structure
• Allocating management duties and responsibilities to senior managers
• Agreeing and establishing a consistent management style
• Agreeing and setting budgets
• Agreeing staff incentives
• Setting sales targets
• Planning the most efficient use of material resources
• Setting timetables and deadlines
• Identifying contingency plans

Question 2

Objectives of business plans should be SMART, what does this stand for?

Answer 2

Specific
Measurable
Achievable
Relevant
Time-defined

Question 3

What are some factors against which a SMART objective can be measured?

Answer 3

Sales revenue
Overheads and expenses
Turnover of staff and its cost implications
Productivity and efficiency
Market performance against competitors
Profitability
Customer satisfaction surveys

Question 4

Names some control models

Answer 4

Management accounting
Budgeting
Critical success factors
Key performance indicators
Key risk indicators
Balanced scorecards
Benchmarking
Management by objectives

Question 5

What is management accounting?

Answer 5

Based on the concept that information should be made available to managers to enable them to track progress of the financial performance of the business throughout the financial year. Managers use analysis of the performance of factors such as sales levels, expenses ratios, staff costs, raw material costs, property management costs and other operational costs.

The analysis will show recent historical development and serve as a mechanism for predicting income and costs for the remainder of the financial year.

Question 6

What are critical success factors?

Answer 6

In defining its objectives, an organisation may have identified certain factors that are critical to realising its mission either by exploiting opportunities or by fending off the dangers posed by external threats and internal weaknesses. These factors are known as critical success factors and usually derived from a SWOT analysis.

Question 7

What is a SWOT analysis?

Answer 7

Strengths, Weaknesses, Opportunities and Threats

Question 8

What are KPIs?

Answer 8

Quantifiable points in the development of a company’s strategy that can show whether or not the copmany is reaching its targets and objectives.

KPIs can be results-orientated or effort-orientated.

Question 9

Give some examples of results-orientated KPIs

Answer 9

Sales volumes and/or revenues
Rates of return in investment
Market share
Asset Growth

Question 10

Give some examples of effort-orientated KPIs

Answer 10

Number of potential customers contacted
Number of complaints actioned within a planned time frame
Actions taken to improve staff relations, such as staff surveys and their response rates
Active pursuing of debtors

Question 11

Give some examples of KRIs

Answer 11

IT downtime
Examples of fraud (internal and external)
Complaints
Property loss or damage
Employee injury or illness

Question 12

Who devised the balance scorecard and when?

Answer 12

Kaplan and Norton, two Harvard Business School academics, in 1992

Question 13

Define a balanced scorecard

Answer 13

A strategic planning and management system used to align business activities to the vision statement of an organisation.

They identify the knowledge, skills and systems (learning and growth) that employees will need in order to innovate and build the right strategic capabilities and efficiencies (internal) that deliver specific value to the marketplace (customers) which will eventually lead to higher shareholder value (financials).

It attempts to take a holistic view of an organisation and coordinates its resources so that efficiencies are experienced by all departments in a joined-up fashion.

Question 14

What are the four perspectives of a balanced scorecard?

Answer 14

Internal
Customer
Financial
Learning and Growth

Question 15

In order to create a balanced scorecard, what must an organisation first know?

Answer 15

The company’s mission statement and strategic plan/vision
Financial status of the company
How the organisation is currently structured and operating
Customer satisfication level

Question 16

Is the balanced scorecard control model still relevant today?

Answer 16

There is some discussion which suggests it is less relevant with the need for business to develop new capabilities such as flexibility or the expertise to respond to the ever-changing technology, competition and customer preferences.

However, many believe it is still relevant because it…
- tethers the company to strategy execution
- aligns every member of the organisation to the same mission and vision
- makes organisations more responsive to abrupt changes
- presents the health of an organisation
- enhances transparency
- connects projects to measurements and measurements to strategy

Question 17

What are the three types of benchmarking commonly used?

Answer 17

Internal, External and Functional

Question 18

What is meant by internal benchmarking?

Answer 18

These compare the performances of divisions and departments within the same organisation

Question 19

What is meant by external benchmarking?

Answer 19

These contract the company’s overall performance with competing firms e.g. profitability, rate of return on capital employed, growth and market share

Question 20

What is meant by functional benchmarking?

Answer 20

This covers an assessment of the company’s main functions and processes and compares them against the same functions and processes in other organisations but not necessarily competitors

Question 21

What factors contribute to benchmarking being successful?

Answer 21

• Comprehensive and accurate information is available on competing or comparable industries
• Benchmarks are used on industry best practice
• Benchmarks used are flexible and can be altered if the external environment changes
• Benchmarks relate to the company’s corporate strategies and plans
• There are sound internal audit processes in place

Question 22

What does MBO stand for?

Answer 22

Management by objectives

Question 23

What is MBO?

Answer 23

Management by objectives is a process of defining objectives within an organisation so that both management and employees agree to the objectives and understand what they need to do in order to achieve them. It is appropriate for knowledge-based organisations such as insurance companies.

Question 24

What are some advantages to MBOs?

Answer 24

• Motivation - involving employees in the whole process of goal setting and increasing employee empowerment. This increases employee job satisfaction and commitment.
• Better communication and coordination - frequent reviews and face-to-face interactions between managers and employees help to maintain harmonious relationships within the organisation and solve many problems.
• Clarity of goals using the SMART methodology
• Employees tend to have a higher commitment to objectives they set for themselves than those omposed on them by another person
• Managers can ensure that objectives of the employees are linked to the organisation’s objectives
• A common goal for the whole organisation means it is directive principle of managemenr

Question 25

What are some disadvantages to MBOs?

Answer 25

- Employees may believe that MBO is another management ploy to ensure subordinates work harder and become more dedicated and involved - There is the potential for considerable paperwork and/or meetings - The emphasis is more on short-term goals - It does not leave any ground for subjective goals as these may be difficult to quantify and evaluate - Managers may not be sufficiently skilled in interpersonal interaction, such as coaching and counselling, which is extensively required - Managers and employees who are wholly focused on objectives might be prone to distort results to achieve their individual short-term goals

Question 26

What is varience analysis?

Answer 26

In the context of budgetting, varience analysis is where departments/individuals provide reasons for any signficiant changes which affect the budget (such as a sharp increase in office space rent). What constitutes a significant varience will be determined by senior managers or directors.

Question 27

What is reforcasting?

Answer 27

In the context of budgeting, the action of revising estimates of a final outcome taking into account the current actual figures as amended

Question 28

What is forecasting?

Answer 28

The method by which budgets are put together by directors and senior managers is a process of prediction which covers: - Levels and types of business that will be transacted - The turnover the business produces - Income, such as investment returns

Question 29

What does forecasting entail?

Answer 29

- Levels and types of business that will be transacted - The turnover the business produces - Income, such as investment returns

Question 30

What are the benefits of budgeting?

Answer 30

- Unifies all employees' activities within an organisation and creates a sense of purpose - Encourages planning and consideration of resources required - Financial awareness and increased desire for efficiency - Basis of comparison for the entirety of the organisation

Question 31

What steps consitute the budgeting process?

Answer 31

1. Guidelines provided by the Chief Executive 2. Consultation (between manager and team members) and preparation of team specific budgets 3. Review by Budget Committee (or board of directors if a budget committee does not exist) 4. Communication to managers 5. Monitoring over a weekly or monthly basis

Question 32

When a budget is reviewed by a budget committee, what are they reviewing?

Answer 32

Departmental budgets are reviewed to ensure that they: - conform to policies of the master budget - show how departmental objectives are going to be achieved - recognise any constraints under which the department is working - are realistic - reflect the financial responsibilites of the department concerned

Question 33

What is a 'cost centre'?

Answer 33

Where money is sent, such as a department

Question 34

What are the four types of budgeting?

Answer 34

- 'Top-down' budgeting - 'Bottom-up' budgeting - Zero-based budgeting (ZBB) - Rolling budgets

Question 35

What is 'top-down' budgeting?

Answer 35

The owners or directors decide on the individual plans for each department and function, and these plans are given to the individual managers to implement. Whilst this approach is easy to operate, it may become remote from the realities of the marketplace. 'Top-down' budgets can be fixed or flexible.

Question 36

What is 'bottom-up' budgeting?

Answer 36

Individual managers construct their own budgets, within set guidelines. These are then passed up to the managers and directors, who incorporate the individual budgets into the organisational master budget. 'Bottom-up' budgets can be fixed or flexible.

Question 37

What is a fixed budget?

Answer 37

As the name suggests, it is a budget which will not change once established, regardless of any change in performance. Projected figures are compared against actual figures at the end of the budget period.

Question 38

What is a flexible budget?

Answer 38

As the name suggests, a flexible budget is changed in accordance with the organisation's real activity levels over time.

Question 39

What is ZBB?

Answer 39

Rather than looking at the amount of expenditure which was budgeted for an item in the previous budget period, zero-based budgeting requires managers to start a position of having nothing in their budget for the item in question. Any amount that the manager subsequently decides they need for that item must be justified and such justification must go through a formal challenge process. ZBB is usually employed for costing individual and self-contained areas of work such as research, machine maintenance and legal services.

Question 40

What is a rolling budget?

Answer 40

Rolling budgets constantly look forward. Monthly figures might be produced prior to a future budget period, such as from January to December. As you come to the end of each month, a new month is added at the far end of the whole period. For example, in a twelve month long budget period, as you come to end of April in Year 1, April in Year 2 is added to the end of the budget. This ensures that managers are always looking ahead (usually 12 months).

Question 41

What is unfavourable varience?

Answer 41

Also known as negative varience - varience where budgets are not met

Question 42

What is favourable varience?

Answer 42

Also known as positive varience - varience where budgets are exceeded

Question 43

What are some causes of varience?

Answer 43

- Inadequate pricing - Higher expenses than planned - Random events - Operating efficiency

Question 44

What is the concept of "management by exception"?

Answer 44

The idea that there is no need to investigate and allocate management resource in investigating minor variences of a budget. For example, an acceptable varience level of 3% can be set which respects the fact that variences will occur naturally.

Question 45

What are the four main steps in decision making?

Answer 45

1. Understanding why a decision must be taken 2. Prior consideration and discussion of the options 3. Taking the most appropriate decision 4. Review outcome

Question 46

What are the five C's of decision-making?

Answer 46

Consider (the problem is considered) Consult (initiatives are taken to involve those affected) Crunch/Commit (the need to ensure something is done) Communicate (what has been decided and why is communicated to staff) Check (monitor results of the decision)

Question 47

What sort of information would a manager need?

Answer 47

What resources are available? What level of productivity is being achieved? Are objectives being met? Financial data to decide on recruitment Sales data to decide on marketing strategy Information about the property market to decide on whether to move office Information about foreign legislation and regulation to decide on overseas expansion

Question 48

What are the three levels of information?

Answer 48

Strategic information Tactical information Operational information

Question 49

What is strategic information?

Answer 49

This refers to the "what" and "why" the business chooses to do something. It is used by senior managers to plan future objectives and help to predict outcomes of planned initiatives and create a basis on which to create contingency plans. Strategic information will include data relates to developing patterns and trends within the financial services sector and the economic environment. It will include future market prospects, the availability and cost of raising new funds, total cash needs, total manning levesl and capital needs.

Question 50

What is tactical information?

Answer 50

This helps an organisation identify "how" they plan to accomplist their strategic objectives. It is used by the company and managers to plan resources (time, money, people) along with the risks or challenges that may be encountered. Tactical information will provide the data to determine the most efficient way to use resources to achieve strategic goals while delivering quality results.

Question 51

What is operational information?

Answer 51

This relates to the day-to-day operations of the organisation and thus is useful in exercising control over operations. It is used in front-line managers to ensure that specific tasks are planned and carried out properly. Operational information provides line managers with regular updates for example on staff numbers, contacts received and made, revenue and costs

Question 52

What does MIS stand for?

Answer 52

Management information systems

Question 53

What is a MIS for?

Answer 53

A management information system collects data from many different sources and then processes and organises the data to help businesses make decisions.

Question 54

What are the basic features of an MIS?

Answer 54

- Information flows both horizontally and vertically, the latter (between managers, team leaders and team members) being the most important for an MIS - Reports generated by an information system will range between information for low-level management about the small area of the organisation under their control, and reports of a broader nature for top-level management concerned with overall control - Tactical information for management control is at the core of an MIS, altough it will also have many sub-systems and sub-sub-systems providing information randing from operational through to tactical and strategic - The control cycle cannot be effective unless the plan is carefully prepared - A precise specification of the areas of management responsibility is essential to ensure that information flows to the managers who need it - Information produced must be able to measure actual results against the plan in such a way that control decisions can be taken at all levels of management. Data must also be available to ensure senior management can plan for the future

Question 55

What is a control cycle in the context of an MIS?

Answer 55

The comparison of actual results against a plan and the production of exceptional reports to show where control action may be needed

Question 56

What factors should be taken into account when deciding to share information internally

Answer 56

- The quality, quantity and clarity of information is often considered to be better by those who give it out then those who receive it. Managers need to communicate information as clearly as possible - Owing to different interests, backgrounds and levels of comprehension among recipients, the content of information right down to the specific meaning of individual words will be perceived differently within an organisation. Managers need to tailor their communication of information to the recipients - Communcation of information about future strategy is brought about by more than words alone. Managers should ensure that information relating to confidential impending action does not pre-empt the execution of that action - In many cases, information is better given out initially at meetings since this indicates that managers are willing to communicate with subordinates in person. This provides na opportunity for issues to be openly discussed so that any misunderstandings can be promptly resolved - Employees should always be given information about planned changes and whether or not they may affect them directly

Question 57

What are the two strategies for knowledge management?

Answer 57

Codification strategy and personalisation strategy

Question 58

What is codification strategy?

Answer 58

A strategy for knowledge management - knowledge is carefully codified and stored in databases, where it can be accessed and used easily by appropriate employees. This is the most common strategy for knowledge management

Question 59

What is personalisation strategy?

Answer 59

A strategy for knowledge management - knowledge is shared direct through person-to-person contacts and structured training programmes. Technology is used to help people communicate knowledge to others, rather than to store it. This strategy is commonly found in more specialised, financial services organisations where knowledge is closely tied to the person who developed it.

Question 60

What is social computing?

Answer 60

An area of computer science concerned with the intersection of social behaviour and computation systems; tools such as bookmarks, blogs, social networking services and wikis have allowed more unstructured, self-governing or ecosystem approaches to the transfer, capture and creation of knowledge, including the development of new forms of online communities.

Question 61

What are the two main areas upon which knowledge management has an impact on?

Answer 61

Creating value for customers and operational economies

Question 62

What is the difference between information management and knowledge management?

Answer 62

Information management refers to management of data (facts and figures) that has been obtained from different sources. This data is structured, organized and processed. Knowledge management is obtained via experience, education and the understanding of information.