The Meaning and Development of Life Insurance Industry in Taiwan

Chapter Ⅱ Ⅱ Ⅱ Literature Review Ⅱ

This chapter describes literature and theories related to the topic, and the research purposes will be further explored. On the other hand, by organizing the relevant data and study, which will be helpful to develop following research and have an overall concept.

What are going to be discussed in this chapter including the development of Taiwan’s insurance industry, the importance of key performance indicators to organization’s performance evaluation, human resource management and key performances on human resource management to construct questionnaire.

The Meaning and Development of Life Insurance Industry in Taiwan

This section will mainly illustrate the meaning of insurance, development of life insurance companies in Taiwan, and performance measurement of insurance company.

Meaning of Life Insurance

The concept of life insurance demand is not based on a unique and integrated

theory. Yaari (1965) considered the demand for life insurance within the lifetime

allocation process of an individual, subject to personal desire to leave funds for

dependants and provide income for retirement. Hakansson (1996) extends this,

suggesting that the level of demand for life insurance products is also a function of

wealth, the individual’s income stream, the level of interest rates, policy premium

rates and the assume discount function for current consumption. Premiums are

typically received before payments for losses are made because the production cycle on insurance companies is reversed and therefore achieving liquidity is not a particular problem (Colombini & Ceccarelli, 2004). Lewis (1989), extending Yaaris’

life insurance framework, proposes that the demand for life insurance involves altruism toward dependents, and Campbell (1980) is of the view that the household’s demand for bequests is probably related to the future need of economic support for dependents. Thus the life cycle theory considers life insurance as an essential risk management tool together with other risk-financing mechanisms (Hwang &

Greenford, 2005). In other words, individual risks are pooled and shared, with each policyholder making a contribution to the common fund. As for the common types of insurance, insurance can be broadly divided into two common types, which are life insurance and general insurance.

As for the policy of life insurance industry, the life insurance policy is a contract between the insurance company and the policy owner that calls the provision of life insurance coverage if the required policy premium [is] timely paid (Bertucelli &

Balsamo, 2007). However, according to McGorry & Lassar (2007), most policies are

purchased for irrevocable life insurance trust (ILIT) with the intent that, regardless of

whether the policy was a whole life, universal life, or blend, the policy would

eventually build up sufficient value such that the internal policy credits would support

itself without further contribution from the policy owner. Figure 2.1 is the production

process of insurance industry.

Figure 2.1 Production Process of Insurance Industry Source: Hwang & Kao, 2006

Marketing Activity

Transferring Premiums to Reserves and adding Capital Surplus into Funds Invested

Investment Activity

1. Bank Deposit

2. Securities: Government Bonds, Treasury Bonds, Stock, Corporate Bonds, and Beneficiary

Certificate

3. Real Estate Investments 4. Mortgage Loans

5. Authorized Projects or Public Investment

Marketing or Acquisition

Underwriting

Claims Settling

Reinsurance

Net Underwriting Revenues

Sources of Profit or Loss

Investment Revenues

Insurance Company Development in Taiwan

Life insurers in Taiwan should set a goal of a higher efficiency of investment performance and profitability because the whole market structure changed after the insurance market opened in 1987 (Hsiao & Su, 2006). In other words, ever since Taiwan’s insurance market opened its door for American companies, the market has further expanded and encouraged development of both domestic and international insurance companies. Following the deregulation of licensing, many large international insurers established branches in Taiwan. In 2002, Taiwan became a member of the World Trade Organization (WTO). In response, it was expected that domestic financial institutions, including life insurance companies, would face strong competition from foreign financial institutions and, as a result, were destined for tremendous change (Chiu, 2002). Facing a highly competitive environment, the formulation of competition strategy, strengthening of corporate operations and upgrading of the quality of service have become essential for survival (Hwang & Kao, 2006). Thus, the insurance market after deregulation became extremely competitive and making the insurance as the dynamic factor influenced the financial environment in Taiwan.

Performance Measurement of Insurance Company

According to Ho & Huang (2007), by the end of 2005, Taiwan’s insurance

market consisted of thirty independent insurance companies (domestic and

international). More specifically, by the end of fiscal 2004 financial assets held by

insurance companies had represented 16.02% of the total value held by the nation’s

financial institutions. Under the extremely competitive insurance market, a well

performance measurement to stir insurance companies’ growth is necessary. A

measurement system should be a communication tool that helps everyone understands

that their actions are important- that their initiatives should be guided by corporate strategy (Keegan, Jones and Eiler, 1997). The feedback of the measurement will reveal whether those strategies are achieved or not. For most companies, achievements don’t exactly correspond to companies’ history; it’s the effective and appropriate strategies to deal with the continuous changing market.

Typically insurers have employed performance measures for individuals and units in sales that are primarily subjective in nature and not directly linked to the specific business purpose and goals of the enterprise (Hoeg, 2004). In order to improve this kind of situation, insurers should set the measurements alighted with corporate goal and replace the measurement to quantitative ones instead of just

“good” or “bad” which can’t reflect contribution to profitability. On the other hand, performance measurement can’t just focus on financial driven indicators; the non-financial indicators should be an integral part of the business and different of each function. It is important that these measures are relevant to the managers of the different departments or units and the managers should be very much involved in the determination of the measures themselves (Davidson, 1994).

Summary

Insurance is a special product, which is invisible and no specific life cycle, gender and age limit of insured are flexible. Furthermore, this invisible product will help insured when they encounter accidental problems even though the loss and damage can’t be measured.

People nowadays gradually change their point of views about insurance and regard insurance as useful and necessary tool for them.

In order to deal with this competitive insurance market in Taiwan, an effective

performance measurement system is a key factor to affect the development of

insurance companies. In this case, key performance indicators play significant role to guide insurance company the way into success. How to alight KPIs with companies’

goals and objectives is another crucial issue for insurance company.

The Importance of Constructing KPIs for Organization

This section will introduce the definition, purpose and process of developing key performance indicators (KPIs), and the relationship between organization and KPIs to explain why it has significant relationship to organizations.

Definition of Key Performance Indicators

It is critical that key performance indicators (KPIs) are defined to establish goals and measure success (Harwell, 2006). The mandate for the use of KPIs called for quantitative indicators, this was interpreted as having indicators that are explicitly defined up front, transparent in terms of their data sources, and relatively objective (Brooks & Coleman, 2003). Once the organization defined its goal, identified its stakeholders and analyzed its mission, it needs a tool to measure its way and progress, and those measurement are key performance indicators. In other words, to measure their achievements, companies should define a series of key performance indicators (Favilla & Fearne, 2005).

Purposes and Process of Developing Relevant KPIs,

The purpose of KPIs is to enable measurement of project and organizational performance throughout the construction industry (The KPI Working Group, 2000).

Collin (2002) advocates that the process of developing KPIs involved the consideration of the following factors.

1. KPIs are general indicators of performance that focus on critical aspects of outputs or outcomes.

2. Only a limited, manageable number of KPIs is maintainable for regular use.

Having too many (and too complex) KPIs can be time- and

resource-consuming.

3. The systematic use of KPIs is essential as the value of KPIs is almost completely derived from their consistent use over a number of projects.

4. Data collection must be made as simple as possible

A large sample size is required to reduce the impact of project specific variables. Therefore, KPIs should be designed to use on every building project.

5. For performance measurement to be effective, the measurement or indicators must be accepted, understood and owned across the organization.

KPIs will need to evolve and it is likely that a set of the KPIs will be subject to change and refinement.

6. Graphic displays of KPIs need to be simple in design, easy to update and accessible.

John Davidson (2006) also indicated the following process of developing KPIs.

1. Define your key internal and external stakeholders;

2. Define what you need to do to meet their needs;

3. Ask what is stopping you meeting those needs (barriers);

4. Assess which barriers are critical;

5. Ask how you will know if you’ve overcome those barriers;

6. Define your KPIs from this information, making sure you have a good mix of leading and lagging indicators;

7. Work with the managers affected by KPIs to determine what prevent the KPI from being achieved (barriers);

8. Assess which barriers are critical;

9. Develop measures to determine progress towards these objectives (these are

PLs, not KPIs);

10. Implement the performance measurement system;

11. Review the system regularly (are we measuring the right things, do we have the right measures) as well as the measures.

To sum up, the process of developing KPIs has to as easy as possible, which means KPIs should be easy to design, flexible to update when organization encounters inside or outside sudden problems and focus on particular aspects instead of too general ones. With the convergent notions of what constitutes relevant KPIs, predicated on quantitative measures, a cornucopia of tools has become available to assist in the process of measuring and the reporting of results (Robinson & Morley, 2006).

Finally, developing measures to see whether the progress go with the objectives

well and reviewing the system and measures regularly is important to maintain the

measurement system and achieve the goal. The concept whole of developing relevant

KPIs is as figure 2.2

Figure 2.2 The process of developing relevant KPIs Source: Davidson, J. (2006).

Start

Internal stakeholders

External stakeholders

Develop outcomes

Develop KPIs

Change processes

Measure results Develop activities Develop

projects

Develop

objectives

The Relationship between Organization and KPIs

Companies want to be understood, and KPIs are a good way of achieving that (Bruce, 2006). Performance improvement has been the subject of recent studies and initiatives as a result of complex internal and external factors. The increased reliance on industry-specific the key performance indicators (KPIs) particularly in large organization is a reflection of the growing importance of performance measurement.

And balanced approach is an appropriate way to achieve improvement instead of just focusing on financial aspect.

However, the meaningful and useful data required a lot of work, such as validate, analyze and convert into a knowledge level to make it actionable before they can be turned into knowledge. The key performance indicators have been the first step in putting data into a context to align with organizational goals (Brown, 2006); however people are wary of publishing too much, in particular KPIs providing non-financial information (Bruce, 2006). Even though, companies also want to be understood, and KPIs are a good way of achieving that.

Summary

Lag indicators are derived from the business objectives in order to represent the

company performance according to the business goals while lead indicators highlight

the performance of the particular issues of each individual can take to contribute to

organization’s goals (del-Rey-Chamorro, Roy, Wegen & Steele, 2003). Organizations

are more and more aware of the necessity and importance of KPIs since KPIs are

deemed as lead indicators to guide the organization. KPIs should be developed

depended on organization’s goal and mission, also align with the strategy so as to be

effective KPIs for the organizations to follow. Besides, KPIs shouldn’t be too much

items and general, or it will reduce the effect. The measurement of KPIs also can be

linked to performance evaluation and reward system, so KPIs have the function as

cohesive force to fit organization’s perspective and employees’ motivations to make

organization have better performance.

Human Resource Management

This section illustrates the definition, role of human resource management (HRM) to explain the significance of HR, on the other hands, explore KPIs of HRM as the basement to construct the instrument of KPIs on HRM for domestic insurance companies.

Definition of Human Resource Management

Storey (1995), defined HRM as a distinctive approach to employment management which seek to achieve competitive advantage through the strategic deployment of a highly committed and capable workforce, using an integrated array of culture, structure and personnel techniques. Human resource management practices vary between market-oriented and internally focused (Delery & Doty, 1996), since market-oriented may refer to emphasize on innovation whereas internally focused on the cost control. Another simple definition of human resource management proposed by Shonhiwa, Shepherd & Gilmore (1996) is that it is planning, organizing, directing and controlling of the procurement, development, compensation, integration, maintenance, and separation of human resources to the end that individual, organizational, and societal objectives are accomplished.

Role of Human Resource Management in Organization

Traditionally, the human resource management function played a role in strategy

implementation, but rarely in strategy formulation. Often viewed as an

expense-generator or an administrative function, the HRM function is currently

imposing itself as a value-added partner (Afiouni, 2007). The role of the HR function,

however, has evolved throughout the years at paces that differ from an organization to

another and from a country to another. On one hand, the HRM function is in crisis, increasingly under fire to justify itself, on the other hand, organizations have an unprecedented opportunity to refocus their HRM system as strategic assets (Schuler, 1990).

According to Becker and Huselid (2000), human resource management’s contribution to value creation is a firm’s strategy based on people as a source of competitive, and a firm’s culture to share those values. The key to success is to ensure that the firm can attract and maintain knowledge workers through appropriate human resource management practices (Afiouni, 2007). According to Becker, Huselid, and Ulrich (2001), employees create value when they help implement a firm’s strategy. If they are not able to do so, their talent has no value. Therefore, HR professionals should understand the required competencies that can help implement a firm’s strategy. On the other hand, HR policies pertaining to training and exposure to culture aspects of life and work may have to be imparted actively in order to facilitate adjustment (AI-Rajhi, Altman, Metcalfe, & Roussel, 2006). Another issue which HR needs to concern is the aging of the workforce will present employers with many challenges, including how to meet their future labor needs (Marjorie, 2006).

Key Performance Indicators Categories on Human Resource Management

Relevant research shows that increasingly HR has generally a tendency to

emphasize on cost-saving, recruit and keep talents. According to Denton (2006), there

is a wide range of potential relevant performance measures that organizations could

use. Other useful measures might include labor, productivity, efficiency and employee

turnover, inventory, and percentage increase in inventory turns. Other scholars such as

Nash & Quinn (2006) also proposed the concept of the relationship between total

salary and revenue, and to labor cost.

Recruiting and retention are also the issue that scholars concerned (Winkler, 2005, Gibson & Cook, 2005), especially facing the aging workforce society.

Furthermore, in anticipation of an aging workforce, human resource (HR) executives are taking a variety of approaches, including succession planning, transmission of business wisdom through benefit design and retention programs for older workers (Arnone, 2006). Employee benefits are an essential and costly component of the compensation and human resources management system (Roberts, 2001). In a word, the increasing focus on talent shortage as well as the steady decline of company loyalty as a means of retaining such expertise has reinvested the traditional HR or performance consultant role in both areas with greater urgency (Buchen, 2006).

Due to the emphasis on talent, today’s authorities are as likely to “buy in”

expertise form outside, often on a short term basis in order to solve a particular problem, as to employ people on their own account (Pollitt, 2006). Moreover, Pickett (2005) indicated the concept “learning capacity” that learning capacity is an organization’s overall ability to learn and innovate- and ultimately, at achieve a continual level of improvement. Hence training, development, and innovation must be valued and supported in order for an organization to have the capacity to respond to changing conditions and consistently achieve strategic goals.

Many approaches for improving operational performance advocate employee

involvement. Effective labor relations practices are critical because they directly

determine labor costs, firm productivity, profits, and the level of sustainable

competitive advantage (Katz & Elsea, 1997). Examples are routinely used in

industry for improving safety performance, such as workgroup-behavioral safety

programs, communication-toolbox talks, consultation-safety committees, and

financial-safety performance incentives (Fuller, 1999). There is also another

mechanism called employee assistance programs (EAP), supported by expert

counseling, are being increasingly developed (Berridge, 1990). In such programs, employers acknowledge that an employee’s work performance may suffer because of work-related or external personal problems that require outside assistance and that employers have some responsibility to make such help available.

From above relevant study, the issue of labor cost, recruit and keep talent in the, employee’s development, benefit and employee relations are the main perspectives to reflect the importance of HR, therefore, the researcher generated six KPI categories which may have significant and critical relationship to human resource management, the six categories are labor costs coded as A, recruiting indicators coded as B, retention indicators coded as C, HRD indicators coded as D, benefit cost coded as E and employee relations coded as F.

Key Performance Indicators on Human Resource Management

On the other hand, the researcher also search for other study about key performance indicators under above six categories to construct an instrument of KPIs on HRM for domestic insurance companies, the KPIs generalized by the researcher is as follows.

A. Labor Costs

A-1 HR cost rate (Denton, 2006).

A-2 Labor productivity (Denton, 2006).

A-3 Proportion of total salary to revenue (Nash & Quinn, 2006).

A-4 Net income per employee (Winkler, 2005).

A-5 Proportion of total salary to labor cost (Nash & Quinn, 2006).

A-6 Proportion of total salary to overtime pay (Nash & Quinn, 2006).

B. Recruiting Indicator B-1 Hire rate (Winkler, 2005)

B-2 Recruiting time (Gibson & Cook, 2001).

B-3 Recruiting effectiveness (Gibson & Cook, 2001) B-4 Recruiting cost (Gibson, & Cook, 2001).

B-5 New employee turnover (Winkler, 2005) B-6 Quality of hire (Winkler, 2005).

B-7 Outsourcing and Contractor Proportion (Hsu & Wu, 2006).

C. Retention Indicator

C-1 Turnover rate (Winkler, 2005).

C-2 Headcount (Winkler, 2005).

C-3 Retention rate (Waldman & Arora, 2004).

C-4 Total turnover and new-hire turn over cost (Waldman & Arora, 2004).

D. HRD Indicator

D-1 Implementation of annual training plans (Pickett, 2005).

D-2 Proportion of annual training cost to revenue (Cagno, Giulio & Trucco, 2004).

D-3 Proportion of annual training cost to total salary (Cagno, Giulio & Trucco, 2004).

D-4 Proportion of annual training cost to labor cost (Cagno, Giulio & Trucco, 2004).

D-5 Annual training cost per employee (Brightman, 2004).

D-6 Proportion of annual trained employee to all employees (Brightman, 2004).

D-7 Annual total training hours (Pickett, 2005).

D-8 Annual total trainees (Pickett, 2005).

D-9 Annual employees’ average training hours (Pickett, 2005).

D-10 Annual executives’ average training hours (Pickett, 2005).

D-11 Average of trainee’s satisfaction of the training class (Andrew, 1993).

D-12 Proportion of internal lectures to total employees (Stephen, Mcintosh, Page &

Hall, 1993).

D-13 Proportion of certification to total employees (Pollitt, 2006).

E. Benefit Cost

E-1 Proportion of benefit cost to labor cost (McDonnell & Salisbury, 2005).

E-2 Proportion of benefit cost to salaries (McDonnell & Salisbury, 2005).

E-3 Proportion of employee welfare committee budget to benefit cost (McDonnell &

Salisbury, 2005).

E-4 Proportion of paid leave to benefit cost (McDonnell & Salisbury, 2005).

E-5 Proportion of insurance cost to benefit cost (McDonnell & Salisbury, 2005).

E-6 Proportion of reserve for employee retirement for benefit cost (McDonnell &

Salisbury, 2005).

E-7 Team insurance context and cost (Su, Ronald, Mitchell & Sirgy, 2007).

E-8 Proportion of reserve for employee retirement pension to practical pension (Kalten & Stinchcomb, 2007).

E-9 Proportion of the labor and capital benefit cost pension and practical pension (Kalten & Stinchcomb, 2007).

E-10 Budget of year-end activity or annual activity (Su, Ronald, Mitchell, & Sirgy, 2007).

E-11 Extra benefits context and cost for executives (Posner, 2003).

E-12 Benefit context and cost for overseas employees (Posner, 2003).

F. Employee Relations

F-1 Employee satisfaction (Wagar, 1998).

F-2 The Dispute times between the labor and capital (Sue & Dean, 1993).

F-3 Times of employee counseling (Berridge, 1990).

F-4 Times of problem solving for employees (Berridge, 1990).

F-5 Times of employee complaint (Hallier & James, 2000).

F-6 Numbers of employee’s proposal (Fuller, 1999).

F-7 Times of interaction between employee and labor union (Moore, 2006).

F-8 Times of interaction between employee and employee welfare committee (Moore, 2006).

F-9 Average absence rate (Winkler, 2005).