Strategic Planning of Central American Insurers

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Strategic Planning of Central American InsurersAuthor(s): Israel UntermanSource: The Journal of Risk and Insurance, Vol. 44, No. 3 (Sep., 1977), pp. 425-434Published by: American Risk and Insurance AssociationStable URL: http://www.jstor.org/stable/252200 .

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Strategic Planning of Central American InsurersISRAELUNTERMAN

ABSTRACTThis paper presents the results of an exploratorystudy describing agroup of CentralAmericaninsurersin their beginning effortsusing themanagement tool of strategic planning. The unique characteristicsofthe CentralAmericanenvironmentand their effect upon strategicplan-ning are explored and analyzed.This analysis leads to a set of recom-mendations for those corporateexecutives and academicians concernedwith insuranceand reinsurancecompanies in Central America.

Among the many research problems of investigating the applicationand/or the limitations of application are two; the definition of the tool andthe accumulation of empirical data that are valid and meaningful.Academic literature (1) and industry speeches (2) present an array ofnomenclature for planning, such as long range, medium range, corporate,tactical, environmental, and so on. In reviewing the Central American in-surers the definition selected for this study is one that was used in a priorinvestigation (3). Strategy is defined as "the pattern of major objectives,purposes or goals, and the essential policies and plans for achieving thosegoals, stated in such a way as to define what business the company is inor is to be in and the kind of company it is or is to be." (4) This definition(although imperfect) seems to encompass many of the characteristicsmentioned by practitioners and academicians (5). Furthermore the defini-tion is appropriate for this study as it enables the researcher to make somecomparison between the United States and Central American companies.

The Strategic FrameworkThe authors of the definition have also developed a framework for deriv-ing a strategic plan. The framework is divided into two interrelated sections:formulation and implementation. Briefly stated these divisions are:A. Strategy Formulation1. Environments-Economic, social, political markets, industry com-petition and products.2. Resources-managerial, financial and technical.Israel Unterman, D.B.A., is Visiting Professor of Management, San Diego StateUniversity and was formerly Professor at Instituto Centroamericanode Administracionde Empresas (INCAE), Managua, Nicaragua. The author thanks two anonymousreferees for helpful suggestions in preparingthis paper for final publication.

( 425 )


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426 The Journal of Risk and Insurance3. Values-personal aspirations, attitudes toward risks and non-economic issues including social responsibilities.

The data (or input) of this section of the framework are analyzed inorder to aid an organization derive a series of goals and objectives. To doso, the suggested approach is to:

a. Analyze and define the opportunities and risks in the environment.b. Analyze and define the competence, or strengths and weaknessesin the use of these resources.c. Analyze and define the values perceived by the leaders of the or-ganization.d. Integrate the analyses of the foregoing subdivisions into a multi-level series of goals and objectives.B. Policy Implementation

1. Assignment of specific tasks2. Reorganization of the structure3. Redefining at all levels of the reward and punishment systems4. Restructuring of systems for management selection and training5. Restructuring of management succession6. Changing of control and information systems as well as a formalreview or evaluation of the systems.These subdivided tasks of the implementation process are to be relateddirectly to the selected objectives and goals. The degree of articulationof the efforts of formulating a series of critical objectives (those objectiveswhich affect the future of the entire organization) and the actions of man-agement in implementing the policies for achieving the selected objectivesmay be designated as the degree of purposeful planning (7).

The IntentThe intent of the researcher is to explore the activities of Central Amer-ican insurers, gather data and evaluate the comparative degree of pur-poseful planning for each of the insurers. The empirical data can be iden-tified, classified and compared to the segments of the previously outlinedstrategic framework. To classify the strategic segments within similar group-ing, such as environmental or internal resources, and to attempt to limit orset some parameters around these strategic groupings definitions are neces-

sary. As strategic planning is a general management tool it is difficult ifnot contraproductive to set narrow or rigorous definitions (8). Yet forevaluation and comparison, limits are required. It wvasdeemed advisablefirst to ask each of the company executives to list his or her major cor-poration problems. These problems then could be classified and dovetailedto the equivalent segments of the strategic framework. By gathering dataas to the activities of the insurers in resolving these specific problems, somecomparison among insurers can be made of the degree of purposeful plan-ning.


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Strategic Planning of Central AmericanInsurers 427The Sample

The original intended methodology of research was ill advised as it wasbased upon the North American insurance environment. The cultural dif-ferences (and perhaps the sample size) of the Central American insurersput severe restraints upon the accumulation of pertinent data as designed.(See section on findings.) However the specific cultural differences inCentral American insurance management did give rise to a series of criticalproblems which affected the use of strategic planning as a managementtool. These critical problems were identified through personal interviewswith 17 executives.With the cooperation of the Instituto de Seguros de Centroamerica yPanama (ISCAP), a questionnaire was sent to the corporate members.Their membership included the countries of Guatemala, Nicaragua, Pan-ama, El Salvador, Honduras, Costa Rica, the Dominican Republic andHaiti. The estimate was that there were 2$ "national" insurers in thisgeographic area and more than 30 multinationals. An attempt was madeto limit the study only to nationals, those insurers controlled by more than50 percent of their own citizens. It was found that ownership of stock wasnot a true measure of control.In order to include in the survey only those insurers which could controltheir planning, it was decided to select among those Central Americanexecutives or officers who participated in an advanced management seminarsponsored by ISCAP. The officers of ISCAP believed that these participantswere either the decision makers or assistants to the chief executive officersof the insurers which were concerned with strategic planning. While 19executives of national insurers attended the seminar, only 17 responded tothe questionnaire. It is pertinent to note that 14 (56 percent of this popula-tion) answered the question on strategic planning. The background andstatus of these executives are shown in Exhibit 1.

Incidence of PlanningOnly two insurers in the sample were, by their own definition, using asystem of strategic planning. Both had begun such planning within theprevious two years. The executives of these insurers had learned of thismanagement tool while attending seminars sponsored by European re-insurers. In describing the kinds of activities involved in planning, both

Central American insurers had become active in all aspects of planningthat could be designated, by prior definition, as purposeful planning. Bothinsurers were among the largest in assets and insurance in force, for theinsurance industry in their respective countries.As for the other Central American insurers in the study, nine others hadsome formalized system for market planning and cost budgeting. Manyof these systems were borrowed intact from property and liability re-insurers. Relatively few in this group were using the marketing systems oflife reinsurers. The intensity of market planning varied considerably with


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428 The Journalof Risk and InsuranceExamrr 1

Executive Titles of the Participants19 participants17 respondents

Number ofPositions ParticipantsPresident .... .................................. 1Vice President ...1............................... lMembers of the Board of Directors................. 1General Manager* ... ........................... 7Assistant Manager ... ........................... 1Division Manager... . ........................... 1Assistant Division Manager........................ 1Actuary... .................................... 1Comptroller.... ................................ 1Department Head ... ........................... 1BranchManager ... ............................. 1

TOTAL..................................... 17? This is the American equivalency of President or ChiefExecutive Officer.Educational Level

4 Graduate School11 CollegeEducationalFields (somehave2)1. Business Administration... ............... 102. Economics.................... 73. Mathematics ... ................ 34. Law................... 15. Medicine ... ................ 1

the personal objectives of the Gerente General (General Manager), theequivalent to the Chief Executive Officer (in U.S.A.). A review of theannual statements of all insurers in the study revealed no mention of plan-ning or of any specific commitment to future sales or growth.

Interview FindingsIn personal interviews with 17 Central American executives, the impres-

sion obtained was that relatively few of them had heard of or had readabout strategic planning as a management tool. Many took the positionthat only market planning was necessary for their insurers. They felt thatadditional planning would be too time consuming and expensive. Themost frequent set of reasons given for abstaining from purposeful planningpertained to the unique characteristics of the Latin American insuranceindustry. These characteristics include:

(a) The significance of national politics. Apparently politics and politicalchange are the strongest factors impinging upon the daily operations andgrowth of the insurers. Such changes are not limited to historical revolu-tions. For example, many countries have instituted agrarian reform. Thesereforms usually imply a distribution of land to small farmers. In one coun-


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Strategic Planning of Central American Insurers 429try the reform law is so worded that insurers believe that they no longercan accept any of the farm buildings as an insurance risk.A Gerente (President) was asked if the insurance industry of that coun-try had lobbyed or contested the actions of the Superintendent of theBanks (who supervises insurers). The reply was that a number of timesduring one year no one knew who was the Superintendent. New govern-ment officials would not inform the insurers specifically who was or wouldbe making the decisions pertaining to the industry. This procedure seemedakin to a "Catch-22".(b) The nationalistic laws. Closely related to the political pressures isthe characteristic nationalism. One insurer is among the oldest nationalizedinsurers in the world. (However, all reinsurance is with private insurersand salespersons are compensated on a commission basis.) The other coun-tries, with one exception, have national ownership and investment regula-tions similar to those of Venezuela (8) and Colombia. For example, "asubstantial proportion of insurer assets must be invested in relatively lowyielding obligations of government or governmental agencies. Thus 60percent of the [assets offsetting] technical reserves of life insurers and 55percent for general insurers, must be so invested." (9) (Words in italicsadded since reserves cannot be invested.)

For most of the countries in the study a series of nationalistic regulationsinfringe upon many operational decisions. In addition to investments, thenationalities of employees, the amount of reinsurance, the kinds of insur-ance and the members of the board of directors all are limited by stronglyworded nationalistic administrative decrees. (In one case a verbal orderwas issued from El Presidente). In sharp contrast is a country which haslittle regulation of insurers. The Gerente of one of the insurers in thiscountry stated that the growth and profitability of his insurer is due to thelack of government interference. (Unfortunately two weeks later this execu-tive was exiled from his country because he also was an officer in theChamber of Commerce.(c) The dependence upon "Grupos."One of the unusual financial traitsof the insurers in the study is their dependence upon groups of wealthyfamilies or "Grupos" for both capital and markets. Within each of thesecountries a number of leading business and/or political families exists. Inone country the number of major groups is estimated as three (10). Thesefamilies not only own the local industries but also control many of themultinational franchises. As the families often intermarry, the businessinterrelationships are formalized with a holding company, typically undera banking umbrella. The insurer either is bought or formed to accommodatethe captive market of the multi-family businesses and of the political powerwielded by multinational companies.As a result some insurance Gerentes are powerless or at least limited inmaking major growth decisions for their insurers. Furthermore, the Gruposcontrol most if not all of the major venture capital of their countries. It isnot unusual for these groups to expect a rate of return on venture capital


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430 The Journalof Risk and Insuranceof 25 to 60 percent annually. Patently the controlled insurers cannot expectsuch a large return under normal circumstances. Hence all Gerentesvociferously complain that insurance is a stepchild. (However, when askedto list or write their most important problems, capitalization needs wereignored. (See Exhibit 2).

EXHIBIT 2QuestionnairesCompleted

Central Americanand Caribbeancompanies (17 replies)#1. List the five most important problems that you will have to overcomenext year.

NumberofProblems Insurers1. Process mechanization.... ................................... 82. Organization (verification of information and control systems). 83. Human Resources (administrativepersonnel, selection, evaluationand training). 84. Sales (sales projections and strategy). 75. Budgets (income and expenditures). 76. Congruencebetween governmentplan and the orientation ofthe business ........... ............................... 47. Diversificationof new insurance lines according to market needs ... 38. Better service to clients....................................... 39. Technical improvementin the line of automobiles................. 310. Improvement in profits of holding companies .................... 211. Geographic decentralization of agencies......................... 212. Selection and training of new agents. 213. Increase in the competition .................................... 214. Reduction in operating costs................................... 215. Credit system ... ........................................... 216. Better condition in re-issuing of contracts.. ...................... 217. Rates system ... ............................................ 218. Industrialinsurancemarket ... . ............................... 119. Personnel relations ... . 1

#2. Are you doing "StrategicPlanning"?Yes No Did not answer2 12 3#3. (A) Are you projecting your market sale and sales efforts?

Yes No Did not answer11 4 2(B) How do you do it?1. Statistical models 42. Managerial criteria 4

3. Gross domestic product 24. Gross national product 1#4. Do you have an Expense Budget?

Yes No Did not answer11 4 2#5. Do you have projectionsfor a loss ratio?

Yes No Did not answer9 5 3Source: Members of ISCAP (Instituto de Seguros de Centroamericay Panama),Managua, Nicaragua, January, 1976.


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Strategic Planning of Central American Insurers 431(d) The dependence upon reinsurers. Related to the insufficiency ofcapital is the characteristic of relatively high levels of reinsurance. TheGerentes speak of reinsuring 50 to 90 percent of the property and liability

business. "Reinsurance on individual life was almost universally the con-ventional yearly renewable term, individual cessions" (11) . . . Dependingupon the historical experience of the general reinsurers, some have foundthe Latin-American market accommodating. Stated from their viewpoint,"if the treaties emanate from developing countries with historical profitableproperty loss ratios . . . Ceding commissions in the neighborhood of 50equal 52.5 percent plus 20 percent profit commission are not unusual" (12).(e) The lack of experienced or trained management. One of the wide-spread problems of all Latin American industry is the lack of educatedand trained managers, in particular middle-management. In many of theinsurers visited, the Gerente and only one or two other executives has hadsome insurance education. The Instituto Centroamericano de Adminis-tracion de Empresas (INCAE), a school founded with the help of theHarvard Business School, offers an MBA in general management. However,no insurance courses are offered. "Insurance education, where it exists, isinformal and tends to be acquired through experience. Formal vocationalinsurance training through company sponsored schools does not exist." (13).The Latin insurers do use materials of LOMA and LIMRA for their lifedivisions. American insurers operating in Latin America also use the samesources, "Training material has been drawn from LIMRA courses and con-verted to the Company's specific needs. It has all been prepared in theSpanish language" (14). Yet, such activities are not similar in the propertyand liability areas. Instead of combined association training, a strongtendency for the insurers in the study is to rely on the reinsurers for bothtechnical and management training. This reliance is particularly apparentamong the Central American insurers and they are influenced by theEuropean reinsurers.As noted, insurers are not the only organizations lacking managementtraining. One Superintendent of Banks and Insurance explained that hisgovernment had sent an employee to the States for two years of insurancestudies. Upon graduation, the employee became the chief examiner ofproperty and liability insurers. After one year at home, the educated em-ployee, not suprisingly, left the government for a more lucrative positionwith an insurer. The government agency then was without anyone educated

in the technical aspects of this insurance area for an additional two years.(f) Incidence of major disaster. One of the characteristics evident tothe researcher is the incidence of catastrophes in Central America. Withina four-year period, the geographic area experienced two earthquakes bothwith an 8 + rating on the Richter Scale, and a hurricane. These catastropheswere added to a series of floods as well as major fires. The ability of theinsurers to pay for the damages of these disasters has become a majorconcern of the governments as well as of the business communities. Further-more, expectations of future disasters is driving property and liability rates


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432 The Journal of Risk and Insurancehigher than the rates of inflation. Therefore the disaster experiences alsosolidify the dependence of these countries upon reinsurance.

Prescriptive SuggestionsGiven the set of unique characteristics of Central American insurersand the executives feelings that these characteristics obviate the need forstrategic planning, a series of prescriptive activities was suggested to theexecutive council of the insurance association (ISCAP).(a) A seminar led by executives of the two insurers which have a formalplanning system. The system could be described and illustrated both inspecific quantitative terms and the flexibility or method of adaptation to

the changing political and other environmental factors unique to CentralAmerica.(b) A film on planning and simulation could be presented. This filmwas made with the cooperation of IBM and LOMA. It shows the activitiesof the executives of a life insurer in preparing a strategic plan for thecompany. The use of computer simulation is suggested as an integral partof decision making. One limitation of this film for Central America is thatonly two of the insurers in the sample were using a computer. (Howevermany other executives stated their companies were in the process ofcomputerization.)(c) A visit to the home offices of some of the North American insurerswhich have formalized their planning systems could be of help to theCentral American executives. Such visits would reveal that strategic plan-ning is a relatively recent management tool for United States insurers. (In1968 a research study (15) of life insurers in the U.S. revealed that no morethan four or five were doing any "purposeful planning".) The NorthAmerican executives could explain and illustrate their problems with en-

vironmental factors such as legislators and regulatory agencies.(d) A visit of Murray Grode, Vice-President of LOMA with the CentralAmerican executives would transfer some of the technical knowledgeneeded for planning. Mr. Grode pioneered the use of planning tools for theU.S. life insurers. He fostered the publication of a series of LOMA casestudies on corporate planning (16). These studies include data describingprocedures and systems for planning.(e) A series of workshops should be conducted by an educator or aconsultant seasoned in the practice of strategic planning. In such a work-shop the Central American executives could explore the beginnings orformats of a strategic plan. Within small group discussions they could de-vise and debate various approaches to planning. Furthermore with theguidance of the educator they could formulate and articulate the outlineof a strategic plan (17) that befits their corporate needs.Conclusion

Central American insurance executives, with some exceptions, are un-familiar with the general management tool of strategic planning. Their


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Strategic Planning of Central American Insurers 433lack of such knowledge is not unlike the situation in the United States tenyears ago. Through the efforts (18) of a trade association, a number ofeducators and consultants, and some leading insurer executives, the atti-tudes of the U.S. insurers toward strategic planning changed.The unique characteristics of the environmental factors in Central Amer-ica seem to many of the executives in the sample to be a deterrent tostrategic planning. However, most of the CEO's are unfamiliar with thismanagement tool and its application to environmental factors. Althoughthere is an insufficient time period for hard evidence to support the con-clusion, the few Central American insurers which do have formal planningprograms appear able to carry out their programs effectively while work-ing within the same environmental constraints applying to the other in-surers.Therefore, this researcher believes that the incidence of purposefulplanning in Central American insurers will follow the direction of that ofthe United States insurers. With the impetus provided by ISCAP, LOMA,reinsurers, educators and the leading Latin American executives, the knowl-edge and techniques of the general management tool of strategic planninggradually will be disseminated and utilized by Central American insurers.The normative approach to strategic planning used in this study is sorecent (relatively) that few research studies have been concluded to supportand demonstrate the viability of the total model. A number of studies havetested parts or elements of the model (19). The Central American insurerswere selected for study because of the infrequency of strategic planning,the impact of the unique environmental characteristics upon any planning,and the small size of the total population involved, enabling a researcherto monitor the changes in corporate activities over the years. Should suchresearch continue over a ten-year period evidence might be provided asto the degree of effectiveness of the model for purposeful strategic planning.

REFERENCES1. Ansoff, Igor. Corporate Strategy, (New York: McGraw-Hill, 1965). Ansoff,Hayes and Declerck. From Strategic Planning to Strategic Management,(New York: John Wiley, 1976). Ewing, David. The Human Side of Plan-ning, (New York: Macmillan, 1969). Glueck, W. F. Business Policy:Strategy Formation and Management Action, (New York: McGraw-Hill,1972). Mintzberg, Henry. The Nature of Managerial Work, (Harper &Row, 1973). Mintzberg, Henry. "Patterns in Strategy Formation." Workingpaper, McGill University, Montreal, Canada, (1976). Steiner, George. Top

Management Planning, (New York: Macmillan, 1969). Steiner, George."Comprehensive Managerial Planning", Planning Executives Institute, Ox-ford, Ohio, (1972).2. Clark, Leavitt, Steiner. "Corporate Planning", LOMA, New York, (1975).Darrow, Morton R. "The Futures and Life Insurance", Prudential Life,Newark, (1972), unpublished. Grode, M. T. "The Internal Auditor", July(1968). Ordematt H. "El Concepto Planificacion de CSR", Swiss Re, Zur-ick, (1972). unpublished.3. Unterman, Israel. "Comparative Strategies of Life Insurance Companies",Harvard Graduate School of Business, Boston, (1968), unpublished disser-tation.


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434 The Journal of Risk and Insurance4. Christensen,Andrews and Bower. Business Policy, (Homewood, Illinois:RichardD. Irvin, 1973).5. Ansoff et al, and Clark, Leavitt, et al, op. cit.6. Bower, Joseph. "Managingthe Resource Allocation Process", Division ofResearch,Harvard,Boston, (1970).7. Unterman,Israel. op. cit.8. Mintzberg,Henry. "Policyas a Field of ManagementTheory",Academy ofManagementReview, (January,1977).9. Greene,Mark H. "Insuranceand Nationalismin Colombia",Best's Review,(June 1976).

10. Strachan,Harry. Family and Other Business Groupsin EconomicDevelop-ment, (New York: Praeger, 1976).11. Robbins, Edward, "Life Operationsin Latin America",LOMA, New York,(1975).12. Parker,Henry. "StructuringInsuranceOperationsOverseas",Best's Review,New Jersey, (January1976).13. Greene,Mark.op. cit.14. Fridley, Richard M. "MarketingOverseas Products",LOMA, New York,(1975).15. Unterman,Israel. op. cit.16. "Creatinga CorporatePlan for a Life InsuranceCompany",LOMA, (1970).

"OperatingUnder the Annual and Long Range CorporatePlan", LOMA,New York, (1973).17. Unterman, Israel. "ComparativeStrategic Planning", Harvard School ofBusiness,Boston, (1977), ICH 9, 377, 648.18. Unterman,Israel. op. cit.19. Montzberg,Henry. op. cit.

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