Strategic Planning of Central American Insurers

Author(s): Israel Unterman

Source: The Journal of Risk and Insurance, Vol. 44, No. 3 (Sep., 1977), pp. 425-434
Published by: American Risk and Insurance Association
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 Strategic Planning of Central American Insurers
ISRAELUNTERMAN

ABSTRACT

This paper presents the results of an exploratorystudy describing a

group of Central Americaninsurersin their beginning efforts using the
management tool of strategic planning. The unique characteristicsof
the CentralAmericanenvironmentand their effect upon strategic plan-
ning are explored and analyzed. This analysis leads to a set of recom-
mendations for those corporateexecutives and academiciansconcerned
with insurance and reinsurancecompanies in Central America.

Among the many research problems of investigating the application

and/or the limitations of application are two; the definition of the tool and
the accumulation of empirical data that are valid and meaningful.
Academic literature (1) and industry speeches (2) present an array of
nomenclature 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 prior
investigation (3). Strategy is defined as "the pattern of major objectives,
purposes or goals, and the essential policies and plans for achieving those
goals, stated in such a way as to define what business the company is in
or 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 characteristics
mentioned by practitioners and academicians (5). Furthermore the defini-
tion is appropriate for this study as it enables the researcher to make some
comparison between the United States and Central American companies.

The Strategic Framework

The 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 Formulation
1. 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 State

University and was formerly Professor at Instituto Centroamericanode Administracion
de Empresas (INCAE), Managua, Nicaragua. The author thanks two anonymous
referees for helpful suggestions in preparing this paper for final publication.
( 425 )
426 The Journalof Risk and Insurance
3. 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 in
order to aid an organization derive a series of goals and objectives. To do
so, 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 weaknesses
in 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 tasks
2. Reorganization of the structure
3. Redefining at all levels of the reward and punishment systems
4. Restructuring of systems for management selection and training
5. Restructuring of management succession
6. Changing of control and information systems as well as a formal
review or evaluation of the systems.
These subdivided tasks of the implementation process are to be related
directly to the selected objectives and goals. The degree of articulation
of the efforts of formulating a series of critical objectives (those objectives
which affect the future of the entire organization) and the actions of man-
agement in implementing the policies for achieving the selected objectives
may be designated as the degree of purposeful planning (7).

The Intent
The 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 outlined
strategic framework. To classify the strategic segments within similar group-
ing, such as environmental or internal resources, and to attempt to limit or
set some parameters around these strategic groupings definitions are neces-
sary. As strategic planning is a general management tool it is difficult if
not contraproductive to set narrow or rigorous definitions (8). Yet for
evaluation and comparison, limits are required. It wvasdeemed advisable
first to ask each of the company executives to list his or her major cor-
poration problems. These problems then could be classified and dovetailed
to the equivalent segments of the strategic framework. By gathering data
as to the activities of the insurers in resolving these specific problems, some
comparison among insurers can be made of the degree of purposeful plan-
ning.
 Strategic Planning of Central American Insurers 427
The Sample
The original intended methodology of research was ill advised as it was
based upon the North American insurance environment. The cultural dif-
ferences (and perhaps the sample size) of the Central American insurers
put severe restraints upon the accumulation of pertinent data as designed.
(See section on findings.) However the specific cultural differences in
Central American insurance management did give rise to a series of critical
problems which affected the use of strategic planning as a management
tool. These critical problems were identified through personal interviews
with 17 executives.
With the cooperation of the Instituto de Seguros de Centroamerica y
Panama (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 and
Haiti. The estimate was that there were 2$ "national" insurers in this
geographic area and more than 30 multinationals. An attempt was made
to limit the study only to nationals, those insurers controlled by more than
50 percent of their own citizens. It was found that ownership of stock was
not a true measure of control.
In order to include in the survey only those insurers which could control
their planning, it was decided to select among those Central American
executives or officers who participated in an advanced management seminar
sponsored by ISCAP. The officers of ISCAP believed that these participants
were either the decision makers or assistants to the chief executive officers
of the insurers which were concerned with strategic planning. While 19
executives of national insurers attended the seminar, only 17 responded to
the questionnaire. It is pertinent to note that 14 (56 percent of this popula-
tion) answered the question on strategic planning. The background and
status of these executives are shown in Exhibit 1.

Incidence of Planning
Only two insurers in the sample were, by their own definition, using a
system of strategic planning. Both had begun such planning within the
previous two years. The executives of these insurers had learned of this
management 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 planning
that could be designated, by prior definition, as purposeful planning. Both
insurers were among the largest in assets and insurance in force, for the
insurance industry in their respective countries.
As for the other Central American insurers in the study, nine others had
some formalized system for market planning and cost budgeting. Many
of these systems were borrowed intact from property and liability re-
insurers. Relatively few in this group were using the marketing systems of
life reinsurers. The intensity of market planning varied considerably with
428 The Journalof Risk and Insurance
Examrr 1
Executive Titles of the Participants
19 participants
17 respondents
Number of
Positions Participants
President ... . .................................. 1
Vice President ...1............................... l
Members of the Board of Directors................. 1
General Manager* ... ........................... 7
Assistant Manager ... ........................... 1
Division Manager ... . ........................... 1
Assistant Division Manager........................ 1
Actuary... .................................... 1
Comptroller... . ................................ 1
Department Head ... ........................... 1
Branch Manager ... ............................. 1

TOTAL ..................................... 17
? This is the American equivalency of President or Chief
Executive Officer.
Educational Level
4 Graduate School
11 College
Educational Fields (some have 2)
1. Business Administration ... ............... 10
2. Economics.................... 7
3. Mathematics ... ................ 3
4. Law ................... 1
5. Medicine ... ................ 1
the personal objectives of the Gerente General (General Manager), the
equivalent to the Chief Executive Officer (in U.S.A.). A review of the
annual statements of all insurers in the study revealed no mention of plan-
ning or of any specific commitment to future sales or growth.

Interview Findings
In personal interviews with 17 Central American executives, the impres-
sion obtained was that relatively few of them had heard of or had read
about strategic planning as a management tool. Many took the position
that only market planning was necessary for their insurers. They felt that
additional planning would be too time consuming and expensive. The
most frequent set of reasons given for abstaining from purposeful planning
pertained to the unique characteristics of the Latin American insurance
industry. These characteristics include:

(a) The significance of national politics. Apparently politics and political

change are the strongest factors impinging upon the daily operations and
growth of the insurers. Such changes are not limited to historical revolu-
tions. For example, many countries have instituted agrarian reform. These
reforms usually imply a distribution of land to small farmers. In one coun-
 Strategic Planning of Central American Insurers 429
try the reform law is so worded that insurers believe that they no longer
can 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 the
Banks (who supervises insurers). The reply was that a number of times
during one year no one knew who was the Superintendent. New govern-
ment officials would not inform the insurers specifically who was or would
be making the decisions pertaining to the industry. This procedure seemed
akin to a "Catch-22".
(b) The nationalistic laws. Closely related to the political pressures is
the characteristic nationalism. One insurer is among the oldest nationalized
insurers in the world. (However, all reinsurance is with private insurers
and 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, "a
substantial proportion of insurer assets must be invested in relatively low
yielding obligations of government or governmental agencies. Thus 60
percent of the [assets offsetting] technical reserves of life insurers and 55
percent for general insurers, must be so invested." (9) (Words in italics
added since reserves cannot be invested.)
For most of the countries in the study a series of nationalistic regulations
infringe upon many operational decisions. In addition to investments, the
nationalities of employees, the amount of reinsurance, the kinds of insur-
ance and the members of the board of directors all are limited by strongly
worded nationalistic administrative decrees. (In one case a verbal order
was issued from El Presidente). In sharp contrast is a country which has
little regulation of insurers. The Gerente of one of the insurers in this
country stated that the growth and profitability of his insurer is due to the
lack of government interference. (Unfortunately two weeks later this execu-
tive was exiled from his country because he also was an officer in the
Chamber of Commerce.
(c) The dependence upon "Grupos." One of the unusual financial traits
of the insurers in the study is their dependence upon groups of wealthy
families or "Grupos" for both capital and markets. Within each of these
countries a number of leading business and/or political families exists. In
one country the number of major groups is estimated as three (10). These
families not only own the local industries but also control many of the
multinational franchises. As the families often intermarry, the business
interrelationships are formalized with a holding company, typically under
a banking umbrella. The insurer either is bought or formed to accommodate
the captive market of the multi-family businesses and of the political power
wielded by multinational companies.
As a result some insurance Gerentes are powerless or at least limited in
making major growth decisions for their insurers. Furthermore, the Grupos
control most if not all of the major venture capital of their countries. It is
not unusual for these groups to expect a rate of return on venture capital
430 The Journalof Risk and Insurance
of 25 to 60 percent annually. Patently the controlled insurers cannot expect
such a large return under normal circumstances. Hence all Gerentes
vociferously complain that insurance is a stepchild. (However, when asked
to list or write their most important problems, capitalization needs were
ignored. (See Exhibit 2).
EXHIBIT 2
Questionnaires Completed
Central American and Caribbean companies (17 replies)
#1. List the five most important problems that you will have to overcome
next year.
Number of
Problems Insurers
1. Process mechanization ... . ................................... 8
2. Organization (verification of information and control systems). 8
3. Human Resources (administrative personnel, selection, evaluation
and training). 8
4. Sales (sales projections and strategy). 7
5. Budgets (income and expenditures). 7
6. Congruence between government plan and the orientation of
the business ........... ............................... 4
7. Diversification of new insurance lines according to market needs ... 3
8. Better service to clients....................................... 3
9. Technical improvement in the line of automobiles................. 3
10. Improvement in profits of holding companies .................... 2
11. Geographic decentralization of agencies......................... 2
12. Selection and training of new agents. 2
13. Increase in the competition .................................... 2
14. Reduction in operating costs................................... 2
15. Credit system ... ........................................... 2
16. Better condition in re-issuing of contracts .. ...................... 2
17. Rates system ... ............................................ 2
18. Industrial insurance market ... . ............................... 1
19. Personnel relations ... . 1
#2. Are you doing "Strategic Planning"?
Yes No Did not answer
2 12 3
#3. (A) Are you projecting your market sale and sales efforts?
Yes No Did not answer
11 4 2
(B) How do you do it?
1. Statistical models 4
2. Managerial criteria 4
3. Gross domestic product 2
4. Gross national product 1
#4. Do you have an Expense Budget?
Yes No Did not answer
11 4 2
#5. Do you have projections for a loss ratio?
Yes No Did not answer
9 5 3
Source: Members of ISCAP (Instituto de Seguros de Centroamericay Panama),
Managua, Nicaragua, January, 1976.
 Strategic Planning of Central American Insurers 431
(d) The dependence upon reinsurers. Related to the insufficiency of
capital is the characteristic of relatively high levels of reinsurance. The
Gerentes 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) . . . Depending
upon the historical experience of the general reinsurers, some have found
the Latin-American market accommodating. Stated from their viewpoint,
"if the treaties emanate from developing countries with historical profitable
property loss ratios . . . Ceding commissions in the neighborhood of 50
equal 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 educated
and trained managers, in particular middle-management. In many of the
insurers visited, the Gerente and only one or two other executives has had
some insurance education. The Instituto Centroamericano de Adminis-
tracion de Empresas (INCAE), a school founded with the help of the
Harvard Business School, offers an MBA in general management. However,
no insurance courses are offered. "Insurance education, where it exists, is
informal and tends to be acquired through experience. Formal vocational
insurance training through company sponsored schools does not exist." (13).
The Latin insurers do use materials of LOMA and LIMRA for their life
divisions. American insurers operating in Latin America also use the same
sources, "Training material has been drawn from LIMRA courses and con-
verted to the Company's specific needs. It has all been prepared in the
Spanish language" (14). Yet, such activities are not similar in the property
and liability areas. Instead of combined association training, a strong
tendency for the insurers in the study is to rely on the reinsurers for both
technical and management training. This reliance is particularly apparent
among the Central American insurers and they are influenced by the
European reinsurers.
As noted, insurers are not the only organizations lacking management
training. One Superintendent of Banks and Insurance explained that his
government had sent an employee to the States for two years of insurance
studies. Upon graduation, the employee became the chief examiner of
property and liability insurers. After one year at home, the educated em-
ployee, not suprisingly, left the government for a more lucrative position
with 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 to
the researcher is the incidence of catastrophes in Central America. Within
a four-year period, the geographic area experienced two earthquakes both
with an 8 + rating on the Richter Scale, and a hurricane. These catastrophes
were added to a series of floods as well as major fires. The ability of the
insurers to pay for the damages of these disasters has become a major
concern of the governments as well as of the business communities. Further-
more, expectations of future disasters is driving property and liability rates
432 The Journal of Risk and Insurance
higher than the rates of inflation. Therefore the disaster experiences also
solidify the dependence of these countries upon reinsurance.

Prescriptive Suggestions
Given the set of unique characteristics of Central American insurers
and the executives feelings that these characteristics obviate the need for
strategic planning, a series of prescriptive activities was suggested to the
executive council of the insurance association (ISCAP).

(a) A seminar led by executives of the two insurers which have a formal
planning system. The system could be described and illustrated both in
specific quantitative terms and the flexibility or method of adaptation to
the changing political and other environmental factors unique to Central
America.
(b) A film on planning and simulation could be presented. This film
was made with the cooperation of IBM and LOMA. It shows the activities
of the executives of a life insurer in preparing a strategic plan for the
company. The use of computer simulation is suggested as an integral part
of decision making. One limitation of this film for Central America is that
only two of the insurers in the sample were using a computer. (However
many other executives stated their companies were in the process of
computerization.)
(c) A visit to the home offices of some of the North American insurers
which have formalized their planning systems could be of help to the
Central American executives. Such visits would reveal that strategic plan-
ning is a relatively recent management tool for United States insurers. (In
1968 a research study (15) of life insurers in the U.S. revealed that no more
than four or five were doing any "purposeful planning".) The North
American 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 Central
American executives would transfer some of the technical knowledge
needed for planning. Mr. Grode pioneered the use of planning tools for the
U.S. life insurers. He fostered the publication of a series of LOMA case
studies on corporate planning (16). These studies include data describing
procedures and systems for planning.
(e) A series of workshops should be conducted by an educator or a
consultant seasoned in the practice of strategic planning. In such a work-
shop the Central American executives could explore the beginnings or
formats of a strategic plan. Within small group discussions they could de-
vise and debate various approaches to planning. Furthermore with the
guidance of the educator they could formulate and articulate the outline
of 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
 Strategic Planning of Central American Insurers 433
lack of such knowledge is not unlike the situation in the United States ten
years ago. Through the efforts (18) of a trade association, a number of
educators 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 to
strategic planning. However, most of the CEO's are unfamiliar with this
management tool and its application to environmental factors. Although
there is an insufficient time period for hard evidence to support the con-
clusion, the few Central American insurers which do have formal planning
programs 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 purposeful
planning in Central American insurers will follow the direction of that of
the 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 planning
gradually will be disseminated and utilized by Central American insurers.
The normative approach to strategic planning used in this study is so
recent (relatively) that few research studies have been concluded to support
and demonstrate the viability of the total model. A number of studies have
tested parts or elements of the model (19). The Central American insurers
were 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 researcher
to monitor the changes in corporate activities over the years. Should such
research continue over a ten-year period evidence might be provided as
to the degree of effectiveness of the model for purposeful strategic planning.

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