Actuarial Notes

SWOT Analysis

Study guide: Exam DISC-RM

SWOT Analysis is a strategic planning method that lists an organization's strengths and weaknesses, which are internal to it, and the opportunities and threats in its environment, which are external, so that its strategy can be built from the match between the two. It is one of the two methods for analyzing an insurer's environment in strategic management, beside Porter's Five Forces, which gives the structured view of the external half.

\text{Factor} \in \begin{cases} \text{S} & \text{internal, helpful} \\ \text{W} & \text{internal, harmful} \\ \text{O} & \text{external, helpful} \\ \text{T} & \text{external, harmful} \end{cases}

\begin{aligned} &\{\text{S}, \text{W}\} \times \{\text{O}, \text{T}\} \\ &= \{\text{SO}, \text{ST}, \text{WO}, \text{WT}\} \end{aligned}

  • Symbols: The first relationship is the whole classification: every factor is placed by two questions, whether it is inside the organization or outside it, and whether it helps or harms the organization's goals. The second gives the four pairings of an internal list with an external one, which is where the strategic options come from: a strategy is built from the match between the two, not from either list alone.
  • Strengths and weaknesses: These are the organization's own resources and capabilities relative to its competitors, such as its capital, brand, distribution, underwriting and claims expertise, data, systems, expense ratio and people. A strength is only a strength if it is better than what competitors have or matters to customers.
  • Opportunities and threats: These come from the external environment: customers, competitors, regulation, the economy, technology, society and the physical environment. The organization can't control them, only respond to them. The five forces give a structured way to find them in the industry, and a scan of the wider environment finds the rest.
  • Matching the lists: Pairing the quadrants turns a SWOT into strategic options, sometimes called a TOWS matrix. Strength-opportunity options use a strength to pursue an opportunity, strength-threat options use a strength to defend against a threat, weakness-opportunity options fix a weakness so as to pursue an opportunity, and weakness-threat options limit exposure where a weakness meets a threat.
  • Place in strategic management: The SWOT comes after the insurer sets its mission and goals and before it chooses a strategy. Its results feed the choice of strategy at the corporate and business levels (Corporate-Level Strategy, Business-Level Strategy), and it is repeated as conditions change.
  • Limits: Internal and external factors must not be confused, so a strength is not listed as an opportunity, and an opportunity must not be confused with the strategic move that would exploit it: an untapped market is the opportunity, and entering it is the move. SWOT is a relatively simple tool, best used to generate ideas rather than as a rigorous method for selecting strategies, so its results are a starting point for crafting strategy, not an ending point.

A SWOT for a Regional Homeowners Insurer A regional mutual insurer writes homeowners insurance in one western state through independent agents. With illustrative facts: it has a 70-year reputation for fair claims handling, a strong surplus and loyal agents. Its policy administration system is outdated, it has little catastrophe modelling expertise, and 40% of its policies are in areas exposed to wildfire. National insurers are withdrawing from wildfire-exposed areas, demand for homeowners coverage there is unmet, regulators are allowing wildfire mitigation discounts, reinsurance for wildfire is getting more expensive, and an insurtech is offering instant online quotes in the state. Prepare a SWOT and one option from each pairing.

Answer

  • Strengths: Its claims reputation, strong surplus and loyal agents.
  • Weaknesses: Its outdated system, thin catastrophe modelling expertise, and the concentration of its book in wildfire areas. The concentration is internal, because it describes the insurer's own portfolio, even though wildfire itself is external.
  • Opportunities: The unmet demand left by national insurers withdrawing, and the approval of mitigation discounts.
  • Threats: The rising cost of wildfire reinsurance and the insurtech competitor.

Pairing the quadrants gives options:

  • Strength-opportunity: Use its surplus and agents to write selected business the national insurers are leaving, priced with mitigation discounts that reward safer homes.
  • Strength-threat: Use its claims reputation in its agents' selling, since the insurtech competes on convenience but has no claims record.
  • Weakness-opportunity: License a catastrophe model or hire modelling staff before growing in wildfire areas, so the new business is priced and selected well.
  • Weakness-threat: Limit concentration in the most exposed areas and buy reinsurance before costs rise further, and replace the policy system so agents can quote as fast as the insurtech.

The SWOT does not choose among the options. The insurer weighs them against its goals and risk appetite, and growth into wildfire areas only makes sense together with the weakness-opportunity fix.

How it appears on the exam

  • DISC-RM: The strategic management section presents the five forces and SWOT as the methods for analyzing an insurer's environment. Questions give a fact about an insurer or its market and ask which quadrant it belongs in, or give a short case and ask which strategy best uses a strength to pursue an opportunity.
  • DISC-RM: The Porter's Five Forces page covers how the two methods combine. Questions that pair them ask candidates to place the forces' findings among the opportunities and threats.

Exam traps

  • Internal versus external: Ask whether the organization controls the factor. A competitor's new product, a regulation or a recession is external, so it is a threat or an opportunity, never a weakness, however much it hurts.
  • A portfolio fact is internal: The insurer's concentration of policies in an exposed area, its expense ratio and its loss experience describe the insurer itself, so they are strengths or weaknesses. The hazard behind them, such as wildfire, is external.
  • Relative to competitors: A capability every competitor also has is not a strength. A modern system is a strength only if it is better than the market's, or if customers value it.
  • SWOT is not the strategy: The four lists describe the situation. The strategy comes from pairing them and choosing, so an answer that stops at the lists hasn't answered a question asking for a strategy.