Friction Gap Overview for Salesforce Account Executives 2025-02-13 - Google Docs

Friction Gap Overview for Salesforce Account Executives 1. Understanding the Friction Gap Definition: Friction Gap – The impact of imperfect processes, systems, and business practices on both the loss and expense ratios of an insurer. The friction gap applies to both Property/Casualty insurers and Life insurers. However, life insurers however do not use the Combined Ratio to measure their performance. We are working on a model that will resonate with Life insurers since they face the same “Friction” issues as P/C insurers, they just don’t have a comparable metric to the combined ratio that can be easily used to describe their challenges. Why It Matters to Insurers: ● Property Casualty insurers rely on a few related key financial metrics: ○ Loss Ratio : The percentage of premiums paid out in claims. Is equal to losses paid divided by premium. ○ Expense Ratio : The percentage of premiums spent on administrative costs (salary, commissions, real estate, IT, accounting, etc). It is equal to expenses paid divided by premium. ○ Combined Ratio = Loss Ratio + Expense Ratio (A measure of overall profitability). If the ratio is under 100, the insurer is running with an “underwriting profit”. If it is over 100, the insurer is running at an “underwriting loss” ○ Investment Income - insurers invest reserves which results in investment income. This is not taken into account when calculating the combined ratio. If an insurer has a combined ratio over 100 (an underwriting loss), investment income often can cover that loss if it is not that significant. Insurers do not want to rely on investment income to make them whole because it is not something that they can count on. When interest rates were at zero percent, investment income was hard to come by. Smart insurers work diligently to keep their combined ratio under 100 and do not want to rely on investment income to support insurance operations.