20 December 2011

Internal performance insurance markets

Here's an addition to my idea of improving utility performance by "importing" competition via insurance companies that compete to write policies:*

This insurance idea can be run inside a company with many operating locations (e.g., Veolia with water treatment plants all over the world).
  • It would treat each plant as a separate business, with a policy that might target water quality and a premium based on existing management.
  • The premium would rise or fall, depending on the inspections of outsiders (former water quality managers still working for the company).
  • All premia would go towards a fund to pay for lapses in quality. 
  • It would be important to consider the objectivity of inspectors and their premium reputations, since mistakes would be harder to overcome without some competition from another insurance company.
  • It may even be possible to allow OTHER managers to travel to "expensive" locations to recommend ways to improve operations and reduce premiums.
  • The complications of these overlapping roles are only possible if a company has enough staff and locations to keep them busy year-round. (These people already work on these problems, so it's a transformation of their work structure.)
This system would create higher-powered incentives that may improve performance over the current system of "informal" inspections and guarantees from the center to various divisions.

Bottom Line: Companies can use internal markets to improve their performance.

* They compete to offer low premiums on policies (to cover loss of service, poor quality, etc.) to water utilities but still need premiums to be high enough so they can stay in business. The resulting rate to customers (tariff + premium) reveals the overall quality of water management.

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