There are very few ways a C level executive of a mature insurance business can dramatically change the cost structure of their business today. The current economic climate forces agencies, MGA’s and insurers to face challenges including low interest rates, greater price transparency, few growth opportunities and sector consolidation. This has resulted in the management of costs as a key competitive advantage.
McKinsey & Company conduct an annual survey of the insurer space and concluded that there were significant cost differences between top-quartile companies and those at the bottom of the stack. With differences as high as 60 percent across various functions. We believe similar statistics and cost drivers affect the insurance distribution channel.
The report offers many valuable insights. The biggest lesson is that the largest cost base for most companies is operations and IT. Typically accounting for 40-60 percent of a companies cost base for the under-performers. For those involved in P&C, size, sales channel, product mix and geography accounted for about 20 percent variance; while meaningful it shows that the majority of improvement can come from other areas.
Ok, enough metrics, so what are the key causes of cost differences? For the majority of firms the drivers are business complexity, operating models and IT.
Firms with very large product mixes, many sales channels and multiple brands tend to be the ones that have higher cost bases. This might be evident in your firm by the existence of a multitude of product options, of which only a few are actually sold and/or desired by the existing customer base and custom commission agreements with your brokers or distribution base.
Simplifying your product offering and standardizing distribution agreements into tiers can help simplify business complexity.
Operating model issues arise after a company has reached a point where there are multiple operating units. This is most evident post a-series acquisitions or after aggressive geographic expansion. An example of an inefficient operating model might be
The issues listed above are a recipe for backlogs, poor internal communication, customer dissatisfaction and eventually less sales.
Auditing satellite office performance by using sales, operational analytics or insurance dashboards can aid in quickly identifying sub par performance.
The primary reason IT is still an issue within many insurance distribution businesses is due to the costs associated with the maintenance, support and training associated with multiple legacy IT systems. Consolidating and modernizing the IT tools used by the entire company usually results in simplified processes, much higher levels of automation and a faster time to market for new products.
The worst performing firms actually saw high IT spend with very little productivity gains while the ones with a lower cost base used IT to help streamline the policy administration process and reduce the amount of staff needed for each policy.
Now that we’ve identified the root causes our advice for CIO’s and COO’s is to do the following to begin to identify cost reduction opportunities.
If you’d like to learn more about using IT to simplify and modernize your business reach out to our sales team by contacting us.
BindHQ helps MGAs, MGUs, and Wholesalers modernize and unite agent portals, consolidate underwriting data, and streamline back office and insurance CRM into one frictionless cloud-based platform.
BindHQ is the AMS 2.0—changing the underwriting process, one insurance binder at a time.