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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
- Multiple back-office groups spread across various locations
- Various process and governance policies per location or group
- Subpar satellite offices lacking clear leadership
- No clear key performance indicators for management
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.
- Identify the most complex areas of your business or business unit and attempt to standardize processes if possible.
- Gain an understanding of your per policy costs and cycle time (time to issue from initial submission). In order to do so keep in mind variances such as location , sales channels and product line. Your goal is to obtain a benchmark you can use for future improvement.
- Review the operating model by reviewing the processes in place across groups, locations and employee skills. There is no magic bullet here, instead use the data you gathered to identify where standardization can be introduced.
- Leverage digital tools to help ease communication across groups, reduce cycle time between teams and customers, and automate repetitive low value tasks.
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.