Sustainable Cost Reduction in Insurance

Sustainable Cost Reduction in Insurance

Insurers today face unprecedented challenges posed by the current economic environment and capital, risk management, regulatory, and financial repor ting requirements. As revenues diminish, the pressure on capital requirements rises and companies look for new ways to sustain competitiveness and protect shareholder returns. Insurers are examining their operating expenses and identifying opportunities to reduce costs that still support new business capabilities.

Organizations around the world are investing heavily in change programs; in the UK alone, financial services organizations spend approximately £5 billion to £7 billion on change every year. The nature of this spend varies widely –from regulatory and transformational programs to keeping the show on the road – but for many firms, the full potential value from this investment is not realized. Consequently, obtaining maximum business value for IT investments and cost-cutting initiatives is a critical imperative for insurers in the coming year.

Focus on Sustainable Cost Reduction

In this challenging economic environment, financial service providers are under pressure to achieve immediate cost reductions, but in their haste, many cost-cutting measures are put into practice without consideration for sustainability.

Insurers need to take an approach that does not begin (and end) with going after the obvious cost savings (see Figure 1). Once the low-hanging fruit has been picked, savings diminish and, more often than not, costs make their way back into the organization; to a certain extent, cost savings achieved in the short term eventually leak away.

Irrespective of the situation, arbitrary cost reduction is no longer sufficient and is even potentially damaging. What is needed is a more strategic approach, where cost cutting is part of a broader agenda.

Insurers should aim to launch parallel strategic efforts to achieve sustainable cost reduction and operating efficiencies while looking at cost reduction through the longer-term lenses of value, pace, and culture to ensure the effectiveness and sustainability of the approach. This view is more likely to embed cost reduction into company governance and controls, organizational culture, and management decision-making.

In our experience, the success of a cost reduction initiative can be attributed to the comprehensiveness of the approach and its dependence on critical inter-related factors such as the business operating model, cost culture, operational excellence, sales, and service capabilities, which affect every aspect of the business.

The motivation for adopting BPO depends on the maturity of the market. For more mature economies, the primary impetus is cost savings; for emerging markets, scale and skills are of greater concern.

o The U.S. and U.K. are mature BPO-buyer markets, accounting for approximately 90% of current deal activity. Cost savings are an important factor when choosing a vendor, as are variable cost structures and improved service levels.
o Europe is a mature insurance market, but legislation and cultural factors have prevented the broad adoption of BPO.
o For countries in Latin America or Asia-Pacific, such as India and China, non-cost reasons are important, particularly scaling insurance to meet exponentially growing markets.

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