insurance market, cost containment has become vital. Despite this,
two studies conducted by Deloitte have revealed that many insurers
are falling short of efficiency levels that can be attained by
harnessing technology more effectively. Charles
Davis reports
Despite the focus on internal cost reduction in the US life
sectors, benchmarking studies from professional services firm
Deloitte identified much more to be done, particularly in the areas
of operations and IT. Deloitte’s 12th annual life and annuity
back-office operations benchmarking studies, Lions 2007 and Aces
2007, provide comparative analysis widely used by insurance
companies to benchmark expenses. The analysis covers a variety of
topics including efficiency, effectiveness, key trends, use of IT
and business performance.
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“Given the increasingly competitive and slow growth environment for
life insurance products, cost containment through operational
efficiency is considered a top priority for executives,” said Joe
Guastella, national leader for Deloitte’s insurance consulting
group. “But it is vital executives recognise that success depends
not just on committing to increase efficiencies – it also requires
focusing on the ones that have the most impact.”
The studies found that while life insurers have made some progress
with respect to cost cutting and increased efficiencies, there is
opportunity for more reductions, especially in the acquisition of
new business lines.
More efficient cost containment
Leading cost-cutters demonstrate the potential for other insurers.
The studies found that the three companies that comprise the lowest
cost group in US life are more than 20 percent more efficient in
terms of cost containment than the average, with a potential
savings opportunity of about $30 million for every $1 billion in
total annual premium.
The results show that there continue to be opportunities for
insurers to improve customer service performance, and that by
reducing service delivery time through greater use of call centres
and online channels, they can obtain significant cost savings
currently unrealised. The studies identify several other areas
where insurers can improve efficiency, from exploring additional
outsourcing opportunities to addressing legacy systems and
expanding use of differentiated service, whereby incoming service
inquiries are routed to various channels.
Because expenses are evenly divided among new business, customer
service operations and related information technology, insurers
must manage the entire business process model with an eye toward
maximising efficiency, and not just one area, the studies
stressed.
The studies found a strong correlation between costs and delivery
time. Insurers with lower cost structures have faster service
delivery time and higher issue rates by face amount than the
studies’ group overall, a clear demonstration of how delivery
efficiencies create advantages throughout the company. Overall, the
studies found that US life insurers are not meeting their own
standards when it comes to efficiency in customer service delivery.
As they begin to focus on the broader middle market, insurers will
face lower margins and thus operational efficiency will be the key
variable in wringing profit from that sector. The numbers, in terms
of customers, will grow, but the profitability per customer will
narrow, so improving performance becomes even more critical.
“Annuity sales have experienced explosive growth over the short
term, which may be masking underlying efficiency issues,” said
Richard Roth, practice leader for Deloitte’s global benchmarking
group. “While it can be challenging to try to determine where a
system can be made more efficient right when it’s being taxed the
most, that is exactly the time to seek out the disconnects and
redundancies because they are magnified.”
Opportunities to improve efficiency
The studies revealed several other areas that offer annuity
providers the opportunity to improve efficiency, including reducing
the not-in-good-order rate in the policy portfolio by addressing
root causes and expanding the use of straight-through processing
(STP).
The studies point to the lingering effect of legacy system
maintenance expenses as a major constraint on the willingness of
insurers to invest in enhanced IT capabilities. When companies make
discretionary IT investments, they tend to invest in new business
applications, forgoing the less exciting but arguably important
investments in customer service technology. The result is the high
cost of operating legacy customer service systems, which the
studies identified as a major drag on efficiency. “The main
difference we see between annuity providers over life insurers is
that there is a larger percentage of discretionary spend among
annuities providers,” the researchers wrote.
The result is that annuity providers are able to invest more in
discretionary customer service IT than life insurers.
The STP revolution
STP promises to revolutionise the business, as the studies show
that huge savings could be realised relatively quickly. The life
insurance and annuity business is virtually the last industry to
apply STP solutions to its operational infrastructure. This is due
largely to product complexity with an evolving array of riders,
service features and fund offerings. In addition, the products must
have multiple versions based on state regulation.
In the third-party distribution space, annuities are receiving the
most focus, with life insurance a distant second. Products such as
long-term care will take a back seat until annuity processing can
make significant headway. Collaborative initiatives through
standards organisations and industry associations are focused
primarily on annuity STP, specifically for new business
processing.
At the same time, most insurers have multiple platforms, operated
in many system languages, and many have older legacy systems that
are not as flexible as needed for internet services and real-time
design. Insurers’ existing technology can make the job of
implementing a solution across systems, product lines and
distribution channels very challenging. Newer technologies lend
themselves to integration capabilities that allow many systems to
work together through translation software, but because they are
newer technologies, resources must be hired and/or educated, and
this slows implementation.
Since it touches many processes, it’s tempting to view STP
implementation as an enterprise-scale undertaking, and while
tackling STP as a single, organisation-wide initiative potentially
delivers the biggest cost savings, it can be done incrementally as
well.
