03.07.2015 – Today´s economic climate confronts insurers with a multitude of challenges. As a result, the profitability of life and property-and-casualty (P&C) players is barely above the cost of equity. In a current survey McKinsey & Company uncovers how to reduce insurance operating expenses.
Business complexity, operating model, IT landscape, and performance management: These four distinct root causes explain both the large remaining cost-level disparities and why insurers fail to optimize immutable cost drivers.
- Business complexity: Business complexity related to brands, sales channels, product mix, or customer-facing processes is an important driver of operating costs and limits insurers’ ability to leverage economies of scale. As a result, insurers with large product portfolios and multiple brands and channels are also those with the highest costs on average.
- Operating model: High-cost players tend not to have consolidated or optimized the setup of their operating units. They may have back-office functions distributed across numerous locations with different processes and governance structures. Workload backlogs may occur in conjunction with underutilization, leading to a drop in customer satisfaction and deteriorating financial performance. Addressing these issues requires a comprehensive examination of the operating model, including processes, location footprint, supporting technology, employee skills, sourcing, and organization and governance structures.
- IT systems: A fragmented legacy IT landscape is often a root cause for failing to leverage economies of scale, driving high IT costs as well as mushrooming operational costs. When comparing the number of policies per full-time employee in operations for both life and P&C with IT spending per full-time employee, insurers with complex legacy systems tended to have both high IT spending and low productivity, while those with streamlined IT managed to achieve high productivity with limited IT expenditure.
- Performance management: Performance management drives cost outcomes across all areas. According to McKinsey&Company there is a frequent lack of rigorous performance management, resulting in costs rising again just a few years after the implementation of cost-reduction measures. A sustainable performance-management approach means changing mind-sets and behaviors, defining new performance metrics and targets, designing new processes, and establishing performance dialogues.
Most of the cost differences among companies actually relate to management. Factoring in these imperatives allows insurers to do much more than just improve their expense ratios: it will give them the freedom to make the investments they need to continue to compete on the global stage.
About the authors: Björn Münstermann is a principal in McKinsey’s Munich office, Georg Paulus is a specialist in the Frankfurt office, and Ulrike Vogelgesang is a senior expert in the Hamburg office.
Full article version: Successfully reducing insurance operating costs: Insights from McKinsey’s Insurance 360° benchmarking (PDF)