expense reduction in the insurance industry · pdf file© 2013 towers watson. all rights...

© 2013 Towers Watson. All rights reserv ed.

Expense Reduction in the Insurance Industry

David Holland

27/3/2013

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Agenda

The Need for Expense Reduction in Insurance

l Pressures on insurers’ resultsl Market activity

Industry Expense Levelsl High level view of trendsl Closer look at the UK life market

Towers Watson Approach

l Drivers of controllable costl Cost reduction leversl Outsourcing and offshoringl Lessons learnedl Actuarial considerations

1


According to Alun Blinder (professor of Economics at Princeton)…

In a 2007 working paper, Alan Blinder assessed the “offshorability” of 800 U.S. occupations and estimated that between 22% and 29% of all

U.S. jobs were potentially offshorable.

Q1) Where did insurance claimsand policy processers rank?1. Top 100 (easiest 100

occupations to outsource)2. 100 – 4003. 400 – 7004. Bottom 100 (most difficult 100

occupations to outsource)

Q2) Where did actuaries rank?1. Top 100 (easiest 100



2


The Need for Expense Reduction in Insurance

3


Pressures on insurers’ results

l Impact of global financial crisis on consumer finances

l Fall in volume of new business across industry leading to unsustainable unit costs

l Growing threat to life business from substitute asset management products

l Increasing compliance costs driven by new solvency regime requirements

l Changing consumer demand towards more capital-intensive products

l Low investment return environment will impact top-line income

Market Factors — Life Market Factors — P&C

l Impact of global financial crisis on consumer finances

l Claims inflation driven by rise in bodily injury claims

l Growing levels of organised fraud and uninsured driving

l Increasing compliance costs driven by new solvency regime requirements

l Margin pressures driven by increasing presence and success of aggregators

l Low investment return environment continues to impact top-line income

THE NEED FOR EXPENSE REDUCTION IN INSURANCE

4


This is nothing new

Cyclical Upward Pressure on Expenses

Ever expanding expense

base

Poorly implemented technological

change

Growing regulatory and

compliance demands

Inaccurate or inflexible MI

Strategy shift not reflected in

changes to operational

activity

Silo or arbitrary decision making

Culture focussed on

top-line results


5


<€50M€50 –

€100M€100 –€150M

€150 –€200M >€200M

(Reported) market activity

Source: Company accounts, Towers Watson research.

Outsource

Offshore

IT Efficiency

Restructuring

Automation

Target Savings


6


Industry Expense Levels

7


Comparison of UK and Irish Life Insurance Expense Ratios

Ratios may not be perfectly comparable —but indicatively, ratios are high in both markets

INDUSTRY EXPENSE LEVELS

8


A closer look at the UK Life market

l Figures shown use aggregate expenses and number of policies for selected companies

l Per policy acquisition and management expenses are on the rise

l 13.4% compound annual growth rates

l Median expenses per policy show a similar pattern

l Large companies exhibited huge variation in 2009 and 2011

l Large companies defined at top 10% by in-force premium income each year

INDUSTRY EXPENSE LEVELS

9


Towers Watson’s Approach

10


Long-term, strategically aligned cost reduction

Strategicassessment

Core competencyidentification to provide context and challenge

Diagnostics

Identification and prioritisation of cost

reduction opportunities

Implementation

Planning, quick wins, refinement and embedding

Changemanagement

Building confidence,

changing culture

TOWERS WATSON’S APPROACH

11


Drivers of controllable costVolume of activity

Level of complexity

Process inefficiency

Duplication of activities

Weak procurement

Outdated/poorly designed IT systems

Misaligned compensation strategy

Manual processing

Low productivity

Spend on non-core business competencies

Spend on unvalued customer services

Operational Inefficiency — traditional focus

Strategic Misalignment — often ignored factors

Poor cost control culture

Inefficient organisational design and structure

Spend associated with superseded propositions or strategy

l Uncompetitive or inflexible outsourced contracts and arrangements

l Overlap of responsibility and activity between risk management, actuarial and MI teams

l Convoluted workarounds to facilitate legacy IT systemsl Frequent and ad hoc use of spreadsheet modelling and

analysisl Lack of centralisation of routine business processes that

span several locationsl Poor management understanding of drivers and

destroyers of valuel High-level or inaccurate expense analytics and

monitoringl Weak or unclear expense control responsibility and/or

accountabilityl Lack of clarity in project/functional/personal objectives

l Low volume product classes aligned with customers outside of target market

l Commercial activity and marketing spend associated with non-core distribution channels or agents


12




Strategicassessment


Diagnostics



Implementation


Changemanagement


changing culture

13


Cost reduction levers

Bus

ines

s M

odel

Channel rationalisation

Business mix restructuring

Divestiture

Ope

ratin

g M

odel

Centralisation of business functions

Outsourcing and offshoring

Improved procurement

IT system improvements

Cor

e Pr

oces

ses Eliminate unnecessary activity

Increase level of automation

Improve business process efficiency

Red

uce

Cur

rent

O

utgo Project rationalisation

Reduce discretionary spend


14


Impact assessment

Key enablers of high quality assessment

Robust MI

Deep understanding of expense analysis

l Sufficiently granular

l Understand cross-subsidies

l Manage through the project

l Fixed vs. variable

l Initial vs. renewal

l Approximations and arbitrary allocations

l Capacity models

Don’t ignore intangible assets…

People and talentManagement time and disruptionBrandProject and operational risk

…or stakeholder implications

CustomersShareholders and analystsDistributors and suppliersRegulator

Business Case

l Strategic impact

l Projected P&L impact

l Cash flow impacts

l Capital impact

l Risk impact

l Qualitative impact


15


Increasing reliance on outsourcing and offshoring

l Language and culture matterl Regulation and tax laws may limit

choicesl Decision can be driven by desire

to gain expertise, access to capital or scale

l Potentially significant arbitrage opportunities exist

l Divide major IT processes up into specialised and focussed components

l Award contracts to several providers — including in-house team

l Keep contract terms short to maintain control and ensure flexibility

l Design contracts to encourage competitive behaviour

Insurance Industry FactorsLessons from Other Industries


16


To outsource or not to outsource?

What are the non-quantifiable consequences of outsourcing?

How sure can we be that our needs won’t change?

Is this capability, system or process genuinely strategic?

What in-house staff do we need to negotiate strong contracts?

Can it be separated and what disruption will we face?

What are the customer impacts of any change?

Should we be building this capability in-house?


17




Strategicassessment


Diagnostics



Implementation


Changemanagement


changing culture

18


Implementation and change management go hand in hand

l Project governance and robust programme management are essentiall Plan to implement cost reduction initiativesl Plan to manage financial impacts

l Redundancy payments will have a significant cash flow and capital impactl Impact on pension fund will be a key assessmentl IT consolidation or improvements can mean significant upfront investmentsl Accounting treatment of long-term lease commitments can be significant

l Plan to manage non-tangible assetsl PR and communications (internal and external) are critical for brand and buy-inl Retention planningl Talent indexl Manage business disruption and loss of capacity during interim project period


19


Typical cost reduction timeline

0 2 months 4 months 6 months 8 months 10 months 12 months

Strategic assessment

Diagnostics and detailed planning

Effective change management

Quick wins

Implement key cost reduction initiatives, including necessary refinements


20


Some lessons learned

l Strategyl Big choices and trade-offs — key decisions should align with the strategy

l Focus on all of your assets, not just those you can value

l Financiall Clear understanding of the P&L impact of decisions

l Early focus on potential accounting and tax issues

l Program managementl Ring-fence the project as far as possible

l Keep executive team engaged and think hard about when to include senior management

l Be smart and with timing and messaging of internal and external communications

l Build a culture focussed on process efficiency and smart innovation

Be ambitious but be brave — this is difficult and very real


21


Actuarial considerations

l Per head, the actuarial teams (pricing, reserving, capital modelling) are very expensive!

l There will be opportunities to reduce costs in the actuarial teamsl Getting the right IT systems and software will make a difference

l Having strong controls on the use of spreadsheets can limit rework and duplication

l Manual processing can and should be limited

l Process mapping and documentation can be extremely revealing

l And we can sometimes seek perfection when pragmatism would suffice

l And there is often duplication of effort with other teamsl Pricing and MI/claims insight teams

l Risk management and reserving

l Clarity of timelines and deliverables also applies to actuaries!


22


According to Alun Blinder (professor of Economics at Princeton)…

In a 2007 working paper, Alan Blinder assessed the “offshorability” of 800 U.S. occupations and estimated that between 22% and 29% of all

U.S. jobs were potentially offshorable.

Q1) Where did insurance claimsand policy processers rank?1. Top 100 (easiest 100



Q2) Where did actuaries rank?1. Top 100 (easiest 100



Low 20s ! 5th !!!!!!!!!

23


Questions

24

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