Many life insurers have already undertaken rapid, one-time cost takeouts in the aftermath of the 2008 downturn. However, there are still numerous opportunities for strategic cost reduction throughout the value chain.
[For more on how life insurers must navigate today's uniquely challenging economic conditions, see 6 Action Items for Life Insurers .]
We have identified at least six major areas in which life insurers can achieve major cost reductions while improving the strength and flexibility of their product offering:
1. Operating models: Over time, many life insurers have allowed their operating models to become unnecessarily complex and duplicative. Non-integrated acquisitions, standalone businesses and independent distribution channels all contribute to higher costs and overall inefficiency. Rationalizing operating models creates more opportunities for platform consolidation and data migration solutions to reduce technology costs and streamline operations. We believe that life insurers still have some distance to go to achieve standardized, simplified and integrated processes across the value chain, especially for underwriting, claims and policyholder functions.
2. Variable cost structures: Instead of a high fixed-cost base, life insurers should experiment with more variable cost structures (which can also provide greater flexibility in response to changing market conditions, such as fluctuations in transaction volumes and policy numbers). More life insurers need to consider business process outsourcing (BPO) and other alternative sourcing mechanisms.
3. Process automation: Life insurers still lag in automating basic processing. At the very least, a straight-through processing (STP) model should progress applications from underwriting to issuance with a minimum of manual intervention. At the next level, e-applications and jet underwriting and issuance should make these processes essentially automatic and significantly reduce the cost per policy.
4. Marketing and distribution: Life insurers need better "bang for the buck" in terms of marketing and distribution. Better data collection and processing supporting more advanced analytics can lead to better leads and more successful cross-selling and up-selling. At the same time, the application of analytics to the recruitment and selection of talent can help identify high-potential candidates for the sales force. On average, less than 15 percent of candidates joining life insurance sales forces make it through their first five years now; the insurer that can move the needle by five percentage points will have a tremendous cost and sales advantage.
5. Market segmentation: Life insurers have traditionally been comfortable with a mass-market, "one size fits all approach" to product development. The use of digital marketing can allow life insurers to focus effectively on niche markets such as diversity markets, affinity markets or single-family households. In addition to tailoring marketing messages and products to narrow demographics, the online and social media channels can also provide a tailored customer experience. The online distribution channel can also create more of a demand or "pull" model with less reliance on a face-to-face meeting with a sales representative.
6. Product flexibility: Insurers should be able to restructure products efficiently and bring new products to market more quickly, especially in light of changing market and regulatory conditions. New products should be developed and delivered in weeks, not months, reflecting revised pricing factors based on market conditions. Of course, insurers also need the flexibility to adapt their funding and investment strategy to newly introduced products while providing the regulatory support needed to adapt to tax and regulatory changes.
From a strategic perspective, cost reduction and cost avoidance are essential parts of an overall drive toward high performance for life insurers. While insurers may have already addressed some of the most obvious aspects of cost reduction, the benefits from greater efficiency in areas such as marketing and distribution, market segmentation, and product segmentation remain largely unexplored. Life insurers that establish and maintain a keen focus on these areas as part of a comprehensive approach to operations transformation, product improvement and cost reduction will be in a much better competitive position than carriers that continue attacking costs with a tactical, case-by-case approach.
About the Author: Brian DeMaster is a senior executive in Accenture's insurance practice.