Finding cost savings
A new survey of retail insurers across the Bahamas, Bermuda and Cayman Islands, conducted by EY, has revealed a number of steps carriers can take to transform their operating models and improve their efficiency.
According to the survey, customer services and claims management are the largest and most costly functions, but also offer the most significant cost-saving opportunities for firms in the property/casualty and life & health sectors.
The survey also found a large disparity in the size of these functions from firm to firm, indicating varied operating models and opportunities for greater efficiency.
“With new business in the market remaining relatively flat, and insurers seeing increasing pressure on margins, the ability of companies to achieve greater operational efficiency and scale their core functions up and down effectively will have the greatest impact on competitiveness and cost control,” says Philip Burrill, partner in EY’s Assurance practice.
“We are pleased to offer a unique set of benchmarks for the retail insurers across the region that will allow local insurance providers to draw comparisons with their peers across the region and help identify improvement opportunities.”
The 2014 EY Cost Benchmarking Survey, which polled 19 different regional insurance companies with premiums between $10 and $150 million and ranging in size from 10 employees to more than 150, did not find a strong correlation between the scale of insurer and its level of efficiency.
While several larger participants operate with a low expense ratio, scale alone is not the only factor influencing overall efficiency.
“A larger policy base can provide an opportunity to offset fixed costs and drive scale economies, but these efficiencies will not be realised unless the underlying operating model is well structured and scalable and functions are managed to make the most efficient use of people, facilities and resources,” says Craig Russell, senior manager in EY’s Advisory practice.
“To fully realise cost and efficiency benefits, successful insurers will need to develop a new operating strategy on a regional basis, rather than running end-to-end local business units.” Philip Burrill
The survey also found that spend on information technology (IT) functions was only the sixth highest element of the cost base, ranking lower than customer service, claims, finance, underwriting and executive costs. While for some firms, this may be an indicator of efficiency, there is a potential risk of under investment in IT, as more regional insurers invest in modern policy and claims platforms and make increasing use of digital channels for customer sales and services.
High spend on underwriting functions was found, with fewer than half of the survey participants deploying an underwriting operations team.
“Those that have shifted work into the ‘underwriting back-office’ are making more efficient use of valuable underwriting talent and creating more scalable and efficient operating models that ultimately improve their expense ratio,” says Russell.
Use of actuaries
Across the region there is also very limited use—and in many cases, no use—of actuaries in the underwriting and pricing process. The global trend has been for personal lines and small commercial lines products to become increasingly commoditised, with insurers making extensive use of sophisticated, automated, data-driven pricing models.
Greater use of actuaries by the regional insurers could increase the sophistication of pricing models while at the same time making more efficient use of underwriters to work on the higher value, more complex business.
One significant variation identified by the survey is in the area of facilities cost per person. This is partly due to a significant differential between property costs in the Bahamas, Bermuda and Cayman Islands. But there is also a broad variation in the cost of facilities within countries, highlighting the potential for savings through either rent negotiations and/or restructuring the location footprint of major operations.
Most insurers with a presence in multiple countries across the Bahamas, Bermuda and Cayman Islands, have full end-to-end operations within each country, but may benefit from a move towards a shared services model. While some firms have corporate functions, underwriting and IT services provided by regional centres of excellence, limited examples exist of fully regional shared services for core operations such as customer service, claims and finance. Moreover, these functions are the largest and most costly for the majority of survey participants, accounting for between 50 and 60 percent of costs.
“To fully realise cost and efficiency benefits,” says Burrill, “successful insurers will need to develop a new operating strategy on a regional basis, rather than running end-to-end local business units, and consider designing centres of excellence and shared services in the most efficient and appropriate locations.”
Philip Burrill is a partner in EY’s Assurance practice. He can be contacted at email@example.com
Craig Russell is a senior manager in EY’s Advisory practice. He can be contacted at firstname.lastname@example.org