Sustainable Cost Reduction in Insurance

Transcription

1 Sustainable Cost Reduction in Insurance Insurers today face unprecedented challenges posed by the current economic environment and capital, risk management, regulatory, and financial reporting requirements. As revenues diminish, the pressure on capital requirements rises and companies look for new ways to sustain competitiveness and protect shareholder returns. Insurers are examining their operating expenses and identifying opportunities to reduce costs that still support new business capabilities. Organizations around the world are investing heavily in change programs; in the UK alone, financial services organizations spend approximately 5 billion to 7 billion on change every year. The nature of this spend varies widely from regulatory and transformational programs to keeping the show on the road but for many firms, the full potential value from this investment is not realized. Consequently, obtaining maximum business value for IT investments and cost-cutting initiatives is a critical imperative for insurers in the coming year.

2 About the Author Vasanthi Jambulingam Vasanthi Jambulingam is a Lead Domain Consultant from TCS Insurance Practice with 15 years of experience in the insurance industry. While at TCS, she has worked in diverse areas such as consulting, presales, and asset development. Prior to joining TCS, Vasanthi worked as a life insurance subject matter expert in various global consulting assignments with insurance companies in the areas of core insurance solution implementations and business/it strategy implementations. She is a management graduate with specialization in finance and holds a Fellowship FLMI from LOMA U.S.A. as well as an Associate Diploma from Insurance Institute of India in Mumbai. 1

3 Table of Contents 1. Focus on Sustainable Cost Reduction 3 2. Strategic Cost Reduction Initiatives 5 3. ITO & BPO Offshoring Case Study 7 4. What TCS Offers 8 5. Conclusion 9 6. References 9 2

4 Focus on Sustainable Cost Reduction In this challenging economic environment, financial service providers are under pressure to achieve immediate cost reductions, but in their haste, many cost-cutting measures are put into practice without consideration for sustainability. Insurers need to take an approach that does not begin (and end) with going after the obvious cost savings (see Figure 1). Once the low-hanging fruit has been picked, savings diminish and, more often than not, costs make their way back into the organization; to a certain extent, cost savings achieved in the short term eventually leak away. Irrespective of the situation, arbitrary cost reduction is no longer sufficient and is even potentially damaging. What is needed is a more strategic approach, where cost cutting is part of a broader agenda. Insurers should aim to launch parallel strategic efforts to achieve sustainable cost reduction and operating efficiencies while looking at cost reduction through the longer-term lenses of value, pace, and culture to ensure the effectiveness and sustainability of the approach. This view is more likely to embed cost reduction into company governance and controls, organizational culture, and management decision-making. Cost reduction initiatives Business process improvement 77% Supplier cost reduction 60% IT optimization Headcount reduction Outsourcing 49% 47% 46% Training programs Retention programs 37% 33% Source: E&Y 0% 20% 40% 60% 80% Figure 1: Distribution of Cost Reduction Initiatives In our experience, the success of a cost reduction initiative can be attributed to the comprehensiveness of the approach and its dependence on critical inter-related factors such as the business operating model, cost culture, operational excellence, sales, and service capabilities, which affect every aspect of the business. 3

5 Outsourcing Trends As more firms look towards outsourcing as a cost reduction initiative, the core insurance BPO market is expected to rise from $5.2 billion in 2008 to $8.6 billion by 2013 (see Figure 2). Global Insurance BPO Market $10,000 $8,000 Millons $6,000 $4,000 $2,000 $ Europe North America Asia Pacific LATAM Africa Source: Celent Figure 2: Estimated Growth in Core Insurance BPO Market The motivation for adopting BPO depends on the maturity of the market. For more mature economies, the primary impetus is cost savings; for emerging markets, scale and skills are of greater concern. The U.S. and U.K. are mature BPO-buyer markets, accounting for approximately 90% of current deal activity. Cost savings are an important factor when choosing a vendor, as are variable cost structures and improved service levels. Europe is a mature insurance market, but legislation and cultural factors have prevented the broad adoption of BPO. For countries in Latin America or Asia-Pacific, such as India and China, non-cost reasons are important, particularly scaling insurance to meet exponentially growing markets. 4

6 Strategic Cost Reduction Initiatives A more comprehensive and strategic approach that goes beyond BPO can not only reduce costs, but also create an efficient organization positioned for growth. The concept entails broader ambitions and more far-reaching changes to both the current operating model and the existing organizational structure - in fact, throughout the value chain. Its aim is not simply to take out cost but to build capability that supports the business strategy. To accomplish this, insurers will need to identify the cost reduction approach that is best for them at the time - a discrete, short-term, cost-cutting measure designed to align the size of the business with the current environment or a more comprehensive approach to integrate and transform operations and reduce costs. While these actions are not mutually exclusive, it is critical to gauge how much change the organization is capable of absorbing before beginning rather than risk taking on too much. If adopting the strategic cost reduction approach, initiatives can be planned around the key areas of business. Overall, the initiatives should facilitate strategic imperatives to create focus, flexibility, responsiveness, and resilience across the IT organization and business operations. These cost reduction initiatives fall into the following broad categories: Operating Model Integration Organizational Streamlining Operational Excellence Streamlining New Business Acquisitions Process Optimization Applications Portfolio Optimization Selective Outsourcing Sales and Service Strategies Operating Model Integration Many insurance companies have significant opportunities to improve their cost structure by integrating their operating models. This opportunity lies within un-integrated acquisitions, line of business silos, and independent distribution channels, all of which are characterized by inconsistent structure, processes, measures, technologies, and business performance. Inevitably, maintaining operating margins and profitability in this economic environment will increasingly depend on creating an operating model that drives down costs and supports growth and expansion. Organizational Streamlining Firms can also reduce costs by reviewing the organizational structure for opportunities to decrease headcount through redesigning and combining functions, streamlining span of control, enhancing productivity, and/or shifting operations to low-cost locations. These initiatives can improve utilization and offer a chance to review employee compensation structure. 5

7 Operational Excellence Insurers can increase operational efficiency through multi-channel integration and efficient, enterprise-wide information exchange. Most organizations can drastically reduce operating expenses by redesigning and automating more of their operations. Streamlining New Business Acquisitions For life insurers, the new business acquisition process accounts for 30-60% of operational costs. Manual, fragmented processes are the major obstacle to achieving the responsiveness and efficiency demanded by customers and intermediary partners. Although many insurers have begun automating specific stages in the new business process, few have implemented end-to-end process management with integrated underwriting systems to enable the straight-through processing demanded by today's business environment. This can not only reduce operational costs but also improve customer service. Process Optimization Since transactions and customer service are essential to their core business, it is critical for insurance companies and financial service organizations to review process costs and the planned efforts to reduce them. Both back-office activities (accounts payable, accounts receivable, billing, accounting, and payroll) and customer-facing functions (distribution, claims, and customer service) must be redesigned to reduce cost-per-transaction while maintaining or improving quality. Applications Portfolio Optimization Ideally, an insurer s application mix should be able to pay for and renew itself, allowing the institution to manage risk, lower operational costs, adapt quickly to change, and improve service across channels - from the field to the call center and online. Firms can control or reduce costs by integrating, updating, and standardizing core business applications and eliminating redundancies. Typically, this entails consolidating, upgrading, and replacing applications on a regular basis - complex tasks that must take into account business and IT variables as well as cost. Streamlined and integrated systems that support a transformed business will lead to greater efficiencies and cost reductions. Selective Outsourcing As globalization increases, sourcing alternatives are also expanding. This allows the insurer to select the strategy, location, skills, and price that best suits its needs. Selective outsourcing is an option for all insurers interested in moving to a more variable cost base. It allows a company to retain its most vital applications and focus key staff on emerging opportunities, while ensuring that overall operations stay at peak performance. For example, activities like payroll and travel and entertainment reimbursement can be outsourced rapidly with a manageable implementation cost. Mature markets also exist for outsourcing core functions, such as first notice of loss taking and claim adjusting through third party administrators and temporary adjusters. 6

8 Sales and Service Strategies As sales and service strategies continue to develop, organizations must meet changing customer needs and offer agile, flexible service and processes that stand out from the competition and enable lasting customer relationships. Customers expect sales and service delivery wherever and however they want via different media such as web, e- mail, text messaging, in person, and over the telephone. Thus, sales and service solutions must focus on improving the effectiveness of the insurance sales organization by creating a multi-channel approach that addresses customer segmentation, channel proposition, and customer centricity. Predicting customer behavior and identifying opportunities is a difficult task to achieve without the right level of customer insight. Having a single view of each customer ensures that any employee, whether they are mobile, within agencies or brokers, or at call centers or channel partners, has access to current activity, history, and information on each customer, thus enabling complete service at the point of interaction to address appropriate sales and service needs. Only then can agents and channel partners identify ways to strengthen the customer relationship, pursue cross-selling and up-selling opportunities, and lay the groundwork for new products, services, and sales channels for meeting emerging customer needs and requirements. ITO & BPO Offshoring Case Study One of the largest life insurance providers in the U.S. was able to achieve 45% savings within a year by implementing several of these strategic cost reduction initiatives and offshoring their IT and life & annuity operations. Company Overview: The client is one of the largest life insurance providers in the U.S., providing fixed and variable annuities, life insurance policies, and long term care insurance products. The firm maintains over 50 offices and approximately 7,200 employees in the U.S. and offers its products through a network of over 220,000 independent financial professionals. Business Drivers: The client needed a self-funding business model and improvements in technology. The client wanted to reduce time-to-market for its products, increase operational service levels, decrease operational costs, and incorporate innovation in everyday business operations. The client preferred to concentrate on market penetration and channel expansion than on IT solutions. Solution: TCS moved all of the firm s IT and life & annuity operations offshore and established and managed an operations center at the offshore location. TCS created robust and well-structured offshore governance with strong insight and implemented technological improvements to reduce time-to-market. 7

9 Benefits: The client saw a tremendous reduction in costs for IT solutions, while obtaining a one-stop solution for all needs and an innovative operating model that will deliver unprecedented operational leverage. The customer experience was improved by reducing response time. A reduction in processing time and response time was attained by implementing automation, stabilization, and optimization initiatives. What TCS Offers TCS helps insurers meet the expectations of all stakeholders - markets, clients, and employees - by creating a foundation for success. As partners, we understand our customer s business vision and enable business and process transformation safely and assuredly. Our delivery excellence, strengthened by our Global Network Delivery Model - a collaborative, best-in-class framework of people, processes, and infrastructure - makes it possible for us to consistently ensure the success of our customers initiatives anytime, anywhere. Our strong domain competencies, accumulated over years of working with the global insurance industry, allow us to deliver solutions that help our customers outdo their competition. We work in collaboration with our clients to build business-enabling solutions, while sharing their risks. As partners, we forge and maintain significant long-term relationships with our customers by not only advising them, but by designing and developing winning strategies and solutions. We build smart solutions that help our customers keep pace with industry trends, while making them adaptable to future business and technology developments. Whether it is our Integrated Insurance Management Solution, Workers Compensation Solution, or Reinsurance Solution, we have always focused on translating innovative ideas into practical, cost-effective solutions. As an end-to-end solutions provider, we offer comprehensive solutions supported by innovation and business value. From consolidating enterprise applications and creating data warehouses to assessing enterprise architecture and migrating to the SOA model, we help enterprises across the life, annuities and pensions, property and casualty, health insurance, and reinsurance sectors experience certainty in their business. Our Offerings TCS Insurance Application Consolidation Framework allows enterprises to rationalize their applications by analyzing existing functionalities and business rules and determining which are required to meet strategic business objectives. TCS SOA Framework for Insurance helps insurance companies adopt and implement SOA easily to make them agile and flexible to meet business demands. TCS Business Intelligence and Decision Support Framework for Insurance is a comprehensive set of tools, models, templates, processes, and deliverables that facilitate building data warehouse/business intelligence solutions to enhance and quicken decision making. 8

10 TCS Architecture Assessment Methodology for Insurance helps insurance companies define enterprise-wide information strategy, integrate applications to ensure data integrity, and consolidate business applications that support underwriting, contracts administration, claims, and finance functions. Closed Book Administration allows insurance companies to benefit from process automation and efficiency by outsourcing the entire end-to-end administration for the closed book business across all product lines, including individual, group life and annuity products, risk products, and investment products. Conclusion The success of strategic cost reduction initiatives depends on aligning business and technology strategies and, in turn, reallocating supportive funding. This requires squeezing every ounce of value from an insurer s application assets in a way that helps enable the business to anticipate and respond dynamically, efficiently, and cost-effectively to virtually any requirements that come its way. References 1. The Economist Intelligence Unit on behalf of Ernst & Young - Effective Cost Reduction Where and How are Businesses Reducing Costs? 2. Celent Report - Insurance Business Process Outsourcing, A Global View by Catherine Stagg-Macey and Michael Fitzgerald, March The Deloitte Briefs Insurance Series - Cost Management for Insurers: Can You Effectively Cut Your Way to Prosperity? 4. Deloitte - Global Insurance Industry Outlook Mid-year Update: PricewaterhouseCoopers - Sustainable Cost Reduction for Insurers in the Downturn. 6. Deloitte Focused on the Fundamentals: A Sustainable Approach to Cost Reduction. 9

11 About HiTech Industry Solution Unit TCS HiTech Industry Solution Unit comprises of Semiconductors, Electronics, Computer Platforms & Services, Software industry and Professional Services. At TCS, we leverage our experience in Engineering Services, Business Process Transformation, end-to-end IT Solutions and Infrastructure Services to provide comprehensive solutions that will help the High Tech firms and manufactures accelerate product innovation, achieve operational excellence, attain greater profitability and maintain market leadership. Our proven consulting capabilities, Extensive engineering expertise, and in-house innovation labs provide breakthrough transformation of product and service portfolios. Our recent investments include dedicated labs and infrastructure in support for convergence solutions, embedded printer solutions, storage optimization and High Tech Center of Excellence based in Eindhoven (The Netherlands). About Tata Consultancy Services (TCS) Tata Consultancy Services is an IT services, business solutions and outsourcing organization that delivers real results to global businesses, ensuring a level of certainty no other firm can match. TCS offers a consulting-led, integrated portfolio of IT and IT-enabled services delivered through its unique Global Network Delivery TM Model, recognized as the benchmark of excellence in software development. A part of the Tata Group, India s largest industrial conglomerate, TCS has over 143,000 of the world's best trained IT consultants in 42 countries. The company generated consolidated revenues of US $6 billion for fiscal year ended 31 March 2009 and is listed on the National Stock Exchange and Bombay Stock Exchange in India. For more information, visit us at insurance.practice@tcs.com. TCS Design Services M 0110 Subscribe to TCS White Papers TCS.com RSS: Feedburner: All content / information present here is the exclusive property of Tata Consultancy Services Limited (TCS). The content / information contained here is correct at the time of publishing. No material from here may be copied, modified, reproduced, republished, uploaded, transmitted, posted or distributed in any form without prior written permission from TCS. Unauthorized use of the content / information appearing here may violate copyright, trademark and other applicable laws, and could result in criminal or civil penalties. Copyright 2009 Tata Consultancy Services Limited