Expense Reduction in the Insurance Industry David Holland 27/3/2013 2013 Towers Watson. All rights reserved.
Agenda The Need for Expense Reduction in Insurance Pressures on insurers results Market activity Industry Expense Levels High level view of trends Closer look at the UK life market Towers Watson Approach Drivers of controllable cost Cost reduction levers Outsourcing and offshoring Lessons learned 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 claims and policy processers rank? 1. Top 100 (easiest 100 occupations to outsource) 2. 100 400 3. 400 700 4. Bottom 100 (most difficult 100 occupations to outsource) Q2) Where did actuaries rank? 1. Top 100 (easiest 100 occupations to outsource) 2. 100 400 3. 400 700 4. Bottom 100 (most difficult 100 occupations to outsource) 2
The Need for Expense Reduction in Insurance 3
THE NEED FOR EXPENSE REDUCTION IN INSURANCE Pressures on insurers results Market Factors Life Impact of global financial crisis on consumer finances Fall in volume of new business across industry leading to unsustainable unit costs Growing threat to life business from substitute asset management products Increasing compliance costs driven by new solvency regime requirements Changing consumer demand towards more capital-intensive products Low investment return environment will impact top-line income Market Factors P&C Impact of global financial crisis on consumer finances Claims inflation driven by rise in bodily injury claims Growing levels of organised fraud and uninsured driving Increasing compliance costs driven by new solvency regime requirements Margin pressures driven by increasing presence and success of aggregators Low investment return environment continues to impact top-line income 4
THE NEED FOR EXPENSE REDUCTION IN INSURANCE This is nothing new Cyclical Upward Pressure on Expenses Poorly implemented technological change Culture focussed on top-line results Silo or arbitrary decision making Ever expanding expense base Strategy shift not reflected in changes to operational activity Growing regulatory and compliance demands Inaccurate or inflexible MI 5
THE NEED FOR EXPENSE REDUCTION IN INSURANCE (Reported) market activity Outsource Offshore IT Efficiency Restructuring Automation Target Savings < 50M 50 100M 100 150M 150 200M > 200M Source: Company accounts, Towers Watson research. 6
Industry Expense Levels 7
INDUSTRY EXPENSE LEVELS Comparison of UK and Irish Life Insurance Expense Ratios Ratios may not be perfectly comparable but indicatively, ratios are high in both markets 8
INDUSTRY EXPENSE LEVELS A closer look at the UK Life market Figures shown use aggregate expenses and number of policies for selected companies Per policy acquisition and management expenses are on the rise 13.4% compound annual growth rates Median expenses per policy show a similar pattern Large companies exhibited huge variation in 2009 and 2011 Large companies defined at top 10% by in-force premium income each year 9
Towers Watson s Approach 10
TOWERS WATSON S APPROACH Long-term, strategically aligned cost reduction Strategic assessment Diagnostics Implementation Change management Core competency identification to provide context and challenge Identification and prioritisation of cost reduction opportunities Planning, quick wins, refinement and embedding Building confidence, changing culture 11
TOWERS WATSON S APPROACH Drivers of controllable cost Volume of activity Level of complexity Process inefficiency Duplication of activities Weak procurement Outdated/poorly designed IT systems Misaligned compensation strategy Manual processing Low productivity Poor cost control culture Inefficient organisational design and structure Operational Inefficiency traditional focus Uncompetitive or inflexible outsourced contracts and arrangements Overlap of responsibility and activity between risk management, actuarial and MI teams Convoluted workarounds to facilitate legacy IT systems Frequent and ad hoc use of spreadsheet modelling and analysis Lack of centralisation of routine business processes that span several locations Poor management understanding of drivers and destroyers of value High-level or inaccurate expense analytics and monitoring Weak or unclear expense control responsibility and/or accountability Lack of clarity in project/functional/personal objectives Spend on non-core business competencies Spend on unvalued customer services Spend associated with superseded propositions or strategy Strategic Misalignment often ignored factors Low volume product classes aligned with customers outside of target market Commercial activity and marketing spend associated with non-core distribution channels or agents 12
TOWERS WATSON S APPROACH Long-term, strategically aligned cost reduction Strategic assessment Diagnostics Implementation Change management Core competency identification to provide context and challenge Identification and prioritisation of cost reduction opportunities Planning, quick wins, refinement and embedding Building confidence, changing culture 13
TOWERS WATSON S APPROACH Cost reduction levers Business Model Channel rationalisation Business mix restructuring Divestiture Operating Model Centralisation of business functions Outsourcing and offshoring Improved procurement IT system improvements Core Processes Eliminate unnecessary activity Increase level of automation Improve business process efficiency Reduce Current Outgo Project rationalisation Reduce discretionary spend 14
TOWERS WATSON S APPROACH Impact assessment Key enablers of high quality assessment Robust MI Sufficiently granular Understand cross-subsidies Manage through the project Deep understanding of expense analysis Fixed vs. variable Initial vs. renewal Approximations and arbitrary allocations Capacity models Business Case Strategic impact Projected P&L impact Cash flow impacts Capital impact Risk impact Qualitative impact Don t ignore intangible assets People and talent Management time and disruption Brand Project and operational risk or stakeholder implications Customers Shareholders and analysts Distributors and suppliers Regulator 15
TOWERS WATSON S APPROACH Increasing reliance on outsourcing and offshoring Lessons from Other Industries Divide major IT processes up into specialised and focussed components Award contracts to several providers including in-house team Keep contract terms short to maintain control and ensure flexibility Design contracts to encourage competitive behaviour Insurance Industry Factors Language and culture matter Regulation and tax laws may limit choices Decision can be driven by desire to gain expertise, access to capital or scale Potentially significant arbitrage opportunities exist 16
TOWERS WATSON S APPROACH 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
TOWERS WATSON S APPROACH Long-term, strategically aligned cost reduction Strategic assessment Diagnostics Implementation Change management Core competency identification to provide context and challenge Identification and prioritisation of cost reduction opportunities Planning, quick wins, refinement and embedding Building confidence, changing culture 18
TOWERS WATSON S APPROACH Implementation and change management go hand in hand Project governance and robust programme management are essential Plan to implement cost reduction initiatives Plan to manage financial impacts Redundancy payments will have a significant cash flow and capital impact Impact on pension fund will be a key assessment IT consolidation or improvements can mean significant upfront investments Accounting treatment of long-term lease commitments can be significant Plan to manage non-tangible assets PR and communications (internal and external) are critical for brand and buy-in Retention planning Talent index Manage business disruption and loss of capacity during interim project period 19
TOWERS WATSON S APPROACH Typical cost reduction timeline Strategic assessment Diagnostics and detailed planning Quick wins Implement key cost reduction initiatives, including necessary refinements Effective change management 0 2 months 4 months 6 months 8 months 10 months 12 months 20
TOWERS WATSON S APPROACH Some lessons learned Strategy Big choices and trade-offs key decisions should align with the strategy Focus on all of your assets, not just those you can value Financial Clear understanding of the P&L impact of decisions Early focus on potential accounting and tax issues Program management Ring-fence the project as far as possible Keep executive team engaged and think hard about when to include senior management Be smart and with timing and messaging of internal and external communications Build a culture focussed on process efficiency and smart innovation Be ambitious but be brave this is difficult and very real 21
TOWERS WATSON S APPROACH Actuarial considerations Per head, the actuarial teams (pricing, reserving, capital modelling) are very expensive! There will be opportunities to reduce costs in the actuarial teams Getting the right IT systems and software will make a difference Having strong controls on the use of spreadsheets can limit rework and duplication Manual processing can and should be limited Process mapping and documentation can be extremely revealing And we can sometimes seek perfection when pragmatism would suffice And there is often duplication of effort with other teams Pricing and MI/claims insight teams Risk management and reserving 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 claims and policy processers rank? 1. Top 100 (easiest 100 occupations to outsource) 2. 100 400 3. 400 700 4. Bottom 100 (most difficult 100 occupations to outsource) Q2) Where did actuaries rank? 1. Top 100 (easiest 100 occupations to outsource) 2. 100 400 Low 20s! 5 th!!!!!!!!! 3. 400 700 4. Bottom 100 (most difficult 100 occupations to outsource) 23
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