70% of insurance business leaders plan to implement a cost reduction initiative over the coming year, but PwC argues that squeezing a few percentage point savings is no longer enough in such a competitive and disrupted marketplace.
The industry is facing a perfect storm of soft rates, low investment yields and new regulation alongside the impact of new technology, shifting customer expectations and the threat of losing margins to nimble InsurTech entrants.
Investment in technologies that sharpen the precision of risk selection and pricing but also improve the overall operations efficiency and effectiveness will be crucial for companies looking to differentiate themselves. Those who take up the challenge will see significant cost savings and a game-changing boost in customer relationships.
Stephen O’Hearn, global insurance leader at PwC, commented: “Many insurance executives have had bruising prior experiences with cost initiatives failing to deliver long-term gains or culture change within the organisation. But the time to confront the challenge is now."
“Real business transformation is necessary. Outsourcing and shared services are certain to yield some benefits but automation may be the most sustainable long-term solution.”
PwC’s five steps to distinctive cost reduction
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Know the score – insurers and reinsurers must start by taking the time to understand the operational costs across every element of the business, and analyse the return from each of these. Insurers without a clear sense of what costs to keep and what ones to eliminate risk being left behind.
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Insurers should also consider what these returns will look like in five years’ time in the face of technological adoption, changing customer behaviours and competition from new market entrants.
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Target your investment –Separate ‘good costs’ (needed to fuel profitable growth) from ‘bad costs’ (e.g. low-performing business lines) and compare what you have with what you need.
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Be brave – be bold, be brave and be creative. Insurers must aim high - settling for marginal gains is not an option.
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Treat cost reduction like M&A – insurers should run the process with the same strategic initiative, board sponsorship and direction as they would an acquisition.
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Keep focused – cost reduction is not a part-time process and should be regularly reviewed in order to track improvements and identify further opportunities.
Stephen O’Hearn, global insurance leader at PwC, commented:
“By identifying the markets and exposures with higher returns and directing resources towards them, insurers can be strategic in their approach. Technologies such as blockchain, artificial intelligence and robotics are increasingly on leaders’ radars and have the potential to deliver millions in savings.
“Those who embrace the change will see the benefits and will raise the bar for the rest of the industry.”
Patrick Maeder, EMEA insurance consulting leader at PwC, concluded: “Resistance from within the organisation is a common challenge for leadership teams looking to streamline, but insurers must bite the bullet and tie their cost reduction measures to their modernisation strategies.
“Ultimately, buy-in from all levels of an organisation will be make or break for insurers and an innovative, accountable and convincing cost reduction strategy will be crucial in getting this support in making changes throughout the company.”
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