More for less: Five steps to strategic cost reduction – PwC
Article Synopsis :
The imperative to cut costs is almost as old as insurance itself. However, with the industry facing structural disruption in the form of shifting customer expectations and rising competition from InsurTechs, cost reduction has moved from a tactical to a top strategic priority. Per PwC’s Annual Global CEO Survey, 70% of insurance business leaders plan to implement a cost reduction initiative over the coming year, more than any other financial services sector.
“More for less: Five steps to strategic cost reduction”, from PwC guides insurers towards better decisions on cost reduction. The report outlines five steps which focus on optimising rather than just cutting expenses to ensure the business can sustain competitive relevance and maximise its potential. The 5 steps are as follows:
- Start with strategy: Have a clear view of your strategy and ensure it is consistently understood across the organisation. Things to consider while defining strategy include interactions with business units, the impact of changing technology and customer behaviour on business, etc. Identify the good and bad cost areas and assess where costs can be reduced.
- Align costs to strategy: Look across the whole organisation and differentiate the strategically-critical ‘good costs’ from the non-essential ‘bad costs’. Evaluate existing capabilities and compare what you have with what you need. Categorise them into four groups: Not Required, Differentiating, Opportunity, and Can’t Avoid. Understand all costs/expenses versus the plan.
- Aim high: Be bold, be brave and be creative – use technology, innovation and new ways of working to radically optimise the cost base. Explore opportunities such as Delegated Underwriting, and Automation of areas such as Pricing and Underwriting, Claims, Operations/Support, and Corporate Services.
- Set direction and show leadership: Deliver cost optimization as a strategic, business-transformation program. The program should be defined and implemented under a dedicated senior team with board sponsorship, direction and accountability. Additionally, it is important to engage the workforce at all levels and encourage personal ownership and organizational collaboration.
- Create a culture of cost optimisation: Ensure you embed a culture of ownership and incentivise continuous improvement. The strategic cost priorities should be regularly reviewed and updated. Reward and incentivise staff to continuously look for improvement areas in the business.
The report contains the following analytical framework for identifying the value-generating potential within the business as well as differentiating ‘good’ and ‘bad’ costs:
Cost optimisation, if handled correctly, delivers significant benefits to the company, including profitability less dependent on pricing, and increased competitive advantage.
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Digital Insurer's CommentsInsurers engage in one-off initiatives to trim costs. Digital insurers, on the other hand, utilize technology to reduce costs permanently by orders of magnitude. Though we wholeheartedly agree with the five steps outlined in this paper we’d add four more as food for thought:
- Focus on Digital Models – Digitizing distribution, underwriting, processing and claims is the holy grail for lower fixed costs in support of highly scalable business models. For example, Zhong An’s online model can handle ‘n’ users with marginal operating and distribution costs approaching zero.
- Automation – Leveraging technology in time intensive, repetitive and error prone processes significantly increases the speed, consistency and accuracy of tasks ultimately leading to huge cost reductions. For example, Fukoku Mutual is replacing their human work force with AI to decide policy payouts.
- Omnichannel Distribution – Leveraging social, mobile, real-time, and similar disruptive technologies in distribution can lead to substantial cost reduction. Notable examples here include on-demand and sharing economy players such as Lemonade and Friendsurance, etc.
- Hitting the Right Market Segment – Luring Millennials primarily with anywhere, anytime access plus an engaging user experience can grow revenues on an ultra-low marginal cost basis.
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