Cost Optimisation in Insurance: Now Is the Time To Get Started
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August 26, 2024
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The global insurance market has experienced a sustained uplift and strong margins over recent years and there has been relatively little pressure to significantly reduce operating costs as premiums have remained strong. With growing pressure on rates and anticipating a potential downturn, insurance organisations have the opportunity to seize the moment and proactively identify cost saving measures.
Although the principles of cost optimisation are commonly understood, in our experience programmes of this nature are disruptive, presenting the dual challenge of managing existing costs without impacting growth strategies and longer-term sustainability. Many cost optimisation programmes focus on delivering an immediate financial benefit, but they often ignore or adversely impact the strategic requirements of the business because entrenched and or structural inefficiencies are difficult to address. There is no guarantee of success, but adopting a structured, disciplined approach with strong governance, while necessary, is not always sufficient to ensure sustained benefits.
Six Key Principles for Effective Cost Optimisation
Align the activity to a clearly defined business strategy
Align cost optimisation activities to a clearly defined set of objectives. These objectives should encompass both the short-term focus on cost reduction and the long-term goal of establishing a platform for future growth and a culture of continuous improvement. Looking beyond immediate cost goals will help the company achieve the organisational, structural and cultural changes that are necessary for sustainable improvement.
Establish strong leadership to drive behaviour organisation-wide
Ensure that change is driven from the top down. Leaders should model the desired behaviour, participate in resolving programme issues, and transparently communicate what the changes will mean. Leadership cannot be delegated on a part-time basis to the programme team. This principle is critical because effective cost optimisation programmes are as much about individuals as they are about deliverables – and human behaviour determines success.
Define the right structure and team
Devote adequate time and consideration to the programme set-up, including governance and engagement with the broader organisation. Consider using a dedicated team to steer change: if the programme must compete for “horsepower” with business-as-usual activities, it is likely to be slow and ineffective. Establish a Transformation Management Office (“TMO”) to undertake the heavy lifting. The TMO should be resourced by operating model, programme management and subject matter experts and be responsible for sequencing, coordinating and tracking planned changes, helping to resolve resource contention and managing change across vertical functions. External support can be invaluable in cost optimisation programmes to conduct independent cost-saving analysis and provide an effective ‘cutting edge’ during the execution phase. The TMO can also assist function leads with difficult tasks like addressing performance issues and exiting underperforming or redundant roles.
Examine the business implications of every cost-saving option
Differentiate the “good” costs from the “bad” by viewing them in the context of the overall operating model. Bad costs might include expenditure on low-performing or ineffective areas of the business. Good costs are typically investments in capabilities required to drive future growth, innovation and other core market differentiating capabilities – here, cost optimisation should be approached with extreme caution.
Adopt an enterprise-wide perspective on cost optimisation
Conduct a high-level review of the end-to-end operating model to identify and evaluate all opportunities for cost savings. The output of this review provides a solid basis for designing a new operating model, together with a blueprint for the transition. Compared with traditional, one-size-fits-all approaches, this approach generates bigger and more sustainable savings. It also helps to ensure that effort and investment stay focused on the right areas of the business, creating a platform for future performance improvement and growth.
Judiciously apply quantitative approaches to model plans and drive change
Leverage best-in-class modelling methods and data analytics to validate potential cost savings, prioritise dependencies and define programme resources and workstreams for efficient delivery. The analyses can help to build momentum during the execution phase, whilst minimising disruption to business performance and productivity levels. In addition, they enable fact-based decision-making, and produce tangible evidence that change is worth making, along with a basis for managing benefits realisation.
Is the Cure Worse than the Disease?
Key requirements of today’s insurance operating models require a combination of digital and operational capabilities, as well as the agility to pivot quickly and respond effectively to emerging opportunities and trends.
To tackle this challenge, organisations require a new approach to cost optimisation. This approach should be centred on ongoing, enterprise-wide commitment to continuous improvement and ‘finding a better way’. Such an approach not only creates sustainable business benefits across a range of different performance dimensions, but also alleviates the need for costly, disruptive point-in-time cost reduction exercises. Successfully embedding a continuous improvement culture will also develop an agile, match-fit team with the necessary problem-solving skills to innovate, adapt and improve operational processes.
FTI Consulting and Cost Optimisation in Insurance
FTI Consulting is an ideal partner for any cost optimisation programme in the insurance industry. We offer:
- First-hand knowledge of the insurance market and its operating models, as well as leading transformation and change management methods.
- Hands-on experience of every aspect of cost optimisation, including analysis, program design and implementation.
- Proven, customisable tools and methodologies for managing cost programmes and enabling fact-based decision-making. A partnership approach that transfers capabilities to your team, supports a continuous improvement ethos to create a lasting legacy within your company.
We apply a context specific approach to each client’s individual needs to support either a point-in-time cost optimisation exercise or develop a continuous improvement culture to implement new processes and working behaviours.
We will ensure that you get exactly the service you need: we can manage the complete programme, provide an operating model redesign or blueprint for change, or simply fill specific gaps in your capabilities.
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Published
August 26, 2024
Key Contacts
Managing Director