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Insurers hoping to raise profitability amid intensifying industry competition must both gain a deeper understanding of how operational processes create value for their companies and redesign operating models to optimize all elements of their business, according to a report by The Boston Consulting Group (BCG).
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Boston Consulting Group says insurers need to revamp operations
The new report, Operating for Value in Insurance, argues that low-level performers in today's global insurance industry typically focus on just one dimension of their overall enterprise-business, operations, or IT — whereas top-level performers tend to have an “end-to-end” design that optimizes all three dimensions. Adopting such a design is critical for insurers that wish to improve operations — and use that improvement to raise their overall performance. This type of approach has enabled some multinational players that started out with a better-than-average cost position to cut their expense ratios by an additional 30 percent, while simultaneously improving the productivity of their sales forces, the report says.
According to the report, insurers should adopt a three-phase improvement program that involves designing a new target operating model and IT architecture, drafting a road map that leads to the target model, and finally, installing governance structures that ensure effective implementation. BCG says that although many insurers are currently considering new operating models, they have no framework to use as a guide.
“Today's insurers are thinking about a host of issues, such as whether they should consolidate operations into shared service centers, outsource or offshore some of their operational processes, or attempt cross-border synergies in operations,” says coauthor Gunther Schwarz, a BCG senior vice president and leader of the firm's global insurance practice. “Yet their previous efforts to improve operations have often failed because they have not taken an end-to-end approach.”
The report says that common roadblocks to operational improvement include internal lines of accountability that prevent end-to-end thinking, work forces that lack sufficient incentives, and legacy IT systems that complicate change initiatives. In addition to having a clear framework for changes that need to be made, the operating model must become a top item on the CEO's agenda if such obstacles are to be overcome and meaningful improvement achieved.
Insurers designing their target operating model and IT architecture should begin by seeking a deep understanding of exactly how the performance of operational processes creates value for the business, BCG says, adding that there are two basic types of processes: complex operational processes, which create value through influencing the customer's purchase decision and through business judgment, and standard operational processes, which create value mainly through their level of efficiency. Once insurers are able to identify and fully define their own complex and standard operational processes, the next step is to translate them into a sharply focused target operating model and IT architecture.
The report says that once the target operating model has been established, insurers can use eight specific levers to draft a road map that leads to the target model. The report adds that the operating-for-value framework cannot fulfill its potential without effective governance and emphasizes that the framework is not just a one-off effort that lasts for a few months but a permanent way of looking at operations and ensuring that they are continuously optimized.
“Although operating for value involves practical hurdles that must be overcome, the value at stake is significant,” says coauthor Frans Blom, a BCG senior vice president. “Operational cost reductions of around 30 percent, lower claims payouts, and higher revenues through higher customer satisfaction are possible in the medium term. In the long term, operating for value enables strong and sustainable growth and prepares insurers for a future in which cross-border synergies will be more important than they are today.”
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