Tidying the insurer's IT 'mess'

A streamlined 'manufacturing' process that makes full use of available technologies will ensure that the typical life and pensions insurer achieves sustainable returns.


Over the past two years, European insurers have occupied themselves with restoring their capital strength, cleaning up country portfolios and reducing exposure to with-profit/guaranteed policies. But for most, the really difficult challenge still lies ahead: How to reduce operating cost drastically to make the life and pensions business, in particular, more profitable to shareholders and more attractive to clients?

Unsustainable cost per policy

An analysis of life insurers in Europe shows that their operating costs per policy are typically in the range of €50-200. The players at the lower end of the range are generally those with either very large volumes (five million or more policies) or closed-book approaches that reduce cost per policy. Most insurers, however, do not have these options and typically operate their individual life business at more than €100 per policy. That is simply not sustainable given the increased competition from unbundled banking products and very low interest rates. In fact, a look at embedded value figures reveals that most insurers run a negative cost process in individual life, meaning the charges they can place on clients do not fully cover operating expenses.

As regulation shifts more and more of future capital gains to policyholders (legal quotes in Germany, Switzerland and other markets, for instance), insurers will have to generate a positive margin on their cost process to achieve sustainable returns.

Shifting down the cost curve

Operating cost reductions of 30-50 per cent is not only necessary, but achievable. Yet those targets might not be reached if current 'fragmented' IT landscapes are 'migrated' slowly to simplified and upgraded structures, as is happening in many IT insurance organisations today. The main reasons for this are that such evolutions always take too long (typically 3-5 years) and ultimately lead to a maximum cost reduction of 20 per cent. Simply put, fixing today's mess of 40-plus interlinked systems requires more than just careful upgrades.

If old IT applications are not overhauled and replaced, operating processes remain highly manual, fragmented and inefficient. To use an analogy, most insurance operations favour an Aston Martin manufacturing style rather than a high-margin, mass-volume approach typified by Toyota.

Drastic rethink required

Insurance 'factories' and how they are run need a serious rethink: standard applications can replace in-house legacy systems; insurance operations should run like modern factories or call centres instead of being tailored to highly individualised processes and 'specialists'; extensive exploration of outsourcing and offshoring options (also for continental European insurers) should take place; and, finally, there should be extensive use of straight-through processing and web technology to propel insurers onto a new productivity curve, The good news is that these solutions are available today.

New application platform providers from China, India and New Zealand are starting to offer streamlined and cost-effective life (and non-life) applications in Europe. Outsourcing of standard tasks (and even complex actuarial work) to India, China and South Africa is becoming the norm for US and UK insurers (but is still nascent in continental Europe), and web technology coupled with Java is enabling a new breed of applications that can drive down IT and operating costs significantly. For example, an eBaoTech client in Singapore with about 1.5 million policies runs its entire core IT department with around 20 people, offering state-of-the-art customer service and turnaround times for example in new business applications (from policy application to policy delivery) of less than two days.

The technology is there and new providers are emerging. All that is required now are forward-thinking CTOs, COOs and CFOs to drive the transformation of today's European insurance operations.


Author
Daniel Adamec (Daniel.adamec@ebaotech.com) is CEO of eBaoTech Europe, an insurance technology company based in Shanghai,Singapore, Beijing and Zurich. Previously, Daniel was CFO at Winterthur Life&Pensions, and partner at McKinsey & Co (Hong Kong and Zurich).