The global insurance market has experienced sustained growth and strong margins over the past few years. As premiums remained high, there was relatively little pressure to significantly reduce operating costs. With pressure on premiums growing and expectations of a potential downturn, insurance companies have the ability to seize the opportunity and proactively identify cost-saving measures.
Although the principles of cost optimization are well known, in our experience, programs of this nature are disruptive and present the dual challenge of managing existing costs without compromising growth strategies and long-term sustainability. Many cost optimization programs focus on achieving immediate financial benefit but often ignore or have a negative impact on the strategic needs of the business as entrenched and/or structural inefficiencies are difficult to eliminate. There is no guarantee of success, but adopting a structured, disciplined approach with strong governance, while necessary, is not always sufficient to ensure sustainable benefits.
Six key principles for effective cost optimization
Align activities with a clearly defined business strategy
Align your cost optimization activities with a clearly defined set of objectives. These objectives should include both the short-term focus on cost reduction and the long-term goal of creating a platform for future growth and a culture of continuous improvement. Looking beyond immediate cost targets will help you achieve the organizational, structural and cultural changes needed for sustainable improvement.
Establish strong leadership to drive behavior across the organization
Make sure change is driven from the top down. Leaders should model the desired behavior, be involved in solving program problems, and communicate transparently what the changes mean. Leadership cannot be delegated to the program team on a part-time basis. This principle is critical because effective cost optimization programs are as much about individuals as they are about results—and human behavior determines success.
Define the right structure and the right team
Devote sufficient time and consideration to program setup, including governance and engagement across the organization. Consider using a dedicated team to manage change: If the program has to compete with usual business activities for “horsepower,” it is likely to be slow and ineffective. Establish a Transformation Management Office (“TMO”) to do the heavy lifting. The TMO should be staffed with operating model, program management, and subject matter experts, and be responsible for sequencing, coordinating, and tracking planned changes, resolving resource conflicts, and managing change across vertical functions. External support can be invaluable in cost optimization programs to conduct independent cost savings analysis and provide effective “edge advantage” during the execution phase. The TMO can also support functional leaders with difficult tasks, such as resolving performance issues and terminating underperforming or redundant roles.
Investigate the business impact of each cost-saving option
Distinguish the “good” costs from the “bad” by considering them in the context of the overall operating model. Bad costs can include spending on underperforming or ineffective business units. Good costs are typically investments in capabilities needed for future growth, innovation and other key market-differentiating capabilities – this is where cost optimization should be approached with extreme caution.
Take a company-wide perspective on cost optimization
Conduct a comprehensive review of the end-to-end operating model to identify and evaluate all cost-saving opportunities. The outcome of this review provides a solid foundation for developing a new operating model and a plan for transition. Compared to traditional, one-size-fits-all approaches, this approach delivers greater and more sustainable savings. It also helps ensure that efforts and investments remain focused on the right areas of the business, creating a platform for future performance improvements and growth.
Carefully apply quantitative approaches to model plans and drive change
Use best-in-class modeling and data analytics to validate potential cost savings, prioritize dependencies, and define program resources and workflows for efficient execution. Analytics can help build momentum during the execution phase while minimizing disruption to business performance and productivity. They also enable fact-based decisions, provide tangible evidence that change is worthwhile, and a foundation for managing value realization.
Is the cure worse than the disease?
The key requirements of today’s insurance operating models include a combination of digital and operational capabilities, as well as the ability to adapt quickly and respond effectively to new opportunities and trends.
To meet this challenge, companies need a new approach to cost optimization. This approach should be based on an ongoing, company-wide commitment to continuous improvement and “finding better ways.” Such an approach not only creates sustainable business benefits across a number of different performance dimensions, but also reduces the need for costly, disruptive, temporary cost-cutting measures. Successfully implementing a culture of continuous improvement will also develop an agile, aligned team with the problem-solving skills needed to innovate, adapt and improve operational processes.
FTI consulting and cost optimization in the insurance sector
FTI Consulting is the ideal partner for any cost optimization program 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 methodologies.
- Practical experience in all aspects of cost optimization, including analysis, program design and implementation.
- Proven, customizable tools and methodologies to manage cost programs and enable fact-based decision making. A partnership approach that transfers skills to your team and supports an ethos of continuous improvement to create a lasting legacy across your business.
We apply a context-specific approach to each client’s individual needs to support either a point-in-time cost optimization effort or to develop a culture of continuous improvement to implement new processes and working methods.
We make sure you get exactly the service you need: we can manage the entire program, provide a new operating model or plan for change, or simply fill specific gaps in your capabilities.
