The IT component in insurance industry performance

Top companies in our survey grind down costs by consolidating IT and rationalizing processes. They’re growing faster as well.

The Great Recession has caused plenty of pain in the European insurance industry. Rock-bottom interest rates have reduced returns on the insurers’ holdings, while economic disruption continues to increase the volume of claims payouts.
Not all companies are suffering, of course; indeed, many are thriving. For insights into the factors that distinguish the top performers from the rest of the pack, we surveyed more than 80 life insurers and property-and-casualty (P&C) insurers across Europe.1 We were particularly interested in identifying the factors that most directly contributed to their superior cost performance, including product development, marketing, sales support, operations, and IT, as well as other support functions. Despite the strong economic headwinds, we found not only that companies in the top quartile of our survey outperformed their peers on costs but also that this operational strength—contrary to conventional wisdom—produced more robust revenue growth.
A yawning gap in costs

One of the more startling survey findings was the size of the cost difference between top- and bottom-ranked players. For top-tier insurers, the total operating cost per policy, across virtually every business function, is at least half that of companies at the bottom of the stack (Exhibit 1). Bottom-quartile players’ unit costs can be twice as high as those of top-quartile ones.
Some of the biggest differences result from the top companies’ much better cost management in sales support, operations, and IT. The consistency of this gap also runs contrary to the industry’s common wisdom: companies may squeeze costs in one area but must compensate elsewhere, with higher costs, to maintain revenues or buttress customer satisfaction. Instead, we found that top-tier insurers sustained their low-cost position without sacrificing top-line revenue growth. Leaders in our survey increased their gross written premiums—the industry’s standard revenue measure—two percentage points faster than the broader market index did.
The survey also calls into question other industry credos (Exhibit 2). The first is that larger insurers have an implicit cost advantage. Our survey data show that while size provides some economies of scale, it often creates administrative and operational complexities that impede even larger efficiency gains. Second, it is often assumed that variations in the wages and regulatory regimes of different countries strongly influence the performance of the insurance companies that do business in them—in other words, that high wages and stiff regulations depress profits. Yet our findings indicate that top performers use operational excellence to dampen the effects of high wages and regulatory constraints. By moving back-office functions to cheaper near- and offshore locales, these companies deftly use labor cost arbitrage to create a lower average cost base. As a result, their cost performance is superior across all geographies.
Finally, we found that the best operators, despite their vigilance on costs, don’t allow that frugality to damage vital functions, such as customer service and due diligence for issuing new policies. When one large insurer found that its cost base was significantly higher than that of industry leaders, for example, its managers attributed the difference to the additional spending needed to ensure longer-term growth and profitability. The company assumed that its lower-cost competitors cut corners in areas such as risk assessment and undertook fewer medical checks to authenticate claims or confirm eligibility. Yet our analysis shows that low-cost leaders did not cut back in these areas and actually achieved higher levels of profitability than the company in question.
Fragmented IT and operations raise complexity and costs. The top-tier companies did more for less thanks to their operational excellence. In fact, among P&C insurers alone, top-quartile players’ profit margins, based on the industry standard combined ratio, were four percentage points higher than the average of the companies we surveyed.
How low-cost companies do it

Behind the low scores of our survey’s poor performers, one factor predominates: operational weakness. These companies are more likely to have an ungainly operational footprint, with limited cohesion among operating centers and fragmented IT systems, so they find it harder to streamline processes, share common tasks, and achieve economies of scale. Such deficiencies, which often disrupt a range of processes, lead to high backlogs, as well as frequent work-arounds and manual interventions—factors that slow down response times, raise costs, and hurt customer service.
We have identified three core operating principles that differentiate top-performing companies. These offer a roadmap for insurers seeking to improve their competitive cost position and growth prospects.
Create a centralized structure
Top performers are more likely to centralize their IT and back-office processes and to consolidate corresponding reporting lines under a single point of contact, often the COO, improving both productivity and governance. They are more likely, for instance, to pool medical experts instead of segregating them by location and channel. This approach reduces the number of resources needed—in some cases by as much as 40 percent—while increasing the quality of the guidance.
Taking this approach, one insurer—ranked in the bottom quartile back in 2007—began a three-year transformation to consolidate its back-office support functions and associated IT platforms and to shrink a sprawling network of over two dozen operational centers. These moves shaved 27 percent and 25 percent from the cost of operations and IT, respectively, and bumped the company from the bottom to the upper-middle quartile in cost performance. The savings were reinvested in several new product initiatives, which eventually raised the company’s market share in several key areas.
Ramp up automation
Top performers make wider use of automated processes, often deploying self-service systems that help customers, insurance agents, brokers, and independent financial advisers process simple transactions (such as low-risk claims) with minimal resort to adjusters.
One P&C insurer cut its processing times by 30 to 40 percent when it automated high-volume, low-risk claims for the replacement of damaged vehicle windshields and the like. Using computer-based, straight-through processing techniques that combine separate steps into an integrated work flow, the company’s process is now completed electronically, without manual intervention. Another insurer, faced with rising claims losses, decided to automate its loss-management process. By standardizing decision making through rules-based programs about eligibility requirements and new compliance guidelines, the company reduced its leakage from payment errors by 4 percent of revenues. These savings, which allowed the insurer to keep down prices for its most popular products, gave it a leg up on the competition and helped raise its revenues.
Use lean process design
Many low-cost leaders have applied lean-manufacturing techniques to alleviate backlogs and improve response times. That design focus allowed these companies to streamline their core activities across the business, to eliminate redundancy, and to route tasks and manage work flows more effectively.
One life insurer, for example, seeking to help its brokers, revamped the redemption process to speed up payout times, a key driver of customer satisfaction. A diagnostic revealed several problems, including frequent back-and-forth steps needed to complete documentation and a system that often jumbled together urgent and routine requests, making it hard for adjusters to prioritize tasks. The result was often weeks-long delays in the vetting and approval process.
In response, the insurer created two separate work streams, one for administrative or routine requests that were less time sensitive, the other for payouts. The company also established strict performance targets governing the payout timetable. For each step in the process, it set time limits, such as the number of days a given piece of documentation could rest with an individual agent or process owner. These changes shortened the payment process to 8 days, from 18, while improving overall productivity by 25 percent. In addition, the company now measures customer satisfaction, obtaining feedback directly from the broker network and using that information to further refine the process.
As our survey shows, organizations that take the steps we recommend stand a strong chance of outperforming their peers. While these findings center on the insurance industry, we believe that the same thinking can be applied to other service industries in which IT and operations can play a key role in speeding time to market and improving the way companies meet their customers’ needs.
https://www.mckinseyquarterly.com/Financial_Services/Insurance/The_IT_component_in_insurance_industry_performance_2700?gp=1

Inflation Threatens China's Growth

China is seeing the highest price increases in over two years, and this has officials worried. While the official consumer inflation rate was 4.4% for October, a 10% rise in food prices is having a huge impact on poorer households. The domestic media is filled with stories of hoarding by both producers and consumers.

The government has responded with a small interest-rate increase and some hikes of the reserve requirement, though rates on demand deposits have not budged at all. More action is needed. A resolute drive to slow growth of the money supply will stop the hemorrhaging of household savings due to inflation. As an added bonus, it may also wean China off of its heavy dependence on investment-driven growth.

The recent bout of inflation may seem mild in comparison to the double-digit price rises in the 1980s and '90s. But the social impact may be almost as severe. According to research by a Chinese government think tank, poorer households now face inflation that is twice the overall rate because their consumption basket is dominated by food items, which have seen the most rapid price increases. So even though wage gains seem robust, many households are seeing flat or negative increases in purchasing power.

Household savings have also been eroded by government policies to control deposit interest rates. After the recent 0.25-percentage point lending-rate hike, the rate paid on demand deposits did not budge. Even without inflation, depositors are paid artificially low rates because the government prevents banks from setting their own deposit rates. In times of inflation, households, especially poorer ones with money mainly in demand deposits, suffer negative returns on their savings.

Savings in demand-deposit accounts today yield negative returns after adjusting for inflation, for a real return of about -4%. Even net of inflation, deposits in a one-year time deposit earn -2%. Meanwhile, banks are earning large margins, and borrowers of medium- to long-term corporate loans, which tend to be state-owned or state-dominated firms, are borrowing at an inflation-adjusted rate of about 2%. Given that households currently have more than 11 trillion yuan ($1.7 trillion) in demand deposits, an annual inflation rate of 4% this year would in effect see the transfer of over 400 billion yuan ($60 billion) from these households to banks and corporate borrowers, both dominated by the state.

This erosion of poor households' purchasing power goes directly against the goal of "raising the income of medium and low income urban and rural residents," as outlined by the Party plenum last month. Given that nominal wages for a large number of households remain relatively flat, continual inflation alone will drive many into destitution. The pressure from negative earnings on savings has driven richer households to speculate in the real estate and stock markets. Rising inflation has further incentivized all households to begin stockpiling food and commodities such as gold. Food hoarding, if sufficiently widespread, can further increase inflationary pressure.

Although inflation might have been boosted by some recent supply shocks, the rapid expansion of the money supply in recent years, especially the spectacular explosion of lending last year, is the root cause. Thus, a key ingredient of future inflation fighting will be to slow down substantially the expansion of money supply.

In the past, the Chinese government has successfully stifled inflationary pressure via the imposition of a resolute credit ceiling on banks. Today, regulators would also need to monitor closely the expansion of trust products and the inflow of hot money. The People's Bank of China and the China Banking Regulatory Commission have all the tools necessary to fight inflation. A combination of interest rate hikes, a credit ceiling, a freeze in trust product issuance and aggressive sterilization of foreign exchange inflows can halt inflationary expectations and stop the erosion of household savings. China's top leadership, however, needs to make clear its collective determination to fight inflation in order to give these measures credibility.

To be sure, the sudden slowdown in credit expansion will cause illiquidity in some investment projects and slowed real-estate construction. Nonperforming loan ratios may rise as cash-starved projects become unable to meet interest payments.

In the medium term, however, the policy will pay benefits. Macroeconomic retrenchment credibly commits the government to both low inflation and a less investment-intensive growth path by cutting off liquidity from a large number of projects. Local authorities will learn that they can no longer pursue growth based mainly on adding new investment projects financed by bank loans and bond issuance.

In the mid- to late-1990s, cash-starved local authorities became much more open to privatization, allowing private firms to dominate sectors previously monopolized by state-owned firms. The competition that resulted was good for the economy. Repeating that process will not be painless, but past experience has shown that resolute macroeconomic retrenchment can put China on a healthier path for growth.

Mr. Shih is associate professor of political science at Northwestern University and author of "Factions and Finance in China" (Cambridge University Press, 2007). A related editorial appears today.
http://online.wsj.com/article/SB30001424052748704393604575615720549028004.html?mod=djkeyword

Japanese bosses: From Walkman to hollow men

Japan’s lack of bold business leaders

Nov 4th 2010 | TOKYO

The pre-iPod generation

THE Walkman changed the way people listened to music, especially on the go. Introduced by Sony in 1979, the portable cassette-tape player is finally being discontinued in the Japanese market. The device will remain in production in China and sold in some other places, although Sony will not say how many it still sells or why it bothers to make Walkmans at all in the age of the iPod and smartphone.
Whoever buys them, the numbers are unlikely to add much to the more than 220m Walkman cassette-players already sold. Yet this pioneering product was almost never made in the first place. Sony’s co-founder, Akio Morita, had to battle with his own engineers and executives who argued that a tape-player without a recording function would never work. “Everybody gave me a hard time,” Morita wrote in his memoirs in 1986. In the end, though, the boss had his way.
Such determination from a business leader is unlikely in today’s Japan. Founder-presidents like Morita, who died in 1999, hold immense power. But their successors, called salaryman-shacho (or “hired-hand presidents”), do not. This makes it difficult for Japanese bosses to be leaders rather than just figureheads.
“The salaryman-shacho is one of the biggest reasons why the Japanese economy went down. They don’t take responsibility,” thunders Tadashi Yanai, the founder and boss of Fast Retailing, Japan’s largest clothing retailer and operator of the Uniqlo chain of stores. Mr Yanai, who is reckoned to be Japan’s richest man, worth around $9 billion, is not alone in his view. Japanese managers lack “assertiveness, vigour, energy and resolve”, says Kazuo Inamori, the 78-year-old founder of Kyocera, one of the country’s biggest producers of electronics parts.
One problem is that in a consensus-based culture—with the ideal of lifetime employment, and promotions and compensation based more on seniority than performance—few bosses have a free hand, or even an interest, in forging a brash path. Such bosses are implicitly expected to keep things as they are and owe their position to so many internal colleagues that thorough corporate overhauls are almost impossible. Hence, when Toyota needed to take radical steps to rejuvenate the company in 2009, it named the founder’s grandson as president, hoping it would put a bold pair of hands on the steering wheel.
The leadership deficit translates into poor corporate performance. Japanese firms’ return on equity has long been less than half that of American and European companies. Since 1996 the number of Japanese companies among the world’s leading 50 firms by sales in sectors like manufacturing, retail, banking and health care has fallen by half or more. If the leaders of Japanese firms were able to make just basic improvements—increasing average sales growth from 2% to 5%, lifting earnings from 4.5% to 7% and boosting capital efficiency by 10%—the capitalisation of Japan’s sickly stockmarket could triple from its current level, says Bain, a consultancy, in a recent study.
Yet bold leadership is rarely appreciated. In June Naoto Kan, Japan’s prime minister, scolded Carlos Ghosn, the boss of the Renault-Nissan alliance, for firing workers—even though Mr Ghosn rescued Nissan from bankruptcy and transformed the company. It also took an outsider to push through change at Sony, where Sir Howard Stringer, a British-born businessman, became boss in 2005. It has taken him years to shoulder stodgy executives aside. This year Sony returned to making money and in the three months to September 30th reported net profits of ¥31.1 billion ($385m), having made a net loss of ¥26.3 billion a year earlier. Sony needed shaking up. Despite creating the market for portable music with the Walkman, it largely missed the shift to digital music-players.

http://www.economist.com/node/17420349?story_id=17420349&fsrc=rss