The Insurance industry is one of the most regulated industries in the world and today’s challenges for insurers are plentiful: greater price transparency, customer cost consciousness, and sweeping regulatory changes, just to name a few. However, compared to many other industries, the insurance industry has proved remarkably resilient to these challenges. Throughout its long history of prudent reserving and risk awareness, insurers have been taught to act cautiously.
Nonetheless, the digital transformation is reshaping the insurance industry, empowering the customers to make their own well-informed individual decisions, allowing for individual choices, and making them even more demanding. Therefore, the competitive pressures are high and ensure that the insurance companies need to tune their business to stay competitive. High premiums and fees are no longer an option – instead, they have to sell insurance at a price prevailing in the market which is expected. To balance this, insurance companies need to continuously find ways to control their costs to be able to remain profitable.
Administration costs, which are one of the largest expenses for life insurance companies, include authority reporting, risk assessments, claim settlements, actuarial services and IT operations. It also includes customer communication and other ongoing customer services. Specifically, the insurance industry defines administrative costs as all costs in excess of benefit payments. This is a large definition, which apart from costs resulting from core administrative functions may include profits as well as taxes and reserve payments and could be referred to as „non-benefit costs“.
A key challenge when comparing administrative costs relates to the fact that insurers do not all perform the same activities. Apart from core insurance activities, such as member registration, reimbursement of providers or financial management, other activities may or may not be performed. For example, risk equalization, quality assurance, or health technology assessments for cost-effective benefit package definition are not always undertaken, but administrative costs are incurred if they are.
It can be difficult to draw any conclusion about the efficiency of an insurance company by comparing its operating costs. Naturally, insurance companies with high premiums have lower operating costs than insurance companies with lower premiums. The cost for distribution may also vary depending on which channels the company is utilizing. An insurance company may also experience higher operating costs during a certain period, due to large investments, for example, in a new and modern IT environment, but which will have a positive impact on the operating costs in the longer perspective.
A modern platform
The life insurance industry has been relatively slow to respond to existing cost pressure, and companies that are already moving in the right direction should be prepared to continue with cost reduction efforts in the coming decade. It’s clear that no one can afford to do nothing. Life insurance companies with legacy policy administration systems are unable to truly leverage the benefits of economies of scale and a fragmented legacy IT landscape is often a root for driving high IT costs as well as increasing operational costs.
Modernizing IT systems for policy administration and benefits management is undoubtedly a complex and challenging exercise, but when done properly it can lower both IT and operating costs. By transforming traditional business models and migrating legacy product portfolios and policies to a modern platform, designed for digital customer interactions and cost-efficient administration, life insurance companies can significantly reduce their administration costs while simultaneously improving customer service.