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2 PwC | More for less: Five steps to strategic cost reduction
Contents
Introduction: 3
Rethinking strategy and cost 5
The way forward 8
Conclusion: 12
Key questions for your organisation
Our approach 13
Contacts 14
More for less: Five steps to strategic cost reduction | PwC 3
Introduction
Insurance CEOs recognise the scale of the disruption within
their industry1, which is creating opportunities for some,
and threats for others.
1 If we put the disruptive forces of change together, the only sector facing greater disruption than insurance is entertainment and media. Based on responses to PwC
19th Annual Global CEO Survey (2016) ‘Seizing the future’ (www.pwc.com/ceoinsurance). Disruption defined as significant CEO concerns over overregulation, new
market entrants, the speed of technological change and shifts in consumer spending and behaviour (www.pwc.com/ceosurvey)
2 101 insurance CEOs were interviewed for the PwC 19th Annual Global CEO Survey (2016) ‘Seizing the future’ (www.pwc.com/ceoinsurance)
4 PwC | More for less: Five steps to strategic cost reduction
2. Align costs to strategy: Look across There are huge top and bottom line
the whole organisation and differentiate rewards for getting this right. Your
the strategically-critical ‘good costs’ from business will be more differentiated and
the non-essential ‘bad costs’. equipped to deliver on its objectives.
You’ll also be less reliant on pricing to
3. Aim high: Be bold, be brave and be
compete in the market as resources
creative – use technology, innovation
are targeted at high earning growth
and new ways of working to radically
business. Without this clear sense of
optimise the cost base.
what costs to keep and what ones to
4. Set direction and show leadership: eliminate, you run the risk of being left
Deliver cost optimisation as a strategic, behind.
business transformation programme.
Stephen O’Hearn
5. Create a culture of cost Global Insurance Leader, PwC
optimisation: Ensure you embed a
culture of ownership and incentivise
continuous improvement.
Many of you will have had bruising The underlying challenges include and dedicated resources allocated to cost
experience of cost initiatives that have resistance from the organisation. This initiatives.
failed to deliver lasting gains. Why is this encourages boards to cut a little from
Now, however, accelerating disruption
such a difficult challenge? All too often, each division as a politically acceptable
has created the burning platform for
ambitions aren’t set high enough on the way to share the pain, rather than
transformation in both strategy and cost
one side and the difficulties of execution looking at where resources could be best
(see Figure 1). And the current market
are under-estimated on the other. This deployed or the underlying reasons why
also offers the technology and openings
is especially so now that we’re moving costs in some areas are needlessly high.
for innovation needed to cut through
from the quick win to hard gain phase of Lack of buy-in can be compounded by
complexity and transform operational
strategic cost reduction. the hurdles of operational complexity
capabilities.
and a lack of direction, accountability
Insurance
industry
Virtually zero investment returns are
0% driving optimisation of the cost base
Market conditions
Continued declining rates, Customer expectations
poor investment returns Demanding consumers with
combined with expense higher expectations of service
pressure create a challenging and value. ‘Digital natives’ expect
environment to underwrite quick and easy access to better
profitably. products and information. This
trend also raises the bar for B2B
relationships with corporate,
affinity and broker markets.
Sorting the good costs from the basis for keener pricing and reduced developing analytical techniques enable
the bad claims costs. insurers to quickly scan for people
The key to realising this opportunity is who may be likely to commit fraud
2. Transactional processes and identify suspicious claims. Further
making sure that maximum resources
are targeted at the drivers of profitable Bad cost developments include predictive models,
growth (good costs), while freeing up Underwriting, claims and finance are which can set benchmarks for how much
and minimising bad costs. So what are littered with low value transactional a batch of similar claims should cost.
the good costs and bad costs in this fast- processes and wasted costs (in It’s then possible to compare the results
changing market and what marks out underwriting, for example, up to against actual experience to detect signs
the insurers and reinsurers who are out 80% of the sales time can be spent on of leakage and tackle the causes.
in front? administration). These processes often Sharpening underwriting: Automation
rely on heavy manual workarounds, and artificial intelligence are already
1. Distribution including re-inputting of information cutting costs by speeding up routine
Bad cost onto multiple systems. underwriting and providing a more
Distribution and policy origination Good cost informed basis for pricing and loss
are needlessly costly, a problem Robotics: Front-runners are moving to evaluation. The emerging opportunities
compounded by poorly targeted robotic process automation (RPA) and include using tracking data in areas
marketing and low conversion rates straight-through-processing (STP). As ranging from equipment sensors to the
within many businesses. The expense of Figure 2 highlights, robotics have already GPS transponders on container ships to
distribution within insurance can be as been proven to deliver significant savings offer real-time risk monitoring, pricing
high as 30% of the cost of the product. over ‘old style’ onshore and offshore and protection. Advances in cognitive
This isn’t sustainable over the long-term. solutions. computing also allow you to move
from analysing what’s happened to
Good cost Digitising claims: A new generation anticipating what will happen and when
Sharpening customisation and of monitors and apps can allow (predictive analytics) and proactively
conversion: The businesses out in front policyholders to initiate a claim shaping the outcome (prescriptive
are using machine learning, advanced instantaneously, making it easier analytics).
analytics and sensor technologies to for policyholders and speeding up
target clients, evaluate their needs, processing. In a car accident, for Blockchain: Blockchain applications
develop fully bespoke solutions and example, the in-car sensor could record can cut processing time and cost of
price risk in real-time. The strategic the speed and direction of travel, while placement and KYC/AML. They could
cost benefits include more focused sales a photo texted from the scene would also speed up decisions over claims and
and marketing investments and more show the damage and get repair and improve customer experience
favourable outcomes for policyholders settlement lined up straight away. In reinsurance, we believe that
– products are bought not sold. The Technology is also strengthening fraud blockchain could reduce expenses by
greater precision in risk selection and prevention and detection as behavioural, 15%-25% of expenses ($5-$10 billion
customer customisation can also provide pattern recognition and other fast industry-wide)4.
3 http://www.csc.com/insurance/success_stories/104821-metlife_modernizes_a_traditional_business
4 We explore the potential further in ‘Blockchain: The $5 billion opportunity for reinsurers’www.pwc.com/
blockchainreinsurance
More for less: Five steps to strategic cost reduction | PwC 7
100%
High
Create an environment and culture that embeds change in the company DNA and
enables a sustainable future
Source: PwC
More for less: Five steps to strategic cost reduction | PwC 9
• Increase efficiency or lower service levels for what • Look for opportunities to increase efficiency
you keep
30%
Eliminate or be pare down Aim for best-in-class cost levels
Starting cost base
30%
breakdown
Differentiating capabilities ‘Can’t-avoid’
• Three to six differentiating capabilities that build • Activities required by insurance industry to
sustainable advantage compete (e.g. Solvency II)
• Streamline for effectiveness and efficiency • Look for opportunities to increase efficiency
• Invest in critical activities to reach best-in-class
service levels 30%
May spend more than competitors Aim for best-in-class cost levels
Source: PwC
Step three Being brave means cutting the costs that to understand the trade-off between
Aim high: Be bold, be brave and be have seemed too difficult to tackle, such how much they want to live off now and
creative as property, structural inefficiency and their desired standard of living when
complex legacy operations. they retire, and then creating solutions
There’s no point looking at cost
to meet these goals. Product boundaries
reduction in terms of benchmarks or Being creative means looking beyond
would become redundant within
percentage targets any more. The real what’s always been done, and asking
comprehensive solutions that could
differential is the strategic ambition to why and what are the alternatives.
embrace mortgages, equity release, tax
set the bar higher (10X) and explore Examples include the opportunities
and inheritance planning,
all possibilities, rather than settling opening up in robotic underwriting or
as well as pensions and life cover.
for marginal gains. As Figure 5 automated claims handling. Crucially,
highlights, there are opportunities it also includes real insights into what
across the value chain. customers value and are prepared to pay
for. Now that life and pensions customers
Being bold means the courage to
in the UK have to pay for financial
withdraw from markets or streamlining
advice, for example, many are opting
product lines so that resources can be
for DIY investment instead. But they are
better focused – cutting back redundant
prepared to pay for defined outcomes.
parts of the organisation so it can thrive.
A good example is helping customers
• Control frameworks • Software robotics • Software robotics • Third party spend analysis • Legacy liability restructuring
Source: PwC
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Conclusion:
Key questions for your organisation
The survival and success of your business depends on
a transformation in your competitive capabilities and
underlying cost base. The only way to make this work is
to think strategically and think big from the outset –
be radical, don’t tinker.
2. How can we cut out the low performing business and inefficient operations
(‘bad costs’) that waste resources and hold back returns?
The front runners are already securing the competitive differential from effective
strategic cost reduction. And the edge they’ve gained will continue to increase as
the market becomes more disrupted and slower moving peers struggle to sustain
relevance and returns.
More for less: Five steps to strategic cost reduction | PwC 13
Our approach
We take a detailed analytical approach focused on
identifying the value generating potential within the
business in a changing marketplace and differentiating
the good and bad costs.
End-to-end value and cost assessment Design and test Programme delivery
Iterative process
Complex or cross-functional opportunities Detailed solution design
• Design solutions blueprint
• Assess risks
Opportunity assessment
• Refine business cases
• Articulate strategy Implementation/further opportunity
• Build cost and value baseline evalution
• Identify gaps and opportunities • Execute action plans
Implementation plan
• Develop initiatives and quantify potential • Monitor progress and make required
• Develop detailed implementation plans adjustments
impact
• Launch test pilots • Evaluate further opportunities for cost
• Prioritise initiatives
• Develop project management office/tracking reduction
• Assign ownership
Quick
wins and
accelerators
Source: PwC
14 PwC | More for less: Five steps to strategic cost reduction
Contacts
Patrick Maeder
Partner, PwC Switzerland
+41 58 792 4590
maeder.patrick@ch.pwc.com
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