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Deloitte: Cost Efficiency Pays Off

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NU Online News Service, April 26, 1:15 p.m.– Consultants in the New York office of Deloitte & Touche say investors really do reward cost-efficient financial services companies with higher share prices.

While the economy boomed between 1997 and 2000, the large banks that had the most improved cost-efficiency ratios saw their share prices increase by an average annual rate of 19.2%, compared with an average gain of 9.6 % for all of the 100 largest banks, the consultants write in a study on the benefits of “strategic cost reduction.”

Deloitte is one of the firms that give big companies advice on cutting costs. Critics say drastic cost-cutting efforts, such as massive layoffs, may create more problems than they solve.

The Deloitte consultants concede that companies have to plan cuts carefully.

“Cost optimization and business strategy are joined at the hip,” says Dennis Yeskey, a Deloitte & Touche principal. “A cost reduction program that doesn’t consider a company’s overall strategy risks the attainment of long-term strategic goals.”

Executives that want to cut costs well really need to understand their businesses, the Deloitte consultants say.

While setting goals, a firm should analyze its competitive position, evaluate potential savings across each line of business and determine the level of cost reduction required to support the firm’s current share price, the consultants say.

The consultants suggest, for example, that a company can cut the cost of layoffs more than 10% by using cash from its pension plan to pay the severance benefits.

Companies can also try options such as outsourcing work and using the Web to handle purchasing, the consultants write.

Insurance agents can play a part by coming up with benefits packages, such as programs that combine pensions, health insurance and life insurance, that hold down or lower the overall cost of insurance, says Larry Danielson, a principal at Deloitte’s consulting unit.

“Agents will have to be careful not to try and sell the same programs to large- and medium-size companies, because the carriers cannot continue to offer the same level of service at current prices,” Danielson says.

Top agents will probably earn more, but weak agents will earn less and get less support from the home office, Danielson says.

The reengineering of the insurance business should provide brokers with drastically reduced turnaround times for typical information requests, marketing materials, illustrations, quotes and claim status, Danielson adds.

“In some circumstances brokers will no longer be involved in routine transactions, such as address or beneficiary changes,” he says. “They will have to figure out new, more valuable reasons to interact with clients.”

In other cases, brokers that handle tasks such as policy administration might find new opportunities to win outsourcing contracts from the carriers, Danielson says.


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