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Life Health > Life Insurance > Term Insurance

Cost-Cutting Costs

By Linda Koco

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Low-cost initiatives can go only so far before they take on the aura–and problems–of cheapness: limited designs, sloppy contracts, poor service, etc.

As the saying goes, “You can squeeze only so much juice from an orange.”

This applies to insurance products and purchases as well as to other products and services, be they cars, computers or reservation systems. Wherever you look, from the executive suite to the consumer purchase, cost savings initiatives can morph into “being cheap” in the blink of an eye. That can be very expensive in the long haul.

Let’s see how this applies to the insurance product landscape.

Company executives: Curbing waste wherever it exists will always be on your list, but cutting into the marrow of insurance products and services hardly qualifies. Pare back on legal reviews? Be prepared to pay for it in regulatory challenges and lawsuits. Cut back on actuarial modeling? Be ready to suffer the consequences of so-so designs and no competitive edge. Order massive layoffs? Get ready for bad PR, lawsuits, and potential takeover.

Actuaries: You can trim development time and costs by not adding more features to products, but foregoing innovative add-ons could put your products on ice. When guaranteed living benefits features took wing in variable annuities, for instance, how could you cost-justify not offering such features in your own company’s VA products? That would be VA suicide–a costly mistake.

Consultants: Want to cut corners by ceasing to market your services? Want to offer clients “low-cost, simple” solutions by holding back on suggesting competitive upgrades or break-through concepts? Look out. You may attract some bottom feeders, but your firm will risk losing face with premium clients. At some point, you’ll have to start building clientele all over again just to stay in business.

Systems pros: No doubt about it, you have scored huge gains in not only cost-control but also productivity, immediacy and a host of other positives. But cutting costs here–fewer upgrades, smaller staffs, less intensive quality control, etc.–can undo all that in a jiffy. What do you save if you offer a neat new online data entry capability but withhold or limit administrative support for it?

Advisors: You definitely don’t want to go in the hole just so you can have the biggest billboard in town or the flashiest 4-color ad. Neither do you want to overextend on staffing, office overhead or continuing education programs. But what happens if you do no marketing, only respond to customers by e-mail, and only attend freebie CE courses? Chances are these tightwad ways could set you back big-time in credibility, service and growth opportunities. Where’s the beef?

Consumers: It would be hard to find any business person who expects customers not to compare products, services and prices, among many other things. That’s part of the fabric of consumerism. But do you really want to buy the cheapest insurance policy, no matter what? Are you prepared for the cost consequences when, say, your low-cost annual renewable term life policy quadruples in price in the later policy years? Will you think you got a good deal when you find that your “affordable” LTC policy doesn’t cover home care?

In business, as in storybooks, misers never get plaudits for their penny-pinching ways. Think of the put downs of 19th century industrialist Andrew Carnegie and the fictional Ebenezer Scrooge (in Charles Dickens’ A Christmas Carol). Their excessive frugality reeks of lack of confidence in a productive future.

But sensible cost control does not have to go to such extremes. It can be implemented in ways that contribute to growth–of sales, opportunities and competitiveness–rather than to scarcity.

How so? By taking a strategic approach to spending, or lack thereof, with the long-term impact fully accounted for. What is the likely impact, for instance, of this cost-cutting measure–not just tomorrow, but in five years? Will we really save?

Naturally, such inquiry will invite star-gazing, and the what-have-you-done-for-me-lately managers will not think much of that. Still, it is in the long term where the true results and/or costs of cost-saving efforts usually come to light, so it bears scrutiny.

One manager I know performed a forward-looking analysis on a cost-cutting project, only to find that the “anticipated savings” would dissolve into enormous admin costs. Other managers checked the numbers and reached the same conclusion. The project was scrapped–the only savings being in dollars not yet spent.

The point: If a project or product saves on one side of the ledger but costs more on the other, it poses the question, “Why bother?”

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