Historically, life insurance companies have not been early or aggressive adopters of operations-shared services. As banks, manufacturers and companies in a broad range of industries embraced shared services to centralize, standardize and reduce the costs of various back-office functions, life insurers largely remained on the sidelines.
The lagging adoption in life insurance grew mostly from the perception that individual product lines and business units had such unique processing, support and technology needs that their back offices had to remain independent of those supporting other product sets. Today, however, this conventional wisdom is changing, as the business case for shared services has become clearer and more compelling.
With current economic conditions forcing a re-evaluation of existing operational models and cost structures, shared services is a viable option to increase profitability, streamline processes and set the foundation for long-term operational excellence. Further, the strongest shared services value proposition in life insurance involves the creation of highly efficient and cost-effective operations centers that go beyond simple accounting and HR processes to the support of underwriting, policy administration, claims management and other core business functions across the product portfolio.
Let’s take a look at the critical questions and challenges life insurers must address as they seek to optimize core operational processes from shared services. We’ll also highlight the best first steps to take along the shared services journey.
Challenges and opportunities in shared services
We define shared services as operations centers that support multiple product entities or lines of business and use common practices and procedures to ensure standardization and efficiency in specific processes, such as claims or billing.
Typically, these operations centers are internally staffed, though some resources may be outsourced. While many companies initially apply shared services operating models to accounting, finance, HR or IT, forward-looking insurers are also moving other operations, such as claims, billing, underwriting and policy administration processes, to shared services models.
The operations center allows organizations to generate significant value through consolidation and standardization, while focusing capabilities and resources on the unique needs of individual product sets or lines of business. Top-performing shared services centers are notable for their customer focus, critical mass of process expertise, high service levels, objective quality measures and widespread use of enabling technologies.
While sharing services has a well-earned reputation for reducing costs, life insurers have long feared that standardized processes would compromise their ability to deliver quality service to high-value customers or tailor the customer experience by product. Further, it was widely believed that the needs and preferences of group life customers, for example, were so different from those of individual annuity customers that there was no way to manage even simple administrative tasks (e.g., address changes) through a single, centralized group. Because those lines of business also maintained their own P&L statements and unique go-to-market approaches, executive leadership was understandably reluctant to give up control of any operation or process impacting bottom-line performance.
One downside of this product-centric or business unit-led management approach is that it has allowed siloed organizations, processes and systems to grow up at many insurance companies. Decades of acquisitions and growth have also contributed to the siloed organizational structure. In some cases, carriers have duplicative functions, with different teams handling the same basic work and activities with different levels of competency and performance levels.
To be clear, sharing services is not exclusively about cutting costs. It can also help life insurers manage a range of other challenges, including compliance. With the increasingly complex regulatory changes being established in the United States and abroad, new regulations demand a more rigorous, automated and repeatable approach to managing risk, capturing the required data and delivering on multiple, complex reporting requirements.
Current systems and processes greatly constrain insurers’ compliance efforts, forcing them into inefficient, costly and error-prone manual workarounds to deliver required reports. With a higher degree of automation and efficiency, shared services centers can greatly streamline the process of regulatory reporting and mitigate the risk of non-compliance.
Collectively, these factors underscore why life insurers need to take the long view and consider strategic approaches for establishing a flexible and lower-cost operating structure suitable for ongoing evolution of product portfolios and continuous process improvement. Centralizing core support, administrative and transaction processing capabilities in a shared services organization or dedicated operations centers represents such a strategy.
The business case for shared services
Cost savings are a key driver of the shared services value proposition. Our experience suggests that total net savings (from initial, pre-implementation baselines) typically range from 15 percent to 40 percent. Of course, start-up costs for developing the centralized operations center must be accounted for in initial ROI models.
Several factors contribute to the overall savings, starting with lower labor costs. The reduction of duplicate resources, labor arbitrage in offshore locations, economies of scale and process automation can produce 25 percent to 35 percent reductions in the labor-cost component of the baseline expenses. Process simplification with the goal of enhancing efficiency and effectiveness can result in savings of 5 percent to 8 percent of overall baseline costs. Consolidation of similar work activities in fewer locations can deliver baseline cost reductions of 3 percent to 5 percent.
Further, minimizing redundant infrastructure by consolidating and rationalizing systems helps reduce the technology budgets.
Enablers of shared services success
Insurers that have realized the business case have embraced a number of critical enablers, including process simplification, automation and the consolidation of technology platforms to support operational functions. Flexible, rules-based engines can help ensure that underwriting and claims management processes, for example, are standardized to the extent they can be, while still meeting the unique needs of different product sets, user groups or customer segments. Strong technology platforms can be enhanced with additional data, advanced analytics tools and reporting dashboards to gain real-time views into performance.
Even for insurers that maintain multiple policy administration platforms, process standardization can help drive improvements. For instance, by breaking down functions into basic steps, it is possible to identify common operations and tasks that a single unit can perform in support of multiple product lines. Process “deconstruction” can also point the way forward to simplification and automation, which typically results in higher efficiency and fewer errors and exceptions. Such streamlined processes are excellent candidates for consolidation via shared services centers.
Another effective model involves internal centers of excellence (in underwriting, for example) that focus on more strategic tasks and decision making, such as developing underwriting guidelines or new product introductions, while highly efficient operations centers or processing factories are utilized to handle higher-volume administrative tasks.
The use of robust service-level agreements and more sophisticated reporting means executives can have confidence that the shared services center is delivering quality service experiences to customers. Improved process visibility may also give managers that first-hand sense of “walking the floor” to see how service is being delivered — even if customer service reps and claims handling staff are located thousands of miles away.
Where to start and the path forward
To chart the best course forward and define the optimal approach, life insurers must address a number of critical questions. Among them:
- How efficiently and effectively are core processes operating today?
- What is the opportunity relative to labor cost savings?
- Where are the integration points or commonalities in processing needs?
- Which sub-processes must be customized by product line or customer segment?
- Do current operations have unique time zone and language requirements?
- What is the organizational appetite for change?
While the lessons of early adopters should be applied where appropriate, life insurers must carefully assess their unique product portfolios, policyholder base, competitive position and market opportunities. Leadership teams will want to prioritize the product categories that are the best fit for centralization, given their current performance and future growth prospects.
Defining a clear and limited initial scope can help mitigate the risk of taking on too much change, too fast. Further, experience shows that shorter implementation timelines can be less disruptive and build momentum for longer-term change through quick wins. These are important factors to bear in mind, because underestimating the organizational impact of a shared services implementation can lead to higher than expected costs or outright program failure.
The history of shared services in other industries confirms that process refinement and technology enhancements are ongoing pursuits, not one-off undertakings. Many mature shared services centers naturally drive toward fully automated end-to-end processing models once they achieve initial cost reductions. Life insurers should prepare long-term improvement plans for their operations centers as they build on initial performance gains and cost savings and seek the optimal balance of process efficiency and service quality for the long term.
Advancements and innovations in technology, data management and sourcing models offer life insurers the opportunity to break free from traditional organizational structures. That is, they are no longer restricted to having siloed or standalone operations by product line or business unit, with each of these organizations providing (and paying for) its own service functions. The combination of market shifts, competitive pressures and macroeconomic realities have stressed the old siloed model to the point that it is no longer sustainable for the long term.
Life insurers must assess and prioritize their own strategic opportunities and tactical needs. Whether they structure as internal centers of excellence or cross-functional operations centers, it is clear that the time for shared services in life insurance operations has come.
The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP.
For more, see: