Shared services: The streamlined solution life insurers need?

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.

See also: Redesigning life insurance distribution: How carriers can help

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