Despite the recent decline in equity prices, the stock market has enjoyed an extraordinary bull market over the last decade. Those working in life & annuity (L&A) insurance companies can only look on in envy – like everyone is at a fabulous party to which they weren’t invited.
Life & annuity insurers have barely participated in the stock market boom. While the S&P 500 roughly doubled over the last decade, the capitalization growth for U.S. L&A companies was just 40%. The ratio of equity market capitalization to book value for L&A insurers is just 1.04, which is lower than any other industry segment, even slow-growth industries like apparel retailing, coal mining and steel.
Investors are demanding stronger revenue growth from the industry, which will require life & annuity insurers to overcome stiff headwinds, such as heightened consumer demand for online sales, advice and service, and the need to improve what consumers perceive to be a poor buying experience. In addition, “insuretech” startups are applying digital capabilities to introduce entirely new business models that offer dramatically lower prices and better service.
Reaching Higher Ground
I’m convinced insurers will find it difficult to substantially boost revenues unless they first develop more efficient operating models that drive down expenses, freeing up the capital needed to invest in new initiatives. They’ll also need modern systems that support the latest digital capabilities if they are to be successful in either competing or partnering with new insuretech companies.
Insurers have been working to reduce expenses through such tactics as sourcing business processes to industry experts, creating shared service centers, and slowly but surely employing robotic process automation. But in my experience, few companies have tackled the heart of the problem – the need to rationalize and modernize the proliferation of outdated, overlapping legacy systems, usually the result of growth through mergers and acquisitions.
Meeting the Challenge
I see these operational challenges in our current work with a leading U.S.-based life insurance and investment company. Created through a series of mergers and acquisitions over the years, the company has struggled with a tangle of 13 outdated legacy policy administration systems, relying heavily on manual processes to manage policy issues, billing, collections, policy processing and claims. The overlapping systems have been expensive to operate and unable to support modern digital capabilities. Further, the company’s reliance on manual processes has created substantial business risk, such as noncompliance.
To rationalize the company’s operating environment, we are implementing our LifeAdmin Core solution, a modern, scalable policy platform designed to accommodate the digital capabilities needed to improve the customer experience and sales conversion. The platform is a business process as a service (BPaaS) solution, which eliminates the insurer’s need to worry about the fixed costs of a major upfront capital investment. The company only pays for what it uses, on a per-policy basis.
Currently, for term and whole life products (and later for annuity products and other types of life insurance products), the platform comes pre-equipped with the standard product and process configurations used in the industry. Instead of reinventing the wheel, carriers can launch new products and services with minimal effort. The platform can still be customized to meet a company’s unique requirements when there is a product or process that differs from standard industry practice.
Cost Reductions, Faster Time to Market
We are now migrating applications to the new platform, and the early results appear promising. The company expects to reduce its cost per policy by more than 40%. Cost reductions of this magnitude not only bolster financial performance and ROI, but they also free up capital that can be invested in leading-edge digital capabilities and new products. When those new products are designed, they can be brought to market much faster.
The most important benefit may be the impact on senior decision-making. By using a BPaaS solution, senior management is freed from managing administrative issues and has the freedom to focus on what really matters – driving revenue growth by introducing new products and services that better serve the customer.