By David Shaw and N.V. Subramanyan
Sept. 30, 2010
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| David Shaw |
N.V. Subramanyan |
As the world approaches the third anniversary of the start of the recession, it is time to assess whether there have been any positive outcomes for the insurance industry from the global meltdown.
Unlike during the Great Depression, many insurers were heavily affected by the current economic downturn. This proved shocking, since the insurance industry should, ideally, be recession proof. Typical problems faced by insurers include:
• Increased policy shopping: Increased consumer shopping for discount insurance makes getting and keeping business difficult.
• Fewer assets sold or insured: Decreased economic activity leads to fewer new policy sales, which would ordinarily push premiums higher. Fewer high-premium policies mean fewer funds available to pay claims.
• Increased coverage levels: Existing policyholders may feel the need to increase their coverage to hedge against disastrous claims during periods of reduced wages or unemployment.
• Resource Optimization: Rightsizing of employees and reduced investments in technology means less focus on innovative solutions.
The Way Out
Unfortunately, most of the insurance industry’s issues resulting from the recession are difficult to predict or control. Therefore, steps like cutting operating costs, having more efficient marketing channels and improving customer retention are essential. Some important steps the insurers might take to deal with recessions are outlined below.
Cost Optimization/Expense Reduction
Cost optimization is the cornerstone of an insurer’s survival strategy in a recession. It’s also imperative to maintain a common technology platform throughout the organization. Other cost reduction strategies include: developing online portals, automating hitherto manual processes and offshore centers of excellence and eliminating redundant systems.
Present industry solutions also include on-demand services and cloud-based solutions to deliver lower costs, higher returns and increased efficiencies. Moreover, shared processing platforms, shared services, co-creation and white labeling also yield these benefits:
• Reduced cost/need for capital investment
• Improved cost transparency and predictability through variable pricing structures
• Improved speed, accuracy and consistency of processing
Revenue Increase
The next logical focus area for insurers in all seasons, especially in a recession, would be to increase revenues. For insurers, revenues are always a function of the following:
• Product variety: Products operate on different philosophies that relate to varying types of needs. Given the socio-economic shakeup that has taken place in the last couple of years, it’s imperative that insurers come up with newer products based on changing consumer need.
• Lean and efficient distribution channels: Efficient and varied distribution channels are critical for insurers to maximize sales. Pending the market segments, channels such as phone, Internet, neighborhood salesperson or kiosk can help increase efficiency. Integration of these various channels is critical for a successful, multi-channel approach.
• Appropriate risk management: Renegotiating reinsurance treaties, making pooling arrangements and revising the scholastic models supporting their operations are all part of good risk-management.
• Smart investments: Since a major chunk of an insurer’s revenue comes from investment, insurers need to revise investment strategies with the market conditions.
Process Optimization
Process optimization is a key mechanism to manage costs. It includes retrieving process performance information from the modeling or monitoring phase, identifying bottlenecks and potential opportunities for cost savings, and applying those enhancements into the process design, creating greater business value.
Some important benefits of process optimization are:
• Improving efficiency of processes by reducing cycle time
• Enabling continuous process improvement and improved customer service
• Improving profitability by reducing the administration/resource costs
• Improving overall productivity
• Aligning IT execution with mission critical business strategy
Customer Retention
During recessions, buyer confidence is low, which means keeping existing customers is both more important than attracting new customers and more cost effective. Customer relationship management (CRM) technologies and predictive analytics (PA) support insurance business strategy by providing greater customer behavior insight and thus, more effective customer interactions.
Chief advantages of PA & CRM are:
• Increasing customer penetration by getting more out of established customers
• Using resources effectively by identifying/concentrating on loyal customers
• Maximizing efficiencies by working smarter and not just harder
Conclusion
Though insurance companies were not as badly affected as other financial institutions, the adverse conditions could have been avoided if the above considerations were taken more into account. That there is no real cure-all to a recession is an unfortunate truth. However, the steps mentioned above along with appropriate technological interventions and a “return to the basics” mode of operations may help minimize the ensuing effects.
David Shaw is the Senior Vice President and Practice Leader for the North American Insurance vertical at NIIT Technologies. Based in NIIT Technologies Inc.’s North American principal office in Atlanta, Georgia, David can be reached at David.Shaw@NIIT-Tech.com.
N.V. Subramanyan is the Practice Leader for the Insurance vertical at NIIT Technologies Ltd. Based in NIIT Technologies Limited’s corporate office in New Delhi, N.V. can be reached at venkata.narayanan@niit-tech.com.
NIIT Technologies is a global IT solutions organization, servicing customers in North America, Europe, Asia and Australia. It offers services in Application Development and Maintenance, Enterprise Solutions, Managed Services and Business Process Management.