Can Operational Productivity improve Insurance Competitiveness?

It seems as if the problems besetting the Insurance industry will never end. Soft markets, low yields, increased regulation, and unprecedented natural catastrophes have intensified the pressure to lower operating costs, reduce waste and lower risk on investment.

While a total business transformation may end these problems, it’s unrealistic at a time when most organizations are struggling simply to stay afloat. There’s another path that Insurance companies can follow: tackling operational performance using supply chain operations as a model.

Take the case of any supply chain in product industries-from tablets to groceries to shoes-and you will find executives focused on "cost per unit." Why? By knowing the use and cost of each element in the production process, including FTEs, you can adjust the components of your supply chain to drive effectiveness, efficiency, and productivity. Done correctly, the result is reduced cost, increased profit, and improved competitiveness.

Many manufacturers, like insurers, operate at low margins, and they have learned to look beyond financially-oriented industry metrics like Operating Ratios to stay competitive. Instead, they delve into the microeconomics of their business. They examine processes in each work stage-what we’ve termed a "unit of work"-to understand and improve each of the underlying elements that drive their costs and operating performance. Applied originally to the plant floor, manufacturers have extended this focus to include their entire supply chains.

This microeconomics mindset hasn’t been pervasive in the Insurance industry. Yes, there have been sporadic attempts to apply Lean/Six Sigma manufacturing principles, but with limited measurable impact on the bottom line. We’ve also seen many insurers waste enormous amounts of IT capital on automation without achieving sustainable returns from that investment-a pattern traceable back to a lack of sufficient attention to the microeconomic drivers of processes and performance.

We think the micro economic unit of work approach is just as applicable to the Insurance industry as it is in manufacturing. Insurers cannot simply rely on new products, premium increases, or even emerging markets for higher profits. They also need to know the step-by-step performance involved in delivering services so they can manage them to create streamlined, responsive, and profitable organization.

By changing the focus to operational productivity, you could potentially move the operating ratio 10 to 20 points-doing it rationally and benchmarking yourself using value as the guide. This will help drive your firm’s competitiveness. You can then reinvest these gains into your pricing and servicing because you will understand precisely how your organization works, know that you’re running it without fat, and know that you’ve made it nimble for when change is necessary.

The units of work model may not prevent earthquakes, floods, or new regulations, but it will help make your company better able to survive them.

About the Author

Mark Foster Collier- Consulting Partner, Wipro Consulting Services.

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