Moving support functions to low cost locations could save specialty (re)insurers estimated $1bn+
24 March 2014
- Firms could centralise up to 40% of their activity
- 85% of specialty (re)insurers are focused on cost reduction and 40% already seeing results
- Eastern Europe is growing as off-shore location of choice
The greatest impact on specialty insurance and reinsurance companies’ expense ratios could be made by simplifying organisation models for underwriting operations and support activities, and centralising them in lower cost locations, according to an EY survey on cost benchmarking. By doing this they could reduce expense ratios by 1%, which would save more than $1bn across the global industry.
EY surveyed over a quarter of the global specialty (re)insurance market by premium, analysing cost, headcount and premium ratios for the participants’ business.
Soft market drives insurers to focus on cost
As (re)insurers seek to grow scale in a persistently soft market, the survey showed that operational expenses are becoming an increasingly important focus area. 85% of participants say they are already involved in cost reduction programmes, with 40% reporting delivered results equivalent to 0.9% of their expense ratios since 2012.
The most cost-efficient (re)insurers were found to have invested over a three to five year period in reducing organisational duplication by establishing operational centres for underwriting, claims and support activities in low cost locations. The survey showed that Eastern Europe is becoming a destination of choice, with Poland, Romania and the Czech Republic as recent examples.
Benedict Reid, Specialty (Re)Insurance Director at EY says: “The savings opportunity for (re)insurers is significant. The majority of (re)insurers have a large proportion of staff based in high-rent offices, in some of the most expensive cities in the world. In addition, activities are frequently duplicated, limiting the organisation’s ability to operate in the most agile and efficient way required to compete and grow.
“Low cost operational centres can also have a dual benefit – acting as hubs to enable the expansion of global trading locations, and effectively allowing premiums to grow whilst expenses remain static or, in some cases, even reduce.
“The key to further success would be increasing the scope to cover more complex activities, such as underwriting operations and claims. However, this must be done without impacting the performance of trading underwriters and claims adjusters, which is an area of real complexity.”
Both large global players and small scale (re)insurers can reap benefits
Organisations as small as 150 employees were found to be as successful as their larger counterparts in using centralised support functions to enable cost reduction and growth objectives.
Rodney Bonnard, Global Specialty Insurance Lead at EY, says: “It is clear that simplification of the operating model is an increasingly important focus for specialty (re)insurers looking to drive competitive advantage in challenging market conditions. As a result, the option to centralise activity in lower cost locations, with substantially lower direct costs, is becoming a more established course of action for market participants of all sizes.
“The tipping point will be when a larger number of Lloyd’s Managing Agents and Bermuda platforms join the trend, as they have been slower to implement organisational change to date and are expected to make a real impact when they do.”