The hard economic facts and lingering uncertainties have intensified perennial cost pressures. Indeed, low interest rates, cash flow strains, and lower equity values represent something of a financial “perfect storm” for insurers. Protecting liquidity and solvency remains the first priority. Instilling operational cost efficiency should be the second.
A lean and flexible cost structure is necessary for many reasons. It is especially important in highly competitive lines of business and direct markets. In this sense, cost efficiency is increasingly correlated with competitive advantage. From customer-facing processes to deep back-office functions, straight-through processing and more extensive automation are the means by which insurers can take out manual tasks and streamline transaction cycles.
Cost optimization programs help insurers play both offense (e.g., freeing funds to invest in digital capabilities) and defense (e.g., protecting precious capital reserves and the bottom line). Similarly, they enable organizations to scale up or down quickly in response to market opportunities and changing conditions.
Capital management has also come to the forefront for insurers. Expected losses and market volatility have strained the capital base of many insurers, while a number of regulators have banned dividends and share buybacks. At the same time, insurers require cash and capital to accelerate growth, whether by organic or inorganic means, and finance large transformation programs, even as income is strained. More have turned to alternative capital to fund their growth strategies (as highlighted in chapter 2).
Market volatility has fed into capital volatility, and financial and capital planning has become increasingly difficult given overall uncertainties. We have seen insurers adopt a more dynamic, scenario-based approach to planning and, increasingly, to capital allocation and business decision making as well.
Agility and efficiency aren’t just for operational and cost models. To adapt during these uncertain and changing times, insurers need to prioritize agility and efficiency to optimize their capital allocation.