9 minute read 16 Jul 2021
Silhouette of a man standing

Why insurers must embrace strategic cost transformation

By Peter Manchester

EY Global Insurance Consulting Leader and EY EMEIA Insurance Leader

Leader in insurance transformation and strategy. Active interest in new entrants. Uses leading-edge technology to transform the customer experience and insurance landscape.

9 minute read 16 Jul 2021

Sustainable long-term growth in insurance requires more efficient and agile operating models.

In brief
  • Insurers are forced to look at costs in new ways, with an emphasis on increased flexibility as well as lower absolute costs, in order to remain competitive.
  • Past cost reduction efforts have not delivered lasting improvements in ratios and aren’t enough for today’s dynamic market and demanding customers.
  • Insurers should shift from a traditional and short-term cost-suppression mindset toward a more strategic and holistic approach to sustainable value creation.

There is broad consensus that the COVID-19 pandemic has accelerated important changes that were already underway in the insurance industry. The financial strains caused by the economic lockdown have increased the urgency for insurers to establish a leaner cost base. However, past approaches to cost reduction no longer suit a fundamentally changed market landscape.

Collectively, the need to innovate and disrupt, rising customer expectations, greater digitalization and intensifying competition and regulatory pressures fuel the need for a more strategic approach to cost transformation. The past goal of simply reducing the cost base is no longer the main objective, because insurers must also invest in new capabilities across the business. Such investments are critically important for keeping up with new competitors and non-traditional players who have entered the market and excel at designing personalized customer experiences and optimizing distribution models. They are also free of the legacy cost and infrastructure burdens many insurers continue to carry.

Strategic cost transformation can free up capital for investment and create simpler, more flexible and scalable business and operational models. Simply streamlining the business or surgically targeting cost reductions, while somewhat beneficial, won’t set the stage for sustainable growth. After all, cost reductions made for their own sake can negatively impact other value levers, including revenue, the employee and customer experience, business resiliency, risk management, operational agility, scalability and sustainability.

An efficient cost base by itself won’t produce strong results or market leadership; rather insurers need to be at the frontier of efficiency. As Satya Nadella, CEO of Microsoft, has said, “Even for businesses that are having tough economic cycles – one of the smartest things that [they] can do is to transition to the efficient frontier as quickly as possible so that they can have more agility, more elasticity and better unit economics coming.” 

The efficient frontier, which offers the optimal balance of risk and return, is an ambitious goal for insurers. But it’s an appropriate and achievable one. Strategic cost transformation, along with the breakthrough potential of modern technology, can propel insurers to reach the efficient frontier. Realizing that value requires boards and C-suites to reflect on market positioning and competitive differentiation – that is, the strategic part of the cost transformation equation.

The focus must be on ensuring the operating model is aligned to the overall strategy. Removing complexity and friction for customers and fully committing to realize the potential of digital technologies are other key priorities. When cost transformation programs are designed based on such insights, they are more effective in freeing up funds for necessary investments in growth initiatives.

Further, they look beyond margins, ratios and basic efficiency metrics, which don’t fully reflect the value insurers can create through more agile operations, tech-enabled processes and customer-centric offerings. These are the key capabilities for insurers to aim for in the post COVID-19 era; insurers should therefore establish new metrics (e.g., proportion of no-touch customer interactions) to track their progress in achieving them. We believe insurers that embrace strategic cost transformation can enact such bold change within three to five years. 

This article will outline why insurers need to embrace strategic cost transformation and present the key questions necessary to define the right approach.  

Facing up to harsh economic realities

With a backdrop of sluggish growth, thin margins, falling volumes in life and pension, and persistently low interest rates, the onset of a global economic lockdown created a perfect financial storm for the insurance industry. Despite expected macroeconomic growth in 2021, the huge impacts of the pandemic and stark near-term outlook have left many insurance boards and C-suites confronting difficult decisions. Some insurers are divesting certain lines of business to focus on the core. Others are exiting specific markets. Private equity, sensing a buyer’s market, continues to search for deals.

Past efforts focused on rationalizing headcount, flattening the organizational model by removing management layers, and outsourcing administrative processes. But, for most insurers, previous approaches have not resulted in meaningful improvements in ratios. Therefore, it’s no surprise that further cost reduction remains a top priority for CFOs, according to EY research. These survey results reveal that more senior insurance leaders recognize the need for a more a strategic approach to cost optimization.

European CFOs who:

  • Plan to reduce their enterprise-wide cost base in the next 12 months: 76%
  • View legacy technology and system complexity as inhibitors to cost efficiencies: 67%
  • View cost constraints as a key inhibitor in delivering strategic priorities: 51%
  • Consider cost reduction as a top three priority: 40%

Past approaches also left many organizations ill-equipped to deliver the rich and personalized customer experiences or efficient servicing that customers expect. For instance, the quest for low-hanging fruit can lead insurers away from necessary transformation investments that yield cost reductions, in addition to performance improvements, over time. Thus, it is critical to establish key performance indicators that don’t over-index immediate cost reductions relative to longer-term benefits.

Today, insurers need not only to bolster their bottom lines, but make big bets on the future and top-line growth. They need new technology and talent, both of which require significant investments. These are not necessarily the conflicting goals they may seem to be; for instance, increased automation and digitization will help reduce costs at the same time they enhance customer experiences.

Cost optimization efforts can’t be viewed as separate from capital allocation. Instead, they should take into account a broader strategic and operational context, including the impacts on customers, partners and employees and the needs of investors. The ultimate goal of strategic cost transformation is a lean, flexible cost base that supports more agile, digital and customer-centric operations, as well as entirely new business models. Such a cost structure enables insurers to rapidly and efficiently scale operations up or down as business expands or contracts.

Most insurers find it easy to scale up, but much more difficult to scale down quickly, due to higher fixed costs (including staffing, physical assets, and technology with committed costs). Non-traditional operating models that source talent differently and embrace as-a-service and cloud computing models can increase both operational agility and cost flexibility.

Prioritizing the many options for optimizing costs

So what does strategic cost transformation look like in practice? It’s important to recognize that high costs are a problem with many causes, and thus require multiple solutions. Insurers should explore the full range of options, considering every part of the business and every link in the value chain. To focus their efforts, they should prioritize cost optimization opportunities based on alignment to the overall business strategy, including the impacts on target markets, customer segments and long-term transformation goals.

Aligning cost optimization initiatives to business strategy means leaders must consider how products and services are bought, delivered and consumed by customers. They will examine the cost and capital implications of establishing new channels to access and engage with consumers. In contrast, a tactical approach focuses on cutting the cost of existing processes (e.g., automating specific points in product development and distribution).

Wherever the initial focus, new metrics are critical. The simple measures of the past – such as total cost of ownership, operational run-rate and cost per FTE – won’t alone give senior leaders the insight they need to make better decisions in a highly dynamic market. From a financial perspective, CFOs and other senior executives will need to regularly assess the organization’s ability to flex operations up and down and deploy capital at scale and speed. Again, near-term cost reductions must be viewed in the context of long-term value creation.

Given the need to be more digital and agile, the rate of straight-through processing and proportion of no-touch customer interactions should be tracked. These capabilities, already prevalent in many claims functions, must expand to sales, service and other functions. Other worthwhile metrics include the proportion of in-process decisions made by artificial intelligence (AI) or algorithms and the amount of friction in customer journeys.

Beyond increased efficiency, such measures also reflect the need for insurers to engage customers in new ways (e.g., embedding policies at the point of sale via retail and ecommerce partnerships). Similarly, as insurers shift to new product types (e.g., subscriptions) and business models (e.g., ecosystems), they’ll need to track costs and evaluate performance in new ways. Insurers that hire new talent (e.g., data scientists, application developers, experience designers) will need to track the value contributed by these roles, rather than overall staffing costs by FTE.

Regulatory pressures also bear mention. New demands for more data and transparency will increase the cost of compliance. More importantly, upcoming accounting changes including IFRS 17 and Long-Duration Targeted Improvement (LDTI) guidelines mean insurers will report performance in fundamentally different ways. Investors looking for guidance on what these new numbers mean will appreciate new value-related metrics that provide useful context. New cost transformation metrics can help senior leaders share a clearer narrative with investors and analysts.

Thinking strategically to define the right course of action

As insurers assess the right cost base and operating model for their strategies, they must address a range of key considerations, including:

  • Does our operating model provide a sustainable expense ratio?
  • Does the existing cost structure enable fast and effective scaling up or scaling down of operations?
  • Do we have the right technical architecture to execute on our strategy and promote innovation, both now and in the future? What are the biggest gaps? Where can new technology be deployed to the greatest effect?
  • What constraints do legacy technology and processes present? What is the most cost-effective way to address them?
  • Do we have the right talent to achieve our growth objectives?

These questions force insurers to find their ideal position on the continuum between best-in-class and best-in-cost. Such insight helps define the right operating model, pricing structures and cost base going forward. They will also help prioritize investment decisions relative to new technology and talent.

The right answers very much depend on the current operational footprint, product portfolio and customer base. However, it is safe to say that every insurer and every line of business can benefit from cost optimization efforts that point toward leaner, more digital and agile operations. Smoother customer experiences and interactions are a priority for the entire industry. Completed successfully, strategic cost transformation can make insurers much easier to do business with. The bottom line is that the cost base must be directly linked to core strategies, particularly those for future growth.

Gaurav Mehra, Partner, Business Transformation Lead, FSO Consulting, Ernst & Young and Jay Subramanian, Partner, Profit Improvement Lead, FS Business Consulting, Ernst & Young LLP contributed to this article.


Long before COVID-19, insurers felt pressure to improve their cost ratios and margins. The pandemic certainly intensified that pressure. Beyond its capital and liquidity strains, the pandemic also revealed new customer needs and demonstrated that insurers can move quickly and boldly when necessary. Strategic cost transformation is one way insurers can navigate the challenging economics and seize the compelling opportunities in a uniquely dynamic market.

About this article

By Peter Manchester

EY Global Insurance Consulting Leader and EY EMEIA Insurance Leader

Leader in insurance transformation and strategy. Active interest in new entrants. Uses leading-edge technology to transform the customer experience and insurance landscape.