Many property and casualty (P&C) insurance companies are heavily siloed. Over time, this has resulted in cross-functional inefficiencies between and across underwriting, claims, ceded reinsurance, actuarial, and finance. In the past, investment returns may have covered the costs associated with these inefficiencies, but this is no longer possible given today's historically low interest rates. Couple this development with the surge of information that is available today and the importance of underwriting efficiently at an "information advantage" becomes clear.
Current state
Many P&C insurers are in the process of transforming, or have transformed, their policy administration, claims, billing, and financial systems, as well as their related data environments and operational processes. While there are economic and technological reasons for these transformations (e.g., record levels of policyholders' surplus across the industry, new and more robust technologies, etc.), the primary driver appears to be strategic: many P&C insurers realize that more insightful approaches to deploying capital in the highly cyclical marketplace will help them to more efficiently achieve their profit and growth goals while mitigating risks (including soft market-related risks).
It is somewhat surprising that it has taken so long for the current level of transformations to occur because, in many ways, insurers are "information factories" that absorb and analyze various forms of information to profitably assume risk over time.
One possible explanation for the delay could be organizational dynamics; many insurers have focused on various levels of functional, business unit and support initiatives to gain targeted efficiencies from activities such as:
- Claims leakage analysis;
- Ceded reinsurance leakage analysis;
- Finance transformation projects;
- IT re-architecture, reengineering and/or outsourcing;
- Predictive modeling to improve pricing and distribution management;
- Legal, auto property and medical billings review for reasonableness; and
- Pricing models, underwriting workbench tools and policy administration system transformations.
Focused functional projects like these have resulted in certain levels of efficiency, but such specialized expertise has also resulted in a certain level of enterprise-wide inefficiency. In other words, enterprise-wide efficiency has suffered due to process, system and organizational gaps/misalignments generated from all of the various focused functional, business unit and support improvements that have taken place. This dynamic is becoming more problematic given how quickly market opportunities seem to change, and rates soften.
Recommendation
A more holistic approach to core system and business transformation is necessary, one that explicitly focuses on establishing cross-functional linkages to enable more informed and efficient underwriting.
Issues to consider when implementing an approach like this include:
- Clearly expressing cross-functional goals and strategies that are intended to result in more focused and efficient underwriting;
- Explicitly developing end-to-end processes and information feedback loops to inform risk selection and distribution management in a more timely manner; and
- Developing cross-functional information and operational strategies based on the needs, uses, data requirements, functional processes, and organizational dependencies across the entire insurance value chain.
How to proceed
Insurers should take cross-functional views of their operating models with the goal of removing enterprise-wide efficiency barriers and enabling cross-functional information flows. This process could begin, for example, a review of unprofitable products, customer segments, agents/brokers, and lines of business for end-to-end breakdowns such as knowledge gaps, operational inefficiencies, data inefficiencies, incentive issues, etc.
Next, insurers should quantify the market, policyholder, agent/broker, product, operational, and financial impacts of identified cross-functional breakdowns or areas of concern.
Upon analyzing the above, the company should develop a holistic underwriting profit-oriented roadmap. The creation of the roadmap should be guided by questions such as:
- How do we enable more efficient and focused risk selection by enhancing our cross-functional flows from one end of the value chain to the other?
- What information enhancements are available if we improve data extraction, data quality and preparation efficiencies?
The company then can identify and prioritize solutions to comprehensively resolve any product, segment, distribution and line of business inefficiency issue.
Francois Ramette is a Director in the PwC Advisory Insurance practice with ten years of management consulting experience with Fortune 100 insurance, telecommunications, and high-tech companies. Joe Calandro is a 25-year insurance industry veteran. He has broad experience, in both the U.S. and internationally, across the disciplines of strategic and enterprise risk management, underwriting, claims and M&A. Richard Pankhurst is a 20-year insurance industry veteran. He has extensive professional services experience, focusing on P&C insurance operations strategy and transformation, insurance sales and distribution and enterprise performance management
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