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CAVENDI MANAGEMENT INSIGHT Why expense focus is the most valid route to short term value creation for Swedish nonlife insurers

Insurers and Expenses

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Page 1: Insurers and Expenses

CAV

EN

DI

MA

NAG

EM

EN

T I

NSI

GH

T

Why expense focus is the most valid route to short‐term value creation for 

Swedish non‐life insurers

CAVEN

DI M

ANAGEM

ENT IN

SIGHT

Page 2: Insurers and Expenses

“Never confuse motion with action” Benjamin Franklin

“Beware of little expenses. A small leak will sink a great ship” Benjamin Franklin  

Page 3: Insurers and Expenses

Why expense focus is the most valid route to short-term value creation for Swedish non-life insurers

Setting the scene The fundamentals of the non-life insurance industry make it significantly more stable compared to the life insurance industry, which is illustrated by relatively stable earnings from year to year. As one would expect from a mature industry, non-life profitability, in terms of return on equity, typically fluctuates around cost of capital, i.e. non-life insurance must be treated as a long-term value case and not a short-term growth case.

Nevertheless, profitability in non-life insurance is very reliant on the capital market environment, as investment income makes up a much larger portion of the pre-tax profit than the technical result in mature insurance markets.

Figure 1: Profitability pressure here to stay

The underwriting operations are, besides being the other fundamental value driver of non-life insurance profitability, the cushion that dampens insurers losses during bust cycles.

The current market fundamentals are characterized by a toxic mix of a low interest rates, higher price consciousness fueled by transparency and increasing complexity driven by regulation, together with a simultaneous need to deal with aging IT infrastructure and a structural lack of growth perspectives – all of which makes keeping the underwriting result high challenging, to say the least.

To conclude, having sound, balanced and profitable underwriting operations is, besides being the fundamental enabler in acquiring investable assets in the first place, paramount in terms of parry poor investment cycles, hence protecting the equity in the balance sheet.

Figure 1: Profitability pressure here to stay

1

Profitability of P&C market particpants is not significant higher than Cost of Equity

Return of Equity composition heavily skewed towards net investment income

-10

-5

0

5

10

15

20

2006 2008 2010 2012 2014

CoE2

RoE1

-3 -4 -3 -5 -3

14

6

12 1115

4

4

4 4

211

2012

12

2011

5

Other

14Technicalresult

Netinvestmentincome

201420132010

14

RoE composition, PercentFigures might not end up due to rounding

1 RoE: Swedish market excluding non-competitive market participants (AFA Sjuk & AFA Trygg)2 CoE: Data represents Western Europe general insuranceSource: Swedish insurance association, Stern Business school, Cavendi analysis

Percent Average industry return: 11%Average cost of equity: 10%

1

Page 4: Insurers and Expenses

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Figure 2: P

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Figure 2: Poor profitability development in Sweden

2

Sweden behind in terms of profitability…Combined ratio, Percent

…driven by poor profitability in mutualsCombined ratio, Percent

79 75 70 71 7018

2012

8717

2011

9318

2010

97

2014

8818

2013

8918

Loss ratioExpense ratio

Den

Nor

SweS

wed

ish

non-

mut

uals

Sw

edis

h m

utua

l76 78 75 74 74

2014

9420

2013

9319

2012

9520

2011

9719

2010

9519

71 72 69 69 6518

2011

9219

2010

9221

2014

8418

2013

8617

2012

87

73 77 75 71 8018

2011

9417

2010

9017

2014

9818

2013

8918

2012

93Ø 93

81 82 77 78 72

2011

10321

2010

10221

2014

9221

2013

9820

2012

9821 Ø 99

Source: National insurance associations, Cavendi analysis

2

The starting point in Sweden Even if the Scandinavian non-life markets are often referred to as some of the most cost efficient in the world in terms of operations, the Swedish market participants’ performance is relatively polarized due to the high proportion of mutuals in the market, in which the demand for bottom line result and expected return on capital is lower.

Figure 2: Poor profitability development in Sweden

Historically, value adding insurers in Sweden have generally needed at least 15% RoE to honor their capital obligations to investors. This tends to translate into about 85-95% in combined ratio depending on balance sheet characteristics (investment return expectations) where a higher share of risk-carrying assets would increase the expected return and vice versa.

Since indemnity costs are, by definition, volatile and the fact that loss ratios got stuck at 70-75% levels somewhere in the mid 2000’s, structural improvements in this direction have proven to be challenging – expense actions increasingly clearly emerge as the remaining natural source of improvement.

Limited impact so far – IT & other support costs rapidly increasing at the expense of the core business and customer interaction Swedish non-life insurers, like their international counterparts, are in a transformation mode and are trying to future proof their business and operating models. To fund this, most insurers are therefore actively promoting some kind of efficiency agenda, and have done so for years.

Unfortunately, looking at the Swedish industry’s expense ratio as a whole, these savings are not being materialized through an improved bottom line1, on the contrary, since new expenses seem to be constantly emerging and offsetting old cost savings. Two things in particular are driving this phenomenon:

IT infrastructure investments not delivering on business case, i.e. process efficiency is much harder to obtain than expected

Increased level of complexity driven by legislation ramp-up

The fact that many insurers are failing to materialize stated business case efficiency gains on their huge IT investments is worrying in the first place. Furthermore, Cavendi has analyzed detailed expense data for a large number of insurers and outcomes suggest that insurers tend to be ramping up costs as well as staff in support functions at the expense of the core business – a development for the customer value that could be called to question.

This development can be seen when analyzing the relative trend in cost associated to customer facing units, such as sales- or claims-focused call centers, and comparing this to the more administrative OH units.

In the customer facing units, the expense ratios have, over the last five-year period decreased by one to five percentage points, while the OH costs have escalated by over ten percentage points over the same time period.

Figure 3: OH cost up 2-3x more than costs associated with customer interaction

Sourcing efficiency gains from the core business units that maintain the primary link to customers is of course not ideal from a customer or management standpoint. An adaptation to online self-service solutions fronting the customer is just part of the solution. Additional reasons as to why this is happening on a broader scale varies of course from company to company, but observations of a wide range of insurers suggest three major drivers:

The core business units have significantly more efficiency knowledge and experience of how to execute savings than the rest of the organization, hence they finance the growth of general overhead costs

Cost cutting is easier at ‘the organizational base’ where managers with budget responsibility and affected staff have limited interactions, i.e. the situation in parts of the organization characterized by multiple layers of staff such as large call centers etc

IT expenditure outside core investments is being allowed to grow disproportionately, hence offsetting by far any smaller efficiency initiatives that do exist within OH functions2

Page 5: Insurers and Expenses

The factthuge IT iexpense dup costs athe custo

This devefacing unadminist

In the cuto five pesame tim

Figure 3: O

Sourcingof coursesolutionshappeninrange of i

Texov

Canch

ITof

2 The insura

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g efficiency ge not ideal frs fronting thng on a broainsurers sug

The core busxecute savinverhead cos

Cost cutting nd affected haracterizedT expendituffsetting by

ance industry tal to continue

y small portionnce and applicaulk of the cost

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ure outside c far any sm

 

is experiencined success. However, these n of the overalation enhances.

failing to mng in the firser of insurerort function

be called to

when analyzlaims-focus

he expense re the OH cos

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varies of cou major drive

havesignifie rest of the

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materialize sst place. Furrs and outcons at the expquestion.

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ratios have,sts haveesca

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icantly moree organizatio

zational basractions, i.e staff such aments is beincy initiativ

m shift where inoftware invest

nal expenditurusiness as usua

stated businrthermore, omes suggespense of the

ative trend ters, and co

over the laalatedby ov

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s that mainttandpoint. A

ution. Additompany to c

e efficiency on, hence th

e’ where mae. the situatias large call ing allowedves that do e

nvestments in tment program

e budget, wheal running cos

ness case effCavendi hast that insue core busin

in cost assomparing th

st five-year er ten perce

on

tain the primAn adaptati

tional reasocompany, bu

y knowledgehey finance

anagers wition in parts centers etc

d to grow disexist within

Digitalizationms (applicatio

ere software sets (infrastruct

ficiency gains analyzed drers tend to

ness – a dev

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th budget res of the orgac. sproportionn OH functio

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ervice and updture etc.) cons

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ustomer ore

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Figure 3: OH costs up 2-3x more than costs associated with customer interaction

3

9493959795

20141312112010

Combined ratio

Expense ratio

Acquisition ratio

Administrative ratio

Claims handling ratio

Claims ratio

Loss ratio ratio

2019201919

20141312112010

7474757876

1312112010 2014

12-5%

201413

12

12

13

11

12

2010

12

87787

20141312112010+11%

88878

2014-1%

1312112010

6566677168

122010 11 13 2014

Source: Swedish insurance association, Cavendi analysis

+3xdifference

External

Internal

+2xdifference

3

The starting point in Sweden Even if the Scandinavian non-life markets are often referred to as some of the most cost efficient in the world in terms of operations, the Swedish market participants’ performance is relatively polarized due to the high proportion of mutuals in the market, in which the demand for bottom line result and expected return on capital is lower.

Figure 2: Poor profitability development in Sweden

Historically, value adding insurers in Sweden have generally needed at least 15% RoE to honor their capital obligations to investors. This tends to translate into about 85-95% in combined ratio depending on balance sheet characteristics (investment return expectations) where a higher share of risk-carrying assets would increase the expected return and vice versa.

Since indemnity costs are, by definition, volatile and the fact that loss ratios got stuck at 70-75% levels somewhere in the mid 2000’s, structural improvements in this direction have proven to be challenging – expense actions increasingly clearly emerge as the remaining natural source of improvement.

Limited impact so far – IT & other support costs rapidly increasing at the expense of the core business and customer interaction Swedish non-life insurers, like their international counterparts, are in a transformation mode and are trying to future proof their business and operating models. To fund this, most insurers are therefore actively promoting some kind of efficiency agenda, and have done so for years.

Unfortunately, looking at the Swedish industry’s expense ratio as a whole, these savings are not being materialized through an improved bottom line1, on the contrary, since new expenses seem to be constantly emerging and offsetting old cost savings. Two things in particular are driving this phenomenon:

IT infrastructure investments not delivering on business case, i.e. process efficiency is much harder to obtain than expected

Increased level of complexity driven by legislation ramp-up

The fact that many insurers are failing to materialize stated business case efficiency gains on their huge IT investments is worrying in the first place. Furthermore, Cavendi has analyzed detailed expense data for a large number of insurers and outcomes suggest that insurers tend to be ramping up costs as well as staff in support functions at the expense of the core business – a development for the customer value that could be called to question.

This development can be seen when analyzing the relative trend in cost associated to customer facing units, such as sales- or claims-focused call centers, and comparing this to the more administrative OH units.

In the customer facing units, the expense ratios have, over the last five-year period decreased by one to five percentage points, while the OH costs have escalated by over ten percentage points over the same time period.

Figure 3: OH cost up 2-3x more than costs associated with customer interaction

Sourcing efficiency gains from the core business units that maintain the primary link to customers is of course not ideal from a customer or management standpoint. An adaptation to online self-service solutions fronting the customer is just part of the solution. Additional reasons as to why this is happening on a broader scale varies of course from company to company, but observations of a wide range of insurers suggest three major drivers:

The core business units have significantly more efficiency knowledge and experience of how to execute savings than the rest of the organization, hence they finance the growth of general overhead costs

Cost cutting is easier at ‘the organizational base’ where managers with budget responsibility and affected staff have limited interactions, i.e. the situation in parts of the organization characterized by multiple layers of staff such as large call centers etc

IT expenditure outside core investments is being allowed to grow disproportionately, hence offsetting by far any smaller efficiency initiatives that do exist within OH functions2

Page 6: Insurers and Expenses

Similar A closer dthe two lacustomer

In Motorthan the

In Houseperformi

Figure 4: O

The chosor, at leasaccountinhence it d

Also, beaand assubusiness cost strucexplanato

This hold

3 Share of in

of other c4 Top four p5 Most play

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players opdrilldown aargest retailr entry prod

r, the high m best perform

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Operational co

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perating simat two isolatl product cl

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ost difference

er segmentsportion of anwever not renstitute a fu

nd the fact thevenly sprea the playerstly controlle e.g. distrib

when bench

 

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milar proded classes olasses, Motony insurers

et participanet participa

s less, howevs.

of 60-130% b

s and distribny profitabieveal signifiully explana

hat the undad across ths in the samed by managution mode

hmarking d

nstitutes only n channel mixn 1 million polll product ranselling

ducts with of business ior and Hous the cost sit

nt has moreant.

ver there is

etween low- a

bution setupility differenicant differeatory power

derlying riskhe sample, a

mple, there isgement is melsor econom

demutualize

about 30% ofx for the overalicies in Motorge, a multicha

huge cost in the markse & Conten

tuation for t

e than doubl

still a facto

and high mark

p is often asnce. A drill dences in cosr for such a w

ks for these and the relats a reason to

much more imies of scal

ed and mutu

f the overall exall expense rati

r and well aboannel distribut

differencesketsuggests nt, both servthe insurers

le the assoc

or 1.6 betwe

k market part

ssumed to mdown in plasts between wide cost ra

product clative uniformo strongly bimportant tle.

ual insurers

xpense base foio ove 0.5 milliontion model an

s  a wide spanving as the s varies cons

ciated opera

en the best-

ticipants for k

make up forayer’s profit the dominaange.3

asses are vermity of bothbelieve that than traditio

s separate.

or an insurer, h

n policies in Hnd rely on one

n of costs. Fmain siderably.

ational costs

- and worst

key products

r the majoritt and loss ant channel

ry diversifieh size4 and the absolutonal

hence allocatio

ouse & Conten core entry

For

s

ty

ls,

ed

te

on

nt

3,259Mutuals

TotalSwedishmarket

~2.3x

Non-mutuals 4,488

4,488TotalSwedishmarket

2,856

Mutuals

~1.6x

Non-mutuals

2,272

2,856

Figure 4: Operational cost difference of 60-130% between low- and high mark market participants for key products

4

MotorOperational cost per policy1, SEK

House and ContentOperational cost per policy1, SEK

3,809

2,922

1,971

2,320

2,882

1,971

2,819

2,777

1,759

1,932

2,267

1,759

1 Total costs (Claims payout + Claims handling expenses + Administrative expenses + Acquisition expenses) divided by number of policies by product and by insurance player

Source: Swedish insurance association, Swedish FSA, Cavendi analysis

4

Similar players operating similar products with huge cost differences A closer drill down at two isolated classes of business in the market suggests a wide span of costs. For the two largest retail product classes, Motor and House & Content, both serving as the main customer entry product for many insurers the cost situation for the insurers varies considerably.

In Motor, the high mark market participant has more than double the associated operational costs than the best performing market participant.

In House & Content the span is less, however there is still a factor 1.6 between the best- and worst performing market participants.

Figure 4: Operational cost difference of 60-130% between low- and high mark market participants for key products

The chosen customer segments and distribution setup is often assumed to make up for the majority or, at least, a large portion of any profitability difference. A drill down in player’s profit and loss accounting does however not reveal significant differences in costs between the dominant channels, hence it does not constitute a fully explanatory power for such a wide cost range.3

Also, bearing in mind the fact that the underlying risks for these product classes are very diversified and assumed to be evenly spread across the sample, and the relative uniformity of both size4 and business models5 of the players in the sample, there is a reason to strongly believe that the absolute cost structure directly controlled by management is much more important than traditional explanatory factors, e.g. distribution models or economies of scale.

This holds true also when benchmarking demutualized and mutual insurers separate.

What does it take to get oneself out of a profitability mismatch? An insurer has in principle four levers to pull to improve the operational combined ratio over an foreseeable time period:

Organic growth: Growth in exposure with same or very similar business mix6 Rates: Price increases on renewed business Net incurred claims costs: Reduction in net incurred claims across all classes of claims Expense reduction: Reduction of all expenses impacting the result – directly owned &

allocations

Cavendi has scrutinized the effort needed to reach a three (3) percentage point improvement in the combined ratio for three types of hypothetical players in the Swedish non-life industry:

The average insurer The average demutualized insurer The average mutual insurer

The takeaway is clear – rate actions and efficiency measures are superior to organic growth for all company types, with a factor five to seven, which implies five to seven (5-7) units (SEK) of growth are needed to offset one (1) unit of efficiency. This holds true for all company types even if it is tougher for public players to reach the target relative mutual ones, which suggests that public players are leaner from the start.

Figure 5: Levers to be pulled to different degrees to improve the combined ratio by three (3) percentage points

The fact that organic growth, hence size, is of limited importance for short/mid term profitability for a non-life player also holds true when analyzing other simpler ratios, e.g. costs per GWP through a scale curve7. On drilling deeper into this matter, initial findings suggest that classic economics of scale thinking is only valid in a few areas, e.g. policy issuance and asset management etc. but seems to be absent in most areas. The likely explanation lies in the high share of variable costs insurers carry thus making organic growth expensive, aside of the fact that it is hard to obtain.

Rates on the other hand, cost nothing and improve the top line and make a contribution to covering fixed expenses. Obviously, the problematic flipside of rate indexation is the increasing level of transparency fueled by digitalization and the fact that this weapon can only be used once a year.

Page 7: Insurers and Expenses

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O R N E

al

Cavendi hcombined

T T T

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bility mismove the ope

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hree (3) pers in the Swe

easures are liesfive to srue for all cones, which

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nd make a cation is the on can only

ubsequently hs d cash flows. Crowth also nee

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ness mix6

all classes of directly ow

oint improvefe industry:

organic grounits (SEK)pes even if ihat public p

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contribution increasing l be used onc

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Cash flow, in tueds to be treate

io over an

f claims wned &

ement in th:

owth for all ) of growth ait is tougherlayers are

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n to coverinlevel of ce a year.

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are r

y gh

f ms

ng

n

by unt

Figure 5: Levers to be pulled to different degrees to improve the combined ratio by three (3) ppt

5

Lever

Total SwedishMarketPercent

Non-mutualsPercent

MutualsPercent

Organic growthGrowth in exposure with current business mix

RatesIncrease on all renewed business, no change to mix

Net incurred claims costsReduction in NIC across all classes of claim

ExpensesReduction in all expenses impacting the result –directly owned and allocated

3

-16

-5

19

3

-18

-4

21

3

-4

-15

17

Source: Swedish insurance association, Cavendi analysis

5

Similar players operating similar products with huge cost differences A closer drill down at two isolated classes of business in the market suggests a wide span of costs. For the two largest retail product classes, Motor and House & Content, both serving as the main customer entry product for many insurers the cost situation for the insurers varies considerably.

In Motor, the high mark market participant has more than double the associated operational costs than the best performing market participant.

In House & Content the span is less, however there is still a factor 1.6 between the best- and worst performing market participants.

Figure 4: Operational cost difference of 60-130% between low- and high mark market participants for key products

The chosen customer segments and distribution setup is often assumed to make up for the majority or, at least, a large portion of any profitability difference. A drill down in player’s profit and loss accounting does however not reveal significant differences in costs between the dominant channels, hence it does not constitute a fully explanatory power for such a wide cost range.3

Also, bearing in mind the fact that the underlying risks for these product classes are very diversified and assumed to be evenly spread across the sample, and the relative uniformity of both size4 and business models5 of the players in the sample, there is a reason to strongly believe that the absolute cost structure directly controlled by management is much more important than traditional explanatory factors, e.g. distribution models or economies of scale.

This holds true also when benchmarking demutualized and mutual insurers separate.

What does it take to get oneself out of a profitability mismatch? An insurer has in principle four levers to pull to improve the operational combined ratio over an foreseeable time period:

Organic growth: Growth in exposure with same or very similar business mix6 Rates: Price increases on renewed business Net incurred claims costs: Reduction in net incurred claims across all classes of claims Expense reduction: Reduction of all expenses impacting the result – directly owned &

allocations

Cavendi has scrutinized the effort needed to reach a three (3) percentage point improvement in the combined ratio for three types of hypothetical players in the Swedish non-life industry:

The average insurer The average demutualized insurer The average mutual insurer

The takeaway is clear – rate actions and efficiency measures are superior to organic growth for all company types, with a factor five to seven, which implies five to seven (5-7) units (SEK) of growth are needed to offset one (1) unit of efficiency. This holds true for all company types even if it is tougher for public players to reach the target relative mutual ones, which suggests that public players are leaner from the start.

Figure 5: Levers to be pulled to different degrees to improve the combined ratio by three (3) percentage points

The fact that organic growth, hence size, is of limited importance for short/mid term profitability for a non-life player also holds true when analyzing other simpler ratios, e.g. costs per GWP through a scale curve7. On drilling deeper into this matter, initial findings suggest that classic economics of scale thinking is only valid in a few areas, e.g. policy issuance and asset management etc. but seems to be absent in most areas. The likely explanation lies in the high share of variable costs insurers carry thus making organic growth expensive, aside of the fact that it is hard to obtain.

Rates on the other hand, cost nothing and improve the top line and make a contribution to covering fixed expenses. Obviously, the problematic flipside of rate indexation is the increasing level of transparency fueled by digitalization and the fact that this weapon can only be used once a year.

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Reducing net incurred claims costs normally means paying claims suppliers less (successfully fighting claims inflation) or customers less (adjusting terms and conditions). Ideally this can be done by being better at technical risk selection, hence better tariffs and underwriting processes. The ‘Big Data’ evolution will potentially improve this over time, but this lever is unarguably dependent on the historic customer base and significant up front investments in data analytics and IT software.

What remains is the only fully controllable lever – expenses. This lever holds all costs linked to both personnel and non-personnel and is the action with the most reliable result.

Where lies the opportunity for expense reduction? A non-life insurer has an expense base usually consisting of five major buckets

Wages and other compensation to employees (50-70%) IT expenses (incl. depreciation and IT consultancy costs) (10-30%) Marketing expenditure (including advertising consultancy) (5-10%) Premises & Facility Management (~5%) Other items (~10%)

By targeting one or several of the cost buckets above to different extents, there are obviously numerous possibilities to improve profitability. The various approaches all have different means, convey different levels of impact (in both time and money) and cause different levels of distortion to the organization, hence also to the business.

Figure 6: Different efficiency levers

We consistently see that the biggest expense reduction opportunity is to reduce complexity in operations, and that preferably this should be assessed prior to any other expense actions, such as distribution model improvement or performance management etc. Reduction of complexity means getting the basics right and discontinuing activities that do not drive value, all under limited business disruption. For optimal effect, this should principally be executed simultaneously within two dimensions:

1. Organizational effectiveness (personnel costs) 2. Operational effectiveness (non-personnel costs and processes)

For both the organizational and the operational processes and their (in)effectiveness, i.e. their corresponding (often too high) costs, there seldom tends to be one or a few explanatory factors that drive costs out of the budget comfort zone.

Figure 6: Different efficiency levers

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Business unit efficiency

How to operate

How to succeed

Corporate-portfolio strategyIdentify areas where the fundamentals are suitable for play

Bus. complexity reduction

Get the basics right and discontinue activities that

do not drive value

Sales & Marketing Scrutinize products, brands and channels. Discontinue or rebuild where relevant

OperationsScrutinize and optimize processes of policy administration and claims

IT and technical infrastructureFight fragmentation of legacy systems by securing transparency in functions and costs towards the business. Secure a relevant funding proportion of AM and AE relative AD

Support functionsScrutinize among activities - prioritize business value rather than SLA

Organizational efficiency enablersOrganize for efficiency – start at the top

Operating model modernization

Modernize amongIT systems

Get performance management right

Overhaul distribution, claims and support models to improve economics of scale

Clean-up, Sunset and Modernize. After that –automatize/digitalize

Make all decisions with P&L owners in mind. Incentivize

the workforce by embedding efficiency targets

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Instead, inefficiencies tend to start in a series of minor errors in various unprioritized processes, solved by simple manual overriding. However, when smaller errors bulk up over time, this tends to create an increasingly greater burden for the organization. A common short-term solution for such problems is to extend the organization or construct temporary workaround processes rather than deal with the core issue. The problematic consequence of not addressing the core issue is therefore swelling organizations and inefficient ways of working within units and departments.

Hence, there is almost never a silver bullet to fire to improve effectiveness, i.e. it is almost impossible for management to execute a few smaller targeted changes and simultaneously reach big profitability impact. Instead, and to reach sustainable impact, a substantial amount of smaller improvements is usually needed through a structured program.

This is particularly relevant in support functions (service level agreement adaption) and IT (infrastructure modernization or sunsetting of legacy systems), where an adaption to a lower service level agreement often implies a savings potential that exceeds 15% with limited impact on the business lines.

What is important to consider during execution Regardless of the desire to drive expense reduction, i.e. price your products or services more competitively, improve financial performance or better serve your customer (stop processes that drive complexity), it is not only important to attack the problem in a structured manner but even more important is to do so with an objective mindset.

What tends to work:

Critically assess the entire cost mass and understand which parts that generate value and focus on the parts that do not (i.e. ‘good costs’ vs ‘bad costs’)

Concentrate on areas where there is significant potential – take on the big ticket items first (‘quick wins’ seldom create material impact)

View all departments objectively – scrutinize top and middle management ‘I just need… - requests’ and ‘business threats’ carefully

Swift execution all the way through – plan sufficiently, communicate clearly and execute swiftly

Ideally, make cuts when you can, not when you have to!

What tends to fail:

Reducing costs without understanding the big picture and how cost cutting can impact employee and/or customer satisfaction as well as loyalty (i.e. unable to see the difference between ‘good costs’ and ‘bad costs’)

Executing non sustainable cost reductions – if costs are easy to get rid of, they tend to be back sooner rather than later

Giving all departments an ‘equal’ target of e.g. 10% is a very imprecise way of execution and tends to miss the mark

Leaving too large unallocated gaps in plan – things seldom end up exactly as planned, hence planning for the exact target or slightly below target is often unsuccessful

Underestimating the need for honest communication – not revealing or smoothing over the original intentions often tends to backfire

Underestimating the understanding for tough business decisions at stakeholder level

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Contact information For any queries regarding this publication or Cavendi’s strategy service offering, please contact the author or any member of Cavdendi’s Strategy Practice.

For other inquiries regarding Cavendi’s service offerings please contact Cavendi’s CEO.

Mats Skogström (author)

Senior Manager, Stockholm

Phone: +46 70 958 80 98

Email: [email protected]

Experience

Mats has more than 9 years of experience of strategy and corporate development.

He has extensive proficiency in managing projects within strategic, corporate finance and organizational related consulting assignments for multinational clients predominantly in the insurance & banking industries. The profitability dimension has been a recurring theme in projects in which Mats has been involvement.

Prior to working at Cavendi, Mats worked at a first tier global consultancy firm and as head of strategy for one of the core countries in a global P&C insurance group.

Jan Bäckman

Partner & CEO, Stockholm

Phone: +46 70 718 25 99

Email: [email protected]

Experience

Jan has more than 20 years of consulting experience and heads Cavendi Management Consulting since 2016.

While focusing on operational excellence and performance management, Jan’s specialty lies within the transformation of finance functions. His project leadership and advisory experience comes from multiple industries.

Prior to working at Cavendi, Jan worked at one of the Big 4 companies where he was the lead partner for the Swedish CFO program and the shared services & outsourcing advisory practice.

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Phone: +46 8 410 829 50 [email protected] www.cavendi.se

Visiting address: Birger Jarlsgatan 32b, 114 29 Stockholm