Re/insurers can, and should take steps to reduce costs: PwC

by Artemis on September 12, 2016

The global insurance and reinsurance industry remains incredibly competitive as traditional and alternative capital continues to enter the space, adding pressure to rates, suggesting that market participants must do more in order to reduce costs, and ultimately increase efficiency, according to PwC.

PwC, in a new report, has challenged insurers and reinsurers to improve their efforts at reducing costs, stressing, “Squeezing a few percentage point savings is no longer enough in such a competitive and disrupted marketplace.”

An abundance of capital, lack of large losses, dangerously low interest rates, intense competition, new regulation and the rise of technology, are all factors pressurising companies to reduce costs while improving customer value in order to remain relevant.

PwC outlines five steps to distinctive cost reduction, which includes understanding operational costs across the business; targeting investment; being bold, brave and creative; treating cost reductions like M&A activity; and remaining focused on the task of reducing operational costs in order to track improvements.

“By identifying the markets and exposures with higher returns and directing resources towards them, insurers can be strategic in their approach. Technologies such as blockchain, artificial intelligence and robotics are increasingly on leaders’ radars and have the potential to deliver millions in savings.

“Those who embrace the change will see the benefits and will raise the bar for the rest of the industry,” said Stephen O’Hearn, global insurance leader at PwC.

Technology continues to advance in industries across the world, including the risk transfer landscape, and it’s likely that in time and when the right tools have been developed that insurers, reinsurers, and the broader risk transfer world will benefit and increase efficiency via new technology.

That being said, insurtech, blockchain, and alike are still in their infancy, but re/insurers can take other steps to reduce costs, something that is becoming more and more important in a world of low interest rates, and reduced returns on the underwriting side of the balance sheet.

Utilising the right capital, efficient capital from diversified sources, such as the insurance-linked securities (ILS) space and the wealth of willing and able capital markets investors, could reduce costs for firms. There are ways insurers and reinsurers can make themselves more efficient, and utilising the right capital, along with ceding the right risk is something companies can start to look at without the need for improved technology.

“Many insurance executives have had bruising prior experiences with cost initiatives failing to deliver long-term gains or culture change within the organisation. But the time to confront the challenge is now. Real business transformation is necessary. Outsourcing and shared services are certain to yield some benefits but automation may be the most sustainable long-term solution,” said O’Hearn.

Patrick Maeder, EMEA insurance consulting leader at PwC, added; “Resistance from within the organisation is a common challenge for leadership teams looking to streamline, but insurers must bite the bullet and tie their cost reduction measures to their modernisation strategies. Ultimately, buy-in from all levels of an organisation will be make or break for insurers and an innovative, accountable and convincing cost reduction strategy will be crucial in getting this support in making changes throughout the company.”

The pressure is on for all in the space to find ways to reduce costs, something that has become much more prevalent in the ongoing softening market, which, shows little sign of changing anytime soon.

Utilising efficient capital from both the traditional and alternative reinsurance providers, along with technology and trying to do what others haven’t, will be key for those that wish to come out of the currently market landscape unscathed.

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