Across the insurance industry, management is under pressure to deliver the multiple objectives of Cost Reduction and Profitability. Generally there is a lack of information in the financial and management systems to properly inform and to target opportunities for improved costs. The complex business models, including issues around multi-channel and multi-product are not being supported by the traditional cost accounting. The speed with which the change is happening in today’s business area has taken on a particular force in the insurance industry due to increased competition, intervention of statutory bodies on pricing, and the advent of new technologies and distribution channels.
For the pricing of a policy the actuarial information provides the basic premium to that the organizational overheads are added ad-hoc. This is done primarily due to the unavailability of the relevant information. With the use of a relevant Activity Based Management (ABM) model the same organization can get information on acquiring a customer, serving the requests, claims and closure of policy due to surrender or maturity payment etc. Let us see how an ABM model can provide sufficiently detail information of the overheads. The model calculates the cost of various transactions (aka processes) in the organization. These transactions are grouped across various dimensions as follows:
Customer lifecycle event – Acquire, Serve, Retain and Close are the four events in the lifecycle of a customer with the organization. Various transactions are grouped as per these events, so that the organization can understand their ‘cost focus’ on acquisition, retention etc. The total cost to acquire in any period could vary between 35-45% of the total overhead. Retention costs take next place which include the renewals and revivals and can go up to 6-10% of the overhead. Cost to serve is around 2% and the cost to close including the claims, surrender, maturity etc. varies.
The ‘cost to serve’ the policyholder is one which should be kept as minimum as possible. This is the section where the policyholder can request a change of address, nominee, a switch in unit linked policy etc. Some of the requests are only because they are not properly handled at the time of acquisition. These can be grouped as region wise and channel wise, so that with a proper training or incentive it can be reduced. Some of the requests can be handled via internet.
Region – The cost information separated by region gives at least two type of information. The cost of same transaction like ‘sales call’ can be seen across the various regions. We can use the information for internal benchmarking. It also tells about the type of products that are sold, the type of post issuance requests across regions. With this information organization can run internal (for advisors) or external (for customers) campaigns to improve the performance of in the respective regions.
Channel – The insurance companies are using various channels for the selling of the policies. They have their attached advisors (tied agency) as the main channel. They are using the alternate channels of which Bank is most commonly used. The others could be from corporate agents to just sharing database. Once we separate the cost of transactions across the channels we can understand the effectiveness of various channels. The acquisition cost is different across various channels. This acquisition cost including the commission and the rework that is required due to incomplete documents etc. The quality of the customer can also be seen across the channels for their effectiveness.
Apart from the segregation of transaction channel wise, there are good amount of expenses made to manage the various channels. These expenses are typically for hierarchy of people within the channel, recruiting the advisors, training them, retaining them through various campaigns. The expenses should be first separated into one for recruitment and the other for retaining them. The effectiveness of the same can be analyzed after that. Around 50% of the overheads are spent on managing the channels. This is a very huge cost in any insurance organization.
Product Group – The primary grouping can be done according to the fund type like Participatory, non Participatory, Unit Linked, Pension etc. the further classification can be done if required. As the transactions are separated product wise it is very useful for the product development team to price the product appropriately.
Like channel dimension, there are various transactions for products and separate expenses which are directly attributable to the products like the collaterals, advertisements or campaigns etc. These expenses should not be taken as general overheads and include in the pricing.
Issuance Process – This is typically applicable for the acquisition and close events. In the acquisition event typically the processes could be a straight through process or non straight through process. A straight through process has certain guidelines decided and once the applicant falls within that no other information is required and it can be issued a policy. The advertisements that show that, people got a policy within few minutes on internet ‘online’ fall under this category. The other non straight through process requires underwriting and sometimes medical tests also. So it can be further separated as non medical and medical. We can find the expenses on various processes for issuance of policy and the same can be used for pricing of the product.
In case of claims it can be segregated as early claims and non early claims. The claims which are lodged within a year or two of the policy can have different expenses that the others. The patter can be seen channel wise and region wise so that fraudulent claim pattern can be found out.
Transactions – The various transactions (or processes) that are done can be primarily grouped as ‘Clean’ and ‘Rework’. The rework for the acquisition phase could be documents are not proper, medical test have to done again or different, policy that are not delivered, excess money refund etc. Like this we can separate the rework for each process and find out the costs of the same. This can be seen as around 1% of the total overhead and eating out your profitability.
Steps – For each transaction we can define various steps and the costs can be seen for each step within a transaction. For example in case of a clean process for issuance of new policy the steps could be sales call, receipt of documents, data entry, medical (if applicable), processing the request, issuance, dispatch, communication. The cost to serve can be defined as receipt of request, process, dispatch and communication. This helps in improving the process after looking at costs at various stages.
Apart from cost of performing transaction at various lifecycle events, cost to sustain the product and cost to sustain the channel, we have to segregate the overhead that has been used to build the capacity in the organization but not utilized (idle costs) and expenses on certain departments like finance (finalization section), internal audit, secretarial function which are not required by any product or customer but required to run the business or for statutory reporting purpose. We call this as ‘cost to sustain business’. This generally should not form the part of pricing, but it can change from organization to organization.
This type segregation of costs across various dimensions and the combination can help the organization in not only pricing of the product but also the improvement of the processes, improvement of the channel performance.
For the pricing of a policy the actuarial information provides the basic premium to that the organizational overheads are added ad-hoc. This is done primarily due to the unavailability of the relevant information. With the use of a relevant Activity Based Management (ABM) model the same organization can get information on acquiring a customer, serving the requests, claims and closure of policy due to surrender or maturity payment etc. Let us see how an ABM model can provide sufficiently detail information of the overheads. The model calculates the cost of various transactions (aka processes) in the organization. These transactions are grouped across various dimensions as follows:
Customer lifecycle event – Acquire, Serve, Retain and Close are the four events in the lifecycle of a customer with the organization. Various transactions are grouped as per these events, so that the organization can understand their ‘cost focus’ on acquisition, retention etc. The total cost to acquire in any period could vary between 35-45% of the total overhead. Retention costs take next place which include the renewals and revivals and can go up to 6-10% of the overhead. Cost to serve is around 2% and the cost to close including the claims, surrender, maturity etc. varies.
The ‘cost to serve’ the policyholder is one which should be kept as minimum as possible. This is the section where the policyholder can request a change of address, nominee, a switch in unit linked policy etc. Some of the requests are only because they are not properly handled at the time of acquisition. These can be grouped as region wise and channel wise, so that with a proper training or incentive it can be reduced. Some of the requests can be handled via internet.
Region – The cost information separated by region gives at least two type of information. The cost of same transaction like ‘sales call’ can be seen across the various regions. We can use the information for internal benchmarking. It also tells about the type of products that are sold, the type of post issuance requests across regions. With this information organization can run internal (for advisors) or external (for customers) campaigns to improve the performance of in the respective regions.
Channel – The insurance companies are using various channels for the selling of the policies. They have their attached advisors (tied agency) as the main channel. They are using the alternate channels of which Bank is most commonly used. The others could be from corporate agents to just sharing database. Once we separate the cost of transactions across the channels we can understand the effectiveness of various channels. The acquisition cost is different across various channels. This acquisition cost including the commission and the rework that is required due to incomplete documents etc. The quality of the customer can also be seen across the channels for their effectiveness.
Apart from the segregation of transaction channel wise, there are good amount of expenses made to manage the various channels. These expenses are typically for hierarchy of people within the channel, recruiting the advisors, training them, retaining them through various campaigns. The expenses should be first separated into one for recruitment and the other for retaining them. The effectiveness of the same can be analyzed after that. Around 50% of the overheads are spent on managing the channels. This is a very huge cost in any insurance organization.
Product Group – The primary grouping can be done according to the fund type like Participatory, non Participatory, Unit Linked, Pension etc. the further classification can be done if required. As the transactions are separated product wise it is very useful for the product development team to price the product appropriately.
Like channel dimension, there are various transactions for products and separate expenses which are directly attributable to the products like the collaterals, advertisements or campaigns etc. These expenses should not be taken as general overheads and include in the pricing.
Issuance Process – This is typically applicable for the acquisition and close events. In the acquisition event typically the processes could be a straight through process or non straight through process. A straight through process has certain guidelines decided and once the applicant falls within that no other information is required and it can be issued a policy. The advertisements that show that, people got a policy within few minutes on internet ‘online’ fall under this category. The other non straight through process requires underwriting and sometimes medical tests also. So it can be further separated as non medical and medical. We can find the expenses on various processes for issuance of policy and the same can be used for pricing of the product.
In case of claims it can be segregated as early claims and non early claims. The claims which are lodged within a year or two of the policy can have different expenses that the others. The patter can be seen channel wise and region wise so that fraudulent claim pattern can be found out.
Transactions – The various transactions (or processes) that are done can be primarily grouped as ‘Clean’ and ‘Rework’. The rework for the acquisition phase could be documents are not proper, medical test have to done again or different, policy that are not delivered, excess money refund etc. Like this we can separate the rework for each process and find out the costs of the same. This can be seen as around 1% of the total overhead and eating out your profitability.
Steps – For each transaction we can define various steps and the costs can be seen for each step within a transaction. For example in case of a clean process for issuance of new policy the steps could be sales call, receipt of documents, data entry, medical (if applicable), processing the request, issuance, dispatch, communication. The cost to serve can be defined as receipt of request, process, dispatch and communication. This helps in improving the process after looking at costs at various stages.
Apart from cost of performing transaction at various lifecycle events, cost to sustain the product and cost to sustain the channel, we have to segregate the overhead that has been used to build the capacity in the organization but not utilized (idle costs) and expenses on certain departments like finance (finalization section), internal audit, secretarial function which are not required by any product or customer but required to run the business or for statutory reporting purpose. We call this as ‘cost to sustain business’. This generally should not form the part of pricing, but it can change from organization to organization.
This type segregation of costs across various dimensions and the combination can help the organization in not only pricing of the product but also the improvement of the processes, improvement of the channel performance.
