Insurance firms evaluate a new operating model

Q1: What are the market trends that are challenging the existing operating model for insurers?

One of the trends I'm seeing is firms adopting new, innovative tech. In particular, firms are using artificial intelligence and big data to help with decision making on cost. It can show you where you are making money and where it is being spent. Or where you thought you made money, but you aren’t due to expenses and risks.

We can also see the effect of technology innovation when it comes to Insurtech and how this has encouraged a plethora of new entrants in the insurance space in recent years. They come into the market and can hit the ground running without all the burden of legacy platforms and processes. They may not have the advantage of big data, but they also don’t have to deal with the biases from established insurance firms.

The 2023 Investops report validates tech as a differentiator - Insurance Heads of Operations identified increasing competitiveness with the help of tech innovation as their top investment priority.

Another challenge in insurance is attracting and retaining talent, this is compounded by competing industries targeting the same talent pool, remote office headquarters and a retiring workforce.

Finally, I must mention the merger & acquisition (M&A) activity which is likely to continue in 2023. Post M&A consolidation sees most companies re-evaluating their operating model and streamlining their book of business so they can focus on the areas where they have a competitive advantage.

This is all playing out with a turbulent macroeconomic background which will see inflation remaining high and creating a lot of uncertainty.

Q2: How has this affected the thinking around the insurance operating model?

With big data providing the necessary insights on main revenue and cost sources, this has enabled firms to make more informed decisions on cost and efficiency optimization. For example, I have seen some of our larger insurance customers streamlining their operating model by investing in new technology and services to free up resources and focus on areas that they identified as core to their business.

Changing customer needs and the search for growth means the creation of new insurance products to generate additional revenue. And although interest rates have increased, investments have continued in new asset classes like alternatives and less liquid assets.

These investment strategies lead to operational complexity, in particular for accounting and regulatory reporting, which have to be balanced accurately with asset liability pressures.

We will also continue to see the consequences of mergers and acquisitions (M&A), and this is a great time to consider your target operating model. With two companies coming together you’ll want to consider a more standard operating model that will streamline processes and ensure that future acquisitions will be done quicker and more cost-effectively.

Legacy technologies create a greater burden on the ability to attract and retain qualified staff, as specific knowledge and training is required to get people operational. With the great resignation and insurance companies seeing a generation retire, this will create an even greater burden on attracting talent.

You want to look at where you can benefit from a standard operating model to increase operational efficiencies and outsource tasks that aren’t considered core. Finding the right partner that can provide these external services that will reduce cost and improve time to market is key.

Q3: What should I consider before embarking on an operating model transformation?

Technology is opening up a lot of opportunities to reassess your operating model and address challenges around resourcing, cost optimization and speed to market.

Resourcing, specifically the need for qualified staff able to deal with bespoke processes and systems, is challenging and can create unnecessary costs and risks. You should consider how changing your tech stack could help you address the need to maintain this large pool of qualified employees. Other options include working with specialized partners who would have an easier time to attract talent and provide the services needed for you to focus on what is core to your business.

Understanding where you can benefit from standard operating models is important. There are more technology and processes that can be standardized than many companies realize. For example, managing banking relationships don’t need to be bespoke and reinvented each time.

Last but not least, is your ability to jump on market opportunities quickly. Speed to market is key to differentiate yourself and get ahead of the competition. Does your current tech stack and expertise allow you to do so? Can you easily change asset mix or integrate a new business quickly? You want to ensure that you have an agile operating model that allows you to get ahead and doesn’t create unnecessary inefficiencies.

To summarize, knowing where your competitive advantage is and focusing on what is core to the business is key. Then all the supporting areas such as data, investment operations and accounting performance measurement need to be assessed on the best way to standardize and manage whether through tech innovation or using business services from a third party.