The topic of inflation is on everyone’s lips. Even if the most current data from the Federal Statistical Office (DeStatis.de press release September 30th) in August and September indicate that inflation has fallen well below 2 percent, this number still says one thing very clearly: it will still be Above all, more expensive, just maybe a little slower.
That may sound good for end consumers at first, but it doesn’t solve the inherent problem for insurers. The structures in companies that have grown over the years are not very efficient in many places, operational costs have risen continuously and the ambitious efficiency projects have remained below the high expectations. In addition, there are investment backlogs in many places when it comes to raising IT and digitalization in general to a new, modern level – and thus being able to properly serve customer needs.
Cost forecast: More likely to rise than fall
The benchmark for cost development and one of the key figures in the insurance industry is the combined ratio. Ultimately, it says whether after deducting all operational costs, the actual damage (loss ratio) and the sales costs incurred, the bottom line for the insurer is still something. In unison, things are not looking good for insurers here. Combined ratios (CR) over 100 are no longer uncommon in some sectors, a prominent example here is certainly motor vehicle insurance. Association figures also predict a CR of 115 percent for this year, but residential buildings and legal protection are also regular candidates for a bad one CR.
So insurers have to do something to get back into the green. But this is not entirely possible. If we break down the combined ratio. But you can at least limit the possibilities.
The costs of third parties
Let’s start with the loss ratio. One or two basis points can perhaps be extracted here through faster, more efficient regulation. But statistics are statistics and the influence of an insurer on the statistical claims behavior of its insured group is very limited. The costs of regulation, replacement or care costs are also difficult to influence. In other words: It is difficult to control how often an individual customer causes liability damage. And if the price of the damaged parquet has increased by 50 percent over the last ten years, it will also be difficult for the insurer to make significant savings. Insurers cannot produce or install parquet themselves. There may be a little bit of fraud prevention and risk selection, but that’s pretty much it.
Saving on sales costs is just as tricky; although you can spontaneously save several percentage points, the penalty usually follows immediately: in a saturated market with many providers, you are simply left out of the selection of your sales partners. This can be very painful. It’s not much easier as a direct insurer, because anyone who cuts their investment loses relevance with their customers. Unfortunately, many industry participants realize too late that insurance is a product whose demand is significantly lower than a new pair of sneakers.
So you can twist and turn distribution costs however you want, finding great savings here is a bit like searching for the holy grail. Many have set out, some are still searching, no one has returned with the cup.
Save operationally
But that leaves one exciting area: operational costs. There is potential here, although not everywhere. Costs for regulation, for example, are set exothermic conditions. Making savings here would mean putting the company at risk and that can’t be a good idea. There is certainly still room for rent or costs for office space and infrastructure, but the actual lion’s share that can still be influenced, for better or worse, are the actual personnel costs. In other words, the costs for the employees that are needed to operate the respective insurance lines and all operational processes.
The last few years have highlighted two clear problems here. Spoiler alert: Both can more or less even be solved together.
The first problem for many insurance companies is clearly the ever-increasing wage costs, the second problem almost goes in the other direction: you can hardly get specialist staff and, if you do, not the workforce with the skillset you actually need. This situation in turn makes available personnel more expensive. Supply and demand. Lots of demand, no supply equals more expensive employees.
Despite the negative aspects listed now, this is where the greatest potential lies. And the solution is actually quite simple. Because if an insurer has expensive staff, it is only because the output, i.e. the income per job, is too low. The employees themselves are not too expensive and it is therefore not an actual wage cost problem, but rather the process in which the employees work is not efficiently designed for their performance. Sounds complicated? Here is an example to illustrate this: An insurance specialist who manually creates claims in the system and attaches PDFs to processes is much more expensive with the same salary than another employee with the same salary who invests her time in solving complex operational or claims processes.
Become more efficient, save costs, dust off workflows
I’m sure some people won’t be able to hear it anymore, but if the employee potential in our industry is limited, but at the same time the demands of customers and the market are growing, then the only answer to the question of increasing efficiency in work processes can only be… the topics of “automation and digitalization”. The few good workers that are still available to our industry must be used much better and optimally according to their qualifications. All uniform, recurring and therefore “monotonous” work processes must be processed with the help of technology. Easier, smarter, more time-saving. By the way, a nice side effect is that this makes the job more attractive for the employees, less time for stupid things, more time for the special things or development – in other words: the exciting part of the job comes to the fore, the boring parts have to be “outsourced”. .
And yes, even if some people can no longer hear the buzzword “AI”: AI is an excellent tool for exactly that, but its potential for simplifying everyday work must also be understood, identified and used. AI will help, but before AI, the technical foundations must be in place so that AI can work, and that is automation and digitalization. The best AI can do little if the database is not structured.
As you can see, the savings potential is high, hidden in a wide variety of areas and, unfortunately, sometimes also associated with previous investments.
Over the next few months, we will examine in detail what potential is hidden where and what needs to be done so that insurers can actually save costs here. Unfortunately, for many people this is not a “nice-to-have” or “profit optimization measure”, but often goes much deeper. Finding and utilizing savings potential has long since become a crucial factor for competitiveness and determines the future of many industry participants. Join us on this exciting journey.
