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Large global insurers are underperforming their smaller peers, and much of the blame can be placed on complexity. Jed Fallis, a partner with Bain's Financial Services practice, describes common pitfalls that snare large insurers and shares three steps they can take to reduce complexity and drive long-term profitable growth.
Read the Bain Brief: Are Global Insurers Too Big to Succeed?
Read the transcript below.
JED FALLIS: Based on some conversations my colleagues and I have had with many of the global insurers, we posed ourselves the question, are the global insurers too big to succeed? As we looked into the numbers, it became clear that the total shareholder return and ROE for the global insurers is 200 basis points less than their smaller colleagues.
As you dig further, a little bit deeper into the numbers, we see that both their growth and unit costs underperform their smaller peers. So the basic question is why, in an industry which is so often defined by the size of the balance sheet, do the large global players underperform?
The answer is a simple one: complexity. Invariably, these large global insurers fall prey to the challenges of complexity, as many of the global companies do. Now, complexity is easy to say, but in fact is very difficult to address. And insurers really stumble on three particular issues.
The first is, there's a tendency to tackle cost, rather than the underlying complexity itself. Programs will often follow a similar pattern. There'll be a benchmarking exercise, followed by a target set, followed by costs taken out without really addressing the underlying complexity of the work itself.
Number two, there tends to be a failure to tackle the opportunities in the seams of the organization. It's all well and good to think about costs in underwriting, but without the connection point to pricing, reserving and claims, you're really missing on the holistic opportunities and that opportunity in the seams.
And three, there tends to be, as they are insurers, a risk-averse culture. In that sort of environment, there is a belt-and-suspenders model, which invariably leads to duplicate costs around the system.
So we see three practical steps that global insurers need to take in order to address this issue of complexity. The first is, start by changing the nature of the work itself. Rather than beginning with a spans-and-layers exercise, begin with the underlying principles of the nature of the work itself and how that work can be realigned.
Number two then, overlay the appropriate operating model. And finally, think about sustaining the change by building a ruthless focus on lower cost and on simplicity. Only when all three of those pieces are put together will insurers find that they're able to not only take out cost, but permanently reduce cost in order to drive long-term profitable growth.