Specialty: Insights for the specialty insurance and ... - Ernst & Young

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Article / Growth: operational transformationThebenchmarkThe results of Ernst & Young’s benchmarking survey — the first focusing onlyon the specialty market — show substantial opportunities for global specialty(re)insurers to reduce costs by transforming their operating models andsimplifying their businesses. For those firms that are challenged to drivemargins in a sustained soft market, we’ve identified a number of ways toimprove efficiency.The 2012 Ernst & Young costbenchmarking survey was designed toidentify key operational transformationopportunities for specialty (re)insurers.Participants of the survey include 16(re)insurers, mostly headquartered inBermuda with offices in a range of countries,including the US and UK. Participants rangedfrom some of the smallest companies inthe market to the largest: Gross WrittenPremiums ranged from US$500m toover US$3b and FTE (full time equivalent)employees from under 100 to over 3,000.Participants were asked to provide details ofthe cost and FTE breakdown by function andby cost type to allow detailed comparisonsbetween peers.Significant savings can beachieved in underwriting,finance and ITThe underwriting function was the largestand most costly function for the majority ofour survey participants. However, the rangeof results was very wide and indicated variedapproaches to balancing ‘front office’ and‘back office’ costs. The majority of insurershad some form of underwriting supportin place, but this was often in higher costlocations or segmented by line of businesswhich reduces the cost efficiency of theseactivities. Compared with the benchmark,this may indicate that some underwritingactivities could be moved to operational orsupport functions.Underwriting cost as a % of total costErnst & Youngbenchmark range17% 38% 60%AverageFinance functions also varied widely insize and cost — the finance functions forall participants were significantly largerand more costly than their equivalents incommercial or retail insurers. These largerand more expensive finance functionsindicate complexity and inefficiency inunderlying processes. This may be causedby role duplication, manual processesand system inefficiencies resulting fromfront-office versus back-office investmentprioritization. They may also be attributed tothe complexity of the legal entity structure.Finance FTE as a % of total FTEErnst & Youngbenchmark range11% 16% 24%AverageThe size of IT functions depended on projectactivity taking place within the organizationsconcerned and also the amount of offshoringand outsourcing that has taken place; thecost of this function can indicate the scale ofoperational transformation. Significant ITinvestment did not appear to be widespread;while the IT spend per FTE ranged fromUS$9k–US$120k, the average was US$38k.However, many participants told us theywere considering investment in claims, policyand finance system replacement, as well assimplifying the overall IT landscape.IT cost as a % of total costErnst & Youngbenchmark range8% 12% 28%AverageClaims, risk and actuarial arealso important areas for costreductionOrganizations with a composite book ofinsurance and reinsurance tended to havelarger and more costly claims functions;in comparison, organizations with smalleror less costly claims functions may haveoutsourced claims or may handle lowervolumes.Market trends showed that claims systemreplacements are being put in place toincrease efficiency and control, such as theuse of Guidewire and claims leakage reviewsto identify ongoing opportunities to reducethe claims ratio.26 Specialty Issue 1 — December 2012
“ Few specialty(re)insurers havefocused onsimplifying theirbusiness modelsand in my view will miss outon substantial cost savingsas they increase in sizeunless they prioritize this.”Ben Reid, Director, Ernst & Young LLP (UK)Risk costs were high, reflecting a recentfocus on Solvency II and other complianceactivities. This increased the amount ofrisk-based capital required and also seniormanagement accountability, putting pressureon compliance and risk departments.Our results indicated that there was somedisparity between the size of the actuarialfunction; we discussed opportunities forsynergies between finance and actuarial,where there are common support functions.Also, there is potential for co-location ofpricing actuaries with underwriting teams aswell as actuarial function rationalization.Some specialty (re)insurersare already implementingopportunities to reduce cost,and many more need to befast followersGlobally, a number of (re)insurers areimplementing operational transformation orcost reduction programs, with a particularfocus on underwriting, finance and ITefficiencies in these complex areas of thecost base.Those organizations that have implementedcost reduction showed smaller or lesscostly functions than those that have not.For example, the finance functions of twoorganizations that had implemented financeeffectiveness initiatives were 9% and 13%of the total cost compared with the averagebenchmark of 15%.“ In my view,trends such asthis have reallygenerated a lot ofinterest in costreduction. With the excess ofcapital in the market,providing reasonable returnsto shareholders must includea focus on efficiencies in allback-office functions.”Philip Burrill, Partner, Ernst & Young Ltd(Bermuda)Issue 1 — December 2012 Specialty 27
Page 1: SpecialtyInsights for the specialty
Page 4 and 5: In this issue ...02Meeting the chal
Page 6 and 7: Article / Growth: future outlookMee
Page 8 and 9: Meeting the challenge of changeof t
Page 10 and 11: Article / Growth: M&A activityFour
Page 12 and 13: Article / Growth: UK economyAutumn
Page 14 and 15: FS ITEM Club economic outlook for f
Page 16 and 17: Article / Growth: finance systemsIn
Page 18 and 19: Growth: the interviewMymost courage
Page 20 and 21: Growth: the interviewAndRuminations
Page 22 and 23: Article / Growth: regulatory focusT
Page 24 and 25: The Swiss Solvency test versus Solv
Page 26 and 27: Article / Growth: preventing tax le
Page 28 and 29: Tax leakage: more than a drop in th
Page 32 and 33: The benchmarkIn order to achieve a
Page 34 and 35: Key contactsPlease get in touch wit
Page 36: What aretoday’s highperformersdoi

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