According to calculations by my colleagues Pat Lyons and Brian DeMaster, a life insurer can improve its return on equity by 2.5 percent through cost-cutting, and a further 0.6 percent by optimizing commission structures and processes. Before taking a brief look at what the value levers that produce these increases, an important general point needs to be made.

It’s simply that cost reduction must be seen at the strategic level. Companies, of course, typically have a number of cost-reduction programs underway at any one time, but these are very limited in scope. What we are talking about here is permanent cost reduction, and that implies streamlining and re-engineering the operational model.

This kind of far-reaching operational change should, I would argue, be seen within the context of the need for life firms to become digital insurers in the fullest sense of the word; that is, to look beyond digitizing their existing processes but rather to take advantage of the full capabilities of digital technologies to achieve greater flexibility and agility. This flexibility and agility is necessary to respond quickly to customer demands for personalized, multi-channel experiences, but such initiatives also carry substantial cost benefits.

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Many companies are already using the shared services model to generate real advances in process and service excellence in support functions like IT and finance as well as core insurance functions such as claims and call centers. But to realize the full benefits, the move to shared services must be integrated with the company’s digital transformation, creating a more cost-effective operating model that spans all the business units, and providing a common digital platform through which insurers interact with both customers and business partners.

The move to a truly multi-channel environment supported by a common, rationalized digital platform will probably prompt a move to a different compensation model for distributors, one that is more aligned with the key performance indicators of a digital insurer.

Transforming the operating model can reduce operating expenses by up to 25 percent, in Accenture’s experience. But as important, taking a strategic, long-term view of cutting operational costs will also help the company acquire the performance anatomy needed to deliver the kind of services that customers now demand, as discussed in my previous blog.

Explore the concept of performance anatomy, one of the cornerstones of high-performance business.

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