Cost Optimisation in an Insurance Company

IT cost optimisation in an insurance company

Where to start with optimisation

1. Define the business goal and a measurable result.
2. Calculate the full cost of the process, including manual labour and errors.
3. Find the constraint: data, integration, approval or infrastructure.
4. Compare several solution options, not just the licence price.
5. Run a pilot and test the effect on real data.
6. Assign a process owner and ongoing monitoring.

Key performance indicators

Modern areas for savings

• electronic policies and automatic data verification;
• a single customer profile instead of re-entering data;
• integration via APIs and event-driven exchange;
• automation of standard claim payments with fraud control;
• electronic archive and document version management;
• cloud infrastructure where it meets security requirements;
• system observability and prevention of failures;
• licence management and switching off unused services;
• reducing duplication of functions between departments.

Total cost of ownership

The purchase price of an IT system is only part of the costs. Take into account implementation, integrations, data migration, support, infrastructure, training, customisation, information security, audit and the cost of exiting from the vendor. A solution that is too cheap can turn out to be the most expensive after several years of use.

Archive interview from 2012

The interview with Ivan Lazarev, General Director of NOVELTY LLP, is preserved in full below. The examples relate to the technology and economics of 2012, but the principles of setting goals, monitoring and comparing options remain useful.

The days are gone when insurance policies were written out by hand and all of an insurer's transaction records fitted comfortably into Excel spreadsheets. Today, without a high-quality information system, not only development but even the day-to-day functioning of a modern retail insurance company is impossible. As a result, insurers are beginning to build up their own IT structures, which, either on their own or with the involvement of outside organisations, launch projects costing well over a hundred thousand dollars.

Are substantial capital investments and ongoing expenditure on an insurance company's information technology really that unavoidable? Ivan LAZAREV, General Director of NOVELTY LLP, gave his view on this problem.

– Tell me, please, Ivan, which key indicators do you think are important for assessing the effectiveness of an insurance company's information technology?

– Insurance companies often wonder why information technology costs are growing while effectiveness remains low. But to get the expected result, experience suggests that it is useful to follow a few simple rules:

- set specific, achievable goals;

- provide the process of achieving these goals with appropriate resources and carry out

constant monitoring of whether the goals set are being achieved.

Moreover, the main factors used to assess the result are: efficiency – the rational use of resources in achieving a result, and effectiveness – the degree to which the planned results are achieved.

The role of efficiency and effectiveness is easiest to explain with a simple example.

The finance departments of companies “A” and “B” complained to their information technology departments about the low speed of transmitting reporting data over the Internet. The IT specialists of company “A” solved the problem by buying extra communication channel capacity. The information technology specialists of company “B” solved the problem differently: they restricted employees' access

to entertainment-type Internet resources and thereby freed up traffic for the company's direct needs.

Both companies achieved the result. But company “A” incurred capital expenditure and its solution cannot be called efficient, whereas company “B”, besides solving the main issue of providing a good communication channel for the finance department, also dealt with a number of issues concerning how employees use their working time, and did so without any additional financial outlay. Undoubtedly, in the case of company “B” both efficiency and effectiveness will be higher.

To understand how to measure the efficiency of the processes taking place in a company in order to achieve its goals, you can use key performance indicators – indicators of how well the company's departments, including information technology, carry out particular activities and tasks in implementing their objectives. Each company can develop its own system of performance indicators, but today for IT processes alone there are more than 400 such indicators.

Another important indicator in assessing the efficiency of information technology is the concept of total cost of ownership, that is, determining the costs of information systems, and not only these, calculated at all stages of the information system's life cycle.

These are the main methods that, as a first approximation, a company can use for the effective functioning of an insurance company's information technology and for assessing it.

– Which methods of optimising information technology costs can you recommend to insurers?

– The first solution that insurers themselves most often arrive at is cutting the information technology budget. Slashing the budget is the quickest and simplest way of dealing with the issue. But one has to cut carefully so as not to cut off something very necessary, without which the company's information technology infrastructure simply cannot function.

For a more balanced approach, it is necessary to assess the total cost of ownership of an insurance company's information technology, consisting of direct costs, which include all the financial costs of running the company's information system – purchase of equipment and software, staff salaries, rent of premises, electricity consumption and so on – and indirect costs, which relate indirectly to the functioning of the company's information system.

People sometimes ask for an explanation of what indirect costs include. I can say that, formally, this means all the costs connected with operating the IT infrastructure but which do not have a line in the company's budget. According to modern ideas about calculating total cost of ownership, such costs include:

• Users teaching themselves how to work with their own computer and set of software, and training and helping colleagues.

• Users servicing their own computer and set of programs themselves – backup, recovery after a failure, debugging programs, installing drivers for new devices and so on.

• Use of work computers and information systems for outside work, for entertainment, games and the like.

• Downtime of the information system as a whole or of individual parts of it:

- because of insufficient capacity (low availability) or unstable operation of system components;

- while waiting for a response from the IT service;

- because of a planned or unplanned emergency shutdown of the system or its individual parts.

It is usually assumed that each user of a corporate network spends at least 80 working hours a year – 10 working days, 2 calendar weeks – on self-training and on servicing their own computer. But practice shows that this figure can safely be increased by one and a half to two times.

Once the total cost of ownership of an insurance company's information technology has been assessed, one can begin to talk about possible areas for cost optimisation. But I would like to dwell on one method of optimisation, outsourcing – handing functions, in this case information technology, over to specialised organisations.

The decision to hand functions connected with the company's information system over to an external organisation must be taken after a careful analysis of a number of factors. IT outsourcing is chosen when it is necessary to reduce the company's own information technology infrastructure, which is non-core from the point of view of its main business, and to reduce the number of contracts with different contractors, the organisation of telephony, the Internet and so on. IT outsourcing reduces costs and allows an organisation to concentrate on its core business. The key point of this outsourcing is to obtain information technology services of the required quality while paying less for them than would be the case if internal resources were used.

– How exactly can costs be reduced by handing information technology functions over to an outsourcing company?

– Outsourcing allows the client company to cut costs and significantly reduce the labour intensity and cost of operating information systems and applications, and to concentrate on the company's core business processes. However, outsourcing can also bring drawbacks to business processes. For example, a level of professionalism among the outsourcing company's staff that proves insufficient to perform the work or provide services of the proper quality, as well as insufficient methods of management control, can lead to lower process efficiency and higher servicing costs.

Therefore, when choosing a partner for IT outsourcing, it is necessary to consider its experience in the insurance sector and to pay attention to the availability of ready-made solutions and the constant use of innovation. One possible form of cooperation within this outsourcing is renting specialised information solutions for insurance companies, which today are developing actively in the form of so-called cloud solutions.

The benefits of cloud solutions for insurance companies, which can be characterised by several key factors, are quite obvious:

- there is no need to incur capital expenditure on buying expensive server equipment and maintaining it;

- no capital expenditure is needed to buy licences for expensive software;

- you can do without hiring expensive specialists to support the software, because IT outsourcing implies a support service that ensures the uninterrupted operation of equipment and software.

– What IT outsourcing services does your company offer and how much are they in demand?

– Our work automation includes: issuing insurance

contracts, underwriting, claims settlement, a document management system and a customer relationship management system.

I can give some figures that characterise the main capabilities of the solution on offer:

- 2 minutes – the time to issue an MTPL policy,

- 1 minute – the time to process a renewal,

- 0.5 tenge – the cost of organising acceptance of a cash payment per policy,

- 0 tenge – IT staff costs,

- 0 tenge – equipment costs,

- 0 tenge – costs of purchasing software,

- 0 tenge – costs of headache medicine.

Today, 13 insurance companies in Kazakhstan use the work automation services based on IT outsourcing offered by NOVELTY.

What has changed over the years

In 2012 the main attention was paid to local infrastructure, communication channels and in-house IT departments. Today these have been joined by clouds, mobile applications, biometrics, unified insurance databases, cyber resilience, artificial intelligence and strict requirements for the protection of personal data.

AI-based automation requires control of data quality, explainability of decisions and human involvement in material insurance decisions. Savings must not lead to an unjustified refusal or to discrimination against a customer.

Project checklist

• is there an owner and a measurable goal;
• has the current cost of the process been calculated;
• have security and continuity risks been described;
• can data be safely returned from the vendor;
• has the effect been tested in a pilot;
• is there a support and training plan;
• has the customer journey not got worse.

Conclusion

An insurer's cost optimisation should improve speed, quality and manageability, and not simply reduce a budget line. The best results come from transparent metrics, elimination of manual operations, quality data and control of technological risks.

This material is for information purposes. Specific technology solutions should be chosen after analysis of the architecture, legislation, risks and total cost of ownership.