Cost optimisation in insurance

Gone are the days when insurance policies were written out by hand and all of an insurer's operations could be successfully tracked in Excel spreadsheets. Today, without a high-quality information system, a modern retail insurance company can neither develop nor even function on a day-to-day basis. As a result, insurers are building up their own IT structures, which, either in-house or with the help of third-party organizations, roll out projects costing hundreds of thousands of dollars.

Are serious capital investments and ongoing IT spending really inevitable for an insurance company? Ivan LAZAREV, General Director of NOVELTY LLP, shared his view on this issue.

– Ivan, in your opinion, which key indicators matter when assessing the effectiveness of an insurance company's IT function?

– Insurance companies often ask themselves: why are IT costs rising while efficiency remains low? Experience shows that to achieve the expected result it helps to follow a few simple rules:

- set specific, achievable goals;

- provide the process of achieving these goals with adequate resources and exercise

ongoing control over the achievement of the goals set.

The main factors used to assess the result are efficiency – the rational use of resources in achieving the 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 IT departments about the slow speed of transmitting reporting data over the Internet. The IT specialists of company "A" solved the problem by purchasing additional bandwidth. The IT specialists of company "B" solved it differently – they restricted the

company's employees' access to entertainment websites, thereby freeing up traffic for the company's actual needs.

Both companies achieved the result. However, company "A" incurred capital expenditure, and its solution cannot be called efficient, whereas company "B", in addition to solving the main problem of providing a high-quality communication channel for its finance department, also addressed a number of issues regarding employees' proper use of working time – and without any additional financial costs. Undoubtedly, in the case of company "B" both efficiency and effectiveness will be higher.

To understand how to measure the efficiency of the processes that take place in a company to achieve its goals, you can use key performance indicators – metrics of how efficiently the company's departments, including IT, carry out particular activities and work when implementing assigned tasks. Each company can develop its own system of performance indicators, but today there are more than 400 such indicators for IT processes alone.

Another important indicator for assessing IT efficiency is the concept of total cost of ownership, that is, determining the costs of information systems, and more, 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 to ensure the efficient functioning of an insurance company's IT function and to assess it.

– What methods of optimizing IT costs would you recommend to insurers?

– The first solution insurers themselves most often arrive at is cutting the IT budget. Slashing the budget is the quickest and easiest way to solve the problem. But cuts must be made carefully so as not to cut something essential without which the company's IT infrastructure simply cannot function.

For a more balanced approach, it is necessary to assess the total cost of ownership of the insurance company's IT function, which consists of direct costs, including all financial costs of running the company's information system – purchase of hardware and software, staff salaries, office rent, electricity consumption and so on – and indirect costs, which are indirectly attributable to the operation of the company's information system.

People sometimes ask me to explain what indirect costs include. Formally, they include all costs associated with operating the IT infrastructure that do not have a line item in the company's budget. According to current approaches to calculating total cost of ownership, such costs include:

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

• Users maintaining their own computer and software set – backups, recovery after failures, debugging programs, installing drivers for new devices and so on.

• Using office computers and information systems for outside work, entertainment, games and the like.

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

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

- while waiting for a response from the IT service;

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

It is usually assumed that each corporate network user spends at least 80 working hours a year – 10 working days, or 2 calendar weeks – on self-training and maintaining their 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 the insurance company's IT function has been assessed, one can discuss possible areas of cost optimization. But I would like to focus on one optimization method – outsourcing, that is, transferring functions, in this case IT, to specialized organizations.

The decision to transfer functions related to the company's information system to an external organization should be made after a careful analysis of a number of factors. IT outsourcing is chosen when it is necessary to reduce the company's own IT infrastructure, which is non-core from the point of view of the main business, to reduce the number of contracts with different contractors, to organize telephony, Internet access and so on. IT outsourcing reduces costs and allows the organization to concentrate on running its core business. The key point of such outsourcing is to obtain IT services of the required quality while paying less for them than if internal resources were used.

– How exactly can costs be reduced by transferring IT functions to an outsourcing company?

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

Therefore, when choosing an IT outsourcing partner, it is necessary to take into account its experience in insurance, and to pay attention to whether it has ready-made solutions and constantly applies innovations. One possible form of cooperation within such outsourcing is renting specialized information solutions for insurance companies, which are currently developing actively in the form of so-called cloud solutions.

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

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

- no capital expenditure is required to purchase licenses for expensive software;

- there is no need to hire expensive specialists to support the software, since IT outsourcing includes a support service that ensures uninterrupted operation of hardware and software.

– What IT outsourcing services does your company offer, and how much demand is there for them?

– Our automation covers: issuing insurance

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

I can give some figures that characterize the main capabilities of the solution we offer:

- 2 minutes – time to issue an MTPL policy,

- 1 minute – time to process a renewal,

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

- 0 tenge – IT staff costs,

- 0 tenge – hardware costs,

- 0 tenge – software purchase costs,

- 0 tenge – costs of headache medication.

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