Chicago — Bull markets are not the most likely of times for rigorous self-examination. So, one may well understand why life insurers, flush in recent years with demands for annuity products, had not spent too much time wondering how to improve the operational infrastructure servicing those products.
“We believe that the annuity industry’s significant sales growth through 2006 masked underlying efficiency and effectiveness issues,” New York-based Deloitte LLP contends in its yearly Annuity Contract Expense Benchmarking Study (ACES).
Indeed, as the economic slowdown ushers in a sustained low-growth environment, insurers would be well served to explore measures in cost containment and efficiency, according to Deloitte. “Cost containment in all aspects of the annuity business remains paramount,” the report states. “A low-growth market requires disciplined cost control to enhance profitability.”
While this is all well and good, where do insurers start? Traditionally, ACES has focused its cost metrics on key operations such as customer service and new business, this year it added analysis on corporate overhead and marketing, product, and distribution (MPD). It found that companies wanting to attain competitive advantage need to tackle overhead and MPD, which represent 74% of total annuity expenses. “With the downturn in the economy, executives need to look at MPD and corporate overhead in the same structured way they evaluate new business and customer service expense,” it states.
One technical initiative rife with cost-reduction potential, according to Deloitte, is straight through processing (STP). Because Annuity products, by their nature, require more frequent customer interactions than traditional life products, automation of the process can pay huge dividends. According to Deloitte investment during this respite will pay off down the line as baby boomers age and volumes once again surge.
“While e-service and other mechanisms may help manage in-force transaction unit costs, growth in transaction volume is expected to continue,” the report states. “Thus, the impact of inefficient processes and obsolescent technologies will take an increasing toll on those companies that simply maintain the status quo.”
Yet, the report acknowledges the barriers to widespread STP adoption are real, as incomplete or inaccurate applications, limited resources and regulatory issues all contribute to companies failing to realize the benefits of STP.
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