A Large Life and Annuity Provider
Unit Cost Reduction
A large life and annuity provider exited the
general agency individual life insurance market in the 1990s. They
were left with a shrinking, closed block of traditional individual
life insurance policies that continued to require policyholder service
and support. For the past few years, their efforts to reduce the cost
per policy have been successful. However, the current cost per policy
was still at $43.19, while industry benchmarks suggest an ideal cost
of $30.82.
The client retained the Robert E. Nolan Company to analyze and
evaluate their traditional life operating expenses. The objectives of
the project were:
 | redesign the operational processes, consistent with industry best
practices, in Policy Owner Service, Call Center, Premium
Administration and Claims; |
| evaluate budget expenses impacting traditional life and recommend changes
to reduce unit costs; |
| reduce expenses to bring traditional life unit costs in line with
industry benchmarks; and, |
| secure outsourcing information and costs from Third Party Administrators
(TPAs) for evaluation by the Steering Committee. |
The scope of the project covered the expenses for traditional life as well
as the various units and the processes associated with it.
Project Approach
A Steering Committee was formed to oversee the project. A participative
workshop, facilitated by a Nolan consultant, utilized the client’s
employees to redesign the fundamental processes.
Nolan consultants conducted an evaluation of all budgetary items,
both direct and allocated. Nolan also contacted and secured proposals
from TPAs who had an interest in administering the closed block of
individual life policies.
Impact and Results
The client recommendations resulting from the project include:
| reducing
operational expenses through process redesign; |
| eliminating
selected non-value-added expenses from the budget; |
| restructuring
and flattening the organization; and, |
| introducing
more control over the process functions to improve productivity. |
Many of the recommendations have been incorporated into the
development of the 2001 budget. Other recommendations will be initiated in 2001,
with financial impact occurring in 2002.
|
Year
|
Unit Cost in Relation to Industry Benchmark
(Before Corp. Overhead) |
Improvement
Percentage
(Before Corp. Overhead) |
|
1997 Actual |
199% |
baseline |
|
1999 Actual |
140% |
30% |
|
2000 Projected |
131% |
6% |
|
2001 Budget |
119% |
10% |
|
Project’s Potential Target |
101%
|
15%
|
The Future
The Steering Committee accepted four proposals from TPAs and is reviewing them for possible
consideration. They recognize that the closed block will continue to shrink
while many expenses will remain fixed, causing the unit cost to rise. In
addition, the current system is outdated and will not be a viable solution for
this block or for the other products it supports. Consequently, over time, a TPA
may provide the optimum solution for managing unit cost.
The client successfully brought the unit cost of this block of business in
line with industry benchmarks. This has afforded them the time needed to develop
and implement a future strategy for the company’s closed block of individual
life policies.
|
