Cost Reduction Program
When a large life and annuity provider exited the general agency individual life insurance market, 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 had been successful. However, the current cost per policy was higher than industry benchmarks suggesting opportunities for improvement.
The client retained The 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 all lines of business and the processes associated with them.
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.
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 In addition, the current system is outdated and will not be a viable solution for this block or for the other products it supports.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.