The imperative to reduce costs is hardly new.However, current economic conditions, combinedwith market forces that have gained momentum in the insurance industry over the past few years,have caused cost reduction to become a top strategic business priority.

The manner in which this priority is addresseddepends largely upon the circumstances in whichthe insurer finds itself. For some the imperative is survival, with short-term stability being theprimary goal. For others it is improvement of theircost structure and their operational capability,the aim being to emerge from the downturn amore formidably positioned competitor. And for

high-performance insurers, the strategy may beto fundamentally transform their cost structure,implementing a new business model that enablesthem to capitalize on the opportunities for growththat the economic crisis presents.

In Accentures view, irrespective of the situation,arbitrary cost reduction is no longer sufficientand could even be damaging. What is needed is a more strategic approach, where cost cutting ispart of a broader agenda. This not only can yieldcost reductionsincluding lower loss costsof upto 30 percent, but also can equip and position theorganization for profitable growth.

A strategic approach to cost reduction in insurance

1There are different approaches that can be adopted to reducecost (see Figure 1). Short term strategies may aim to cutexpenses as rapidly as possible. Others seek to optimize thecurrent model in order to move to higher levels of efficiency.

Strategic Cost Reduction, on the other hand, entails broaderambitions and more far-reaching changes to both the currentoperating model and the organizational structurein fact,throughout the value chain. Its aim is not simply to take outcost but to build capability that supports the business strategy.

It defines value not only from an internal perspective, butalso in terms of what it means to customers, agents, regulatorsand shareholders. The result is a highly efficient and opera-tionally superior organization that is positioned for profitablegrowth and continuous capability development.

Strategic Cost Reduction creates an efficient organization positioned for growth

+-x

-

Figure 1: Strategic Cost Reduction approachWhile insurers need to focus on reducing cost to improve their profit margin, to create valuethey also need to achieve growth. This duality is embedded in Accentures strategic cost reduction offering.

Pure Loss

CommissionExpense

LossAdjustmentExpense

GeneralExpense

OtherAcquisitionExposure

Loss Ratio

ExpenseRatio

CombinedRatio

InvestmentIncomeRatioLeverage

ProfitMarginPost Tax

ROE

Cost ofEquity

Organic

M&A

Post TaxSpread

NPEGrowth

Total Return toShareholders(TRS)

EconomicValue Added(EVA)

Value Creation

Figure 1: Cost Reduction StrategiesThe three broad categories of cost reduction

Rapid Cost Take Out Quick-hit process improvements

Organization streamlining

Span-of-control enhancements

Procurement optimization

Optimize Current Operations Activity and process improvements

The elimination of activities thatadd little value

Organizational layer improvements

The establishment of shared services

The outsourcing of non-core activities

Strategic Cost Reduction Process optimization with an

enterprise-wide focus

Enterprise organization re-design

Enterprise-wide technology integration

BPO and bundled outsourcing

Implementation of operationalexcellence capability

Segmented sales and service strategies

Figure 2: Potential Impact By LeversEach of the four levers of strategic cost reduction contributes to an improved combined ratio

80%

100%

Rapid Cost Take Out Optimize Current Operations

Strategic Cost Reduction

Time

Value

93.0%89.3% 86.6% 85.2% 84.7%

Pure Loss

Loss AdjustmentExpenses

0.5%

4.3%2.7%

1.4%

Increasing spread,the difference bet-ween ROE and COE,creates value

Magnifying positivespread by growingpremiums creates value

Illustrative

2A powerful solution that extends throughout the enterpriseAccentures approach to cost reduction is more effective thantactical, narrowly-based efforts because it is aligned with the business strategy, it includes the entire enterprise, and it is planned and effectively implemented by an experiencedteam of specialists.

What also sets Strategic Cost Reduction apart from other cost-cutting approaches is its inherent creativity. Itpurposefully challenges established industry assumptions and conventions, looking not only to insurance trendsettersbut also to other innovative industries for new and effective

practices. Its aim is not simply to reduce costs but, if possible,to change the shape of the cost curve.

The magnitude of savings achieved by Strategic Cost Reductionis attributable to its comprehensive approach and its relianceon four powerful inter-related levers that shape the coststructure of the enterprise, affecting the way the insurerconducts every aspect of its business (see Figure 2). Thelevers are (1) operating model integration; (2) optimizedsourcing; (3) sales and service optimization; and (4) opera-tional excellence.

Figure 1: Cost Reduction StrategiesThe three broad categories of cost reduction

Rapid Cost Take Out Quick-hit process improvements

Organization streamlining

Span-of-control enhancements

Procurement optimization

Optimize Current Operations Activity and process improvements

The elimination of activities thatadd little value

Organizational layer improvements

The establishment of shared services

The outsourcing of non-core activities

Strategic Cost Reduction Process optimization with an

enterprise-wide focus

Enterprise organization re-design

Enterprise-wide technology integration

BPO and bundled outsourcing

Implementation of operationalexcellence capability

Segmented sales and service strategies

Figure 2: Potential Impact By LeversEach of the four levers of strategic cost reduction contributes to an improved combined ratio

0%

20%

40%

60%

80%

100%

Rapid Cost Take Out Optimize Current Operations

Strategic Cost Reduction

Time

Value

52.9%

11.6%

9.5%

8.1%

7.3%

3.6%

93.0%

51.4%

10.7%

9.5%

8.1%

6.0%3.6%

89.3%

51.4%

9.0%

9.5%

7.8%

5.3%3.6%

86.6%

51.4%

9.0%

9.4%

7.3%

4.5%3.6%

85.2%

51.4%

8.9%

9.4%

7.3%

4.1%3.6%

84.7%

Lever 1:Operating Model

Integration

Lever 2:OptimizedSourcing

Lever 3:Sales & Service

Optimization

Lever 4:Operational

Excellence/Six Sigma

Baseline

Pure Loss

Loss AdjustmentExpenses

CommissionsExpenses

Tax & Dividends

General Expenses

Other AcquisitionExpenses

0.5%

4.3%2.7%

1.4%

Figure 5: Key Accenture tools and methods for Strategic Cost Reduction

Conduct PerformanceAssessment and

Identify Hypotheses

Prioritize and ValidateOpportunities

Define Initiatives andTransition Requirements

Develop IntegratedRoadmap and

Benefit Realization Plan

Illustrative

3Lever 1: Operating Model IntegrationMany insurance companies have significant opportunity to improve their cost structure by integrating their operat-ing models, thereby gaining economies of scale and scope. This opportunity lies within un-integrated acquisitions,autonomous operating structures, line-of-business silos, and independent distribution channelsall of which arecharacterized by inconsistent processes, measures, structures,technologies and business performance. Integration lowersthe cost structureexpenses as well as loss costthrougheconomies of scale and scope and by raising effectivenessacross the value chain.

Between 30 and 50 percent of the total cost savings potentialcan be achieved through operating model integration, withtypical results including:

Consolidated and centralized structures and activities, such as a single Finance function supporting all lines of business

Flatter organizational structures and increased spans of control

Standardized, simplified, integrated and automated processesacross the value chain, especially for underwriting, claimsand policyowner functions

The elimination of activities that add little or no value, and better alignment of resources with those that do

Better use of business intelligence solutions to enhance decision making

Better management of procurement budgets

Lever 2: Optimized SourcingWith increased globalization has come an ever-expandingrange of sourcing alternatives, which today allow the insurerto select the strategy, the location, the skill sets and thepricesas well as the level of sensitivitythat best suit itsneeds. Strategic Cost Reduction entails a clear definition ofthe activities that lend themselves to alternative sourcing, the careful evaluation of the options, followed by theaggressive pursuit of business arrangements that offeradvantageous, variable cost structures. Just three of themore popular sourcing alternatives are:

Business process outsourcing (BPO), which enhancesprocess effectiveness and efficiency by engaging with service providers that offer greater scope, scale and expertise than can usually be achieved in-house

Application outsourcing (AO), which is used both for portfolio rationalization and process improvement

Infrastructure outsourcing (IO), which enables the insurer to consolidate and rationalize its infrastructureand server environments

In addition to these benefits, the typical results of optimizedsourcing include:

Simpler, standardized processes and platforms Improved efficiency and quality as a result of greater

scale and expertise The reduction of labor costs by moving operations to

less expensive locations The focus of resources on assets and activities that

differentiate the insurer The switch from a fixed to a more variable cost structure,

which keeps costs more in line with transaction volumesand policy numbers

The opportunity of sharing risk and reward with a strategic partner

Lever 3: Sales & Service OptimizationThe sales and service capabilities of an insurance company areobviously vital to its competitive differentiation. Cost reductionin these areas has to be undertaken carefully to avoid damagingthe growth engine of the business or inadvertently driving upcustomer attrition. It is because of this complexity that thislever is often overlooked or under-addressed. However, signifi-cant cost structure improvements can be achieved, not onlyreducing expenses buteven more importantlysharpening the focus of the organization and improving the return on itsacquisition and service spend. Insight from customer, channel,product and other data can be leveraged to inform strategiessuch as customer / agent segmentation and tiered service levels. This not only can positively shape the customer / agentexperience, but also can ensure that the improvements are costeffectively sustained.

Shifting the levers that drive down cost

4The results typically achieved through sales and serviceoptimization are:

Greater reliance on fixed or lower cost channels as sales and service transactions increase, reducing unit costs

The optimal alignment of marketing spend with distributionand sales goals

More effective sales management and execution, and a better-focused sales force

An increase in cross- and up-selling Improved alignment with the desired agent service model

through, for example, tiered levels of focus and service.This is achieved by gaining a better understanding ofagent segmentation

Reduced call volumes and other transactions throughintuitive sales and service processes on self-service channels like the Web

An increase in first-call resolution and a lower cost-per-call Greater customer retention through better, more relevantly

segmented service

Lever 4: Operational ExcellenceOperational excellence is indispensable to establishing a business capability that delivers long-term differentiation. It provides the discipline that allows insurers to realize

benefits, and also to systematically evaluate their businessand make improvements on a continuous basis. Companiesthat have this capability tend to be better positioned goinginto a downturn, as well as better equipped to deal with it.

This lever plays a key role in Strategic Cost Reduction, as itprovides the infrastructure, methods and capability to monitorand sustain the cost reduction benefits. Most importantly, itinfuses a discipline that views cost management as a way ofdoing businessnot an event.

The results typically achieved through operational excellence are:

Trained internal resources who have the tools and experience to continuously improve performance and reduce costs

The discipline to rationalize projects on the basis of their contribution to overall economic value

The precise measurement of benefits, and the rigorousevaluation and prioritization of opportunities

The infrastructure needed to perpetuate operational excellencefor example deployment leaders, master blackbelts, kaizen practitioners, etc.

Ongoing identification of opportunities, and an increase in activities that reduce costs across the business

Pure loss 3Loss adjustment expenses 3 3 3Commissions expenses 3Other acquisition expenses 3 3 3General expenses 3 3 3 3

Total Benefit Impact 1530 percent improvement in expense base

Figure 3: Impact of the Four LeversStrategic Cost Reduction shifts all of the levers that act upon the insurers cost structure. The resultant savings are reflected in the majorexpense categories, delivering a combined benefit that typically adds up to a significant improvement in the overall expense base.

Illustrative P&C/General example

Lever 1: Lever 2: Lever 3: Lever 4: Operating Model Optimized Sales & Service Operational

Integration Sourcing Optimization Excellence/Six Sigma

Client ProfileRSA is a leading multinational insurance group. The companyhas operations in over 30 countries and provides its productsand services to more than 20 million customers in over 130countries. For 2007, the Group reported net written premiumsof UK5.8 billion.

Business ChallengeIn early 2003 a new Group CEO, Andy Haste, was appointedby the Board with one main goal: to make RSA a stronger,higher performing businessone that delivered to share-holders and one that customers and employees could againbe proud of.

The operational transformation program has had two ele-ments. The first has been to restructure and de-risk theongoing portfolio by focusing on general insurance and bysuccessfully exiting life and underperforming businesses. Thesecond has been a demanding operational improvement pro-gram. Two key targets were publicly announced: to cut theexpenses of the Groups ongoing businesses by UK 270 mil-lion and to achieve a combined operating ratio of 100 per-cent on average across the insurance cycle for the Groupsongoing business (combined operating ratio is a measure ofindustry profitability).

Critical to the transformation program was a fundamentalrestructure of the UK claims business. The objective was to improve claims performance by implementing a newoperating model to drive reductions in claims indemnitycosts and claims expenses.

How Accenture HelpedAndy Haste brought in Accenture to team with RSA as thepartner to implement this fundamental restructure. This wouldexploit Accentures industry insights, transformation expertise,software assets and outsourcing capabilities. The two companiesstructured a contract with a risk and reward payment arrange-ment based on the delivery of the program benefits, withinbudget and on schedule. Both organizations stand to gain by making progress over the course of a three-year plan totransform the insurer.

The transformation program was comprehensive and included: Implementing a new operating model comprised of a Rapid

Response Unit for claims notification and settlement of simple claims, and a segmented back-office for handlingcomplex claims

Establishing an offshore claims processing center for claimnotification and recovery processing

Implementing Accenture Claim Components Solution as the single claims handling system across the operations

Implementing consistent organization, team and job structures and re-engineered business processes across the operations

Establishing supply chain arrangements with suppliers tooptimize UK500 million in spend across motor, commercialproperty and indirect spend categories

RSA and Accenture staff have worked side by side in integratedteams to deliver the new claims operating model. Accentureassembled a strong global team with extensive experience inlarge-scale program delivery, claims transformation, claimssystem delivery and outsourcing

High Performance DeliveredThe claims transformation program began in October 2003.Within three years, the target operating model and supportingsystem were fully implemented.

RSAs UK claims operations now have a consistent organizationand handle claims through a single system using a single setof best practice processes. Whether based in a RSA office orin the field, the claims employees in the UK now work asintegrated, virtual teams instead of the previous silos dictatedby geography and systems functionality. Workflow with keysuppliers is seamless due to supply chain system integration.

The claims program is a significant contributor to RSAstransformation program and strategic plans. Within little overtwo years of its commencement, claims indemnity costs werereduced by more than UK 130 million a year, and claimsexpenses by more than UK 5 million a year.

Further long-term success for RSA will depend on consistentdelivery against strategic objectives. One key part to this is its ongoing performance improvement program and its part-nership with Accenture. For both companies the partnership is about more than reducing costs. It is about getting RSAahead of the pack and enabling it to stay there throughcontinued, sustained performance.

5

RSA Claims Transformation Drives High Performance

6Accentures Strategic Cost Reduction offering is based on ourdeep understanding of how an insurance organization functions,and its key value levers. Our large and experienced team ofmanagement consultants are familiar with the stages of opti-mization and all their components, and have at their disposala suite of proven methods, tools and software assets that canbe deployed wherever they are required. Within this team,overseeing the process, is an expert group of cost reduction,functional and insurance specialists who can help implementthe agreed changes and, where necessary, provide alternativesourcing solutions.

Accentures Strategic Cost Reduction offering owes itseffectiveness to a number of key attributes in the planningandmore importantlythe implementation stages:

Disciplined and Thoughtful PlanningComprehensive perspective Strategic Cost Reduction is based on a thorough review ofthe insurers business, considering all key processes and functionsin the value chain and utilizing a multi-disciplinary assessment.This is informed by our High Performance Insurance CapabilityModel and our insurance research. Our approach will identify a comprehensive portfolio of cost reduction opportunities.

Proven planning tools and methods Accenture has a large portfolio of proven tools and methodsthat are used within all of the planning stages of Strategic CostReduction to ensure rigororous application of best practicesand swift delivery of value. They include, among many others,operating model frameworks and architectures, analysis tools,assessment and activity toolkits, and change and programmanagement delivery methodologies.

Strategically alignedAccentures cost reduction strategies are consistent with ourclients business strategies, which ensures that they supportrather than undermine the longer-term focus of the business. Infact, our approach uses the business strategy as the point ofdeparture from which cost reduction opportunities are evaluated.

Pragmatic and results-orientedOur consultants create a pragmatic design for the future stateof the business. It defines specific targets, initiatives and solu-tions that can be effectively implemented to achieve results.There is a built-in bias toward proactive risk identification andmitigation, transition planning and implementation. It all addsup to a clear roadmap for transition and implementation, withthe necessary discipline to realize the projected benefits.

Unmatched Implementation Capability Accenture has many years experience in converting ambitiousoptimization plans into measurable business benefits. Successfulimplementation depends on close coordination between ourmanagement consulting, systems integration, outsourcing and IT teams. Whether the design for the improved operatingmodel is implemented on the insurers premises, or at near-shoreor off-shore locationsor a combination of all threeourexperts ensure a smooth transition with minimal disruptionand quick turnaround.

We have an extensive Global Delivery Network staffed by75,000 application outsourcing, business process outsourcing,infrastructure outsourcing and other implementation professionals. They are complemented by our experiencedbusiness consulting and systems integration teams.

While our expertise reaches across all sectors, we haveunsurpassed proficiency in the insurance industry. Wecurrently serve more than 85 percent of the worlds top 40 insurance companies, and more than half of all NorthAmerican carriersincluding the ten largest in the US. Wehave an international network of insurance BPO deliverycenters which offer shared, optimized processing platformsincluding the Accenture Life Insurance Platform (formerlyNaviSys), rated by Celent as one of the leading platforms on the market. Our Insurance Data Migration Factory has,over the past six years, successfully converted more than 30 million policies.

Accenture is regarded by many industry analysts, third-party advisors and insurers themselves as the worlds leading insurance BPO provider. In 2008 we were rankedthe number one outsourcing service provider by theInternational Association of Outsourcing Professionals, and also by the publication InformationWeek.

Our track record of contributing to high performancehelpingreduce costs, improve service, and enhance flexibility throughprocess optimizationis testimony to an offering that works. It is also what gives us the confidence to commit to targetedoutcomes by offering to link our fees to the benefits ourclients receive.

Because of our particular set of capabilitiesin particular, thestrength and experience of our consulting, systems integration,outsourcing and IT teamswe can assist insurers from thedevelopment of a Strategic Cost Reduction plan through toexecution of the critical initiatives, as required. We team withour clients to achieve resultsnot merely to generate ideas.

Why team with Accenture? Disciplined planning and an unmatched implementation capability

Copyright 2008 AccentureAll rights reserved.

Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

Find out moreAccentures Strategic Cost Reduction offering can help younavigate the storms that are buffeting the insurance market.Just as importantly, it can help you re-equip and repositionyour organization so that, when conditions stabilize, you will emerge stronger and better placed to capitalize on theopportunities that will undoubtedly abound.

If you would like to learn more about Accentures StrategicCost Reduction offering, you can visit our website atwww.accenture.com/insurance.

About AccentureAccenture is a global management consulting, technologyservices and outsourcing company. Combining unparalleledexperience, comprehensive capabilities across all industriesand business functions, and extensive research on the worldsmost successful companies, Accenture collaborates withclients to help them become high-performance businessesand governments. With more than 186,000 people servingclients in over 120 countries, the company generated net revenues of US$23.39 billion for the fiscal year ended August 31, 2008. Its home page is www.accenture.com