insurance benchmarking study results 01242008

Insurance Benchmarking – Charting Your Course

Joe Guastella, PrincipalTim Calvert, Senior ManagerLarry Baum, Senior Lead

Deloitte Consulting LLPJanuary 8, 2008

Financial Services Presents:

Life Insurance and Annuity Operations 2007 Benchmarking Results

Copyright © 2007 Deloitte Development LLC. All rights reserved.

Benchmarking Approach

Deloitte’s proven methodology, robust analysis, and commitment to developing actionable and insightful results for participants provides significant value.

Robust questionnaires developed over twelve years with industry leaders

Broad participation of insurance industry in annual kick-off meetings and studies

Proven MethodologyProven Methodology

Detailed data definitions (facilitates apples-to-apples comparisons) Built-in error checking within questionnaire (participant history,

metrics, outliers) Dedicated resources to support data-gathering questions and

concerns

Data IntegrityData Integrity

Fosters open discussion experiences, challenges and lesson learned Ensures data measured is consistent with current business issues Governs the exchange of ideas among participants

Participant DrivenParticipant Driven

High quality data checks and interactive review and validation Preliminary results verified by participant organizationRobust Data ValidationRobust Data Validation

Evaluate competitive cost position and opportunity compared to top performer median

Quantify benefits of achieving top performance Provide leading practices that may be used to achieve performance

improvement

Competitive AssessmentCompetitive Assessment


12 years of experience assisting over 50 leading life insurance and annuity providers in identifying opportunities to improve performance

AEGON Direct Marketing Group AEGON Financial Partners AEGON Financial Services Group AIG American General Life Cos., LLC AIG Retirement Services, Inc. Allianz Life Allmerica Financial Allstate Financial Ameriprise Financial AXA Equitable Baltimore Life Chase Life (Zurich) CIGNA (to Lincoln/Allstate) Conseco Services, LLC Fidelity Life Insurance General American Life (MetLife) Genworth Financial

Great American Financial Resources™, Inc.

Northwestern Mutual Life Old Mutual Financial Network Pacific Life PennCorp Financial Ping An of China Principal Financial Group Prudential Financial, Inc. Samsung Life Security Benefit Group Sun Life Financial The New England (MetLife) Thrivent Financial TIAA-CREF Travelers Insurance Co. (MetLife) Western Southern Life Woodmen of the World Ins. Society

Great West Life & Annuity Hartford Life ING Jackson National Life John Hancock Life Keyport (Sun Life) John Hancock Annuities John Hancock Life Legacy Marketing Group Lincoln Financial ManuLife Financial (John Hancock) MassMutual Financial Group MetLife Minnesota Life The MONY Group (AXA) Mutual of Omaha National Life New York Life

Note: Parentheses indicate acquiring company name


Insurance Benchmarking Scope

Total Processing Expense

Underwriti’g& Issue Support

Underwriti’gReqs

New Business

Processing Expense

NB Operating Expense

NBLights-on

IT

NB Discretion’y

IT

Back Office 3

CS Operating Expense 3

RemittanceCall Center

Customer Service

Processing Expense

CS Discretion’y

IT

CS Lights-on

IT

Other Line of

Business Expense 1

Other Business

Functions 2

Other Application

ITOther Infra

Total Line of

Business Expense

New Business

ITCustomer Service IT

1 Audit, Compliance, Communications, Legal, Legal Settlements, Reinsurance, Stock Options, Treasury, and Valuation

2 Marketing, Distribution, Field, Finance, etc..3 Back Office includes Policy Administration, Policy Changes, Claims & Disbursements


Life Segment Summary (LIONS 2007 Results - 2006 Data)

Given the low-growth environment, cost containment through operational efficiency is a priority.

• The three companies that comprise the lowest cost group are 20% lower than the average with a potential savings opportunity of $95 million.

• The savings opportunity equals approximately $30 million per $1 billion of Total Annual Premium.

• Study results suggest that Life insurers with lower new business costs achieve efficiency through:– Use of technology– Typically faster service delivery time

• Study results also show there continues to be opportunities for insurers to improve customer service performance – companies are tapping into the potential of call centers to varying degrees; new technologies are further reducing costs while improving service.

• Outsourcing for insurers is still gaining traction.• Life insurers have several additional opportunities to improve efficiency:

– Exploring additional outsourcing opportunities– Leveraging eService capabilities– Addressing costly legacy systems environment– Expanding use of differentiated service


Given the low growth environment, cost containment through operational efficiency is a priority… low cost providers are 20% lower than the average.

Adjusted Line of Business (ALOB1) Expenseper $1,000 Total Annual Premium

Total Ops and Related IT Share of ALOB Expense% of Total Adjusted LOB Expense

$0

$25

$50

$75

$100

$125

$150

$175

$200

NB Ops Expense

CS Ops Expense

NB & CS IT Expense

0%

5%

10%

15%

20%

25%

30%

35%

40%

9%

10%

13%

33%

8%

9%

10%

27%

$122.76$152.93

Average Lowest Cost2

• In a low-growth market, enhanced profitability will require disciplined cost control

• The savings opportunity equals approximately $30million per $1 billion of Total Annual Premium

• New business and customer service operations and related IT expenses are a significant part (roughly one-third) of overall baseline costs

• Because expenses are evenly divided among New Business operations, Customer Service operations, and related IT, insurers need to manage the entire business process model -- not just one area

1 ALOB is based on the statutory annual statement (blue book). The LOB (lines 23, 24) expense is adjusted to exclude field expenses and the effects of IT capitalization, amortization, and depreciation2 Throughout “Lowest Cost” refers to three companies with lowest costs


Insurers with lowest cost typically have faster service delivery time… low cost providers are 25% lower in cost than the average.

New Business Processing Expense (NBPE)per $1,000 NB Face Amount

New Business Time Service by Face Amount BandsAverage # of Days

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

2004 2005

60

Average All

New Business Processing Expense (NBPE)per $1,000 NB Face Amount

New Business Service Delivery Time by Face Amount Bands Average # of Days

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

20

25

30

35

40

45

50

55

60

Under100K

100K to249K

250K to499K

500K to999K

1 Mil to4.9 Mil

5 Mil orMore

Average

$1.33$1.77

Lowest Cost

• The savings opportunity equals approximately $ .4 million per $1 billion of Total New Business Face Amount

• Cost containment is one of the challenges facing insurers. Other challenges include reducing service delivery time and improving underwriting results

• Lower cost per $1,000 face amount is a reflection of greater operational efficiency

• Insurers with lower cost structures have faster service delivery time and higher issue rates by face amount band than the study group


Insurers have not fully leveraged e-Service capabilities and Call Centers... low cost providers are 32% lower than the average.

In-Force AdministrationCost per Transaction (excl. IT)

In-Force Administration Transactions per In-Force PolicyAverage Number of Transactions

Customer Service Processing ExpensePer Inforce Policy

Average

$0

$4

$8

$12

$32

0.0

0.2

0.4

0.6

0.8

1.0

$16

$20

$24

$28

0.96 0.65 $26.77 $17.95

Lowest Cost

• The savings opportunity equals approximately $ 9 million per 1 million Total Inforce Policies

• Customers are placing greater importance on delivery of quality service. The challenge is to offer quality service while increasing the cost effectiveness of operations

• Effectively serving the future market (broad middle market) will likely require lower margins; operational efficiency will continue to be the focus

• There is an opportunity for insurers to improve performance in meeting target standards… companies are not meeting their own standards (which have been lowered)


Legacy system maintenance expenses constrain the ability to invest in enhanced capabilities.

NB Application IT Share of Adjusted LOB Expense% of Total Adjusted LOB Expense

CS Application IT Share of Adjusted LOB Expense% of Total Adjusted LOB Expense

Maintenance IT Spend Discretionary IT Spend

0%

1%

2%

3%

4%

5%

0%

1%

2%

3%

4%

5%

46%

54%

2.7%

71%

29%

1.9%39%

3.5%

61%

20%

3.7%

80%

Average Average Lowest Cost Lowest Cost

• When companies make discretionary IT investments, they tend to invest in New Business application IT more than Customer Service application IT

• The investments choices, legacy systems and operating profiles of organizations may be a matter of strategic choice or a default choice based on current operating constraints. The data highlights the high cost of operating legacy customer service systems


Annuity Segment Summary (ACES 2007 Results – 2006 Data)

Our hypothesis is that significant growth in Annuity sales is masking underlying efficiency issues. Opportunities for Annuity providers include:

• The three companies that comprise the lowest cost group are 43% lower than the average with a potential savings opportunity of $115 million.

• The savings opportunity equals approximately $16 million per $1 billion of Total Deposits• While e-Service and other mechanisms may be utilized to manage in-force transaction unit

costs, transactions are expected to continue to grow• To address an increasing number of regulatory issues and to remain competitive,

companies are realizing the importance of developing automated systems for straight through processing (STP) of annuities

• The main difference we see between Annuity providers over Life insurers is that there is a larger percentage of discretionary IT spend… may be in a better position to invest in STP

• Providers with lower cost structures have more aggressively outsourced key business functions.

• Annuity providers have several additional opportunities to improve efficiency:– Addressing Not-In-Good-Order (NIGO) rate root causes– Exploring additional outsourcing opportunities– Leveraging eService capabilities


Given the higher growth environment, expense efficiency is a priority for Annuity providers… low cost providers are 43% lower than the average.

Trend of ALOB Expenseper $1,000 Annuity Deposits

Total Ops & Related IT Share of Adjusted LOB Expense% of Total Adjusted LOB Expense

Adjusted Line of Business Expenseper $1,000 Total Annuity Deposits

Total Ops & Related IT Share of Adjusted LOB Expense% of Total Adjusted LOB Expense

NB Ops Expense

CS Ops Expense

NB & CS IT Expense

0%

5%

10%

15%

20%

25%

30%

35%

40%

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

28%

10%

13%

5%

11%

14%

6%

31%

$20.36$35.90

Lowest CostAverage

• The savings opportunity equals approximately $16 million per $1 billion of Total Deposits

• New business and customer service operations and related IT expenses are a significant part (roughly 30 percent) of overall baseline costs. Given the significant growth in annuities and the volatility associated with that growth, it is imperative that companies manage the entire business process model -- not just one area

• Within the Annuity business, success is driven more heavily by technology which can require significant outlays, underscoring the importance of managing each component of the business process model, including IT


Addressing the root cause of the NIGO rate offers the opportunity to further improve new business efficiency… low cost providers are 23% lower than the average.

New Business “NIGO” Rate% of Contracts Deemed Not In Good Order

NB Processing Expense per Contract WrittenUS Dollars

0%

10%

20%

30%

40%

50%

60%

New Business “NIGO”1 Rate% of Applications Deemed Not In Good Order

NB Processing Expense per Contract Written

Average

0%

10%

20%

30%

40%

50%

60%

Variable Fixed Total$0

$50

$100

$150

$200

$250

$300

$215.84 $165.7045%48%27%

Lowest Cost

• The savings opportunity equals approximately $1.3 million per 25,000 applications written

• New Business processing unit costs for the lowest cost group are 23 percent lower than the average, which represents a $5 million opportunity

• NIGO rate continues to be high across all companies, which translates into added time and cost required to process new business

• Lowering NIGO rate will allow companies to lower processing unit expenses even further and may help increase marketplace attractiveness by enhancing ease of doing business

1 NIGO – Applications that cannot be processed because of missing or incomplete information.


Transaction volumes and unit costs are expected to grow… low cost providers are 26% lower than the average.

In-Force Admin. Transactions per In-Force ContractAverage Number of Transactions

Average

$0

$10

$20

$30

$40

$50

0.0

0.5

1.0

1.5

2.0

2.5

2.04 1.51 $44.34 $32.74

Lowest Cost

Customer Service Processing Expense Per Inforce Contract

• The savings opportunity equals approximately $ 3 million per 250,000 Total Inforce Contracts• Annuity products require more frequent customer interactions than life products; additionally, as the market witnesses a

fundamental shift from asset accumulation to income planning, annuity products will play a key role and may involve an even longer term relationship

• While e-Service and other mechanisms may be utilized to manage in-force transaction unit costs, transactions are expected to continue to grow


Annuity providers are able to invest more in discretionary customer service IT than Life insurers.

NB Application IT Share of Adjusted LOB Expense% of Total Adjusted LOB Expense

CS Application IT Share of Adjusted LOB Expense% of Total Adjusted LOB Expense

Maintenance IT Spend Discretionary IT Spend

0%

1%

2%

3%

4%

5%

6%

0%

1%

2%

3%

4%

5%

6%

3.5%4.3%

2.1% 2.6%

39%

61%

41%

59%

44%

56%

57%

43%

Average Average Lowest Cost Lowest Cost

• Annuity providers are investing in IT at about the same rate as Life insurers; however, discretionary IT spending is higher than that of Life insurers. This may mean that Annuity is in a better position to invest in STP (straight through processing).

• To address an increasing number of regulatory issues and to remain competitive, companies are realizing the importance of developing automated systems for STP of annuities.

• The ability to process transactions with less paperwork, eliminate duplicative efforts, and build in compliance parameters is critical to the industry.


For more information, please contact:

Joe GuastellaDeloitte Consulting LLP +1 212 618 4287 [email protected]

Larry BaumDeloitte Consulting LLP +1 207 236 [email protected]

Tim CalvertDeloitte Consulting LLP +1 816 802 7417 [email protected]

mailto:[email protected]




Appendix one: Outsourcing for insurers is still gaining traction.

Total Outsourcing by Function % of Spend Outsourced

Average

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

New Business PolicyAdministration

Policy Change Claims Disbursement Call Center Remittance Policy Statements

Lowest Cost

• Among insurers, outsourcing is not entirely unfamiliar, but it has not fully taken hold

• Deloitte proprietary research shows that insurers are most open to outsourcing servicing processes for closed lines of business – administration and claims


Appendix two: Annuity providers with lower cost structures have more aggressively outsourced key business functions.

Total Outsourcing by Function% of Spend Outsourced

Total Outsourcing by Function% of Spend Outsourced

Average

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

New Business ContractAdministration

Call Center Disbursement Remittance Contract Statements

Lowest Cost

• Among study participants, outsourcing has not fully taken hold, though insurers outsource a large portion of remittance and contract statement spend


The information contained in this publication is for general purposes only and is not intended, and should not be construed, as legal, accounting, or tax advice or opinion provided by Deloitte & Touche to the reader. This material may not be applicable or suitable for, the reader’s specific circumstances of needs. Therefore, the information should not be used as a substitute for consultation with professional accounting, tax, or other competent advisors. Please contact a local Deloitte & Touche professional before taking any action based upon this information.


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insurance benchmarking study results 01242008

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