The No. 1 driver of overall IT costs within insurance companies is business mix, according to Boston Consulting Group's (New York) and TCi Consulting and Research's (Cresskill, N.J.) first annual benchmarking study. The 2003 Enterprise Level IT Effectiveness (ELITE) Survey examined IT spending at six of the top 20 life insurance companies to determine how much the companies spend on each of their business lines and how that spending compares to that of their peers. The study - which was designed to provide detailed information only to the companies participating in the survey - also concluded that insurance companies can keep IT costs in check by keeping their business processes and IT architectures simple.
Among the study's other key findings was that insurers with a higher mix of investment products also enjoyed a lower IT cost ratio (IT costs divided by premiums and deposits). "Investment products have a very different set of economics than insurance products," says Boyd Pederson, senior manager, information technology practice, at the Boston Consulting Group's Toronto office. "As the relative size of the investment business versus the insurance business increases, insurance companies will spend a declining proportion on IT."
Wide variations in unit costs among insurance companies participating in the study could largely be explained by economies of scale. "Companies with more policies in force have lower IT cost ratios," says John L. Johnsen, managing director, TCi Consulting and Research. "We were able to show on a scale curve that every time you double the number of in-force policies, you reduce your overall costs by 10 percent."
Johnsen says that information is particularly meaningful for companies contemplating an acquisition. "If they do it right and spend the time integrating it with the existing blocks of business, they could reduce their overall costs by 10 percent," he says. "That was a revelation for a lot of companies."
Complexity Drives Costs
While most of the variance in IT unit costs between insurance companies can be explained by size differences, the majority of the remaining difference can be attributed to complexity in the form of business process, products and IT architecture, according to the study. Companies with higher IT complexity had unit costs that were 25 percent below the scale curve, while high-complexity companies were 25 percent above the curve, the study shows. Those organizations with redundant application landscapes and more complex application and infrastructure platforms pay the price with higher maintenance costs.
"You can basically explain up to a 30 to 40 percent unit cost difference through simplicity," Boston Consulting's Pederson says. "Companies need to be careful of the complexity cost of taking on additional revenue."
According to Pederson, the best companies understand that complexity drives their costs and are trying to drive toward simplicity. However, he says it is hard to understand the value of that business case without understanding where others are relative to your organization's position.
The two research firms are currently gathering information for the 2004 survey and are looking for additional participants for the 2005 study.