Amid growing financial pressures, Australian general insurers are increasingly focusing on productivity as a way to manage rising costs and maintain affordability for consumers, according to global management consulting firm McKinsey & Company.
Challenges such as frequent natural disasters, inflation-driven claims expenses, and regulatory demands have placed additional strain on insurers. To navigate these conditions, McKinsey’s analysis suggests that Australian insurers could draw lessons from the productivity improvements applied by global industry peers.
McKinsey’s report highlighted a 20% rise in underwriting costs over the past seven years for Australian insurers, driven by escalating climate risks, compliance demands, and investments in technology. These expenditures, though intended to bolster resilience and manage risk, have yet to yield substantial productivity improvements.
According to the firm, this cost burden has been unevenly distributed: established insurers have seen underwriting costs rise by around 20%, while costs for international players have increased by 37%, and challenger firms report even greater hikes.
As competitive pressures mount and market conditions shift, insurers in Australia are increasingly prioritising efficiency initiatives.
Drawing on strategies deployed internationally, McKinsey’s report outlined three primary levers that can collectively reduce costs by 15% to 30%:
Labour productivity, which can comprise up to 60% of the operational cost base, is a primary area for potential savings.
McKinsey identified several tactics that have shown results internationally, including “zero-basing” functions, restructuring operational models, and selective offshoring.
Insurers can review operational activities from the ground up, defining only essential roles and functions, then strategically reintroducing necessary tasks.
McKinsey noted that such zero-based redesign can yield savings of 20% to 40%, compared to more incremental approaches.
In a more streamlined structure, operational layers are minimised, reducing management costs and enabling faster decision-making. This model, common in tech firms, has been adapted by some insurers to streamline functions.
Australian insurers offshore 10% to 15% of their workforce on average, compared to 20% to 40% among global counterparts.
By selectively offshoring critical roles – especially in technology, cybersecurity, and analytics – insurers could enhance cost efficiency while bolstering specialised capabilities.
IT infrastructure optimisation offers another substantial avenue for productivity improvement, potentially targeting up to 30% of IT costs. Key strategies include system modernisation and rationalisation of applications.
According to McKinsey, many insurers are embracing advancements in generative AI to boost efficiency.
Gen AI, when integrated into core processes, can automate repetitive tasks, speed up software updates, and reduce the costs of maintaining legacy systems.
Insurers often maintain large, complex application portfolios, which increase operational costs and risk of downtime. To address this, some insurers have implemented simplification programs or “factories” to streamline applications and reduce costs by up to 15%.
Cross-functional teams are also managing tech debt incrementally, avoiding the disruptions of major, large-scale technology overhauls.
The final lever, focusing on third-party expenses, addresses a significant portion of the cost base, with opportunities for reductions in both procurement and real estate.
Moving beyond simple cost-cutting, insurers can shift to an approach that emphasises optimal spending across vendor contracts and services. This involves analysing demand, terms, and compliance across all spending categories to identify where efficiencies can be achieved.
Australian insurers tend to have substantial real estate commitments in high-cost areas. Internationally, insurers have been reducing office footprints, turning to remote or hybrid models.
Some have entirely remote claims management teams, or are subleasing office space to save on operational costs.
McKinsey emphasised that translating these strategies into action requires robust performance management systems.
Globally, insurers that succeed in implementing productivity measures maintain a focus on key performance indicators, tying objectives directly to specific metrics across all levels of the organization.
The report further advises Australian insurers to assess productivity initiatives with four critical questions in mind:
These questions, McKinsey said, can help insurers refine their productivity strategies in a sustainable and impactful manner. Given the heightened operational and regulatory challenges facing Australian insurers, now may be a pivotal time to adopt such transformative approaches.
