Supply chain: A closer look

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Insurers must understand the microeconomics of supply chains to thrive during the downturn.

There has been enough bad news for insurers recently. With soft markets, increased regulation and unprecedented natural catastrophes, they are in the firing line. The current climate feeds into a cycle where firms declare reduced earnings and cut jobs. Then, when earnings increase, the jobs return and expenses creep back up.

Short-term thinking is disruptive. Employees and investors will be unsure about the security of insurance firms in the future, and the industry will spend more of its time trying to reassure key stakeholders.

Stability is the answer to weathering such crises and can create a competitive advantage. Nowhere is this more relevant than in the operation of supply chains. Like manufacturers, insurers operate on low margins and competitiveness can be improved through knowledge. If firms can understand the microeconomics of their business processes they can learn a great deal.

For example, knowing exactly how many staff are devoted to serving customers through marketing, lead generation, needs analysis, creating proposals, vetting application forms, underwriting and activating payment methods can help firms discover the cost of each new customer.

By understanding the microeconomics, costs can be reduced. With a view of the current cost as a starting point, restructuring becomes a matter of choosing the right combination of variables such as using fewer people, optimising IT systems or avoiding duplication.

The key is getting started. Understanding the microeconomics of the business is important, but it shouldn’t stop there. This is a very different approach to simply using the combined operating ratio as the master metric and cutting the biggest numbers, like the headcount, to improve by a few percentage points.

Gains can be reinvested into pricing and further driving competitiveness, because companies know exactly how their processes work. This approach won’t prevent natural disasters or stave off new regulation, but it can create an important competitive advantage at a time when the market is under significant stress.

Mark Foster-Collier consulting partner, Wipro Consulting Services and Kris Denton managing partner, business transformation practice, Wipro Consulting Services

This article was published in the 1/8 August 2013 edition of Post magazine

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