Insurers can reduce their operating costs through strategic onshore outsourcing, consolidating their tech stack, and improving the efficiency of core functions like underwriting, claims management, and customer support.
Across nearly all industries, companies seek to improve profits and lower costs. The insurance industry is no exception. While insurers’ spending is subject to large fluctuations from inflation and rising replacement and construction costs, there are still ways they can reduce expenses and achieve better margins.
Below, we’ll reveal some practical strategies to reduce operating costs in the insurance industry without letting service quality suffer.
Common Operating Expenses in Insurance
First, let’s pinpoint some of the main spending areas for insurers. Reviewing these costs can help insurers better understand where they have opportunities to save, and which costs need to remain to support successful operations.
Claims and Benefit Payouts
Claims and benefit payouts are among P&C insurers' most substantial expenses. These are largely unavoidable, and data from Bankrate shows that between 2017 and 2021, the average property damage claim payout on homeowner policies was $15,091. Payouts surged higher for claims involving fire and lightning, which averaged $83,519.
Underwriting and Policy Administration
Another large spending category for insurers is underwriting and policy administration. These are two fundamental insurance processes with associated costs such as underwriter salaries, investments in relevant technology and tools for risk assessment, and other expenses like professional development and employee training.
Sales and Marketing Expenses
Insurers also need to invest in sales and marketing to attracting and nurture potential customers. This includes spending on advertising campaigns, software systems to store and manage the deal pipeline, and fees paid to external marketing agencies. While it’s not generally wise to cease spending on sales and marketing completely, insurers should make sure their efforts are effective and produce a positive ROI.
General and Administrative Expenses
Like any other business, insurers incur general and administrative expenses to support daily operations. This includes things like office leases or rent payments, utility bills, salaries for administrators, and other overhead expenses to keep the lights on and support daily operations.
10 Tips to Reduce Operating Costs in the Insurance Industry in 2024
Insurers have many levers available for reducing costs, some that are easy fixes and some that require a more long-term approach. Review the following suggestions for reducing insurance operating costs and potential savings opportunities.
Leverage Insurance Outsourcing Services
A key way for insurers to reduce operating costs without compromising the quality of their operations or the policyholder experience is to outsource key processes like customer support or claims processing to vetted providers. The insurance business process outsourcing (BPO) market is set to climb in value to $83.7 billion by the end of 2029, as a growing number of insurers take advantage of this model as a way to streamline operations and save costs.
The P&C insurance outsourcing advantage is that these providers often charge less than it would cost to hire, train, and pay the equivalent full-time team, while still providing top-tier service based on their industry expertise and established processes.
Improve Risk Management
Because payments from claims make up one of the largest insurer expenses, insurers can reduce their exposure and lower the chance of claims by investing in more robust risk management. This will require insurers to review their current risk profile and assess where they might be overexposed, whether to a certain geographic region, age range, or other factor.
Based on their findings, they may need to make some adjustments to mitigate their exposure, such as raising premiums, adding policy exclusions, or lowering maximum benefits.
Automate Routine Tasks With AI and Machine Learning
It’s not practical for insurers to drastically reduce operating costs by replacing their team entirely with AI and machine learning solutions. However, they can strategically leverage these technologies to automate repetitive tasks that are resource-intensive and don’t require human expertise. As a result, they can reduce labor costs for hourly wages by requiring their team to spend less time on routine tasks.
Optimize Claims Management Process
Insurers can significantly reduce costs by ensuring they have top-tier claims specialists on their team. These professionals can quickly assess the validity and extent of a claim, ensuring that settlements are fair and reducing the risk of overpayment or fraud. Assemble a team of seasoned FNOL and claims experts if possible, or look for a dedicated insurance BPO provider to support this process and help you achieve more efficient and effective claims management.
Streamline Underwriting
In a similar vein, having expert underwriting support can help insurers save costs by streamlining operations and ensuring greater underwriting accuracy. These professionals can make well-informed decisions with greater efficiency, reducing the time and resources spent on evaluating applications. This can lead to faster policy issuance and improved policyholder satisfaction, creating positive ripple effects throughout the organization.
Enhance Customer Support
As HubSpot explains, investing in your customer support offerings can decrease your churn rate, meaning your current policyholders stay satisfied and retain their policies rather than look for an another provider. In other words, it’s less expensive for insurers to retain current policyholders than it is for them to invest in sales and marketing efforts to acquire new ones.
Make sure your current support options are satisfactory and are not frustrating policyholders or causing them to lose loyalty. If you don’t have the resources to offer quality customer support internally, consider outsourcing it to an experienced provider.
Consolidate IT Systems and Platforms
Keeping software systems separate and siloed isn’t just inefficient, it could also be causing a drain on your resources. Chances are, the current platforms you’re using have overlapping features and capabilities, giving you the opportunity to reduce the number of systems you need to pay for. Review your current software and determine if it’s possible to consolidate them, which could result in lower licensing fees and maintenance costs.
Adopt Cloud Computing for Scalability
Implementing cloud systems and moving away from expensive on-premise IT infrastructure can create noteworthy cost savings. Maintaining and upgrading hardware can cost a pretty penny, and cloud service providers are often much more cost-effective. In most cases, these providers will automatically roll out any updates or system patches at no extra cost. Plus, they often utilize pay-as-you-go plans, helping you avoid large upfront investments.
Focus on Preventive Fraud Detection Measures
Insurance fraud is costly for both insurers and their policyholders, as losses can be passed on through higher premiums. According to the Coalition Against Insurance Fraud (CAIF), $308.6 billion is lost each year to insurance fraud, and fraud occurs in an estimated 10% of all P&C insurance losses.
Insurers can reduce these preventable losses by implementing fraud detection measures like behavioral analytics and continuous monitoring. These systems can make it easier for insurers to spot anomalies and unusual claim patterns to prevent losses before they can occur.
Promote Remote Work to Reduce Facility Costs
Switching to a remote or hybrid work model can help insurers capture additional savings. With a smaller headcount working from the office each day, insurers can eventually downsize their office space to a location with lower rent. Plus, fewer people in the office means lower energy consumption, resulting in lower utility bills and less frequent orders for office supplies like paper, toner, pens, and more.
Cut Operating Costs by Outsourcing to Covenir
The above strategies are effective methods to reduce operating costs in the insurance industry. While any one of these strategies won’t be an immediate fix, adopting policies and processes to become more efficient and streamline operations can produce meaningful savings over time.
If you have a specific area of operations that you know is dragging on profitability and efficiency, but you don’t have the resources or expertise to enhance it, consider outsourcing to a trusted PBO provider like Covenir. We are an onshore insurance outsourcing solution, helping you deliver efficient, proactive, and on-brand services.
Investing the time and resources to recruit, hire, train, and support in-house teams can be expensive, and working with an outsourced team like Covenir can be a more cost-effective way to improve core insurance operations. Whether you need underwriting support, product sales advisors, premium services, or everything in -between, we have you covered.
Contact us today to see how Covenir can help you deliver a smooth-running and efficient insurance operation.