New research from McKinsey shows that the gap between the most and least efficient insurance companies is widening, as technology investment creates winners and losers.
By analysing operating costs as a percentage of gross written premium, McKinsey has determined how operationally efficient different carriers are in life and P&C markets across Western Europe.
In the life market in 2012, the best performing carriers were spending $3.10 for every $100 of premium written while the least efficient were spending $7.10. By 2017, the gap had widened as top carriers were able to reduce costs to $2.90 while expenses at under-performing firms grew to $8.70.
This means a poorly-run life insurer now spends 3x as much as a well-run competitor to produce the same amount of premium.
The industry's technology investment record explains this divergence in fortunes. IT spend has been the fastest growing area of operating expenses, but investments have been unequal across the industry.
Many insurers are stuck maintaining legacy systems which eat-up resources and slow down employees. COBOL-programmers that can manage these systems are rare and command large salaries to work in a near-defunct language. In addition, as a consequence of legacy M&A transactions, many insurers run separate IT systems in parallel.
Carriers who have put off investment in technology are now feeling the competitive squeeze.
The differences in operating costs between the leaders and laggards can be attributed to several factors. The best carriers stand out with their exemplary cost management. Some are very large companies that capture economies of scale, while others benefit from a less complex operating model. Still others have made heavy investments in digitalization and automation and are starting to see the benefits.