Implications of Cost Management
As is the case with most competitive industries, profitability and viability of a firm in the insurance industry significantly depends on its market share, and its ability to minimise its cost of operations without compromising the quality of its service and risk management. Perhaps the easiest way to reduce cost is to reduce the cost of processing and underwrit¬ing policy applications.
In the US, the average cost of processing and underwriting an application has been estimated to be in excess of USD 250. As a consequence, insurance companies have increasingly resorted to replacement of personnel by computer based "expert" systems which apply the vetting models used by the companies' (human) experts to a wide range of problems."
However, the US companies have found it more difficult to reduce their cost of marketing and distribution. A significant part of these expenses accrue on account of the commissions paid to exclu¬sive and/or independent agents, the usual rate of commission being 15 30 per cent, depending on the line of business.
As such, independent agents have greater bargaining power than the exclusive agents because they "own" the insurance contracts held by the policyholders, and can switch from one insurance company to another at will. These agents also benefit from the perception that, as outsiders having bargaining power vis a vis the insurance companies, they will be able to ensure better service for the policyholders.
In order to mitigate the cost related problem, insurance companies in the US are increasingly looking at alternative ways to market and distribute their products. Direct marketing has gained popularity, as has marketing by way of selling insurance products through other financial organisations like banks and brokers.
These actions might lead to signifi¬cant reduction of cost of operations of insurance companies, but it is not obvious as yet as to how the small policyholders will fare in the absence ol powerful intermediaries with bargaining power vis a vis the insurance companies.
As is the case with most competitive industries, profitability and viability of a firm in the insurance industry significantly depends on its market share, and its ability to minimise its cost of operations without compromising the quality of its service and risk management. Perhaps the easiest way to reduce cost is to reduce the cost of processing and underwrit¬ing policy applications.
In the US, the average cost of processing and underwriting an application has been estimated to be in excess of USD 250. As a consequence, insurance companies have increasingly resorted to replacement of personnel by computer based "expert" systems which apply the vetting models used by the companies' (human) experts to a wide range of problems."
However, the US companies have found it more difficult to reduce their cost of marketing and distribution. A significant part of these expenses accrue on account of the commissions paid to exclu¬sive and/or independent agents, the usual rate of commission being 15 30 per cent, depending on the line of business.
As such, independent agents have greater bargaining power than the exclusive agents because they "own" the insurance contracts held by the policyholders, and can switch from one insurance company to another at will. These agents also benefit from the perception that, as outsiders having bargaining power vis a vis the insurance companies, they will be able to ensure better service for the policyholders.
In order to mitigate the cost related problem, insurance companies in the US are increasingly looking at alternative ways to market and distribute their products. Direct marketing has gained popularity, as has marketing by way of selling insurance products through other financial organisations like banks and brokers.
These actions might lead to signifi¬cant reduction of cost of operations of insurance companies, but it is not obvious as yet as to how the small policyholders will fare in the absence ol powerful intermediaries with bargaining power vis a vis the insurance companies.