Saturday, March 19, 2016  02:44 AM

Are you actively saving costs for your company by using industry-standard operations? You may not realize it, but by doing so, you may be doing social service, of a sort.

Consider this: insurance enables insureds to take risks that otherwise they may not have been able to take. Risk transfer by insurance creates opportunities for businesses and ventures to flourish; in a very real sense, the economy is dependent on insurance. For example; a bank would generally hesitate in lending money to a person buying a home if the bank fears the risk of buyer’s inability to repay the loan in case the house is destroyed. However, if the person is insured, the bank is willing to lend knowing that the insurance company will pay in case the insured is unable/unwilling to pay due to the loss of the mortgaged property. This enables the functioning of a whole set of services around the house in terms of construction workers, utility and even property dealers, thus creating significant economic activity.

So, what’s this got to do with standardization? While a major portion of premium typically goes towards paying for the losses, a substantial portion is also spent in expenses including policy servicing, claim servicing, and general administrative expenses. The standardization of operations has a direct bearing on the expense ratio of the insurer. With standardization, the insurers have to spend less in reinventing the wheel, and the overall transaction costs are lower due to increased automation and the use of industry-wide tools. As expenses lower due to standardization, prices for the insured decrease. This, in turn, allows individuals and business to carry out economic activities that their ordinary circumstances may not have allowed. For example, if insurance premiums are reasonable, taxi owners will gladly take insurance to cover their risks and ply with confidence, thus facilitating travel and supporting economic needs.

There is a direct link between the standardization of operations and a reduction in expense cost. The following are examples of different avenues that the insurance industry is already pursuing or can pursue to keep encouraging standardization:

  1. Leverage industry blueprints like the Industry Reference Blueprint for Insurance (IRBI) from IRBI provides a means for standardizing the Business Model, the Information Systems Model and the Technology Model for a P&C organization, helping an organization conform its architecture, processes, and technologies to industry-standard frameworks like TOGAF and the Zachman framework.
  2. Leverage standardized data interchange standards from associations like ACORD.
  3. Utilize standardized regulatory reporting platforms available from bodies like NCCI and various state bureaus.

A lot has been done in the recent years by various industry bodies to increase the standardization of insurance operations—and the efforts are paying off; we are seeing a reduced expense ratio across the industry. However, a lot more can still happen.

So the next time when you are helping your company save costs through standardization, you can also take pride in doing so by thinking of it as the equivalent of social welfare: your work is allowing the wheels of the economy to turn with the support of affordable insurance.