Post Europe: Shared service and competence centers for insurers

New regulations, in particular Solvency II, and the aftermath of the financial crisis are putting pressure on insurers across Europe. Currently European insurers need to improve their income and secure their market share, by generating additional sales and reducing costs.

For the last option, the benefits associated with shared service centers and shared competence centers are increasingly being considered. Due to the high saving potential of cross-border consolidation, this is particularly relevant for insurers operating cross border.

Large ahead of game
Larger European insurers, in particular, have already implemented shared service centers for selected functions. Smaller, more regional insurance companies, however, did this only partially, thus providing potential for optimisation. They should - and have to - try to catch up. In turn, further consolidation for large insurers provides the opportunity for further economies of scale.

The results of the joint study by Efma and Roland Berger Strategy Consultants indicates that shared service centers are primarily implemented in order to save costs and improve service quality as well as for controlling purposes.

"They should - and have to - try to catch up."

Central objective
The objective behind the introduction of shared service centers is primarily to centralise services and processes, in order to achieve greater efficiency and significant cost reduction. Although, shared competency centers are designed to improve service quality and corporate governance, the purpose of the centers is to consolidate functions in order to ensure the sharing of know-how across markets and products, in order to improve quality and increase efficiency.

European insurance companies expect cost savings of between 10% and 16% on cost base for shared service centers and of between 6% and 15% on cost base for shared competence centers.

Half way there
While reinsurance, asset management, IT-related functions as well as sourcing and procurement were already at least partially centralised by more than half of the respondents. In fact, around 40% of insurers have already organised shared competence centers for product development, human resources and distribution management.

Whereas other functions like finance/accounting or policy administration are consolidated in shared service centers at present by only by a small number of insurers.

"European insurance companies expect cost savings of between 10% and 16%"

Criteria surprise
In contrast to popular market trends, shared service and competence centers are not solely located in low-labor-cost countries. European insurers say that the main criteria when choosing a location is the availability of functional and language skills, as well as the proximity to company headquarters, this is considered to be even more important than labor costs.

Cultural differences do not seem to be a major hurdle for setting up a shared service centers, whereas this can cause significant problems when establishing a shared competency center. For both shared service and competence centers establishing credibility and trust, as well as commitment are strong factors that need special attention during the setup.

Know-how loses
Major disadvantages associated with both shared service and competence centers are the loss of local know-how and the distance to the relevant markets. Moreover, shared service centers are considered to lead to lower flexibility. To achieve the benefits and to mitigate risk and potential downside of integrated service and competence centers, special attention needs to be paid to the definition of organizational interfaces, service level agreements as well as to cross-border harmonized processes and the level of technical know-how of all employees.

Shared service and competence centers are expected to become even more important for European insurers within the next three years. They are following examples of US companies, which usually tend to outsource and run shared service and competence centers to a much larger extent than in Europe.

"Shared service and competence centers are not solely located in low-labor-cost countries."

Further increases
Therefore, it is expected that the modularisation of services and organisational units within European insurance companies will further increase. In particular, the share of IT-related services provided through shared service centers is expected to further increase - from 61% to 89% of respondents for IT infrastructure; and from 55% to 72% of respondents for IT application development and support. Similarly, finance/ accounting - from 28% to 50% of respondents - and call center services - from 28% to 44% of respondents - are also expected to be centralised to a far greater extent.

Shared competence centers will also increase in importance with insurers organising product development - at least partially - set to increase from 39% to 55%. The number of insurers that establish competence centers for reinsurance (currently 56%) and asset management (currently 50%) is expected to increase by at least 10%. In addition, insurers are planning to implement competence centers for actuarial services, which will increase the share of respective competence centers from 22% to 34%.

The number of insurers that will fully consolidate specific functions in shared service or competence centers will, nevertheless, remain stable. Support functions, in particular, will be consolidated in shared service centers only partially. With the exception of re-insurance and asset management, this is also valid for core functions that have a direct impact on the customer benefit. For reinsurance; the share of insurers that fully consolidate this function in a shared competence center is expected to increase from 28% to 39%, and for asset management from 39% to 44%.

Hendrik Bremer is a partner in financial services at Roland Berger Strategy Consultants