As part of a heavily regulated field, insurance companies are limited in options when it comes to increasing profit margins outside of investment revenue. In this article, we’ll explore those limitations and discuss how re-configuring your operations around payments can help you lower your combined ratio.
Most other types of businesses can affect their bottom line by adjusting product prices, offering promotional discounts, and negotiating bargains with vendors, manufacturers, and suppliers.
This is not the case for insurance companies.
Between actuarial table algorithms and Department of Insurance (DOI) restrictions, premiums pricing is practically fixed, leaving insurers little room to compete on price. And beyond diligent underwriting practices, not much can be done to avoid incurred losses and the associated expenses. Adding in taxes and general overhead, insurance product profitability is minimal at best.
For decades, insurers have accepted low margins as part of the trade. But that paradigm is beginning to shift. Despite continued regulations, the gap between insurance leaders and laggards is rapidly widening.
But how is it that, playing by all the same rules, one company can have a combined ratio below 50 and another above 130?
One often-overlooked area that contains the most freedom and flexibility to nudge the needle can be found in your admin expenses.
Industry leaders have discovered that some expenses – previously considered “necessary evils” – are, in fact, variables that can be altered. With a few simple modifications, these companies are now able to focus their resources on growth and innovation, rather than being dragged down by cumbersome tasks and unnecessary expenditures.
The key to reducing your admin expenses, and therefore your combined ratio, is hiding in plain sight:
Typically, premiums are counted as part of your positive revenue flow. However, when you unpack the admin expenses, you’ll likely find the operational cost of taking payments is higher than you thought.
Credit Card Processing Fees
The most obvious expense with credit card processing is the 2% – 3% transaction fees that accompany every payment. Other costs can include setup fees, equipment fees, and flat per-transaction fees.
Additionally, credit card processing requires dedicated resources to ensure compliance with the various payment-related regulations, individual card-brand rules, and state-by-state DOI policies, all of which require an investment of time and legal counsel.
When it comes to accepting payments, most insurance companies are concerned about keeping up with PCI requirements, and therefore invest heavily in compliance practices. Any procedural gaps can result in thousands — even hundreds of thousands — of dollars in fines for noncompliance.
Beyond PCI implications, when you store credit card information on your servers, you increase the risk of security breach, because payments data is a particularly high-value target for hackers. This puts a tremendous strain on your IT department to defend the network amidst increasingly sophisticated, financially motivated cyber-criminals.
Time Spent Reconciling
Your treasury team is an integral part of your company’s profitability. Unfortunately, finance departments are often overburdened with the tedious task of reconciling premiums payments – often spending a substantial number of hours each week inspecting every single line-item, just to track down something as simple as a partial chargeback.
Insurance leaders have discovered that payments-related admin expenses present the greatest opportunity to affect their combined ratios.
By partnering with the right provider — one that intimately understands the nuances of internal processes at insurance companies — you should be able to reduce your credit card processing costs, ease PCI compliance and other security burdens, and decrease your time spent reconciling. And, ultimately, lower your combined ratio.
As an added benefit, by reducing expenses and eliminating unnecessary time-consuming tasks, you will free up resources to dedicate toward the innovative projects that will allow you to become an industry leader.
If you would like to know how One Inc can help you reduce your admin expenses and lower your combined ratio, contact us today.
Patricia is passionate about helping insurers continue to achieve success in a rapidly changing industry. She offers news, insights, and tips to help you modernize your organization, boost efficiency, and provide a superior customer experience for today’s policyholders.