You are currently viewing The productivity imperative for Australian general insurance
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Australia’s general insurers have been facing more frequent and more severe natural disasters, rapid inflation of claims costs, and increased scrutiny from regulators—all while trying to achieve sustainable financial performance. At the same time, the cost of insurance has become increasingly unaffordable for consumers. Insurers trying to outperform in this competitive environment and offer affordable products should look at step-change productivity improvements such as the three levers described in this article.

Underwriting expenses are soaring

General insurers face increasing climate and general risks, which have helped to drive up underwriting costs by about 20 percent over the last seven years. These increased costs are often associated with investing in risk and compliance capabilities and modernizing technology estates. Much of this investment is ongoing and has yet to deliver meaningful productivity benefits.

Some insurers have felt the pinch more than others. Costs have increased by approximately 20 percent for incumbents and by about 37 percent for international insurers, while challenger businesses have seen their costs more than double (Exhibit 1).

Expenses have risen 23 percent for incumbent insurers, with steeper increases for challengers and international companies.

Three major productivity levers

As markets soften, insurers are likely to increase their focus on efficiency and productivity over the next three to five years. Productivity is not a new topic for Australian insurers. Businesses have restructured, changed operating models, and set up capabilities overseas to deliver incremental improvements. However, insurers in some global markets have had a stronger focus on efficiency for longer, so observing their experience can suggest which productivity levers to deploy.

Based on our analysis of efficiency in global insurance markets, we see the global insurers applying three primary levers to drive productivity: improvements to labor, IT, and third-party spend (Exhibit 2). Using these levers together has the potential to drive down costs by 15 to 30 percent.

Global insurers typically use three levers levers to improve labor productivity.

Lever 1: Improve labor productivity

In our experience, measures to improve labor productivity typically focus on aligning 50 to 60 percent of the cost base to global best practices. Some of the proven strategies include zero-basing functions, partnering strategically, and using a domain-based approach to reimagine processes.

Zero-basing functions. Leading insurers take a holistic approach to the redesign of operating models. Examples include zero-based redesign of support functions, starting with the identification of “survival” minimums and then adding back activities deliberately. This can lead to a productivity improvement of 20 to 40 percent, rather than the more common 10 to 20 percent usually achieved through incremental redesign. Importantly, when done well, a zero-based approach leads to a sustainable, rather than temporary, shift in the cost base.

Similarly, moving to a modern operating model (usually, but not necessarily, agile) can get an organization structure down to three to five layers between the CEO and front line. This range, which is common in technology organizations, provides inspiration for insurers.

Strategic approaches to partnering. Australian insurers have significantly lower rates of offshoring (typically 10 to 15 percent) than global insurers (typically 20 to 40 percent). One global insurer outsourced roughly 40 percent of their non-IT workforce by investigating “What needs to stay?” rather than “What can we move overseas?”

Furthermore, leading insurers have taken a strategic approach to using overseas capability centers. Going well beyond cost savings for back-end services, they have sourced key talent for critical tech, cyber, and data analytics capabilities. In addition, these players’ businesses have better integrated the centers with their onshore business by appointing strong leadership and rethinking ways of working.

Domain-based reimagination. Some global insurance leaders have taken a meticulous top-down approach to process improvement. This entails prioritizing and mapping processes using task capture software, followed by redesign and elimination of all non-essential steps, through digitization, outsourcing, and automation.

This process is most successful when anchored in a domain-based transformation approach. The domain-based approach takes a functional area, such as claims or underwriting, and reimagines the end-to-end future state of the domain rather than incremental changes from the current state. This approach has led to efficiency savings of up to 20 percent, as well as multiple benefits involving customer and employee satisfaction.

Lever 2: Improve IT productivity

Improvements to IT productivity can target around 20 to 30 percent of the cost base. We have seen results from technology modernization and from tech simplification and rationalization.

Technology modernization. While simplification is important, modernization of an insurer’s technology landscape typically brings broader productivity gains, enabling the development of new business features and establishing competitive advantage.

Separately, advancements in generative AI (gen AI) have demonstrated 30 to 70 percent productivity gains in time spent on routine and complex repetitive tasks, particularly by converting legacy code into new code at a fraction of the cost and time previously required. However, gen AI use cases should be evaluated as part of an end-to-end redesign of a domain, rather than in isolation, as data requirements are typically specific to an individual domain. Globally, we see insurers typically gaining strategic advantage through modernizing their claims, pricing, underwriting, and customer domains.

Tech simplification and rationalization. Insurers have legacy systems and application landscapes that can range from 200 to 4,000 or more applications. This is typically characterized by unclear usage patterns and increased risk of business outages. Rather than accepting a five-to-ten-year cycle of building up and remediating tech debt, leading insurers have found two major solutions. First, they launch application simplification “factories.” These aim to reduce 10 to 15 percent of application run and change costs and are often coupled with the intent to install more modern systems or an advanced data architecture. Second, insurers have dedicated product teams in cross-functional squads that, as part of ongoing business-as-usual sprints, measure and buy down their tech debt and organically simplify the landscape instead of waiting for a big-bang project.

Lever 3: Improve third-party spend

The third lever, improving third-party spend, can target another 10 to 20 percent of cost base. Global insurers have benefited from enhancing control of their procurement and external spending, as well as from rationalizing their real estate and facilities.

Enhanced procurement and external-spend control. Australian insurers have significant potential to optimize their supply and services contracts, especially after a sustained period of inflation. The shift lies in moving from “buying better” to “spending optimally,” increasing productivity impact from single digits to greater than 10 percent. This requires deep reform of every spending category, focusing on price, terms, demand, specifications, control, and compliance. Delivery requires cross-functional teams, supported with innovative supplier collaboration.

Real estate and facility rationalization. Compared with their overseas competitors, insurers in Australia typically have larger real estate commitments in more expensive locations. Globally, insurers are actively trying to reduce their footprints and reimagine their workplace. Examples include having a 100 percent remote distributed claims management center, subletting existing offices, and repurposing suburban locations for use as head offices.

Pulling the levers: From strategy to action

Translating these actions from strategy to execution requires effective performance management. Distinctive global insurers excel at execution, with ambitious targets and granular visibility of key performance indicators. Some transformational examples include the full management team moving to organization-wide visible and ambitious objectives and key results (OKRs) and role-modeling the same taxonomy throughout the organization.


Globally, insurers have demonstrated the capacity to deliver step changes in their cost base. Moreover, with accelerated technological developments, the potential to do so in a sustainable and rapid way is greater than ever. We urge Australian insurance leaders to explore four key questions:

  1. Is productivity a top five strategic priority for the organization?
  2. Is the business being bold enough—for example, aspiring to shift the cost base by 30 to 40 percent or more?
  3. How are you using technology and AI to derisk and accelerate your progress?
  4. How rigorously are you tracking the performance of your productivity program?

With a challenging outlook coming into view for the Australian insurance sector, the time to act is now.

McKinsey & Company

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