Automation to improve insurers’ earnings by 37%, reduce staff numbers significantly
Robotic Process Automation is expected to improve insurers’ earnings by about 37 percent with staff numbers falling 20 percent in back office functions, according to a base case scenario by Royal Bank of Canada (RBC).
Robotic Process Automation (RPA) can mimic the steps of a rules-based process and can replace many repetitive, data entry and reconciliation type processes, according to an RBC research note. For example, Zurich’s use of computers to evaluate medical reports has reduced the average time taken from 58 minutes by person on average to 5 seconds by machine. The immediate advantages of this technology are lower costs; a licence for a 'robot' costs in the region of €5k per annum compared to the cost of an onshore employee of €40k. Additionally, companies should see improvements in speed, accuracy and continuity of processing.
According to a McKinsey study, a significant proportion of the insurance workforce is in operations roles. In property/casualty (P&C) insurance, this can be as high as 70 percent with 59 percent of roles in life insurance in these functions. As a result, the insurance workforce could reduce by between 15-25 percent due to the high level of operations roles, with many of these set to be replaced by RPA.
Automation will lead to a 2.1 percent expense ratio reduction and an increase in the return on equity of 4.4 percent, according to the RBC study. The analysts’ bull case scenario yields a 49 percent improvement in profit after tax with a bear case of a 15 percent reduction in costs still leading to a 24 percent pick up in earnings.
The technology lends itself to more simple risks and products than complex and bespoke lines such as reinsurance or specialty lines. Larger personal lines insurers are likely to benefit, and those who are currently less efficient clearly have more to gain than those that already have low expense bases. Companies with new systems and streamlined processes will likely find it easier to introduce the technology. Finally, insurers that are further down the digital transformation journey would be able to utilise RPA faster than peers.
The speed of adoption by companies will vary greatly, the analysts noted. Furthermore, when cost benefits emerge, it remains unclear if or how quickly any benefits would be competed away. Highly competitive personal lines insurers could lower prices in order to increase market share with first movers likely to have an advantage initially. In the longer term, RBC sees RPA being more accessible to larger personal lines insurers and as a result, in a scale game, analysts could see the larger personal lines insurers getting bigger with the smaller personal lines insurers less able to compete.
RBC analysts highlighted Direct Line, RSA, Allianz, AXA, Legal and General and Aviva as being well placed to benefit from the increasing adoption of RPA.
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