Next Level Sourcing boosts profits for insurer Tryg
Strategic procurement and improvements to internal processes led to significant cost savings for insurance firm Tryg.
When Nordic insurer Tryg looked at its costs in 2011, management did not like what it saw. Despite a strong market position, it had suffered from high claims resulting from bad winter weather. A deeper problem was the entry into the market of online competitors with lower costs.
Tryg’s combined ratio – the measure of profitability used in the insurance industry – stood at 98%, which meant it was paying out almost all of its premium income. The firm engaged Efficio to deliver a procurement transformation strategy, of which Next Level Sourcing (NLS) has been a major factor.
NLS was co-designed with Efficio and implemented in waves to address claims expenditure in each major product area, as well as associated spending categories such as IT and facilities management.
There was also an in-depth analysis of how procurement had been undertaken, which found a need for better procurement skills, processes and infrastructure, and standardized procurement practices. Claims handling practices and guidelines were either missing or inconsistent across departments.
So far, NLS has realized savings of €92 million found in home contents, motor, buildings, health and travel insurance, from procuring better suppliers for repairs or replacement goods, and with some coming from indirect savings such as standardization of practice for determining how much compensation should be paid to claimants.
Below is an overview of how NLS sought to achieve these substantial and sustainable savings in four key ways.
1. Creating a supplier network for sourcing replacement or repaired goods
Efficio helped to design an external supplier ranking system with standardized contractual agreements and pricing for sourcing replacement or repaired goods.
There had been more than 1,500 workshops used in the past, with significant price differences between them and no referral process to direct customers to the best and most cost-effective suppliers. Hard negotiations helped Tryg end up with a network of some 200 workshops to give full geographical coverage in Denmark for each brand of car. Now, a claims handler can direct a claimant with a damaged BMW in Copenhagen to the appropriate workshop.
Overall, for motor claims, €8.2 million worth of savings on €113 million of expenditure has been delivered, equivalent to 7.2%.
2. Awarding strategic supplier partnerships
Claims for broken car windscreens turned out to be even more complex as claimants were using more than 1,000 different suppliers for repairs and replacements. Tryg had limited control over these as just 11% of glass claim customers called Tryg for a referral. The remainder simply used a workshop of their choice, resulting in large variations in prices charged to Tryg by suppliers.
After a competitive tender process, the plethora of suppliers was reduced to just two long-term strategic partnerships. While Tryg staff direct claimants to these new strategic partners, a further five companies with one-year contracts provide services at competitive negotiated rates.
Overall, these changes saved €4.7 million by dealing in volume with the strategic partners, and a further €1 million through better rates from the five short-term suppliers, totaling €5.7 million on €31.2 million worth of claims.
3. Implementing web-based claims handling systems
A similar approach was taken with private home contents claims, where, as with motor, Tryg was helped to take full advantage of its buying power to leverage the market and select partners to value lost goods.
Processes were standardized and visibility over spending on settling claims was improved. Investigation of the nature of the claims and the supplier market helped the implementation of a new web-based claims handling system with significant cost reductions. These came through improved valuation of lost or damaged goods and leverage of supplier agreements across the most common types of products, such as jewelry, electronics and furniture. Savings of €12.4 million on €132.5 million worth of claims expenditure were found, equal to 9.3%.
Strategic sourcing was also used for health claims, with a network of approved hospitals, while for structural buildings claims Efficio designed an e-auction approach, which delivered savings of more than 20% when piloted.
4. Staff training and transparency across business processes
The success of these reforms was dependent on the ability and willingness of staff to change. Claims handling staff were coached to change the way they approached claimants. Different customer profiles now have specific claims handling referral dialogues, which apply across all claims.
Claims handling now distinguishes low-risk and high-risk customers, so they are treated with different thoroughness. Someone who has never claimed in 20 years is treated differently from someone who makes repeated claims, where more enquiries are made. A claims handler can see how much a claim is worth and the claimant’s records, and decide how it should be handled by a pre-vetted supplier.
Training was provided widely, including on-the-job experience, with a customized formal training and coaching program for procurement staff. Resources for training were significantly increased with the Tryg staff, supported by Efficio consultants, cooperating in each work stream as a single multi-functional team.
To ensure that improvements continue, a tracking system includes key performance indicator (KPI) definitions, a benchmarking tool for realized-versus-expected savings and information for Tryg staff on how to obtain the KPIs on a monthly basis.