Introduction: Why Insurance Digital Transformation Efficiency Challenges Can Raise Costs
Digital transformation in the insurance sector offers a cost-efficient approach that enhances efficiency and agility.
Yet, despite investments in AI-driven underwriting and automated claims, many insurers experience higher costs, not savings. Why? This paradox—often called the ‘efficiency trap’—highlights the importance of avoiding inefficiencies in digital innovation to ensure technology investments genuinely pay off.
The Efficiency Trap in Digital Transformation
To make digital transformation truly effective, insurers need a strategy that aligns technology, roles, and resources to drive sustainable savings.
Here are some impactful statistics that highlight the efficiency gap and illustrate why it is a crucial issue for us to consider:
- 70% of digital transformations fail to deliver expected ROI, deepening inefficiencies.
- 32% of cloud spend is wasted on unused or redundant resources.
- A 10-20% spike in management complexity adds unexpected costs.
- A workload increase of 30% occurs as teams fill the time freed by automation.
- Only 16% of employees see real efficiency gains from automation tools.
These statistics highlight a vital reality:
Innovation guarantees sustained cost savings if organisational behaviour and resource management evolve alongside technological upgrades.
This article thoroughly examines this phenomenon, discusses value creation, and explores strategies to maximise success.
Contents
PART I: The Allure of Digital Innovation
1. Digital Transformation in Insurance: What It Promises
Insurers face increasing pressure to manage costs effectively, which sharpens their focus on insurance technology cost management as they modernise their operations and reduce expenses. This is especially true in investor-backed companies, where value creation over short—to medium-term horizons is paramount.
Digital innovation is, therefore, essential for insurers to stay competitive. Here’s what transformation can achieve:
1. Lower costs: Streamline policy management, claims, and customer service.
2. Improved accuracy: AI and automation can reduce human error.
3. Better quality decisions: AI Unlocking data can provide new insights and opportunities.
4. Higher customer satisfaction: AI Faster processing improves the client experience.
For example, automating a traditionally labour-intensive claims process might free up staff to focus on higher-value tasks, reduce the time to settle claims, and improve the customer experience. Fewer employees are expected to be needed to do the same work, thus reducing staffing costs.
However, this is where reality differs from the ideal scenario. Often, employees don’t just transition to more strategic tasks; they also take on additional activities or expand their roles to occupy the time that has been freed up.
This behaviour results in a short-term focus on immediate tasks and control rather than adopting a broader, value-driven perspective that fosters long-term growth and planning. As a result, the transformation intended to simplify operations often complicates them, reinforcing inefficiencies instead of delivering the expected benefits.
2. Why Efficiency Gains Can Lead to Cost Increases
Here are a few reasons why costs can increase even when technology is meant to create savings:
- New Complexity in Insurance Technology: New tech can add tasks like monitoring and updates. For example, AI in underwriting requires ongoing supervision to stay accurate.
- Low-Value Work: Free time may lead to extra reports or analyses that don’t add value, taking time without increasing productivity.
- Role Redefinition: Without clear goals, employees may need to justify their roles by filling time with tasks that don’t contribute to the bottom line.
- Resistance to Change: People may continue outdated tasks even when they’re no longer necessary. These behaviours underscore the importance of avoiding inefficiencies in digital innovation to ensure cost savings from automation are fully realised.
3. The Increased Cost Base: A Case of More, Not Less
In regulated sectors like insurance, rather than cutting costs, digital transformation often increases them.
Here’s why:
- New Systems = New Resources: Managing added tools and ensuring compliance may require extra staff.
- More Roles, Higher Costs: To handle oversight and analysis, some companies expand their workforce rather than streamline it.
- Added Complexity: Regulatory requirements may mean using technology to enhance—not replace—existing processes.
4. The Same Phenomenon in Target Operating Models
The efficiency trap is not limited to introducing technology alone. It frequently manifests in adopting new target operating models (TOMs), where organisations restructure their processes and workflows to increase capacity and improve performance.
A well-designed TOM should streamline operations, improve resource allocation, and lower costs. However, many businesses discover that while capacity may increase, overall performance needs to improve proportionally, and expenses may rise.
This often occurs due to similar dynamics at play during digital transformation:
1. Overcomplicating Processes: When an organisation implements a new TOM, it typically involves rethinking how resources are deployed, how teams collaborate, and how decisions are made. While the intention is to create leaner and more efficient operations, the reality can be far more complex.
New layers of management, additional approval processes, or overly ambitious scopes can add complexity rather than eliminate it. The result is often slower decision-making and inefficiencies, eroding anticipated cost savings.
2. Capacity for the Sake of Capacity: One common mistake when designing new operating models is focusing too heavily on increasing capacity without a clear strategy for utilising that capacity. Sometimes, organisations expand teams or introduce new roles without aligning them with business objectives or prioritising which activities deliver the most significant value.
The expanded capacity becomes absorbed in low-impact work, leading to higher costs without substantial improvements in output or customer satisfaction.
3. Misalignment Between Strategy and Execution: A new TOM may be designed with the best intentions, but the anticipated efficiency gains can evaporate if executed incorrectly. Misalignment can occur when teams are not given clear direction on how to use their increased capacity or when there is a lack of coordination between different business functions.
The result is that departments may pursue conflicting priorities or fail to collaborate effectively, leading to redundancy and inefficiency.
4. Cultural Resistance to Change: Just as with digital transformation, cultural resistance can stifle the potential benefits of a new TOM. Employees may be reluctant to embrace new working methods, preferring to stick to familiar processes, even if they are less efficient.
In some cases, teams may interpret new roles or expanded capacity as opportunities to create additional work—further entrenching inefficiencies rather than eliminating them.
5. When Target Operating Models Increase Costs
These factors often create a paradox: while new operating models aim to streamline organisations, they can also increase overhead costs.
Introducing new roles, longer reporting lines, or enhanced oversight can drive up expenses with only slight performance improvements. As a result, the organisation often becomes weighed down by its complexity, preventing it from realising the anticipated benefits of restructuring.
This issue is especially significant in industries like insurance, where regulatory compliance and risk management are already demanding on resources. A new Target Operating Model (TOM) might further complicate these areas, requiring more reporting, governance, or control processes that ultimately increase costs.
6. Focusing on Value Over Volume in Digital Transformation
True profitability goes beyond making money; it encompasses creating lasting value, a difference often overlooked when assessing the impacts of digital transformation. The challenge of digital transformation is that it must integrate seamlessly with a company’s current operations.
This transformation should improve the services, efficiencies, or applications of its capabilities and resources to achieve value.
7. Avoiding the Silver Machine Paradox
In his book Good Strategy/Bad Strategy, Richard Rumelt demonstrates this idea through a fictional “silver machine.”
Imagine a machine that makes £10 million worth of silver every year without needing any money to run. A company buys this machine for £100 million, hoping to profit from it. But even though it sounds like a good deal, the company only gets back the same amount of money as it costs them to buy it—10% each year—without any extra profit.
Without a strategy focused on true efficiency, new tech often increases workloads and expenses, rather than cutting costs.
This machine can’t be made to produce more or be improved; it just keeps making the same amount of silver each year. Therefore, the company isn’t adding any extra value by owning it; they hope the silver price increases to make it worthwhile.
This analogy aptly highlights the efficiency gap in digital transformation.
Many organisations invest in technology hoping to unlock value but often do not see returns exceeding their initial investment. Instead of decreasing costs, they frequently match or surpass their capital costs by taking on additional tasks, reporting, or administrative duties—efforts that fail to enhance genuine profitability. Like the silver machine, technology yields significant value only when it produces returns that surpass its costs, underpinned by a strategy that curbs task escalation and prioritises long-term benefits over short-term gains.
In a typical digital transformation, new technologies are introduced to reduce manual tasks, increase speed, or automate repetitive functions. These tools are often viewed as “silver bullets” for efficiency, significantly lowering costs in specific areas, such as data processing or report generation.
However, as these tools become more accessible and less expensive, they are used more frequently. Rather than eliminating tasks, the availability of these resources can lead to an expansion of work and a rising cost base.
In his book, Rumlet emphasises that enhancing value necessitates a strategy focused on advancing one of four areas:
2. Broadening competitive advantages
3. Creating higher demand for products/services
4. Strengthen the barriers that prevent competitors’ easy application/imitation.
The Silver Machine Paradox highlights that the efficiency gap results from technological shortcomings and how technology is integrated into an organisation’s culture. Leaders can close this gap by harmonising innovation with effective resource management, ensuring that digital transformation fulfils its potential for actual efficiency and cost savings.
Step 1: Clarify Roles
Step 2: Prioritise High-Value Work
Guide teams to focus on tasks that drive business goals.
Step 3: Manage Change Effectively
Train and motivate employees to embrace technology as a tool for growth.
Step 4: Set Clear Targets
Define and measure specific cost savings and efficiency goals.
Step 5: Be Selective with Automation
Only some things should be automated. Focus on areas that will genuinely benefit from it.
9. Conclusion: Closing the Efficiency Gap for Real Digital Transformation Success
10. Key Takeaways for Leaders
Digital transformation can drive an organisation forward, but without focus, it risks inflating costs. Prioritising efforts prevents inefficiencies in digital innovation and ensures technology investments yield genuine value.
Leaders should:
1. Focus on Value: Ensure time is spent on meaningful tasks, avoiding task creep.
2. Assess Technology Use: Be cautious with “free” or readily available technology, as it may encourage low-value work.
3. Align Goals: Keep technology, strategy, and culture focused on efficiency, avoiding unnecessary costs.
11. Taking the Next Step in Digital Transformation
Interested in exploring cost-efficient digital strategies for your insurance business? I’d be happy to discuss this further with you.
