Liberty Mutual Insurance
Develop a new costing approach to help improve operations efficiency
Our client was Liberty Mutual Insurance, the third-largest property and casualty insurer in the United States. We worked with Liberty Mutual’s Shared Services division, which supports the operations of the Commercial Insurance business unit, one of the company’s most sizable.
Liberty Mutual must remain competitive in a market where customers hop on price, but the Shared Services division was facing problems performing two of its major activities efficiently. We were tasked with improving them.
Shared Services' Customer Service department
The Shared Services’ Customer Service department handles and answers call on behalf of independent agents and brokers, and charges a flat annual fee for their services. Their ultimate goal is cost neutrality, but previous attempts to achieve it hadn’t been effective.
Drawing from the Managerial Accounting (ACC552) course, we found that Liberty Mutual was using a traditional costing method, which involved dividing all costs by the total number of transactions. This method assumed that all transactions require the same amount of resources.
After conducting a regression analysis, we discovered that the type of transactions significantly impacted call time required form customer service representatives. As a result, Liberty Mutual had inaccurate cost-to-serve data, which was inhibiting sound managerial decision-making.
Based on what we had learned in Managerial Accounting, we came to the conclusion that Activity-Based Costing was the best costing method for them. We decided to use Time-Driven ABC, where time would be the driver. Liberty Mutual did not have relevant data, thus we had to record call timings based on transaction type. We went on to create a financial model that calculated accurate current and future costs for each transaction type. Liberty Mutual is now collecting more data to feed into our models, which will be used to customize their pricing and marketing policies for each type of service call to meet the goal of cost neutrality.
Shared Services' Policy Conversion department
The Shared Services’ Policy Conversion department transfers all policies from multiple “legacy” systems into one new system, a seven-year $50 million initiative. Considering the volume of policies to be transferred, Liberty Mutual needed to optimize costs. This department also followed a traditional costing method, in which the total costs were divided by the total number of converted policies. Without detailed and differentiating information about the costs involved in converting policies, Liberty Mutual did not know where to focus optimization efforts.
Using what we had learned in Managerial Accounting and following a similar process as above, we used TD ABC to build a financial model to calculate costs for each stage of the policy conversion process: enabling, staging, conversion, audit and referral. Based on accurate and in-depth stage costing information for policy conversion, we confidently recommended that Liberty Mutual optimize costs by focusing on automation efforts and outsourcing, such as transferring the referral and audit activities to off-shore vendors to save 48% in costs.
Having seen the strategic benefit of using ABC based on our work, Liberty Mutual plans to implement TD ABC on a wider scale in the Shared Services organization.
