About the author
Lucy Alphonse, Consultant
Lucy Alphonse is a Senior Consultant at Oxbow Partners.Contact Lucy
May 24, 2019 Lucy Alphonse
In a recent blog post we observed that multinational insurance groups are generally organised as a collection of national operating entities and wondered whether this model was ‘fit for purpose’ in the digital era. But the world is never black and white, of course, and so it is the case that many of these multinational groups do already have global business units nestled within their group operations. These business units might be specialised on a particular customer segment (e.g. Aon EMEA Affinity), product (AXA Assistance) or distribution channel (Digital Partners at Munich Re).
But structuring global business units poses particular challenges for insurers. For example, which licences do you use in each country? If you use existing operating entity licences, how do you manage the risk that the GBU adds to the local balance sheet for both regulatory and internal reporting purposes? How do you create incentives for the local country to distribute the global product?
Oxbow Partners recently supported a large European insurance group develop an operating model for a global business unit. In this article, we describe five critical actions.
There are three basic models for a global business unit (“GBU”) which we illustrate on a spectrum from ‘stand-alone business’ to ‘centre of excellence’ (see illustration). Detailed analysis of the group context and GBU strategy should determine which model is appropriate for the situation.
The ‘lightest’ model is a central best practice sharing unit. In this model, the GBU provides specialist knowledge to the local entities. This model is appropriate for example when the GBU proposition has significant regional variation or does not require global infrastructure. For instance, HSBC used a GBU to work with local countries to explore particular customer experience problems (e.g. queuing in branches) and to share best practices with their global network. The downside of this model is that the GBU has neither sticks nor carrots to implement its proposition.
In the second model the GBU gains its own (possibly shadow) P&L and owns the investment budget. Execution is owned by the local entity. The advantage of this model is that the GBU can use its experts to build a coherent strategy and proposition and execute cost-effectively through local operating entities. The disadvantage is that the GBU is constrained in its delivery. We have, for example, seen this model come unstuck when a specialty GBU could not persuade local operating entities focused on retail business to write business. The CEO was concerned about the ‘optics’ of a large gross loss on his balance sheet, despite the fact that the GBU would put in place internal reinsurance. The GBU failed.
The third model, the independent business, is the most onerous to set up but provides the greatest flexibility. This model allows the GBU to operate independently of other group entities – but of course does not eliminate the political challenges of two group entities operating in the same country.
GBUs are often established to support the development of new lines of business, new products, new customer segments or new innovations. The capabilities they decide to offer are therefore often untested and their value for that purpose unknown.
Data capability is a case in point. This may be an attractive capability for the GBU to offer, but it could be difficult to execute in practice given regulatory realities (e.g. sharing personal data across borders) or operational challenges (e.g. the quality of data).
The best (and sometimes only) way to find out is a test-and-learn approach. Oxbow Partners advocates the use of agile principles in the development and execution of strategy and change projects; we therefore advise clients to identify strong hypotheses about the capabilities that should be provided by the GBU, but then swiftly to devise practical ways to test whether these capabilities add value to either the GBU or local entities.
An important consideration in this step is to determine where in the global operating model these capabilities sit. Data is again a good case in point. It might be appropriate to invest in a global data infrastructure, but deploy analytical capability (e.g. data scientists) locally (e.g. to combat the aforementioned regulatory challenges).
Organisations must be openminded about testing their hypotheses and use their learnings to challenge decisions that have previously been made.
GBUs risk being seen as ivory towers – head office teams that have lofty thoughts about their proposition but insufficient local market insight to be successful. It is important for GBUs to have a clear way to measure their value and to communicate it to their stakeholders.
Our experience suggests that most GBUs need to have a clearer, more formal, communication strategy. GBUs assume, often incorrectly, that others know more than they do.
For some GBUs measuring value is reasonably straightforward. For example, Mastercard Enterprise Partnerships (which develops business for global accounts at Mastercard) tracks its value using a virtual P&L and can point to £500m of new business over the past five years. But for others measuring value is often difficult – particularly for GBUs that are best practice sharing centres. It can be difficult to prove cause and effect of their actions, and they often do not have access to data required to prove a hypothesis. Sometimes creativity is required in the KPI definition process.
Communicating this value is equally important. GBUs should push for their KPIs to be included in appropriate reporting and governance processes, and should find ‘champions’ at all levels of the business to advocate for the value being created. We have seen GBUs host annual awards ceremonies to celebrate successes. Sometimes GBUs employ an internal communications resource; to some this is wasted overhead, but often it is a necessary to implement a formal communications plan.
In most instances, GBUs have some level of interaction with local operating entities. It is imperative that the end-to-end incentive framework encourages development of the GBU proposition and that barriers which preclude growth of the GBU proposition can be eliminated.
These barriers could come in two forms. First, overemphasis of local KPIs in the broader group KPI framework could mean that the GBU proposition is a distraction for the local CEO. Why would a local operating entity jeopardise the achievement of their local result in order to support the growth of a startup product for the GBU? At worst, incentive structures can preclude supporting the GBU, for example poorly designed cost allocation frameworks.
Our experience highlights the importance of aligning incentives for the GBU. For the GBU, this could include developing cost allocation models that are bespoke to the nature of the GBU.
Finally, GBUs must focus on the soft elements of the operating model. The best incentive structure cannot be a substitute for solid relationships between the GBU and stakeholders, or trust in and respect for each other’s objectives. GBUs must know their stakeholders to understand when they must push through internal barriers, and when to be respectful about the competing priorities of their stakeholders.
In our experience, if change projects fail it is not because the upfront thinking was inadequate but because the execution was poor. For this reason, the relationship with stakeholders is not just an enabler to implement a project, but an input into the development of it. This is a key principle of an Agile Strategy approach.
Oxbow Partners has helped several insurers and reinsurers build strategies for global operating units and develop operating models to support them. Get in touch if you are considering doing projects in these areas.