Car Insurance Provider

I: Client is an UK based insurance company Car at home, helping everyone to own a car. It is part of a bigger conglomerate. They have 2 requirements: 1) Have growth at least equal to industry average 2) Have profits at least 13%. Currently both are not satisfied. Suggest how to go about it?

C: Since we are talking about growth rate and profits, I would like to look into current revenues and costs associated with the company. In revenues I would like to look into market size, current market share, competitor landscape and probable bottlenecks and barriers. On the cost side, I would like to look into different cost heads and the possibility of cost cutting.

I: Why do you want to look at the market size since we want to increase profits?

C: Since we are also looking at growth, I would like to retain the possibility of expanding into other areas in case the market conditions are not conducive to attain the desired growth rate.

I: Let me show you a graph, try to analyze it and then we can proceed ( shows the graph). Can you give figures for our clients in terms of profits and growth?

C: Our client has a growth rate of 0% while industry is growing at 4% and our clients profits are 7% while industry average is 13%.

I: Can you look at other companies and hypotheses why those companies are at the position in the graph?

C: Let's start with A: A has the largest market cap which might have led them to a position where they have attained economies of scale and also attained a position where they are having organic marketing due to word of mouth leading to optimized costs and higher revenues and growth rate.

C: B, C, D: All these firms have lesser market cap then us, Also their growth rate us also lower than industry average, but are exhibiting higher profits than us. This could be due to lean operation. Might be that they are operating on small teams and have optimized other costs accordingly.

C: H: This firm has a very high growth rate, a similar market cap to us but lesser profits. A probable reason for such a scenario could be that this firm is spending a lot to expand in the market by spending a lot on marketing and commissions and is not focusing on profits right now.

I: Alright, let's talk about our own firm. So, our client wants to reduce their cost in admin head to attain the desired profitability, is it feasible?

C: Since a company operating in the insurance market has multiple costs, can you share how much share is of admin costs in our firm? 

I: For every dollar earned, admin cost is 20 cents.

C: Alright, so based on this data, the revenue earned by the firm right now is 1 dollar and costs incurred to the firm are 93 cents, owing to 7% profits, of which 20 cents are admin costs. To increase the profits to 13%, we need to reduce costs to 87 cents, which accounts to reduce 6 cents, which is 30% reduction to overall admin costs. This I feel is a very significant reduction which might not be feasible, my suggestion would be that since admin cost is a very small percentage of overall costs, we can look at the entire cost structure to identify possible reduction instead of focusing just on admin costs.

I: Can you suggest what all costs are associated with our firm?

C: There could be 5 different categories of costs namely admin, salaries, incentive/ commissions, S&M and claims.

I: Which of these do you think would be majorly contributing to costs to our client?

C: As observed traditionally in the insurance market, I believe claims are one of the areas which contribute to one of the highest incurred costs for insurance firms.

I: This looks good. We can close the case now.