A recent article by Mckisey debated over whether North American life insurers should prioritize share buybacks. The report highlights that share buybacks have been a common practice among insurers as a way to return excess capital to shareholders and increase the value of their shares.
However, it argues that insurers should also consider the potential impact of share buybacks on their long-term financial stability.
The article explores the exigency for insurers to effectively manage their capital in order to achieve their strategic objectives while highlighting several alternatives to share buybacks. Some of them are dividends, debt repayment, investments, mergers and acquisitions, and special dividends.
We need to call attention to a few focal points for insurers opting for share buybacks as a way to manage capital. One is the organization’s growth strategy. Today the insurance industry is focused on accelerated digitalization by investing in product development, technology, and marketing. In such cases, share buybacks may need to be deprioritized to favor these initiatives.
Another note-worthy aspect is the varying expectations of shareholders regarding the use of excess capital, including dividends, share buybacks, and investments in growth initiatives. Insurers need to balance these expectations with their overall strategic objectives carefully.
Whether or not North American life insurers should stop prioritizing share buybacks depends on their specific circumstances, financial performance, and strategic objectives. However, we explored alternatives that focused more on how C-level management can contribute to reducing the need to buy back shares and manage capital better.
Recent studies have accentuated the importance of outsourcing insurance processes as a way to reduce costs and improve operational efficiency, which can indirectly reduce the need for share buybacks.
What are Insurers doing Today to Increase Capital & Reduce Share Buybacks
For Insurers struggling to improve financial performance, it may not be prudent to prioritize share buybacks over other investments or initiatives. C-level management should explore the direct or indirect benefits outsourcing can have on curbing capital loss.
We see outsourcing insurance processes as a strategy many insurers employ to reduce costs. For example, insurers may outsource functions such as claims processing, policy administration, or customer service to experienced insurance vendors who can perform these functions more efficiently while reducing operating costs and improving profitability. This could indirectly reduce the need for share buybacks.
Outsourcing can free up capital for insurers to invest in growth initiatives or return to shareholders in other ways, such as through dividends or debt repayment. This can indirectly reduce the need for share buybacks by improving the company’s overall financial position, while also reducing the excess capital available for share buybacks.
Ultimately, the decision to outsource insurance processes should be based on a comprehensive analysis of the insurer’s financial position, strategic objectives, and operational needs.
However, if you have any questions about whether or not outsourcing is a viable solution to complexities in capital management, we can share some insights.
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