Life and Annuity Companies Prefer Simplified Approach to Allocating Costs

However, Top Performers Show a Different Tendency

CINCINNATI, OH–(Marketwired – Oct 22, 2014) – Ward Group, an Aon Hewitt company and the leading provider of benchmarking and best practices research studies for the insurance industry, today released findings from its study of cost allocation practices at life and annuity insurers. The results show that companies tend to prefer using simplified approaches for the basis of allocating costs throughout the organization rather than complex, multi-driver formulas. To illustrate, agent commission is commonly reported as a cost allocation driver within the sales, marketing and distribution management areas. Subsequent correlation of company responses with financial performance revealed the top third of companies by return on equity utilized activity-based costing. Conversely, the bottom third of companies by performance did not. Similar high versus low comparisons were made with other surveyed financial practices.

“Comparing the study and financial results, we found companies that base allocations on activity based-costing tend to experience higher returns,” noted Don McNees, partner and head of Ward Group’s Life and Annuity benchmarking. “Firms that fully allocate costs to the product level, reevaluate cost allocations and/or re-forecast on a quarterly basis also show a tendency to higher performance.”

The study, which assessed overall internal allocation methods and complexity, also provides insight into the effectiveness of cost accounting framework driving accountability at the “point of spend,” as well as perspective on other areas including:

  • Cost chargebacks to department (i.e., technology, occupancy, etc.)
  • Departmental cost accountability
  • Allocations to life, annuity, accident and health, and investment expenses
  • Corporate overhead allocation to department business unit and product
  • Level of transparency and level of understanding of expense charges by “cost center managers” relative to peers
Comparing the study and financial results, we found companies that base allocations on activity based-costing tend to experience higher returns

The report includes benchmarking comparisons by business mix and company size. Notable observations from the study include:

  • Large companies were more likely to reforecast the budget throughout the year than small companies
  • Across all benchmark groups, companies most often analyze budget to actual variances on a monthly basis
  • Small companies are more likely to fully allocate corporate overhead costs to product than large companies
  • Companies that allocate corporate overhead to business units were more likely to use allocation drivers like premium or headcount as a basis

For more information or to purchase a copy of results for the Life Cost Allocation Practices Study, visit the Firm’s website at




About Ward Group
Ward Group, a McLagan/Aon Hewitt company, is the leading provider of benchmarking and best practices studies for insurance companies. The firm analyzes staff levels, compensation, expenses and business practices for all areas of insurance company operations and helps companies to measure results, optimize performance and improve profitability. For more information about Ward Group and the Ward Research Center, visit
About Aon Hewitt
Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit