Smaller insurance companies are often caught in a bind when it comes to outsourcing. Because they have limited IT resources to build new applications, outsourcing is appealing. However, because insurance business processes, products, and industry regulations are complex and changeable, it’s hard to find an outsourcer whose prices are within budget and can also address smaller insurance companies’ unique requirements.
Service Insurance Company (SIC) in Florida writes property and casualty insurance policies in Florida and flood insurance in 20 other states, with total annual premiums of about $50 million.
According to Dave Cruikshank, President and CEO of SIC, it outsources a BPO service from National Flood Services (NFS) to do all policy processing and administration. He explains, however, that those agents are independent contractors to SIC and interface with NFS for all functionality and expertise needed to do their job. So NFS is the face of SIC to SIC’s customers, its agents.
The Value Proposition
NFS is a BPO provider that specializes primarily in one area of insurance-flood insurance, which the federal government provides and regulates through the National Flood Insurance Program. Because flood insurance is offered exclusively by the federal government, it’s governed by different rules pertaining to factors such as the state in which the property insured is located and when the property was built, which makes the process by which a policy is created enormously complicated.
Agents for SIC, however, are insulated from all that complexity. NFS is responsible for tracking regulation changes as well as automating the policy creation, approval, processing, and administration. To write policies, agents simply answer pertinent questions in forms on the NFS Web site, says Cruikshank. They then submit policies for approval via from the site, get a quote from NFS, tell customers the price, then post the policy to NFS for processing.
Specifically, this means NFS collects the premiums, sends all necessary information to the federal government, posts the insured’s payment to the federal government, pays the agents’ commission, and keeps its processing fee. “They do all that accounting for us,” Says Cruikshank.
To replicate that service in house would be a time-consuming and expensive undertaking. For instance, Doug Fraley, Vice President, Marketing at NFS, says federal regulations require that agents address over 350 questions that NFS presents on its Web site. Depending on the answers, NFS’s back-end system then presents the appropriate following question. He explains that “these are very intricate and detailed questions, and this adds complexity to the process,” which is actually the front-end of NFS’s policy processing and administration workflow. This process involves hundreds of in-house and remote policy processing personnel. NFS manually answers any factors it cannot address automatically on the Web site via phone or mail.
When agents submit the policy, says Fraley, the action kicks off an entire series of complex business processes that span integrated back-end applications such as scanning, automated capture, electronic imaging, workflow, forms processing, and ERP that are located primarily in Montana. The intuitive Web front end hides the complexity of process and functionality from the agent.
So, while it’s a third-party provider, NFS provides almost all the value of the policy processing and administration that SIC offers and rebrands. SIC has about 30 employees, so dedicating several full-time people to creating such an in-house infrastructure and acquiring the requisite flood insurance expertise wasn’t feasible. Instead, Cruikshank says using a specialist for these activities was “a no-brainer–it didn’t make any sense to reinvent the wheel when NFS had something in place that was working well.”
Using NFS, SIC, therefore, need simply market its service to agents to offer insurance products through them versus other insurance companies. This makes getting into the flood insurance business much easier for an SMB carrier.
But other factors were as compelling. In Cruikshank’s business, sales margins are thin. “I think it’s fair to say,” says Cruikshank, “your return on a premium is probably three percent.” Launching a full-bore policy processing and administration system would entail taking out a huge loan and paying it down would further erode margins and delay real profitability for years. Therefore, “that is something you would not normally go into today as a new venture,” explains Cruikshank.
It’s much simpler to minimize overhead, he says, and just market your own insurance company, write claims, and do a volume business to compensate for the low margins. Doing it all himself, he estimates, would require a minimum start-up investment of about $4 million.
The complexity of regulations that drive the attendant complexity of processes is daunting as well. “The National Flood Insurance Program is a very complicated system set up years ago by the federal government, and only a few companies entered into that field,” says Cruikshank. So the few companies already in that business have established formidable barriers to entry for new players–breaking in as a start-up would be especially difficult.
Unfortunately, the complexity of this area of insurance undermines the quality of many providers’ service. Cruikshank says “in our industry there aren’t many good processing systems–they all have their problems and none work extremely well.” By comparison, Cruikshank is convinced that “NFS has superior service over the entire industry. They are very competitive on price with the other companies. NFS is a Cadillac, and you’re paying Chevrolet prices.”
NFS also combines the benefits of smaller, more flexible specialist providers with those of larger, less flexible ones. It possesses specialized expertise in processes unique to one product set and assumes responsibility for upgrading its processes as regulation changes dictate. But it’s also been around long enough to refine its processes to be optimally efficient, and it has the size to process and administer policies on a large scale.
NFS has been doing flood insurance for over two decades and now services over 70 insurance companies, many of them quite large. That combination of automated efficiency and economies of scale lets it offer services at quite affordable rates, says Cruikshank. NFS’s efficiency also translates to better service than SIC can promise its customers–its agents–and in turn makes agents more productive because policies are easier to write and are processed more accurately and in a timely manner. Meanwhile, Cruikshank does not have to worry about technology obsolescence or managing a complex infrastructure.
So BPO has been more than an enabling solution for SIC-NFS essentially provides the core solution that SIC resells under its own brand so that it can prosper because its personnel and technology costs are low. That’s not a bad model for any SMB in this niche.
Lessons From The Outsourcing Journal:
- BPO can insulate SMB insurance carriers from the process, technology, and regulatory complexity of their business.
- It also lets them quickly surmount barriers to entry like high infrastructure, personnel, and education costs.
- An ideal BPO partner can offer focused expertise in an SMB carrier’s processes and affordability via scale.