Small-to-medium (SMB) insurance companies face more challenges in adopting outsourcing than companies in just about any other industry. This is not to say they don't enjoy substantial benefits when they do--lower cost, better technology, improved processes, to list a few. However, SMB carriers--those with under $300 million in premiums--considering outsourcing should address these factors when short-listing providers or risk being susceptible to downsides that could neutralize the benefits outsourcing might otherwise secure.
The Process Problem
According to Marc Cecere, Vice President, Research, Forrester Research, in many industries like manufacturing both providers and customers can create processes like order-to-cash according to common standards. In insurance, this is not as true. Providers, for instance, he says, have to "modify billing processes for each company they serve and each product line within each company," so processes vary greatly.
The challenge for the outsourcer, therefore, becomes one for the buyer. The provider has to estimate pricing for services addressing processes that are moving targets, so the criteria providers are forced to use to calculate customer base and margins are shifting. That uncertainty breeds services that often only roughly map to insurers' unique requirements. Estimating value of "comparable" services is therefore harder for the buyer because pricing and features are approximate--making "apples-to-apples" price/feature/function comparisons more difficult in insurance.
Complicating the matter also is the fact that insurance processes are quite complex. Cecere claims in banking, for example, all processes are based on seven basic transactions, while in insurance they're based on 50 or 60. This might seem fertile ground for niche suppliers, but because processes change so fast, specializing in BPO for specific intricate processes is difficult and risky.
Larger providers tend to focus on predominant and stable processes in which they can do volume business. Smaller providers, therefore, specialize in niche processes to guard against higher-end competition, especially in the life and annuities insurance business, says Cecere. SMB carriers are better served by these players.
Indeed, they often must use them, according to Harris-Ferrante, because carriers "find it difficult to build specialized competencies for certain processes." In fact, she explains, they "generally outsource when they don't have competencies in an area that requires specialized skills/knowledge that they might not possess, and seek strategic benefits like new products, for which they don't have existing policy systems to support, and which they can if they outsource the administration of those policies."
The Product Problem
Cecere says insurance products are also complex and tend to change often. He says carriers are constantly creating new life insurance products, which are more accurately investment products rather than strictly insurance ones, and may take the form of, say, variable life products with guaranteed or deferred payouts. Understandably, outsourcers are challenged to replicate and refine the requisite processes with adequate granularity and responsiveness. So SMB carriers may have to hunt extra hard for the right match or work with a supplier who will evolve according to the carrier's changing requirements.
However, that does not mean they can ignore customers using old products, which, says Harris-Ferrante, may have a lifespan of over 50 years as with life insurance. This means supporting legacy systems supporting those products, the cost of which cuts into their budgets for new systems and outsourced solutions.
Business Models, Regulations, and Offshore Alternatives
If an SMB is part of a larger insurance conglomerate, negotiating a good deal with a large provider that addresses key requirements at a low price may be difficult. Cecere says that in property and casualty it's often the case that a carrier is one of many insurance business units in a large company, all of which may want to outsource policy administration but each of which may want to do so using different processes. Cecere says a large provider will balk at modifying its processes to suit each unit and forging different service level agreements (SLAs) for them. In this scenario, going with a boutique provider willing to be more flexible is a better bet.
Larger outsourcing suppliers have a different business model than do boutique providers. They can offer lower prices by spreading greater volumes of work over fixed resources and focusing on stable processes. Their size affords them economies of scale that result in lower prices, but they focus on a high-volume clientele to prosper, which makes them less flexible.
Boutique suppliers are usually the only option for SMBs whenever scale is an issue. Cecere believes SMBs simply don't have the scale to enable a very large provider to service them profitably.
Insurance is also the most regulated industry after pharmaceuticals. Forrester surveys indicate that a key concern for SMB insurance carriers is that their business partners not leave them liable for noncompliance. "If the outsourcer doing claims isn't doing the right things regarding reporting or how fast it's closing out claims or any number of things that state regulations require," Cecere maintains, "then it's the insurer who's liable for that." So making sure a provider's processes and practices comply with the numerous relevant regulations is a must.
Among the regulations that might apply are, of course Sarbanes-Oxley (mandating C-level approval of data, processes, and practices) and The Patriot Act (which protects against terrorist activities like using a business to launder money). Others are Basel II (that governs capital required for investment pertinent to insurance companies), HIPAA (securing the privacy of insured person's health data), as well as endless state regulations. For instance, Cecere says agents must be "licensed per state for the products the insurer is providing," which could mean training agents for multiple sets of regulations and changing processes per state for a regional company--all at an extra cost.
Unlike other industries that take advantage of labor arbitrage and other key benefits of offshoring, insurance companies tend to be less successful in this arena, according to Cecere. He says, because of the complexity of the insurance business, setting up operations abroad presents more difficulties. For instance, Harris-Ferrante explains that "they must invest in the internal infrastructure, including program management offices, governance for outsourcing, etc. in order to mitigate risks. Risks are much higher in offshore outsourcing than with onshore outsourcing and much higher with offshore BPO than with offshore ITO." They also find it hard to determine real return on investment (ROI) because "often neither the baseline nor mechanism for measuring is there," points out Cecere.
For these reasons insurance lags other industries in outsourcing initiatives among SMBs. On the upside, it need not have to for generic processes like back-office claims scanning and distribution. However, at the other end of the spectrum, policy administration--because it tends to be unique to each insurer--will be a harder outsourcing nut to crack.
Lessons Learned From The Outsourcing Journal:
- SMB insurers with nonstandardized and complex business processes should look to providers who specialize in complex processes or will flex their solution to carriers' processes.
- If their products change often, they should seek flexible providers who will tweak the related outsourced processes as needed.
- If they have smaller volumes and require process and other changes driven by changing regulations, they should also look to specialists first.