Most insurance industry insiders would agree that insurance companies are quite tradition-bound in how they conduct business, using the same conservative attitude that governs how they invest policyholders' premiums. Consequently, an industry whose very job is to quantify risk and provide as much financial security as possible for its customers has typically deemed outsourcing a bit too risky. They would rather keep their business processes closer to the vest, as it were. This is not to suggest that insurance companies don't outsource at all; indeed, industry watchers are predicting double-digit increases for 2003. But clearly, business process outsourcing has been slower to catch on in the insurance world than in other industries.
However, like many companies facing ever-shrinking margins--in some cases, their very survival is in question--insurers have to squeeze every bit of efficiency they can out of their operations.
Breaking The Binds Of Tradition
When business is good, there is less incentive to look at various business processes and re-evaluate what is working at an optimal level and what isn't. In such an environment, tradition thrives. When there is a downturn in the business climate and greater scrutiny of business processes is mandated, non-traditional solutions, like outsourcing, take on a different light.
"The insurance industry clings to tradition and is slower to adopt trends," explains Steve Holcomb, president of Trumbull Services, a Windsor, Connecticut-based company that provides BPO and ASP (application service provider) solutions to the insurance industry. "But other industries have clearly adopted outsourcing and the insurance industry is definitely moving in that direction."
Member Insurance Agency is based in McHenry, Illinois, and provides insurance services for the hardware and building material industry. Its president and CEO, Wayne Fell, recognizes his industry's reluctance. "If you talk to a lot of people in the major insurance companies, they're going to tell you that 'nobody can do this better than we can--we're never going to outsource these operations.' And that's the traditional thinking and that's why insurance is always 10 to 20 years behind every other industry segment."
Member Insurance transferred its customer service to an outsourcer in 2000. Fell gives compelling reasons why insurance companies are breaking with tradition in ever-increasing numbers. "If you look at the industry, I think there's a realization that just because you're good at underwriting and you're good at selling, it doesn't mean you're good at doing the paperwork," says Fell, using the automotive repair business to make his point. "Used to be you went to one place and they do everything from tuning up your car to servicing your transmission to changing your oil. Today, you go to one guy to change your oil, another guy for the transmission. It's specialization."
Since outsourcing his company's customer service, Fell maintains he now spends 10 percent of his time worrying about current customers and the other 90 percent obtaining new customers. Before outsourcing, the reverse was true.
Outsourcing is Finally Catching On
There are signs, however, that insurers are looking at outsourcing with a clearer eye. In a survey conducted in October and November of 2001, Gartner, Inc., a research firm in Stamford, Connecticut, estimated that among 114 U.S. insurance carriers who have written at least $100 million in net premiums, 51 percent of life and health insurers and 48 percent of property and casualty insurer outsourced at least one business function. Fifty-seven percent of each group planned to outsource at least one business function in 2002.
One of the drivers in the trend towards outsourcing is the growth of eInsurance. Web-based distribution of insurance products places a heavy burden on IT departments. Bloor Research, located in Bletchley, Buckinghamshire, United Kingdom, has figures suggesting that by 2005, premiums generated via the Web may reach $17 billion in the U.S. With the rapid evolution of technology, along with the increased pressure on in-house IT personnel to keep certifications up to date, outsourcing becomes an obvious solution for insurance companies who want to maintain a competitive advantage.
What's Being Outsourced
The fallout from September 11 is just one of many huge challenges facing insurers. Currently in the throes of a hard market--a necessary evil of the capitalistic business cycle--insurers are grappling with other obstacles as well: asbestos, mold, runaway lawsuits (including class actions) and large jury awards. Cash reserves are being diminished to dangerously low levels. "Insurance companies pay out much more in claims than they take in premiums," explains Carolyn Gorman, vice president of the Insurance Information Institute, based in New York City. "They make up the difference through their investment gains." This is good for policyholders because premiums are low; however, when investments stop performing well, premiums are raised (known as a hard market) to make up the difference.
Obviously, in such a scenario, insurance companies need to concentrate on their core competencies: writing new business, merger and acquisitions, etc. Outsourcing support functions allows them to concentrate their focus on activities that contribute to growth. Steve Holcomb, president of Trumbull Services, highlights four distinct groups of insurance processes that are being outsourced:
- Field-based services. Services performed over a large geographical area, including loss prevention and premium auditing.
- Policy administration and billing. This is a third alternative to the buy- versus-build question. It also elevates the process to a best-practice level in all areas: technology, customer service, insurance expertise and transaction processing.
- Financial recoveries. This includes subrogation and premium (and overdue premium) collection.
- Data management (and analysis) and statutory and regulatory reporting.
Clearly, as 2003 approaches, insurance companies will continue to adopt more relevant business models. (One of the most obvious, made possible by the Internet, is the virtual insurance company.) Fiercer competition, rapidly evolving technology, deregulation and the resultant spawning of more innovative insurance products, terrorism, and a volatile economic landscape all demand business solutions that surpass the capabilities of in-house staff. Insurance companies that are willing to take stock of their inadequacies, accurately assess their needs, and consult with outsourcing experts to ensure partnering with the right provider will be in the best position to not only survive, but prosper, in 2003 and the years to come.
Insurance Outsourcing Trends in 2003:
- Shrinking margins will force more insurance companies to break with tradition and consider BPO to reduce operating cost.
- The growth of eInsurance and virtual insurance companies require cutting-edge IT and emphasize the need to create outsourcing partnerships.
- Insurers will refocus on core competencies and, by outsourcing non-core functions, allow their back office to become somebody's front office.