James BargentThe insurance industry sees a lot of attractive things about third-party outsourcing, starting with lower costs for specialized services. Couple that with forecasts that insurance companies are looking to increase infrastructure outsourcing, a key questions arises: With the classic advantages of Americas-based players create a whole new sector of opportunity?
Insurance companies have long utilized BPO in areas such as third-party administration but, “what has been a relatively new phenomenon is third party outsourcing – that has grown dramatically, around 10-15% on a year by year basis,” says Saurabh Gupta, VicePresident at Everest Group, where he heads BPO research.
Profit Squeeze
Gupta believes the primary motivation for this surge in outsourcing is new pressures squeezing insurance company’s profit margins. “During and after the recession there was a twin pressure,” he said, “how do you grow and how do you manage costs.” According to Gupta, in the last few years insurance companies’ profit margins have been hit hard by tumbling premiums, a dramatic increase in fraudulent claims, an increasingly complex regulatory environment and the need to update technological infrastructure.
Companies are also having to adapt to changes in consumer behavior. “Insurance is becoming highly consumer-centric,” he said. “People have got all kinds of choices now, loyalty with insurance companies is on a decline as people do quote management and get quotes on line.”
For many insurance companies outsourcing has provided a convenient and efficient ways to meet these new challenges. However, according to an Information Week report – Optimizing the new outsourcing model – cost arbitrage is not the only thing on offer for insurers. “Outsourcing can provide insurance organizations with myriad benefits, whether purely a cost-savings measure, a means to hand over tactical and non-strategic tasks while leveraging the expertise of a third party, a strategy for increasing flexibility and agility and fostering growth, or a way to more quickly and efficiently enter new markets and introduce new products,” it states.
However, Gupta believes only certain sectors of the insurance business are appropriate for outsourcing. Insurance can be roughly split into four key areas: product development and business acquisition; setting up new policy creation, underwriting and premium collection; managing records and policies and claims management.
“Outsourcing can provide a way for companies to essentially shed a lot of fixed infrastructure when they shed part of their operations or exit countries. Otherwise, they are under pressure because demand goes away and they are saddled with a large infrastructure.”
According to Gupta, while core activities such as policy creation must remain in-house, non-core processes such as claims management and other transactional activities are well-suited to outsourcing. “If it is not a source of competitive advantage,” he said, “then it can be outsourced.”
Better Cost Management
With the current global economic instability, outsourcing also offers a prime opportunity for insurers looking to move from a model of fixed to variable costs, especially for those operating in non-domestic markets. “Outsourcing can provide a way for companies to essentially shed a lot of fixed infrastructure when they shed part of their operations or exit countries,” said Daan De Groodt from outsourcing advisory firm Deloitte Consulting, quoted in the report. “Otherwise, they are under pressure because demand goes away and they are saddled with a large infrastructure.”
In the areas that are suitable for outsourcing, insurance companies have recently been moving into “as a service,” processes, according to the Information Week report. In particular, more and more companies have been looking to capitalize on software-as-a-service offerings (SaaS), where applications are hosted by an outside service provider and made available to users, usually over the internet.
Companies are also increasingly looking to other outsourcing solutions that utilize new technologies to support increasingly mobile, remote workforces and to take advantage of on-demand technologies, real-time communications and enhanced data analytics capabilities, the report added.
However, the nature of the insurance industry has also led to some companies taking a wary approach to outsourcing. Aside from issues common to all outsourcers, such as cultural, political and economic sensitivities, insurance companies are frequently concerned over risk management and regulatory compliance. “The biggest concern is risk,” said Gupta, “-how do you manage risk, how do you look at exposure to liability.”
What worries insurers most is data management and security, according to the Information Week report. “One of the perceived risks of outsourcing is the loss of control over data and the ability to get data back when needed or at the end of the outsourcing relationship,” it states.
Despite the concerns, with 85% of insurance companies already using outsourcing on some level, according to Novarica, there is no doubt that insurance outsourcing is a growing market. However, the question remains as to whether Nearshore operators are capitalizing on the opportunity.
According to Gupta, at the present time, Latin America remains an underdeveloped market in the sector, although that could change with certain adjustments. “From a supply perspective there needs to be a lot more footprint than there is in that region and from a macro-economic perspective these economies need to open up a lot more,” he said. “If that happens then there is no apparent reason why we won’t see an exponential increase in this type of activities in the region.”
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