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21st Century Outsourcing: New Drivers, New Options, New Challenges

Outsourcing offers more than cost-savings benefits to insurance companies. Increasingly it’s a strategy for increasing flexibility and agility and fostering growth by facilitating entrance into new markets and development of new products.

Outsourcing has become an imperative — not an option — for insurance IT organizations. Today, carriers are looking to outside service providers to help them in many ways, including becoming more flexible, efficient and successful; enabling them to focus on their core competencies; and providing expertise and skillsets that complement what they have in-house.

Optimizing the New Outsourcing Model.
As the role that technology and the IT organization play in the insurance enterprise becomes increasingly strategic and influenced by consumerization, the traditional value of outsourcing as a cost-saver is being expanded. Meanwhile, new outsourcing opportunities are emerging around cloud and web-based initiatives, mobility, real-time interactive customer service, and data management. What is the new thinking in insurance about outsourcing and what are the new opportunities - and risks - in the current hyper-connected global financial services environment?

In the complex current operating environment, the great majority of insurance organizations are finding that they can’t do it all — or if they can, most can’t perform extraordinarily well at everything they do. And so insurance IT outsourcing has continued to grow in popularity over the past several years.

Eighty-five percent of insurers currently outsource some element of information technology, according to a 2012 report from Novarica, “Outsourcing in U.S. Insurance IT: Current State and Future Plans,” (see this). In addition, 25 percent to 35 percent reportedly are planning to use more external services this year.

The depth and breadth of outsourcing options and offerings are large and expanding. Outsourcing isn’t monolithic. It’s not just limited to data center outsourcing or application maintenance outsourcing or business process outsourcing (BPO). It’s all of the above. There is simultaneously more specialization and more options — on-shore, offshore and near-shore. There are new metrics and new ways to evaluate success and to set up contracts.

But as plentiful and diverse as outsourcing options have become, the reasons and motivations for insurance organizations to choose to outsource are now even more varied.

Outsourcing traditionally has been a means for insurers to save money — to cut costs by taking advantage of less-expensive labor (usually overseas). And outsourcing can cut product development time and increase speed to market. But beyond the cost savings (which always will be a key reason insurers turn over some IT areas to an outside company), outsourcing can enable insurers to focus on their core business and core competencies, and to supplement their own in-house expertise with an outsider’s perspective, specialized skills and in-depth knowledge.

To some extent the new take on outsourcing is a corollary of the fact that insurance IT plays a different role now compared to its function 20 years ago. Today, insurance IT is more strategic. There’s an increased focus on deliverables, metrics and project management, for instance. And even when IT is outsourcing some tasks and areas to a third party, it’s still responsible for those areas and for the success of each initiative. In addition, insurers today look to their outsourcing providers as not just product and service vendors, but as strategic partners that have a vested interest in the success of each initiative.

Why Outsource?

According to John Albanese, vice president, CSC Financial Services Group (Austin, Texas), the early years of outsourcing focused primarily on labor arbitrage, with insurers looking to get tasks done for less money. “Today, buyers are much more sophisticated,” Albanese explains. “Insurers are still looking for cost savings, but they are also looking to get other business value out of an outsourcing arrangement.”

CSC’s Susan Hunter, VP of P&C business process solutions, says the outsourcing picture has changed over the past few years. “Now, people are much more willing and open to even discuss outsourcing or business processes and services than ever before. They are even starting the conversation,” Hunter explains. “It used to be people were scared of outsourcing because they thought it meant that they would have to get rid of all their people.”

But because of the economy and the fiduciary responsibility executives now have, the executives have to at least look at outsourcing as an option, she adds. “They can’t go back to their board and say they want to do a new policy administration process or they want to expand without at least considering outsourcing, first for potential cost savings, and also because it is becoming more widespread and accepted.”

The recent financial crisis notwithstanding, insurance companies are more concentrated on growth than ever before. But to grow, they must run as efficiently and effectively as possible, and they have to differentiate themselves in a crowded marketplace. According to Karen Furtado, partner at Boston-based research and advisory firm Strategy Meets Action (SMA), many insurance operations take considerable time and talent to manage. Consequently, carriers often opt to outsource some of the less-value-added activities in order to free their valuable employees to focus on corporate core competencies.

“Outsourcing isn’t even about someone doing something better than you can do in-house. It’s often just about having someone else to do a task,” Furtado says. “Insurers have to determine where they want to place their energy, and invest in their differentiation. Do you need your staff making sure BlackBerrys are running properly? Or would you rather see your IT staff working on deploying mobility apps, for instance?”

For Mike Toran, CIO of Starr Companies ($2.4 billion in gross premiums written), a specialty lines insurer based in New York City, staffing issues figure heavily into the outsourcing arrangement he has with CSC (see related article, page 16). Staffing presents a lot of risks, Toran explains. “There’s a lot of recruitment that goes along with hiring many people, and not all of the new hires will fit the company culture,” he says. “It takes a while to get everyone up and running. You don’t have those issues with an outsourcing relationship.”

The reality is that insurers are looking to meet multiple objectives when they outsource: cost reduction, a more flexible model and the ability to avoid making capital investments, says Daan De Groodt, principal, outsourcing advisory practice, Deloitte Consulting in Atlanta. “We see insurance companies looking for the vendor to essentially take over the client’s business, potentially the technology platform, or provide the technology platform to companies that would otherwise have to keep running a very expensive infrastructure,” he says.

Martina Conlon, Boston-based principal, insurance, with research and advisory firm Novarica (New York), has seen a transition from insurance companies choosing an outsourcer for data center support, to using outside vendors for application development and maintenance and other areas, and then eventually for BPO.

“There certainly has been a shift towards more services conducted offshore, and the vendors have matured dramatically in the past few years in terms of understanding the business models that work, the processes that work, what security measures and training, etc.,” Conlon explains.

These kinds of benefits can be gained by any size insurance company. Yet, according to Conlon, the model has been adopted over the past five to 10 years mainly by either very large or very small organizations. Mid-sized carriers seem to be more hesitant to aggressively adopt outsourcing, she adds.

“Many mid-sized companies haven’t yet gone through a technical transformation so they don’t feel prepared to migrate to an outsourcing arrangement,” Conlon says. “And mid-sized organizations seem to want to avoid giving up control, [or say that] outsourcing goes against [their] company culture, or that they can do it themselves to maximize customer service and service to business constituents. But that’s changing. Mid-sized companies are now moving toward outsourcing, just at a slow pace.”

Peggy Bresnick Kendler has been a writer for 30 years. She has worked as an editor, publicist and school district technology coordinator. During the past decade, Bresnick Kendler has worked for UBM TechWeb on special financialservices technology-centered ... View Full Bio

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