Deciding When BPO Makes Sense: Homesite Insurance's 3 Criteria

Like other personal lines insurers who want to do business in California, Homesite (Boston) chooses to participate in the California Earthquake Authority, a quasi-governmental agency that actually underwrites the product. However, Homesite manages that business through a BPO arrangement with Blue Cod Technologies (Marlborough, Mass.). The insurer's relationship with the vendor illustrates the conditions under which insurers should consider adopting BPO solutions.

Peter Settel, Homesite

Insurers have traditionally felt the need to own the infrastructure and staff associated with key business processes, but they are starting to consider options, relates Ellen Carney, a senior analyst with Forrester Research (Cambridge, Mass.).

"There's been growing comfort with using technology vendors and putting functions like finance, accounting or HR into the cloud or doing BPO," Carney reports. "We're now seeing tier one carriers moving into core process areas, such as billing."

Changing business pressures are opening insurers' minds to the potential advantages of BPO as their internal systems prove inadequate to emerging needs, according to Carney. "Carriers are asking whether some other organization can perform certain functions better, letting them focus on whatever their strength is, be it risk management, sales and marketing, product development or customer service," Carney elaborates. "There's a particular opportunity around specialized lines of insurance."

Such is the case with Homesite's earthquake business. The carrier decided some years ago that it didn't have the resources to manage that business internally and began a relationship without adequately assessing risks, confides Peter Settel, senior VP and CIO, Homesite.

"A few years later that company got out of the business, and it was very jarring to us," Settel recalls. "For a long time we did it ourselves — we took care of sales, service and fulfillment, etc."

Recently CEA made changes to its product, and the resulting increase in cost and complexity in the management of the earthquake business caused Homesite to consider whether outsourcing the function might be a better option.

"In order for us to outsource, it has to be a better solution on a cost-and-complexity basis," Settel says. "Once the relationship with CEA changed in that regard, it changed the equation."

Homesite began communicating with Blue Cod early this year and embarked on a formal relationship in the second quarter. However, Settel stresses that the insurer applied rigorous criteria.

"Due to the nature of our business, we're not looking for short-term bridge solutions — we find that these produce bad results," he says. "We're looking for relationships that suit our long-term objectives and strategic direction."

The Blue Cod relationship is not the largest of Homesite's outsourcing partnerships, but it does have the potential to save the carrier about $250,000 annually — which frees up resources for more attractive uses, according to Settel.

Settel comments that Homesite sees BPO as a way of scaling its business and accelerating its time-to-market for new capabilities.

"In general, we're very open to it and do quite a bit," Settel declares. However, in order to consider embarking on a BPO relationship, Homesite applies three criteria beyond the cost/complexity equation, according to Settel:

1. Real Advantage: "First, the partner has to bring genuine advantage compared to our doing something ourselves. That consists primarily in significant technology investment, significant infrastructure management and capabilities specific to the opportunity — they have to be deeply in the business in question, not merely seeking to get into it."

2. The Cooperative Effect: "If we're the only or the significantly largest customer, the economics won't be right for us, because the combined benefit would be lower than if we built the capability ourselves. We'd be spending money to create our own solution and paying a high margin for it. The partner has to have a scale model and revenue from many sizeable clients to create what we call a 'cooperative effect.'"

3. Risk Management Foundation: "Our relationship with a BPO partner has to built on risk management. Outsourcing often looks good on paper but risk management trumps 'paper' benefits. When you're outsourcing a core part of your operation, you have to go beyond traditional due diligence, SLAs and contract provisions. The relationship must embrace consideration of significant changes in technology and the competitive landscape, and it has to include the building of disaster recovery and business continuity solutions. That requires willingness of our partners to invest in creative ideas that may be outside their standard offering."

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio