Insurance Outsourcing Reaches New Levels of Maturity
Cut to the Core Processes
Once carriers have chosen those outsourcing locations and enjoyed early success on projects amenable to outsourcing, the possibilities for further gain can evolve (see related sidebar, opposite page), according to Sridhar Rajan, a senior manager in Deloitte's (New York) outsourcing advisory practice. Having succeeded with projects, insurers' next step is to move on to processes, making judgments about which capabilities are core to the enterprise, he says.
"When you consider what is possible from a middle- or back-office operational and IT function, there is a significant amount of value-add that actually can move offshore," Rajan asserts. "At the end of the day you're creating a service that you're offering to the customer; so the question is, 'What kinds of services can you really take out of your four walls?'"
Arriving at a reliable answer requires an adequate understanding of one's internal functioning before attempting to move it outside, Rajan warns. Without that understanding, the chances of crafting SLAs to a realistic performance baseline are poor. "You need to know what you're doing before you actually start outsourcing," Rajan declares. "Otherwise, be prepared for a period of time before you establish that baseline."
If a company understands its processes, however, it can develop superior ways of managing them through outsourcing relationships, according to Rajan. As an example, he cites a U.K.-based carrier of global reach that moved significant customer-facing claims processes, including first notice of loss, to an offshore center. "As the capability of the center began to develop, more of the claims value chain started moving out," Rajan recalls. After three years in operation, he adds, "That center can now be notionally called a claims center of excellence and has been responsible for identifying a number of strategic drivers."
Another area that offers strategic outsourcing opportunities is prerelease product testing, which drives speed to market, Rajan says. He recounts the experience of a credit card firm attempting to offer an insurance product to cover its customers' outstanding balances; along with more-typical features, the firm added a family leave-of-absence provision. "They needed to do market testing to see how people reacted to the offering and whether the elasticity of the product still remained," Rajan explains, adding that the company's use of offshore resources to execute the test phase proved "to be a very cost-efficient way to test its hypothesis."
Moving the Middle Office Offshore
More-confident insurers are beginning to shift middle-office elements offshore, adds Rohit Kapoor, president and COO of business process outsourcing (BPO) provider EXL (New York). Kapoor defines middle-office functions as those typically tied into enterprise resource planning (ERP) systems involving analysis, reporting and ongoing operating activity that provides information on business performance.
"If a carrier has financial and HR packages on SAP or Oracle, it's a matter of leveraging a number of business tools that are being created in order to be able to move some of this work offshore," Kapoor explains. "Outsourcing partners are then able to produce the reports and provide information to senior management to make better decisions."
According to Kapoor, EXL currently is shaping a project with a major U.S. carrier for analytical consulting work to determine how to reduce incoming customer call volume. The proposal illustrates a far higher degree of both technical sophistication and confidence than required to execute traditional outsourcing engagements, owing to the volume and sensitivity of customer data accessed across the respective geographies, he says. "If this is a successful project, it will have demonstrated that a significant amount of middle-office functions currently performed in-house can be outsourced," Kapoor contends. "That would be a direct consequence of being able to create the necessary layers for enabling access and providing data that can be stored and accessed offshore."
As more and more such functions can be moved outside the enterprise, the configuration of the core IT organization that supports them will be redefined. Being able to identify what can be released from the four walls of the enterprise will be critical in addressing pressure to maximize the value of IT investments, believes Oliver Bussmann, who as CIO of Allianz of America (AZOA) -- a member of Munich-based Allianz (US$140 billion in revenue)-- is in charge of IT for Fireman's Fund (Novato, Calif.) and Allianz Life (Minneapolis). "It's a key function -- both from an IT perspective and overall -- to find what's core and non-core, who are my vendors, and what are the global locations that can provide me the right access to resources," he says.
Having observed the use of outsourcing evolve in other financial sectors and geographies, Bussmann expects a similar evolution in the North American insurance industry. "We will start with more non-customer-facing activities, and that will move increasingly toward customer-facing activities over the next three to five years," he predicts.
"We are just beginning to embrace a global sourcing model in the insurance business," Bussmann contends. As price competition heats up in a softening market, he suggests, insurers more readily will seek access to knowledge already available in other industries that have developed mature offshore outsourcing vendor relationships.
Strategic sourcing, including both the tapping of expertise of vendors on a buy-versus-build basis and traditional outsourcing, has been a major component in AZOA's ongoing transformation initiative, begun at Fireman's Fund in 2005 and now embracing Allianz Life and other elements of AZOA. The company has outsourced IT infrastructure management to IBM (Armonk, N.Y.) and network management to AT&T (Basking Ridge, N.J.), and has tapped Big Blue's global resource pool for integration work involving the implementation of new core systems, including Accenture's (Chicago) ClaimComponents and ISO's (Jersey City, N.J.) AscendantOne policy admin system, as well as new underwriting, workflow and content management tools and an SAP (Newtown Square, Pa.) ERP platform.
Bussmann notes that even with many large-scale transformation projects that have some direct or indirect outsourcing component -- for example, projects to implement vendor software packages -- the bulk of the risk still is with the insurance carrier. However, there are different risk- and gain-sharing models available within BPO, he says. "The BPO provider needs to leverage its success with other clients, so it has a huge interest in being on time, on budget and within scope," Bussmann elaborates.
Incorporating the services of BPO will be part of an ongoing discussion within carriers to establish what is or is not core capability for the enterprise. "Is one's value proposition around service? Is it price-sensitive? Out of this discussion you define the selection criteria of what is core and non-core," Bussmann says. "It is critical to spend a significant amount of time on that because you don't want surprises at the end."
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
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