WAR INSPIRES MORE CAUTIOUS APPROACH TO OUTSOURCING

Insurers' concerns about the relative riskiness of offshore outsourcing were heightened even before Operation Iraqi Freedom began last week, and those concerns continue to affect assessments of the strategy, according to Kimberly Harris, research director, Gartner (Stamford, CT). As early as February, in response to the pending threat of war, insurers began making more cautionary assessments of offshore providers' risk mitigation and disaster recovery practices, Harris reports.

And although the actual waging of the war in Iraq has not stopped carriers from exploring their offshore options, "large insurers are following a blended sourcing model in order to spread risk amongst multiple geographic regions," explains Harris.

In fact, apprehension due to geopolitical threats, coupled with the hardening economy, has resulted in a reduction of overall IT outsourcing activities by insurers, according to a new Gartner Research Note, "Insurers Shift Focus and Approach to Outsourcing." The study, which was conducted in the fourth quarter of 2002, was based upon responses from 81 US-based insurers with more than $100 million in net annual premium, including 42 P&C and 39 life/health carriers.

The greatest drop in outsourcing activity was in the life/health segment, reports Harris. There is "no real explanation" for the more significant decline in outsourcing rates by life and health underwriters except for the possibility that the outsourcing needs of P&C carriers are higher because their businesses are traditionally more transaction-based, she suggests.

And outsourcing continues to make financial sense for many insurance companies, despite the uncertainty caused by the war. Although overall IT outsourcing rates reportedly were down by the end of 2002, major IT outsourcing contracts were awarded by insurers to providers based near-shore last year. For example, Fireman's Fund Interstate Insurance Group (Chicago) awarded a contract to CGI (Toronto) for infrastructure services, and Manulife USA (Boston) awarded an $80 million application outsourcing contract to CSC Corp. (Austin, TX). And even offshore remains a viable option -- just two weeks ago, Guardian Life (New York) announced a $35 million-plus outsourcing relationship with India-based Patni Computer Systems.