Product complexity, agent reaction give some insurance companiespause

Orlando

A growing number of insurers have begun to embrace at least someform of outsourcing to local and even global vendors in theirinformation technology and business processing units to cut costsand improve efficiency.

However, some carriers remain skittish about farming out theirmain functions and fear alienating their agency forces, accordingto experts speaking before a packed session here at the recentACORD-LOMA Insurance Systems Forum.

“Many insurance companies that I talk to say, 'We have taken asmuch cost away from the company as we can, and outsourcing is thenext thing on the list,'” said Keith Johnson, a partner atHamilton, Bermuda-based Accenture, who leads the firm's NorthAmerican insurance business process outsourcing practice.

John Albanese, vice president of CSC Financial Services Group inEl Segundo, Calif., noted that in addition to cost reductions,outsourcing firms also offer scale and allow insurers to focus ontheir core strengths.

“Many insurers use outsourcing to really narrow their focus,”said Mr. Albanese, who handles outsourcing operations within CSC'sfinancial services group. “Insurers can focus on things that aremore important, such as management of distribution channels,focusing on agents.”

Outsourcing can also help insurers avoid capital-intensiveinvestments, since outsourcing vendors provide infrastructure andintellectual property, keeping systems and software up-to-date, thespeakers noted.

At a glance, these experts observed, the insurance industry andoutsourcing seem to go perfectly together with no downside. On theone hand, insurers are looking to cut costs and focus on corestrengths in a competitive environment, while outsourcing firmsoffer scalability and technological expertise.

However, there are other factors–often unique to the insurancebusiness–that present challenges, the speakers warned.

When it comes to business-process outsourcing, outside firmsmight fail to understand the complexity of insurance transactions,the speakers noted.

One example is the agency bill in the property-casualty sector,according to Mr. Johnson. “It's easy for a provider to say, 'We cando it,' but unless you have actually done it, it's hard tounderstand the true complexity of negotiation and working withunderwriters and agents, and all the different parties that getinvolved,” he said.

Another potential hurdle when outsourcing insurance businessprocesses is the long-term nature of many policies, added Mr.Albanese. “Insurance products often have a shelf life of more than20 or 30 years, and you have to capture all that history associatedwith that product. That all builds up and that's an aspect that'sparticularly challenging,” he said.

Carriers–especially those that are laser-focused ondistribution–also fret about the kind of signal outsourcing mightsend to their distributors if carriers farm out main functions suchas customer service call centers and claims administration,according to Mr. Albanese.

The industry's independent distribution system also plays arole, Mr. Albanese added. Since many insurer distributors oftensell for the carrier's competitors as well, “you don't want toalienate agents in any shape or form,” he said.

“Outsourcing can provide a carrier's field force with betterservices than they have been providing themselves, but at firstit's a tough sell–a tough mental hurdle to get over,” he added.

Panelists advised insurers looking to outsource businessprocesses to find vendors whose culture is compatible with theirown.

“Cultural fit is one of the most important things,” Mr. Albanesesaid. “These deals are typically 10 years in duration. So whoeveryou make the commitment with, you want to make sure that yourcompany's culture and the way it interacts would be compatible withthe potential outsource firms for the long haul.”

Walt Wojcik, a consultant for Infosys Technologies, Ltd. inFremont, Calif., and the former chief information officer ofNorthwestern Mutual, added that the U.S. economy is entering abrave new world, moving from a “command-and-control” environment toa “connect-and-collaborate” structure with global outsourcing.

“You just have to be open to the fact that this is now a new wayof getting things done,” Mr. Wojcik said.

Flag: Decisive Factors

Should You Outsource?

While many believe outsourcing is a perfect fit for insurerneeds, there are potential downsides to consider, experts warn.

Plusses:

o Cost-cutting.

o Allows carriers to focus on core strengths, such as productdevelopment and marketing.

o Helps carriers avoid having to make capital-intensiveinvestments in non-core and non-revenue producing functions.

o Takes advantage of economies of scale at outsourcingvendors.

Minuses:

o Outsourcing firms may tarnish a carrier's reputation and brandimage if service is poor, especially if customer service is farmedout.

o Short-term outsourcing arrangements might conflict with thelong-term nature of many policies.

o Agents might get the wrong impression if key customer servicefunctions are outsourced to generic firms, prompting them to movebusiness to competing carriers.

o A carrier's culture might clash with that of the outsourcingfirms, creating tension and undermining the deal'seffectiveness.

“Outsourcing can provide a carrier's field force with betterservices than they have been providing themselves, but at firstit's a tough sell–a tough mental hurdle to get over.”

John Albanese, V.P.

CSC Financial Services Group