Global carriers can create IT advantages for themselves nationalinsurers will have a hard time beating. But outsourcing can makethe world of insurance get a little bit smaller.

Taking best practices and moving them from country to country isjust one way identified by the Boston Consulting Group (BCG) forinsurers to claim a global advantage over their competition. In itsreport Creating IT Advantage in the Insurance Industry, BCGs vicepresident, director, and co-author of the report, Boyd Pederson,claims the ability to aggregate technology bases that are scalable,such as the infrastructure and the network, allows carriers to takethat investment and apply it more broadly across multiplegeographies. This permits carriers to spread those items that aretypically more fixed-cost initiatives across a broader range ofcountries.

In some ways [insurance] is very different globally because ofregulatory measures, product differences, the ways in which it issold, and the distribution channels, notes Pederson. I would saythe product can be very different from geography to geographydepending on the type of [insurance]. The underlying drivers of alife insurance contract probably are not that dissimilar from Chinato North America, but the underlying information about the riskswould be very different.

The alignment of business strategy and IT strategy is the onlyway IT can become a true source of competitive advantage forcarriers, according to Pederson. He believes proper alignment canbe brought about only through integrated planning supported byorganizational and governance structures aimed at maximizing thebusiness value of IT investments.

In the area of outsourcing, Pederson asserts there are mixedactivities around the globe. We certainly see in the studies Ivedone in the last three years a trend to increasing the use ofoutsourcing [in North America], but thats not necessarily trueacross the globe, he says. Its very active [in North America] aswell as in the United Kingdom, and part of that has to do with thelanguage being spoken in the areas of offshoring and the nature ofthe business.

In both the U.S. and the UK, outsourcing businesses are welldeveloped. Outsourcing companies have been pursuing insurance andother financial services companies as a core of their businessmodels for the last few years, indicates Pederson. There are goingto be services in IT that are much more likely to be outsourced, hesays, adding commodity-based services, such as software applicationsupport, package applications, and service for distributedcomputing, fall into that group.

As the outsourcing market continues to develop, the pricingmodels are going to change, Pederson predicts. As vendors change tomake outsourcing more attractive, those changes will make it moreappealing for large outsourcers to pursue smaller deals, allowingsmaller companies to move into the marketplace.
The report states insurers in the UK spend nearly 20 percent oftheir IT budget on outsourcing, with the U.S. at 10 percent. Germaninsurers spend just five percent of their IT budgets onoutsourcing.

Pederson also points to a lack of transparency in insurance ITcosts. He maintains one reason for this relates to the two classesof business executives in the insurance market: those who wouldlike IT to go away, and those who are IT savvy. Over time, in orderto meet the needs of both kinds of business executives, there hasntbeen a tremendous amount of investment by IT organizations inmaking the costs of IT and the drivers of IT pretty clear to thebusiness in business terms, he says. When business people discussIT costs, they often hear about servers and gigabytesthings theycant put their fingers on when theyre used to talking about agents,people, and policies, he explains.

In order to make IT costs much more transparent to the businessdecision-makers, discussions need to be stated in business terms,he contends. But he doesnt believe business leaders completelyresist advancements in technology. It takes time to change behaviorand recognize the value IT brings and the role IT will have to playgoing forward in the insurance industry as it becomes increasinglyautomated, concludes Pederson.

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