For all the controversy that has surrounded outsourcing inrecent years, Scott Hawkins makes an interesting point, namely,insurers have been outsourcing some business processes since thefirst independent agent began doing business. "You really saw thefirst breaking down of the [in-house] business model with the useof noncaptive distribution," argues Hawkins, who is an analyst atConning Research & Consulting.

Advocates of business process outsourcing (BPO) cite itsadvantages for carriers–the ability to: respond to new businessopportunity without the build-up time needed to bring on additionalstaff; replace fixed infrastructure expenses with variable coststhat directly relate to business demand; move employees frommundane tasks to challenging and revenue-enhancing activities."Virtual" insurers have become the biggest users of BPO, willing tooutsource all but the most essential, image-defining processes tothird-party providers.

Yet despite the connectivity and business process workflowtechnology advances that facilitate effective BPO, Gartner reportsoutsourcing activity within the industry as a whole actually slowedthroughout 2006 and into early 2007.

"We ask insurers about [BPO] in our semiannual surveys, and BPOis completely off the radar for P&C and a second-tier priorityfor life carriers," says Kimberly Harris-Ferrante, research vicepresident at Gartner.

Part of the reason BPO has seen a slow uptake among traditionalinsurers is those carriers don't take a strategic view ofoutsourcing. "Most companies are using BPO for tactical challengessuch as overflow support or to perform back-office processes fasterand cheaper. It's not being used for competitive differentiation oras an overarching strategy," Harris-Ferrante says.

In addition, outsourcing still is a loaded term, with carriersfearing staff pushback, negative PR, and a belief the majority oftheir business processes represent unique core competencies thatsimply can't be handled by a third party.

"The head of claims believes he doesn't enhance his value to thefirm by outsourcing all the claims operations," says Craig Weber,senior analyst in Celent's insurance practice. "It's anextraordinarily sensitive topic for agents and customers, so manycarriers that do outsource are quiet about it."

To be fair to reluctant carriers, there are valid business risksto BPO. For instance, Weber points to concerns about data securityand loss of control over service levels. "Carriers are loath to doanything that might result in their agents or customers having alower-quality experience," he says.

"There are risks that service delivery won't be there and thatthere might be changes in ownership, particularly with smallershops that are more susceptible to being purchased," adds DavidSmith, senior vice president of operations at Old Mutual FinancialNetwork (OMFN), part of the U.K.-based Old Mutual group and anextensive user of outsourcing services in both business processesand IT.

Also inhibiting the adoption of BPO among traditional carriersis the fear of losing control of a process by being at the mercy ofa third party or that, by divulging the details of adifferentiating process to an outsourcer, the provider could supplythat information to competitors. Additionally, while technology hasbeen an enabler of BPO by improving connectivity, insurers stillface technology hurdles to effective outsourcing.

"The biggest [obstacle] is that paper still plays such a majorrole in many insurance processes, and those paper processes don'ttravel well to an outsourcer," Weber says. "Other concerns includehow to transfer institutional knowledge to an outsourcing partneras well as how tightly integrated an insurer's systems are," whichinhibits bringing an outside party into workflows.

One virtual insurer that exemplifies having a strategic view ofoutsourcing is the Sunshine State Insurance Company, formed in 1997to assume policies from the Florida Joint Underwriting Association(JUA). In 2004, Sunshine State merged with another insurer in thestate, QualSure, and subsequently migrated its book of businessfrom BIPT's TiVA administration system to the CSC POINT IN platformQualSure used. Today, Sunshine State outsources its policyprocessing to CSC and its claims management business to InsuranceNetwork Services (INS) from the Seibels Bruce Group.

"For all the companies that formed or came into Florida to takepolicies out of the JUA, there was a need for speed to market. Webelieved the quickest and surest way to get in the business was toengage an outsourcing partner that could do end-to-end transactionsfor us, rather than trying to build those capabilities from theground up," says Jim Brown, Sunshine State's director of legal andgovernmental affairs.

Today, Sunshine State's in-house staff of fewer than 20employees sets the underwriting and sales strategy of the companyand handles marketing, finance, and accounting operations, leavingall policy and claims administration to INS and CSC.

In a typical end-to-end process, Sunshine State agents use CSC'sWeb-based Agency Link system, which is hosted at a CSC data center,to quote and bind policies. A CSC call center in Sarasota fieldsquestions from agents regarding policies, with CSC underwritingstaff taking responsibility for enforcing underwriting guidelinesthat Sunshine State promulgates.

The call center also fields first notices of loss, transmittingthose notices to INS. "We set the guidelines for claims handlingand establish authority, but the ministerial, day-to-day managementof claims is handled by INS," Brown says.

Sunshine State's goal of writing business quickly was met by theoutsourcing arrangement, which has continued to pay benefits as thecompany has grown its business both within Florida and SouthCarolina. "The scalability of operations we are afforded by anoutsourcer, without having to add personnel, premises, or computercapacity, is very important. If you're looking at a particularstate or line to expand into, knowing you can obtain infrastructurethat is integrated with what you already have is a major benefit,"Brown explains.

BPO also has provided other strategic benefits to Sunshine Statein the volatile Florida homeowners market. "For those of us whohave endured the business and regulatory challenges writinghomeowners in Florida has presented over the last few years, it'sbeen important we have not been distracted by ministerial tasks,"Brown says.

The outsourcing arrangements also have enabled Sunshine State toweather natural disasters. When Florida was hit by four hurricanesin 2004, CSC was able to transfer the call center from Sarasota toSouth Carolina.

Sunshine State's management is well aware of the concern citedby Celent's Weber about maintaining the quality of agent andcustomer experience in a BPO relationship. It manages that riskthrough a producer counsel process.

"We actively audit and monitor what [CSC and INS] are doing andmeet with their senior management at least twice a year tocommunicate business plans we might have so we don't catch themunaware," Brown indicates. "Issues we have had [with CSC and INS]have been minor glitches vs. recurring problems that causesignificant dissatisfaction."

Ask most carriers to list processes that define "corecompetencies," and underwriting usually will make the list."Underwriting is a control point," Hawkins says.

However, OMFN sees underwriting as an activity where outsourcingcan enhance the company's business strategy. "At the underwriting[outsourcing] partners we have chosen, underwriting is their niche.They can secure people on their staff we can't. For instance, onehas three previous chief underwriters on its staff. We couldn't getthat level of expertise in a home-office environment," saysSmith.

Like Sunshine State, OMFN considers itself a virtual insurer,with a management staff of only 11 overseeing the activities ofmore than 700 outsourcing staff members who process about 350,000applications and handle 1.5 million calls each year. At one time oranother, OMFN has outsourced every core insurance process fromnew-business underwriting through claims administration, retainingonly product development and financial activities.

Ten years ago, when OMFN first went to the fully virtual model,the company contracted with just one provider. Since then, it hasshifted to a multisource approach to better manage risk. Currently,three different providers perform underwriting for OMFN:Mid-America Agency Services handles a little more than half of theinsurer's business, with Best Innovative Underwriting Services andCase Professional Resources splitting the rest. When a new piece ofbusiness comes in, the company's policy administration provider,Perot Systems' Transactions Applications Group (TAG), uses aworkflow system TAG developed to assign automatically theapplication to the appropriate underwriting company.

When OMFN entered a new line of variable annuity business inJanuary 2007, it selected McCamish to take care of policyholderservice and call center support in addition to producer contract,licensing, and commissions. HSBC Insurance Solutions handlesoffshore variable annuity business, and Legacy Marketing Grouptackles business written by OMFN's Americom Life and Annuitysubsidiary.

OMFN does occasionally bring processes back in-house. Forinstance, it began handling contestable claim processing in-housethree years ago, and a year later it brought incontestable claimprocessing back in, as well.

"Our model is, 'Be the best, or contract the best,'" Smith says."We still outsource part of the claim process, including receivingand paying the claim. But the review of the claim is handled by ourown claim manager because it's a high-risk area and it needs to betied closely to our legal staff. I wasn't comfortable with thelevel of expertise in the provider marketplace."

Smith attests to a budgetary benefit to BPO. "Ninety percent ofmy costs on a $90 million budget are variable costs" directlycorrelated to business demand, he says. But more important,outsourcing is an institutionalized process that is fundamental toOMFN's business strategy.

"I couldn't fathom going back to an in-sourcing model because wesimply move too quickly," Smith notes. "We're a product developmentshop–putting out up to 15 new products a year–and our volumesfluctuate, including tripling our volume in some lines in the pastfew years. I don't think we could have succeeded in handling thatgrowth if we would have had to build the capacity toin-source."

Beyond using a multiprovider strategy, OMFN manages businessrisks of outsourcing through comprehensive service-level agreementsand constant evaluation of and contact with providers. "You canoutsource the activity but not the accountability," Smith says. "Ilive and breathe numbers and monitor my daily and weekly dashboardsto make sure providers are adhering to agreements and meeting ourand our clients' needs."

The company also has learned from its mistakes. "It is easy tobecome complacent with an [outsourcing] arrangement and not spendenough face time with partners. We learned it's important to [spendthe time] to prevent bad habits from forming before we need tomitigate them," Smith says.

Although M Financial Group is a life insurance producerassociation, it performs many of the policy administration tasks aninsurance carrier would, including program development,new-business processing, call center support, and claimsprocessing. It also must sync M Financial policy information withthat of its member producers and partner carriers.

When M Financial introduced its MAGNASTAR product in 2000, itchose to outsource all the administrative tasks to McCamishSystems. "We never wanted to do [the administration] in-house,"remarks Jacob Boston, vice president of communications at MFinancial Group. "That would have required us to buildinfrastructure in areas that weren't related to what we do best,which is designing products and marketing them to the needs ofhigh-end buyers."

The core administration system for MAGNASTAR is McCamish's VPASLife platform, which runs at a McCamish data center. M Financialuses a sales illustration system from SunGard to compile offer dataprovided by its partner carriers to design a product portfolio.VPAS interfaces with the SunGard system, McCamish issues andadministers contracts, and XML data on issued contracts istransmitted back to issuing carriers. M Financial's staff uses aWeb-based front end to access the VPAS system.

"[The initial BPO arrangement] was a cost-effective way to getinto the business. Without it, we would have needed not just theinfrastructure but a redundancy of staff to handle anticipatedincreases and fluctuations in sales volume," points out CurtRynties, vice president of information technology at M FinancialGroup.

Since it first launched the MAGNA-STAR product, M Financial hasadded similar infrastructure and staff to meet other needs;however, it has maintained the outsourcing relationship withMcCamish–recently extending its contract with the provider to2010–because of the additional benefits BPO provides.

"Outsourcing makes things simpler in many cases, particularlyfor integration with the carriers because McCamish already had datafeeds with those carriers in place," Rynties says. "Also, by usingan outsourcer to provide consistent information to multiplebusiness partners, our business is simplified with more consistentprocesses and system interfaces."

Even the most outsourcing-averse insurer might learn somethingfrom one of its virtual counterparts. "The important lesson is toidentify what you do well and consider outsourcing things youdon't," says Weber.

The easiest processes in which insurers can gain some comfort inoutsourcing, according to Weber, are the ones that are not core tothe insurance business per se, such as HR, payroll, andbenefits.

"We also see administrative services tasks such as print, mail,imaging, and indexing as good back-office candidates foroutsourcing–the nuts and bolts of running the business that don'tpertain to risk," Weber comments.

Gartner predicts the course of BPO will begin to shiftthroughout 2007, with adoption of BPO accelerating, albeit stillnot at a remarkable pace.

"We project there will be more interest in BPO, particularly intier-one life companies that look to outsource activities such asclosed book administration," Harris-Ferrante says. "Both life andP&C will look more at outsourcing for back-office management ofproducer licensing, appointment, and commission payment."

Although a strategic outlook on BPO is the best practice, mostinsurers will continue to view outsourcing as a tactical activity."Today, cost still is the dominant driver. If you can take anexisting process and save money by outsourcing, it's compelling,"Weber asserts. However, he continues, tactical, cost-focused BPOinitiatives can pave the way for more strategic adoption at thesame time they help assuage staff concerns about outsourcing.

"People are not as concerned about outsourcing if they don't seejobs leaving the company, and one way to make sure those jobs don'tleave is to make sure the business is healthy," Weber concludes."In other words, it's not so bad to outsource if it improves yourbottom line, makes you a better company, and creates newopportunity for staff as a result."