Going Global

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

Taking best practices and moving them from country to country is just one way identified by the Boston Consulting Group (BCG) for insurers to claim a global advantage over their competition. In its report Creating IT Advantage in the Insurance Industry, BCGs vice president, 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 take that investment and apply it more broadly across multiple geographies. This permits carriers to spread those items that are typically more fixed-cost initiatives across a broader range of countries.

In some ways [insurance] is very different globally because of regulatory measures, product differences, the ways in which it is sold, and the distribution channels, notes Pederson. I would say the product can be very different from geography to geography depending on the type of [insurance]. The underlying drivers of a life insurance contract probably are not that dissimilar from China to North America, but the underlying information about the risks would be very different.

The alignment of business strategy and IT strategy is the only way IT can become a true source of competitive advantage for carriers, according to Pederson. He believes proper alignment can be brought about only through integrated planning supported by organizational and governance structures aimed at maximizing the business value of IT investments.

In the area of outsourcing, Pederson asserts there are mixed activities around the globe. We certainly see in the studies Ive done in the last three years a trend to increasing the use of outsourcing [in North America], but thats not necessarily true across the globe, he says. Its very active [in North America] as well as in the United Kingdom, and part of that has to do with the language being spoken in the areas of offshoring and the nature of the business.

In both the U.S. and the UK, outsourcing businesses are well developed. Outsourcing companies have been pursuing insurance and other financial services companies as a core of their business models for the last few years, indicates Pederson. There are going to be services in IT that are much more likely to be outsourced, he says, adding commodity-based services, such as software application support, package applications, and service for distributed computing, fall into that group.

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

Pederson also points to a lack of transparency in insurance IT costs. He maintains one reason for this relates to the two classes of business executives in the insurance market: those who would like IT to go away, and those who are IT savvy. Over time, in order to meet the needs of both kinds of business executives, there hasnt been a tremendous amount of investment by IT organizations in making the costs of IT and the drivers of IT pretty clear to the business in business terms, he says. When business people discuss IT costs, they often hear about servers and gigabytesthings they cant 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 business decision-makers, discussions need to be stated in business terms, he contends. But he doesnt believe business leaders completely resist advancements in technology. It takes time to change behavior and recognize the value IT brings and the role IT will have to play going forward in the insurance industry as it becomes increasingly automated, concludes Pederson.

ROBERT REGIS HYLE