As growth demands surpass in-house capabilities, Jeremy Owenson looks at how modern day outsourcing can more easily produce mutually beneficial solutions.
At a press conference last year, to coincide with the release of the UK Insurance Industry Working Group's report, the former Chancellor of the Exchequer, Alistair Darling commented: "The insurance sector is a vital part of the UK economy, employing about a third of all people who work in financial services and managing almost £1.5trn in assets." These facts emphasise that insurance was and continues to be one of the fastest growing businesses in the UK. It is also becoming one of the most dynamic business sectors, in terms of emerging challenges surrounding risk management, international markets and changing customer behaviour patterns.
Needless to say, the UK insurance industry today is going through a major transformation. In a recent survey of UK insurance professionals by Ernst & Young — where 36 face-to-face interviews and 714 online questionnaires were conducted with senior claims professionals, loss adjusters and brokers across UK — around 50% of respondents said they anticipate major technological changes in the insurance sector in 2010. An equal number expected continued changes at every stage of the value chain over the next three years.
Leading the pack
Solvency II leads the pack with what it requires of insurers. By the end of 2012, Solvency II will be firmly in place. Companies across the European Union are preparing themselves for this new risk-based capital regime, which will usher in better enterprise risk management overall.
Tackling losses due to claims leakage and the spectre of innovative frauds are among the next major challenges, particularly in the general insurance market. Effective claims management is a critical success criterion for insurance companies. It has a direct impact on margins through a higher or lower loss ratio.
Controlling claims costs is paramount to controlling leakage, but many companies have become complacent about their strategy. The sophistication in fraud increases by the day, and has cautious insurers thirsting for new ways to clamp down on it.
Many years ago a survey asked London market claims directors to rank the quality of their departments into quartiles — top, upper-middle, lower-middle and bottom. All placed their departments in the top two quartiles. There were no 'below average' assessments.
How is this possible? I suspect people rank based on what they were good at, so people who had solid systems ranked their performance above average, stating that the systems kept the staff honest; and people who had poor systems said they employed good staff to compensate for the systems' inadequacies.
The reality is, there are good and bad claims departments and there are good and bad people. What these insurers needed to understand is that there is no evil in asking a specialist to deliver a service. Some claims need loss adjusters, but it is possible to have specialists in customer service, technical claims handling, accounts and recovery functions.
The idea that business process outsourcing is driven solely by an operational cost saving is an old philosophy. Over time, BPO players have proved they have the specialisation, skilled manpower and technology platforms that can fuel and sustain the growth of companies, by providing quality personnel at a competitive rate.
There is a real appetite within the BPO community to build partnerships with insurance customers, to work together to develop a business plan for growth. This can take the shape of a special purpose vehicle or joint venture between a supplier and an insurer, where the insurer gets a financial benefit through an equity stake, or through a benefit paid upfront.
An outsourcing arrangement can also be a commercial deal that aligns interests — for example, gainshare, where savings or profits are shared; or payment by results, such as per policy sale or a percentage of the amount recovered on subrogated motor claims. Another option is co-investment, including using BPO research & analytics capability as a 'free' resource to improve deals. The appetite to do deals by BPO providers means that set-up costs can normally be amortised over the deal length.
The role of outsourcing providers becomes critical in this new order, particularly as numerous firms in the insurance sector have opted for major technology changes in the past three to four years. This has been accompanied by a considerable amount of outsourcing and offshoring activity, most of which has been in the area of notification and claims validation.
Another area where outsourcing can be leveraged is customer service, which has traditionally given insurance companies much cause for concern, especially because of the power it wields on their corporate reputation. Currently, the insurance industry is facing major challenges on this front and many companies are moving to a direct-to-customer business model, bypassing brokers and other intermediaries.
But this change brings its own set of challenges. The lack of personal, face-to-face interaction necessitates that the customer experience via other touch points like phone calls and e-mails is seamless as well as personalised.
Executives need to understand where they want to be, and what management should be focused on. In insurance, two key areas where the insurer can differentiate are in product innovation and pricing. There are other areas where management time can be absorbed for very little return.
This can include functions often described as back-office — accounts, administration, payroll, IT and claims — but could also include areas such as run-off, closed books and legacy processes. For all these non-core functions, the board should evaluate whether there is an outsourcer, with the right attention and experience, that can deliver more effectively and at a reduced cost.
Insurance companies may be known for taking a conservative approach to outsourcing but operational expenses can put their very survival in doubt. Many players have realised their forte lies in quantifying risks and providing financial security, so there is rising appeal for outsourcing back-end processes to specialists that are adept at them.
So, it is not surprising that processes such as policy administration and billing, financial recoveries, data management as well as statutory and regulatory reporting, are already being outsourced. With the BPO appetite for taking risk and entering new partnerships, this will unlock value and reveal a potential asset in an area only seen in the past as a burden.
Fiercer competition, changing technology, new regulatory and compliance measures and the resultant spawning of multifarious insurance products, terrorism and the economic landscape all demand business solutions that surpass the capabilities of the in-house staff of any insurance company. Outsourcing partnerships become imperative both for survival and growth.
Jeremy Owenson, senior vice president of insurance at WNS, will be participating at the British Insurance Summit on Thursday 23 September, where he will be addressing the subject of transformational change and how to embed innovation in the UK insurance sector. This will cover how to identify core areas where change is needed; how boardroom pressures in the current environment continue to bear down on managing costs; and the need to develop a strong future business strategy.
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