BPO starting to drive insurance policy admin

Insurers in Europe and the US are increasingly considering policy administration business process outsourcing (BPO), says a new report by independent market analyst Datamonitor. Facing challenging market conditions, both life and non-life insurers are seeking to reduce costs and gain flexibility. Often times, however, these goals are stymied by rigid policy administration platforms, which are often built in-house. The report, Trends and Strategies in Policy Administration BPO, also identifies the rise of business transformation outsourcing (BTO), a long-term outsourcing contract where the outsourcer transforms the policy administration process through application replacement and process reengineering, as the next and essential frontier.

The report concludes that insurers need to reduce costs and become more efficient in order to protect profit margins during this - and future - soft markets. Furthermore, insurers in the mature markets of North America and Western Europe that are struggling to find new pockets of growth need a flexible policy administration system that enables quicker time-to-market. Policy administration BPO can effectively increase efficiency and flexibility, as well as free resource that can then be expended on value-add functions.

“Insurers are increasingly targeting the policy administration function to improve their competitiveness,” says Jonathan Steiman, a Financial Services Technology Analyst with Datamonitor and the report's author. “Business process outsourcing, which is often less capital intensive and less time consuming than other options, is being considered by more and more insurers.”

Steiman warns, however, that along with the benefits come some risks. “Outsourcing the policy administration function can greatly improve an insurers operation - which is imperative in today's market - but insurers are still wary of losing control of the customer and becoming over-dependant on a single vendor.” Many of these risks, Steiman adds, can be mitigated with a comprehensive service level agreement (SLA).

Policy administration BPO to be adopted by large and small insurers alike

Insurers with fewer than 5,000 employees currently have the lowest policy administration BPO adoption rate. This is likely to change, however, according to a Datamonitor survey of 200 global insurers conducted in the first quarter of 2008. Small insurers, the survey found, are heavily weighing a BPO strategy, which is evidence of the need to lower costs and concentrate limited resources on value-add functions in today's competitive marketplace.

The survey also found that large insurers, those with more than 20,000 employees, are increasingly likely to outsource policy administration. Typically, these players engaged in off-shoring via captives, or company owned facilities. The captive route has not been as fruitful as expected, elevating their interest in outsourcing to a third party.

“The trends captured by our survey are incredibly interesting,” notes Steiman. “On the one hand, we see small insurers looking to outsource in order to improve competitiveness. On the other hand, we see large insurers, many of them who have already gone overseas with captives, being drawn to outsourcing because of the maturity and expertise that BPO providers now possess.”

Transformative outsourcing is the next - and essential - frontier

Many of today's BPO arrangements can be classified as traditional, or “your mess for less,” BPO. In other words, insurers look to BPO providers to perform the same functions on the same platforms, but for less money. The savings in traditional BPO are typically driven by moving the process offshore to low-wage countries.

This level of BPO is palatable for the insurer but in the long-term insurers need to move towards Business Transformation Outsourcing (BTO), finds the report. BTO is a long-term outsourcing contract where the outsourcer transforms the policy administration process through application replacement and process re-engineering. BTO will become increasingly important as the marketplace becomes more competitive and wage arbitrage becomes more difficult to exploit.

“Real change, measured by improved profitability, will be achieved by insurers that look to BPO providers to be transformative sources with unique process and technological expertise, as opposed to simply a cleaning service hired sweep poor process under the carpet,” says Datamonitor's Steiman.

Notes

Datamonitor's report Trends and Strategies in Policy Administration BPO provides an overview of the trends within the insurance industry as well as the actions that major participants - both insurers and BPO providers - are taking to address them. The report also includes primary research findings from a survey undertaken in the first quarter of 2008.