Insurance service outsourcing remains a viable alternative for many companies despite changing client needs and preference for end-to-end insurance BPO services. In a highly volatile market, insurance support services provided by third parties continue to play a key role in helping companies perform routine, back office activities in a cost-effective way. Insurance support, while not a core activity for some firms, is as necessary as higher-value services to drive business transformation. The insurance outsourcing vertical is part of the larger banking, financial services and insurance (BFSI) industry, which was one of the first sectors to outsource non-core, transactional activities to external providers. Insurance outsourcing represents one of the largest buyer segments in the overall BPO industry, and it is also one the most mature.
Insurance service outsourcing in the late 1980s and early 1990s was all about cost reduction. Many companies worked with partners in low labor cost locations (locally and offshore) to leverage economies of scale. A successful insurance support outsourcing partnership reduced overall costs associated with running back-office operations. The next wave of outsourcing activity incorporated technological advancements. Newer, faster and more sophisticated tools increased productivity and rate of return, and IT outsourcing vendors offered these tools to companies in different industries, including the technology-hungry BFSI segment.
In the early 2000s, shared service or captive centers were as popular as outsourced insurance support services. At the time, the main advantage of the captive center delivery model was that it allowed insurers to assume greater control over processes. Insurance service outsourcing providers back then did not have the expanded capabilities and deep domain knowledge they have now, so it was more practical for insurers to centralize operations. However, management of captive centers became increasingly complex as the workforce grew and operations were conducted on a larger scale. As providers matured and acquired sophisticated technology, talent and resources, outsourced insurance support once again proved a good alternative for companies looking to establish strong back-office operations.
The third wave of business process outsourcing in the insurance industry is characterized by maturity and a focus on quality and value derived from third-party partnerships. While cost control and process efficiency continues to be top drivers of the growth of insurance support outsourcing, insurers want a partner that will share risk and provide consulting and strategic services. Today, the insurance outsourcing market continues to mature, reflected by the increasing demands of global insurers and providers strengthening their capabilities.
From transactional services that include insurance support, service providers offer increasingly judgment-based services such as analytics, underwriting, and claims adjudication. Insurance vendors have become true partners to business success, instead of an external party that merely provides a service. Vendors are more accountable and share operational risks with their clients. With deeper domain expertise and greater experience with different types of insurers, vendors can deliver value beyond cost reduction and efficiency improvements.
It’s not uncommon to find outsourcing engagements today that combine unbundled insurance support services like document management with higher-value processes like underwriting, analytics and product development. With a surge in demand for full service offerings in pension and closed block administration, analysts expect the elimination of paper-based work and automation through straight through processing or STP. As Insurers seek innovation, rapid product development, and customer-driven solutions, insurance support partners are aggressively investing in integrated IT-BPO offerings with a focus on long-term value and flexible delivery models.
Most insurers adopt a hybrid approach to outsourcing. They may keep some core activities in-house while outsourcing consulting, strategy and support to different vendors. Another flexible solution is outsourcing support services in lower-cost areas domestically as well as offshore, hiring part-time support workers (data entry professionals, mailroom workers), and hiring additional temporary support staff during peak times.
Global economies stabilized in 2015, and several countries are showing significant improvement in terms of economic growth. The spending power of the middle class is rising, as are the financial resources of high net worth individuals. While the overall picture is positive for insurance firms and brokers, key challenges remain across all regions. Insurers in the United States struggle with regulatory changes, tight profit margins, rising competition from new entrants and new products, and generally slow premium growth. Elsewhere, technology issues, cost pressures, market volatility, and changing consumer behavior are the main drivers for the growth of insurance service outsourcing.
Growth prospects are promising for U.S. life annuity and property-casualty insurance firms, but soft pricing conditions are tightening profit margins. In Europe, insurance companies are struggling with low business investment and increased competition, while customers are demanding multichannel interaction and personalized products and services. This is pushing many companies to focus on efficiency improvements and cost control through various means, including selective offshoring of insurance activities. Insurers are seeking enhanced risk management and process optimization from their outsourcing partners. Besides integrated IT and end-to-end insurance solutions, cost-effective insurance support services will continue to be in demand. For example, many carriers have leveraged claims processing services and centers of excellence established by insurance service outsourcing vendors to increase profits and reduce the claims lifecycle significantly.
Multiple new entrants are disrupting the insurance value chain, which has become more complicated in the last few years. Aggregators, for example, make it easy for customers to shift from one insurance carrier to another through simple price comparisons. Insurers must devise innovative ways to prevent a further slide in customer loyalty and stay competitive in a price-driven environment. Differentiation can be difficult with existing resources, so many insurers are turning to third parties to optimize their supply chain, reduce costs, and improve underwriting processes.
Insurers in Europe will need to make operational and strategic changes to comply with regulations like the second Insurance Mediation Directive (IMD2) and Market in Financial Instruments Directive (MiFID2). In the United States, new unified regulatory standards and the implementation of Own Risk and Solvency Assessment will require companies to alter their distribution and marketing activities for compliance. Service providers that can help modernize insurance products and distribution and transform back office operations will be in demand.
Technology is the number one driving force behind most insurance and insurance support outsourcing partnerships. Insurance firms have embraced the importance of the new digital storefront and multi-channel customer engagement. Many companies are investing in digital platforms to attract prospects and retain existing customers across all geographies and product categories. For customers, digital transformation improves product transparency and the shopping experience.
According to the 2015 Global Insurance Outlook study by global advisory firm EY, insurers in all regions, from North America to Asia-Pacific, are investing in data analytics, cloud computing, mobility and social business to improve underwriting processes and risk management, reduce fraud, and develop better market segmentation strategies. Technology solutions also help insurance firms optimize processes, improve collaboration within the organization, improve margins, and differentiate themselves from other carriers.
Sophisticated data collection and analytics tools are crucial for better decision making, and data superiority will prove a differentiator for insurers. Enhanced data analysis and modeling help improve customer acquisition and retention, provide detailed insights into risk profiles, and develop cross-sell opportunities customized to each client. However, technological upgrades and improvements tend to be costly for small and large enterprises alike. This is why many insurers are working with service providers with the right technological capabilities and IT offerings integrated with insurance support services.
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