Offshore business process outsourcing (BPO) in the insurance industry is facing new challenges, ranging from rising wages in the most popular outsourcing destinations to natural disasters. In February, India experienced a major Internet outage caused by two severed undersea cables, while a heavy snowstorm left large areas of China without power. Additional concerns—related to setting up of contracts, quality of work and delivery efficiency — also have emerged in recent months, as insurance firms opted for third-party vendors to manage their onshore and offshore processes. Despite these challenges, the sector continues to grow, helped along by diversification strategies and the increasing value and complexity of the outsourced functions.

The insurance industry still considers the BPO market as an important cost-saving factor to meet their end-to-end needs. A 2008 report by KPMG International projected the knowledge process outsourcing industry to be worth $5 billion by 2010 in the financial sector alone. Additionally, firms are looking beyond cost arbitrage and moving toward more sophisticated and specialized areas of outsourcing of core insurance processes, as well as exploring further options in knowledge process outsourcing.

“The latest trends include movement of some of the mid-office functions such as underwriting support, claims support, accounting functions, claims analytics, statutory reporting, regulatory compliance work, issuance of policy or endorsement documents from property/casualty companies,” says B.C. Sheshadri, SBU head of the insurance, healthcare and life-sciences business unit at Bangalore, India-based Infosys Technologies Ltd., which has developed electronic commerce applications for New York-based healthcare insurer Aetna Inc.

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Insurance firms also are looking for vendors that can provide IT as well as BPO support, as many of them have inefficient legacy systems, according to Sheshadri. “Large IT investments, [coupled with] the lack of skilled manpower, has made companies ask for BPO providers to support IT implementation,” he says

One such example is of a Chicago-based property/casualty insurance provider, Unitrin Inc., which wanted to replace its legacy systems as the company’s agents couldn’t look up even basic policy information over the Web with the old system. So Unitrin Business Insurance opted for El Segundo, Calif.-based CSC’s BPO services to help launch an Internet-based commercial package policy (CPP) called TRIN-PAC.

“UBI’s success demonstrates how BPO can result in true business transformation,” says Ray August, president of CSC’s Property/Casualty Insurance Division. “With BPO, we’re committed to the same goal, achieving positive business results for UBI day in and day out.”

Erie, Pa.-based Erie Family Life Insurance Co. also opted to stay onshore when it chose Plano, Texas-based Perot Systems Corp. for a multi-year deal last year.

Under the deal, Perot Systems consolidated Erie’s insurance services into a single policy administration system, and provided a large range of policy issue and management services for both active and closed policies. However, Erie, which provides life insurance and annuity products in 11 states, decided to retain sales service and support, claims adjudication, underwriting and actuarial responsibilities.

RISING CONCERNS

While the BPO market expands, the insurance industry is still tackling new challenges in the forms of natural calamities. The current size of the global BPO market is estimated to be around $29 billion, an increase of 35% since 2003, and is expected to reach $230 billion by 2012, according to the 2008 Nasscom-Everest Group study.

Capital insurance and banking verticals will constitute between 60% to 70% (approximately $160 billion) of the total growth, the study projected.

“One concern that an insurance company raised is that they were not defining what value they wanted to get out of these contracts upfront and, hence, they were not measuring the value that they are deriving,” says Kalpana Ramakrishnan, head of sourcing advisory services at Netherlands-based consultancy KPMG International.

Today, most of the measurements in place are from a service-level agreement point of view, including the tactical, day-to-day monitoring system. However, from a strategic standpoint, companies recognize that there are areas of improvement from the vendors’ side, according to Ramakrishnan.

Thus, forging up an outsourcing contract can be a protracted process, and insurance companies are expecting more from vendors besides the value aspect.

“Additional concerns are related to performance and maintaining the quality of work, governance and understanding the total cost of ownership,” says Sridhar Rajan, senior manager at New York-based Deloitte Global Services’ outsourcing advisory practice. “In other words, if insurance companies are migrating their processes out, then they truly understand what end-to-end services cost.”

According to Rajan, the risk mitigation part of the contract also is one of the challenges insurance companies face. Tapping into a cheap and efficient talent pool is one of the significant aspects of outsourcing, as labor costs rise in the U.S. and European markets. But emerging BPO markets are not immune to competition. “The rising attrition problem is a major issue in India, and maintaining quality is a significant challenge that is frequently underestimated by many buyers,” Rajan says.

However, according to Rajan, by having specialized outsourcing centers for core processes, insurers can keep attrition level at 20% or less. It also would help if carriers or vendors trained their employees for a specialized career path.

“For example, U.K.-based AXA Insurance has its own captive center in India, and it is doing well there,” says Rajan, noting the complexity of the work has to increase to keep employees interested. “The employees joining AXA in India have a career path, which could lead to a global career path.”

DIVERSIFYING OUTSOURCING LOCATIONS TO REDUCE RISK

To reduce operational risks, the insurance industry can adopt a global approach in outsourcing their processes. This multi-country approach helps safeguard against the rising attrition level, shrinking talent pool and increasing wages. Geographic diversification also is one tool to protect against Internet outages, power failures and natural disasters.

As a result, insurance companies are looking at multiple outsourcing destinations around the globe rather than focusing on one country or one vendor for BPO services. By spreading their outsourcing operations to different countries, and beyond India, insurers can explore different vendor-expertise, as well as look for viable near-shore options to match their own customers’ time zone. At the same time, the third-party BPO vendors are expanding their global networks to provide deliveries from multiple destinations and multi-vendor delivery systems to their insurance clients.

“As a vendor, we’re looking at the Philippines where we’re tapping into the talent pool for financial accounting and for contract center work,” says Siddharth Malhi, VP marketing for New York-based Genpact Insurance. Genpact, which was initially a part of General Electric, has 35,000 employees in the insurance sector and 35 global clients, including U.K.’s largest private healthcare provider, BUPA. “The other is Mexico, where we’re tapping into the talent pool for document management, and for bilingual call center-type activities. Other centers in Romania and Hungary would provide multi-language processing facilities to the European insurance companies,” he adds.

Every market can have different advantages and certain limitations for providing services to insurers. For instance, the Philippines has advantages besides the cost perspective, as it has a talent pool with language skills more attuned to an American marketplace in some circumstances than India, according to Faith Trapp, VP at Genpact.

“So the Philippines might be a better location for voice kinds of processing,” Trapp says. “We will look at the Mexico because of its proximity to El Paso, Texas for doing documentation management kinds of functions and Spanish-language capabilities. Whereas in India, we’d look at the different places for IT, finance and accounting, analytics and transactional types of processing.”

OFF-SHORING COMPLEX PROCESSES

Another benefit of BPO is that it forces companies into more standardized processes.

“Insurance is relationship driven, so companies need customer specific processes,” Infosys’ Sheshadri says. “In many cases, there are no documents to support the process or process steps have lost relevance. When the work moves offshore, many service providers develop standardized processes; however, acceptance of the standardized process is difficult by the field staff,” he adds.

In addition, to meet the current demands in the insurance marketplace, firms have started to re-evaluate their overall business model to assess what processes are truly core, and what ones they want to retain in-house. Thus, increasingly complex processes are now outsourced.

“Insurance companies are moving into the areas that traditionally were core, including actuary support, rating and product development and supporting new products, by examining their operations and real dependencies,” says Sumer Shankardass, head of the insurance business unit, WNS Global Services, which has 18,000 employees delivering outsourcing services from 14 locations, including Sri Lanka, India, the U.K. and Eastern Europe.

“We have seen outsourcing move from non-core to core, which creates more demand for more complex services and provides a career path for people,” he says. “In locations where a vendor or an insurance firm has a labor pool supporting, for example, a level I outsourcing service, they are moving up the value chain and getting into level II.”

Mayur Pahilajani is a business writer on staff at Hong Kong-based Trombly Ltd.

To find out more about China and other emerging BPO markets, please visit www.insurancenetworking.com and search “Why BPO Buyers Are Hesitant.”

(c) 2008 Insurance Networking News and SourceMedia, Inc. All Rights Reserved.

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