Chicago — While still a sensitive topic for many carriers, core business process outsourcing (BPO) continues to thrive. In fact, the latest report from Boston-based Celent estimates that the core North American insurance BPO market (currently $1.9 billion in 2008) will grow to reach $4.1 billion by 2013.

According to the survey, “Business Process Outsourcing in North American Insurance,” the reasons for this are a combination of unrelenting pressure on expenses, vast improvements in networking and communication technology and an increased appreciation for highly flexible business models. As a result, these factors have compelled most carriers to explore non-traditional options for running their businesses.

While this survey focused specifically on North American BPO, comparisons between North American and European attitudes about BPO may be difficult to make, as participating insurers diverge greatly in line of business focus.

“In terms of insurance BPO, there are two broad markets in Europe—the UK and mainland Europe,” Mike Fitzgerald, Celent senior analyst and author of the report, tells INN. “The UK is characterized by the mega-deal, high value, end-to-end BPO contracts that are primarily for life and pension companies. It is a more mature market than North America. Mainland Europe is the least developed market and there are perceived cultural barriers to the adoption of BPO. The North American deals that were submitted for analysis were heavily weighted toward P&C, whereas the UK and mainland Europe ones are predominantly life and pensions.”

Twenty-six firms, most of which Celent believes constitute the top tier of insurance BPO providers, completed the data submission sheet between September and October of 2008. Vendors were asked to provide client-level details about current BPO deals, including lines of business covered, annual value of the deals, number of full-time equivalents represented and specific business processes performed by the vendor on each client’s behalf.

One of the key findings to emerge is—what was once deemed unthinkable to many—carriers are now starting to farm out core business processes to third parties. This, in turn, is now considered by many to be a viable option, the report says, with BPO providers quoting 30% to 50% cost savings.

“In conversation about BPO, insurers sharply contrast their willingness to outsource non-core activities (accounts payable, HR service centers) with core activities (handling underwriting files or servicing agents),” Fitzgerald explains. “This reluctance is now diminishing as more insurers and providers gain experience about what makes outsourcing core processes work.”

Improvements in operational efficiency also are possible through the application of tools and techniques gained through vendor scale and reach, according to the survey. These benefits are becoming more attractive for insurers and difficult to ignore.

Following along with this, Fitzgerald believes adoption of BPO by insurers for core insurance services is progressing at a steady rate in North America. Going forward, he feels that for insurers that have not yet initiated BPO, delegating core insurance functions to outside parties will continue to be perceived as risky. The current economic uncertainty will reinforce their concerns, whereas insurers that already have entered the BPO model and built organizational competencies around successful outsourcing will likely continue to expand these relationships.

The central point for insurers, he finds, is that successful outsourcing is an organizational capability.

“It requires the establishment of specific processes and attainment of special skills,” Fitzgerald says. “Insurers who have already ‘invested’ in building these skills can now leverage their abilities and expand BPO activity. This will yield an expense advantage over less experienced competitors.”

The report also offers a few tips for carriers considering outsourcing or extending their existing outsourcing relationship:

The report also offers a few tips for carriers considering outsourcing or extending their existing outsourcing relationship:

•    Understand the business benefit for outsourcing: Outsourcing brings value through delivering lower expenses from wage arbitrage, but, more importantly, can deliver cost savings through process improvement with skilled providers.

•    Focus on quality of delivery and not location of delivery: Deflate the emotional issue of location of operational centers of the provider and focus on the how and what of service delivery.

•    Leverage BPO capability as a competitive advantage: Those insurers who have embedded outsourcing as part of their approach will have a distinct advantage in being able to further extend outsourcing relationships, and thus release further cost savings. An insurer able to reduce costs in the current climate is well positioned to benefit when the economic cycle swings once more.

Source: Celent

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