Insurance companies have a unique set of challenges to overcome in creating efficient operations. Because of increased competition, insurers are being forced to narrow their focus to the core competencies at which they excel. At the same time, carriers must offer greater product and service offerings and faster distribution to meet increasing customer demands.And, because service industries such as insurance are so dependent on information, the increasing digitization of data is forcing these companies to redefine how they operate. Therefore, to be successful-and to prosper-in this digital environment, organizations must reshape their business models.

Many companies recognize that the best way to meet these challenges is to create a virtual entity. Virtual entities typically consist of a core group of personnel focused on risk and capital management and a network of business partnerships.

The model enables carriers to reshape the way insurance is managed. Insurers can reduce the time, cost, and risk of entering new markets, and establish a competitive advantage by having a lean, agile, focused company with a high percentage of variable expenses that are a derivative of revenue.

Virtual companies are flexible and can adapt quickly to today's rapidly changing business environments. And, virtual companies leverage the technology, research and development, operational expertise and capital of their partners to build a better business.

The challenge for most organizations is how to change. Here are the five crucial steps to creating a virtual entity.

Understand the driving forces

The first step is understanding why virtualization makes sense. The changing business environment is forcing companies to select specific core competencies and processes they want to leverage to gain competitive advantage. The basis of competition is shifting to service, quality, innovation and customization.

Carriers that adopt the virtual model can streamline their organizations to meet increased consumer demands for more product offerings and faster distribution, and to take advantage of digitization of data in an electronic model.

And, most of all, the virtual model will make your entire operation more effective by eliminating and delegating processes. The process of virtualization can be applied to a particular product line, geographic region, one or more functional operations, or the entire operation.

Determine mission and goals

Once you've looked at what virtualization can accomplish, you must look at what you want and can reasonably expect it to do in your company.

For start-up companies or divisions, your focus might be on optimizing speed to market and reducing fixed expenses until premium volumes increase. Or, your primary goal might be accomplishing a relatively easy exit if the business model proves to be unsuccessful.

For companies with ongoing insurance operations, virtualization goals typically include becoming more flexible and being able to respond more quickly to changing market conditions. In addition, virtualization can help existing companies reduce overall expenses and shift expense risk to outsourcers.

Define structure

By definition, a virtual company outsources most of its operations to third parties. Virtual entities typically have a flat structure populated by a small cross-disciplinary staff, outsourcing functions as needed.

However, companies vary in the degree of virtualization and the functions that make sense to outsource. Most insurers differentiate themselves through risk and capital management. Therefore, it makes sense to retain profitability monitoring, product development, risk selection and pricing, marketing and distribution, and asset management.

Alternately, by partnering with an outsourcer whose focus is process management, many companies benefit from outsourcing policy processing, billing and collection, technology, customer service and regulatory reporting.

Build alliances

Alliances enable companies to share risk and reward and better manage conflict and interrelationships. The customer benefits from the strengths of each partner. In selecting your outsourcing partners, look for flexibility and for skills that enhance your strengths and bolster your weaknesses.

Look at the cultural fit as well. Make sure your outsourcing provider understands your market, has a service philosophy that is similar to yours, and will be flexible to changing business conditions.

In creating relationships with providers, it's crucial that all parties have a clear understanding of the scope, responsibilities, dependencies and costs of the outsourced functions. The contract should also quantify specific service levels, remedies and incentives.

Move forward

Once you've put your strategy in place, it's important to understand the ongoing challenges of being virtual. Managing your outsourcing relationships is key.

Successful partners will ensure that regular planning meetings occur, and will welcome frequent audits to ensure that they are performing up to your standards. It's also important to have a partner that will deliver constant innovation to meet your ongoing needs.

Jane Smith is senior vice president, P&C sourcing and surround solutions, for Computer Sciences Corp., El Segundo, Calif.

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